OTW #57: Protect your profits, Wealth destroyer, Dirty secret, and more.
Important financial stories to check out over the weekend
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1. A simple way to protect your profits.
Don’t wait for the rain to buy an umbrella.
Along those lines, the best time to prepare for a market crash is before it happens. As the saying goes, “Stocks take the escalator up…but the elevator down.”
With U.S. equities sitting at nose-bleed valuations, be sure you have a plan to protect your profits. It’s gut-wrenching when a portfolio you spent years building gets cut in half in just a few weeks.
If you’ve never been through a bear market, that may sound farfetched. But as someone who has invested through the dot-com crash of the early 2000s, the great financial crisis of ‘08-’09, and the covid crash of 2020, I can say with certainty that sudden and severe crashes can and do happen.
When the dot-com bubble burst nearly 25 years ago, I was completely unprepared. I lost nearly everything. Fortunately, that was early in my investing career, which made it a great time to learn a hard lesson: prepare for the crash before the crash.
Since that time, I’ve used a variety of strategies to reduce risk. One of the simplest of these is a protective put.
A protective put lets you lock in your investment profits without selling your stocks. Think of it like insurance. It’s something you buy…but hope you never use.
For example, you buy homeowner’s insurance because if a tree falls on your house, insurance will cover the repairs. Obviously, you don’t want a tree trunk in your living room, but it’s nice to know that if something crazy like that happens, you’re protected.
That’s how a protective put works. It’s like insurance but for stocks. To learn more, check out this article.
2. The worst wealth destroyer.
Morningstar labeled Cathie Wood and her ARK ETFs as the worst “wealth destroyer.”
The ARK Innovation ETF (ARKK) erased $14.3 billion in investor wealth over a decade. That was the worst of among the funds analyzed.
Antagonist’s take
This is a classic example of hype + investor euphoria = devastating crash.
Wood convinced people that investing in “disruptive technologies” would lead to enormous gains that could be repeated year after year. And she was right…at first.
High-profile investments in sectors like genomics, robotics, and tech platforms led to massive gains, especially in 2020 when her flagship ETF, ARKK, returned over 150%. Those staggering numbers tempted many investors to jump on the ARK investment bandwagon.
Unfortunately for those investors, their FOMO (fear-of-missing-out) decision resulted in crushing losses.
ARK ETFs crashed in 2022, with their funds experiencing declines ranging from 34% to 68%. To make things worse, this decline occurred despite a general market uptick.
Even after a strong rebound in 2023, the earlier losses were not fully recovered.
That’s why Morningstar designated ARK’s fund family as the ultimate wealth destroyer.
Wood and ARK’s rise and fall is a painful reminder that investing in high-volatility sectors comes with enormous risk. That risk is heightened when it seems like “everyone” is in on the trade and getting rich.
Our current market’s infatuation with AI stocks is reminiscent of the ARK euphoria. While there are excellent businesses in this space, such as Nvidia, their valuations have reached deep bubble territory.
I’m not saying that you should sell your high-valuation stocks right now. They could very well continue to rise from here. Hold onto them and enjoy the gains.
What I am saying, however, is that market euphoria and bubbles ending in a crash is the norm, not the exception. Keep profiting from the “meltup,” but have a plan in place to protect your gains when the meltdown inevitably comes.
3. Another major acquisition.
Diamondback Energy (FANG) announced it will acquire Endeavor Energy Resources in a massive $26 billion deal. This will make Diamondback one of the largest independent oil and gas producers in the Permian Basin.
This also the latest in a series of major acquisitions within the energy sector.
Antagonist’s take
Last April, I wrote that we should expect the major energy companies to start acquiring smaller companies. Here’s an excerpt from that issue:
Small oil companies are trading at extremely low valuations. In other words, they’re selling for way cheaper than they’re worth.
More importantly, they’re sitting on oil reserves.
When you compare the amount of natural gas and oil that smaller companies have in relation to the size of their market cap, they become prime targets for acquisition.
Think it from the perspective of the oil majors like ExxonMobil and Chevron.
It’s already extremely difficult and expensive to explore and find new assets/reserves. When you factor in the negative sentiment from politicians, the general public, and banks, you have a regulatory nightmare on your hands as well.
Since that’s the case, why even bother with exploration?
It’s much easier and cheaper to buy a smaller company that has tremendous reserves relative to its market cap.
Investment opportunities
It was this expectation that the “majors” would acquire smaller companies that led me to select two small-cap oil stocks in our Blend Portfolio.
That decision has already paid off in a big way. Those positions have gained 52% and 28%, respectively, since last April.
I don’t expect this acquisition trend to slow down, and I’m still bullish on (certain) energy companies. To view these stocks, and all the other ones we hold in the Blend Portfolio, upgrade to a Premium Membership. You can try it for 30 days absolutely free. Hurry though. This 30-day trial offer expires at the end of this month.
4. “Dirty” reasons to remain bullish on energy.
In their excellent article, “Dirty Secret,”
explained how global coal demand continues to smash records:As 2023 came to a close, data behind the global demand for coal began to roll in. Despite trillions being squandered on the development of wind and solar energy, the dirtiest of the fossil fuels turned in another record year.
Even though coal has been villainized, the fact remains that it’s needed. Here’s Doomberg again:
Almost exactly a year ago, we took to these pages to make the point that the European energy crisis—in particular, Germany’s response to it—would have significant ramifications across the developing world. The Global South, after years of being lectured about the need to forgo fossil fuels in its pursuit to increase the standard of living for its citizens, watched with interest as Germany burned coal in copious amounts to get through its emergency…
If we don’t understand why coal is so valuable, we have no hope of beating our addiction to it. Coal is cheap, reliable, and easy to store for indefinite periods. Replacement technologies that fail across these critical dimensions have no hope of decreasing global demand for coal.
Antagonist’s take
Last year, I shared a similar hypothesis in my 2-part special report on the energy crisis and its implications for investors:
Life as we know it depends on fossil fuels…at least for now.
While some may argue against investing in companies focused on oil, gas, and other fossil fuels due to their negative impact on the environment, these businesses are necessary in the short term.
I recognize the need to phase out fossil fuels. In addition to their negative environmental impact, they are a limited resource. By definition, we can’t tap them forever.
The fact remains, however, that we do not have an alternative energy source that is capable of replacing fossil fuels right now or in the near future.
I’m not just talking about oil either.
Following this report, we invested in various energy companies, including one with an emphasis on coal. These have been some of our top performing-stocks, and I expect that continue for at least the next few years.
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Thank you for reading, and have a great weekend!
Jason Milton
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worst is investor still have to pay a management fee to destroy their wealth...it's always nice to go the glitzy and glam path...and when the party ends...they wake up into reality and realize that its all a fools play 😏