This Isn't a Game of Make-Believe

Pretend you're Cathie Wood... What will you do to make up for a 70%-plus plunge?... This isn't a game of make-believe... A plan to 'democratize venture capital'... The latest garbage investment from a known purveyor of garbage investment vehicles... The long trek to the mega-bubble's bottom continues... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Pretend you're Cathie Wood... What will you do to make up for a 70%-plus plunge?... This isn't a game of make-believe... A plan to 'democratize venture capital'... The latest garbage investment from a known purveyor of garbage investment vehicles... The long trek to the mega-bubble's bottom continues... --------------------------------------------------------------- We'll begin today's Digest with a game of make-believe... I (Dan Ferris) want you to pretend you're Cathie Wood... I've [written about Wood a bunch of times]( over the past 18 months or so. So regular Digest readers likely know enough about her at this point to get an early edge in this game. Now, imagine it's January 2014, and you want to get a coveted invitation into the trendy and growing "[Bull Club]( So you put up your money to start your own business... You call it ARK Investment Management. It's named after the Ark of the Covenant – the sacred relic that reportedly holds the Ten Commandments. (Later, you'll tell your clients that ARK actually stands for "Active Research Knowledge"... But let's not get too complicated in this game of make-believe.) You believe "disruptive innovation" is the way of the future. And you want to help people grow wealth by investing in these types of companies. So now, you have your focus. The first few years aren't too exciting. But by 2020, you really hit your stride. Your firm's assets under management ("AUM") soar as the market rebounds from the COVID-19 panic. You're quickly accepted into the Bull Club. In fact, you become one of the faces of the club. The world hails you as a genius. And you're really feeling this disruptive innovation stuff... For example, you tell the world that electric-vehicle maker Tesla (TSLA) will go to $6,800 per share. By early 2021, [your firm has about $54 billion in AUM](. And even after a rough few months, you say in May 2021 that your AUM "will more than triple" within five years. Life is great... until it isn't. Now, it's September 2022. The past 19 months have been brutal. Your flagship ARK Innovation Fund (ARKK) is down about 75% from its February 2021 mega-bubble peak... Sure enough, that's "more than triple" – but it's not what you meant at all. It's more than triple the Nasdaq Composite Index's roughly 24% drop during the same period. It proves to the whole world that... You touted the worst speculative tech garbage in the market... Of course, as a staunch Bull Club supporter, you touted those stocks like they were the "best of the best" in the market. And you're not going to just quit on your beliefs... More than 19 months after their peak, you've yet to acknowledge that you really screwed up. But that's to be expected... You may never come clean. And if you do, it won't be for many years after you've watched billions more of your investors' money disappear forever. Your firm's AUM is now around $14.5 billion. That's a 70%-plus plunge from the peak. ARK Invest charges 0.75% or greater expense ratios on all but two of its eight exchange-traded funds ("ETFs"). Those two ETFs account for just 2.1% of AUM. So for our purposes, it's accurate enough to say that every $100 of assets that goes out the door takes another roughly $0.75 in fees with it. The disappearance of roughly $40 billion in assets means ARK Invest has lost about $300 million in annual revenue from fees to the bear market. So now, you have a simple but urgent problem... You need to make up for those losses. What will you do? How will you attract new money after recently destroying billions in investor capital? Suddenly, the next genius idea comes to you... You can start a new fund to attract a lot of new investors. But this time, you won't show them how much money they're losing every day. And you won't let them take their money out all at once like they can with your ETFs. Since ARK Invest's AUM has fallen so much, you'll need to charge much than 0.75% in annual fees. After all, that lost revenue won't suddenly reappear on its own. You need to cast your net as far and wide as possible. You need some way to attract money from absolutely everybody with two dimes to rub together. But you need to do it in a way that will appeal to wealthy folks, too. To overcome the hesitation folks might feel knowing that all your ETFs have been absolutely decimated over the past 19 months, it will need to be something really special. It will need to be some type of investing not normally accessible to most investors. Any thoughts? It's a tough nut to crack, isn't it? Well, the real Cathie Wood did something this week that ruined our game of make-believe... I guess it makes sense that no matter how good you and I might be at make-believe... we'll never compete with the real Cathie Wood. Wood knew just what to do... On Tuesday, she launched the new ARK Venture Fund. The fund's purpose is to allow anyone – including the smallest (least experienced) – investors to invest in illiquid private companies. Its prospectus says it will be 20% to 85% invested in private companies at any time. The rest will be in publicly traded companies. The ARK Venture Fund is an "interval fund"... Interval funds get their name from the fact that once you put your money in, you're only allowed to take it out at predetermined intervals. At those points, the fund's managers – in this case, ARK Invest – offer to buy a portion of your shares at the current net asset value. ARK Invest will offer to repurchase ARK Venture Fund shares once each quarter. That means investors will be allowed to take their money out four times per year. But importantly, you can't get your money back all at once. When you want it back, you'll likely only be allowed to take out 5% per quarter. So if you want everything back, it will take 20 quarters to get it all out. That's five years. Of course, you can put money into the fund any time you want. You