Many people have made huge profits by owning shares of Tesla (NASDAQ: TSLA). Even those who have only one year under the guise of the electricity producer’s shares have seen astonishing gains. Indeed, long-term investors have discovered life-changing wealth.
Professional investor Ace Cathie Wood has benefited greatly from the rise of Tesla. The chief investment officer of the active pioneer of exchange-traded funds ARK Invest has dramatically increased the results of several of its ETFs, owning shares of the car giant.
So when two of ARK Invest’s ETFs cut their stakes in Tesla last week, it raised questions. Can the star investor lose confidence in Tesla? Or does she just make sensible portfolio management decisions? Let̵
2 sales of Tesla shares
The good thing about the active ETF model is that you can see the moves that Wood makes in his funds almost in real time. The funds announce their purchases and sales on a daily basis and you can track them to see when there are changes in the mood in ARK Invest.
Last week, ARK made two moves involving Tesla. The ARK Innovation ETF (NYSEMKT: ARKK) sold about 137,000 shares of Tesla shares on Jan. 19, raising about $ 115 million. The ARK Internet of the next generation (NEW: 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 wider redistribution. For the next generation Internet, the ETF uses money to add positions to Synopsis 09.30 NASDAQ: SNPS. Meanwhile, the six stocks that Innovation ETF bought on the day it sold Tesla include Regeneron Pharmaceuticals 09.30 NASDAQ: REGN and Spotify technology (NYSE: SPOT), among others.
Still a big owner of Tesla
ARK Invest’s sales do not change the prominent role that Tesla shares play in the portfolio of these two ETFs. The Internet Innovation and Next Generation ETF still holds Tesla as its largest position, with a total of more than $ 2.8 billion invested in shares in both portfolios. For both ETFs, Tesla represents more than 9% of their respective assets under management.
It would therefore be unreasonable to conclude that ARK Invest has lost confidence in Tesla’s ability to maintain its leading role in the electric vehicle industry. But this raises a centuries-old dilemma: Do you let the winners run even after they make up a large percentage of your total holdings? Or are you reducing your position in favor of redirecting money to other investment opportunities?
Risk against reward
Long-term investors like to hold stocks for as long as they can. When a company’s core business is successful, it can generate huge growth in sales and profits over years or even decades. Shares usually follow suit as investors see with Tesla that vehicle supplies are rising and it is starting to generate steady profits.
This does not mean that long-term investors never sell. But it usually takes a huge change in a company’s condition to bring about a complete liquidation of a investor’s long-term equity position – something that fundamentally contradicts the investor’s thesis of buying shares in the first place.
However, when it comes to cutting out a winning stock, there is more debate. Some say it is wise to diversify to reduce the risk of a concentrated position. Others argue that if a stock is profitable, you should not confuse success.
When to cut
The question you need to ask yourself is this: Are you downsizing because you have a stock that you think has even better prospects for the future, or are you just selling to make a profit?
Trimming a winning position in favor of investing in an even bigger possible winner can be a great move, especially in a retirement account for which you don’t have to worry about capital gains taxes. This does not mean a loss of confidence in your original stocks, but rather the belief that you can do better elsewhere.
On the other hand, haircuts because of haircuts are not always so clear. Raising cash while looking for better growth prospects is not a bad idea, but you need to be prepared for your original stocks to keep growing even as you look. However, taking money from stocks to reinvest in lost stocks often turns out to be bad – especially when there are good reasons for those losers not to perform better.
It certainly seems that ARK Invest’s motivation for trimming Tesla’s position was to redirect capital to other ideas with highly convincing shares. This is a worthy move – and it says nothing negative about Tesla’s ability to continue to dominate its industry for years to come. If you have another stock that you think will do even better than Tesla, you might consider doing the same thing ARK Invest did.