Champion Trader vs Cathie Wood: Who Wins?

A battle between a great trader and a prominent money manager has taken place in recent years. Mark Minervini, 2x US trading champion, has taken shots at billion dollar money manager, Cathie Wood of ARK Invest.

His primary critique appears to be based in a rule that he has observed over time. A stock that has fallen 80% can decline by another 50%. Or more simply put, a stock that is down a lot can plunge a whole lot further. The rule speaks to the idea of risk management, and cutting losses, early.

It’s a pattern that Minervini doesn’t see in the methodology of Cathie Wood. The purchases and sales often tend to ignore prudent rules of risk management. He seems to argue that she buys a company based on a narrative but when the market completely contradicts it, she doesn’t respect the larger forces that oppose the investment thesis.

So, what does this all have to do with you and how can it help you make money?

Key Points

• Minervini appears to critique Wood for ignoring risk management and holding onto declining stocks based on thematic narratives.
• Evaluate your portfolio for under-performers and cut losses on stocks that aren’t meeting expectations.
• Focus on undervalued, fundamentally strong stocks with solid metrics and market dominance.

Your Mission Should You Choose To Accept It

Your mission should you choose to accept it, is to analyze your portfolio and identify what stocks are underperforming.

Find the ones that you thought would go up but went down. Identify the ones that you had conviction in but disappointed you.

In short, surface the stocks in your portfolio that have not done what you expected, and worse completely contradicted your expectations.

At this point Minervini might say simply sell the junk. Get out, cut your losses, and move on. Be a disciplined trader. One who can leave the anchor of poor decisions in the past and make smarter ones going forward.

But it is still wise to pay attention to the Buffett argument, whereby the baby is thrown out with the bath water. Besides, that’s how great stocks end up trading at way undervalued prices.

Be Wary Of The Chart Only

While it’s valuable to pay attention to the technical trends and be mindful and respectful of them, it’s equally important to understand when a great company is simply not being rewarded by the market with a fair valuation.

That happened just a couple of years ago with Buffett’s own Berkshire Hathaway, which traded in the $200-range before soaring to $400 per share.

How do you pick between the two, meaning which company is technically weak and fundamentally poor, versus which is underperforming in price but has solid fundamentals?

The answer lies largely in a few metrics that you should pay close attention to. This is not a complete set but if you can spot the price-to-earnings multiple is low relative to the growth rate, and the balance sheet is solid, you’ve probably got a company that will do well over the long-term.

There is much more to jot down if you can for a complete assessment. For example, is there a big competitor taking share? That might be the case for a company like Western Union that is being disintermediated by online competitors.

Or perhaps a large regulatory risk is outstanding. The list goes on. But for the most part if free cash flows are abundant, debt is low, and revenues and earnings are growing, you likely are onto a winner when it already holds a dominant market share.