Many people have made huge profits through shares of Tesla (NASDAQ: TSLA). Even those who have only a year behind them with the stock of the electric car manufacturer have made remarkable profits. Real long-term investors have found life-changing wealth.
Ace investment professor Cathie Wood has benefited tremendously from the rise of Tesla. The chief investment officer of the active exchange traded fund pioneer ARK Invest has dramatically increased the performance of several of its ETFs by owning shares in the automotive giant.
When two of ARK Invest’s ETFs decorated their stake in Tesla last week, it raised questions. Can the star investor lose confidence in Tesla? Or is she just making prudent decisions about portfolio management? Let’s see what Wood has done and what it means for Tesla investors.
Image source: Tesla.
2 sales of Tesla stock
The nice thing about the active ETF model is that you can see the movements that Wood is making in her funds virtually in real time. The funds make daily announcements of their purchases and sales, and you can keep an eye on them to see when there are changes in sentiment at ARK Invest.
Last week, ARK made two moves involving Tesla. The ARK Innovation ETF (NYSEMKT: ARKK) sold approximately 137,000 shares in Tesla on January 19, raising approximately $ 115 million. The ARK Next Generation Internet (NEW: ARKW) followed on January 20 with a much smaller sale of 10,500 shares, yielding approximately $ 9 million in cash.
The sales were part of a broader reallocation. For the next generation of internet, the ETF used the money to add to positions Synopsys (NASDAQ: SNPS). Meanwhile, the six shares the Innovation ETF bought on the day it sold Tesla included Regeneron Pharmaceutical Products (NASDAQ: RAIN) and Spotify Technology (NYSE: SPOT), amongst other things.
Still a big Tesla owner
ARK Invest’s sales have not changed the prominent role that Tesla’s share plays in these two ETFs’ portfolios. The Innovation and Next Generation Internet ETFs still have Tesla as their largest positions, with a total of more than $ 2.8 billion invested in both portfolios in the shares. For both ETFs, Tesla accounts for more than 9% of their respective assets under management.
It would therefore be unreasonable to conclude that ARK Invest has lost any confidence in Tesla’s ability to retain its leading role in the electric vehicle industry. But it raises a centuries-old dilemma: Do you make winners run, even after they make up a large percentage of your total interest? Or are you slashing your position in favor of allocating money to other investment opportunities?
Risk versus reward
Long-term investors like to hold stocks for as long as possible. When a business’s underlying business is successful, it can generate huge growth rates in sales and earnings over periods of years or even decades. The stock usually follows, as investors saw with Tesla as its vehicle deliveries skyrocketed and began to make a steady profit.
That doesn’t mean long-term investors never sell. But it usually takes a big change in a company’s luck to bring about a complete liquidation of a long-term investor’s position in a stock – something that is fundamentally at odds with the investor’s thesis for the stock in to buy first place.
When it comes to pruning a winning stock, however, there is more debate. Some believe that it should be prudent to diversify in order to reduce the risk of a concentrated position. Others argue that if you win a stock, you should not succeed.
When to prune
The question you need to ask yourself is this: Do you reduce your position because you have a stock that you think has even better prospects for the future, or are you simply selling to include a profit?
Pruning a winning position to invest in an even bigger potential winner can be a good step, especially in a retirement account for which you do not have to worry about capital gains tax. This does not indicate a loss of confidence in your original stock, but rather the belief that you can do better elsewhere.
On the other hand, pruning for the sake of pruning is not always so clear. Raising money while looking for better growth prospects is not a bad idea, but you need to be prepared for your original share to keep rising, even if you seem to. However, taking money from winning shares to reinvest in losing shares often turns out to be bad – especially if there were good reasons for the losers to underperform.
It certainly seems that ARK Invest’s motivation to decorate its Tesla position was to redeploy capital to other ideas with high conviction. This is a worthy step – and it says nothing negative about Tesla’s ability to dominate the industry for years to come. If you have another stock that you think will perform even better than Tesla, you might consider doing the same as ARK Invest did.