Many people made big profits from owning shares in Tesla (NASDAQ: TSLA). Even those who have only one year on their resume with the electric automaker’s stock have seen mind-boggling gains. Real long-term investors have found wealth that can change their lives.
Ace investor Cathie Wood has benefited enormously from Tesla’s rise. The investment director at ARK Invest, a pioneer in publicly traded funds, dramatically boosted the performance of several of its ETFs by owning shares in the auto giant.
So when two ARK Invest ETFs reduced their holdings in Tesla last week, that raised questions. Is the star investor losing confidence in Tesla? Or is she just making prudent portfolio management decisions? Let’s see what Wood did and what it means for Tesla investors.
Image source: Tesla.
2 Tesla stock sales
The good thing about the active ETF model is that you can see the movements that Wood is doing in his funds almost in real time. Funds make daily disclosures of their purchases and sales, and you can track them to see when ARK Invest sentiment changes.
Last week, ARK made two moves involving Tesla. O ARK Innovation ETF (NYSEMKT: ARKK) sold about 137,000 Tesla shares on Jan. 19, raising about $ 115 million. O ARK Next Generation Internet (NYSEMKT: ARKW) followed on January 20 with a much smaller sale of 10,500 shares, producing about $ 9 million in cash.
Sales were part of a broader reallocation. For the Next Generation Internet, the ETF used the money to increase positions in Synopsys (NASDAQ: SNPS). Meanwhile, the six shares that Innovation ETF bought on the day it sold Tesla included Regeneron Pharmaceuticals (NASDAQ: REGN) and Spotify technology (NYSE: SPOT), among others.
Still a big Tesla owner
ARK Invest’s sales have not changed the prominent role that Tesla shares play in the portfolios of these two ETFs. Next Generation Internet and Innovation ETFs still have Tesla as their biggest positions, with a total of more than $ 2.8 billion invested in shares in both portfolios. For both ETFs, Tesla represents more than 9% of its respective assets under management.
Therefore, it would be unreasonable to conclude that ARK Invest has lost any confidence in Tesla’s ability to maintain its leadership role in the electric vehicle industry. But it raises an age-old dilemma: do you let the winners compete even after they represent a large percentage of your overall portfolio? Or do you reduce your positions in favor of reallocating money to other investment opportunities?
Risk vs. reward
Long-term investors like to hold shares as long as they can. When a company’s core businesses are successful, they can generate huge growth rates in sales and profits over years or even decades. Stocks generally follow suit, as investors saw with Tesla that its vehicle deliveries skyrocketed and it began to generate a consistent profit.
This does not mean that long-term investors never sell. But a big change in a company’s fortunes is usually required to cause a complete liquidation of a long-term investor’s position in a stock – something that fundamentally runs counter to the investor’s thesis of buying the shares in the first place.
However, when it comes to cutting a winning action, there is more debate. Some say it is prudent to diversify to reduce the risk of having a concentrated position. Others argue that if a stock is winning, you shouldn’t mess with success.
When to cut
The question to ask is: are you reducing your position because you have a stock that you believe has even better prospects for the future, or are you simply selling to guarantee a gain?
Cutting a winning position to invest in an even bigger possible winner can be a big move, especially in a retirement account for which you don’t have to worry about capital gains taxes. It does not signal a loss of confidence in your original actions, but rather the belief that you can do better elsewhere.
On the other hand, trimming for trimming is not always so clear. Raising money while looking for better growth prospects is not a bad idea, but you must be prepared for your original stocks to continue to rise, even while you look. Taking money from winning stocks to reinvest in losing stocks, however, usually ends badly – especially when there are good reasons for those losers to underperform.
It certainly seems that ARK Invest’s motivation to reduce its position at Tesla was to redistribute capital for other highly convinced stock ideas. This is a valuable move – and it says nothing negative about Tesla’s ability to continue dominating its industry for years to come. If you have another stock that you think will perform even better than Tesla, you may want to consider doing the same thing that ARK Invest did.