just can't get it all back at once. And five years is the most optimistic scenario... The investment horizon is listed as five to 10 years. So you know ARK Invest intends to keep it longer than five years, at least on average. The company says it will conduct offers to repurchase between 5% and 25% of investors' shares every quarter. But 5% is likely the best you'll do – and even that isn't so likely... That's pretty clear from the first page of the prospectus. Take a look (emphasis added)... In connection with any given repurchase offer, it is expected that the Fund will offer to repurchase only the minimum amount of 5% of its outstanding Shares. It is also possible that a repurchase offer may be oversubscribed, with the result that shareholders may only be able to have a portion of their Shares repurchased. In other words... if too many people want their money back all at once, you won't even get your 5%. You might not even get 1% if the offering is oversubscribed enough. You can decide whether or not to accept ARK Invest's quarterly offer. But aside from these minimal parameters, management decides when and how much of your money you get back. So let's say the private companies within this shiny new ARK Venture Fund finally admit their assets are imploding as fast as every other tech stock on the planet... Do you think the quarterly redemptions will be oversubscribed or undersubscribed? Said another way... do you think the great unwashed who put their last $500 in before watching it get cut in half in a quarter or two will rush to get as much of it back as possible at the end of every quarter? Or will they all get together, act rationally, and not panic? We don't need another game of make-believe to know the answer to those questions. Read [the first page of the ARK Venture Fund prospectus]( and tell me it's not a roach motel... You can check in whenever you want. But when you try to check out once every quarter, you can't really leave. You're stuck. And you're surrounded by piles and piles of garbage. After all, [venture capital ('VC') asset values are already imploding](... But most folks probably haven't noticed. That's due in large part to the quirks of private-company investing and the fact that folks have been calling for the tech VC bubble to burst for more than a decade. Heck, all the way back in November 2011, early Facebook investor Sean Parker said of the VC frenzy... I don't know how many more years of this we have – maybe it's a year, a year or two, max. More than a decade has passed since Parker made that statement. So I understand any doubts you may have about calling a bust that seems like it never arrived. The VC critics started to sound like permabears after a while... And folks stopped listening. But honestly, every asset on Earth is imploding right now. Is it really possible that some of the most speculative, risky, unlikely-to-succeed investments aren't also in serious trouble? The VC implosion hasn't already been widely reported for a simple reason... The companies are all private, which has two powerful implications... Both of these implications lead to a "delay and pray" approach. By that, I mean VC investors hold off recognizing their losses in hopes that it will all blow over... First, because VC investments are in private companies that don't trade on public exchanges, their equity is highly illiquid. So there's rarely any reason to tell anyone what their fair value is at any given moment. It's like owning a house you don't intend to move out of for years. As long as you can pay the mortgage, you're not too concerned with any estimated home values. Second, when it comes to reporting asset values to investors each quarter, private-company accountants can stretch the numbers however they want. Since they're not beholden to any public-reporting rules, they can do what it takes to justify claims that their investments haven't been crushed like practically every other type of investment on the planet. VC investments are startups. So they're doing something new. And they can make all kinds of claims about the value of their technology that nobody can argue with. But don't be fooled... The VC bubble has already started blowing up. As the Financial Times reported in July... The venture capital bubble is facing a slow and messy unwinding. After a historic boom that puts even the tech bubble of the 1990s into the shade, an adjustment to more rational conditions has started. But structural factors and the psychology of private markets make it hard to tell how long this will take – or what will emerge on the other side. One of the "structural factors" is the fact that raising money at a lower valuation than the last round is viewed by startup founders as a failure in the world of VC investing (and by previous investors as highly dilutive, just like in public markets). So there's always a powerful incentive to report the highest possible valuations... And as long as private startup companies report high valuations, they can keep issuing stock to employees. That makes the management teams feel rich and keeps them feeling like they're part of something great. All of these incentives create an awful situation... They encourage private companies to deny the reality of what's happening all around them. Being rewarded to ignore enormous threats to your viability as a startup company doesn't seem like a great incentive for management to prepare for hard times. It also seems like a horrible way to treat your employees – though I recognize that they would likely resent you for telling them an unpleasant truth. That's human nature. Let's go back to the ARK Venture Fund. Remember what I said earlier... No matter what's really happening to the private startups in Wood's latest brainchild, its shareholders can only sit and watch the value of their investment evaporate as the industry is forced to confront the truth. ARK Invest will keep their money, no matter how badly investors want it back. Worse still, investors will need noise-canceling headphones to mute the massive sucking sound of their money being siphoned off into ARK Invest's bank account via massive fees. And the sucking will be substantial... Wood's firm is charging investors in its new ARK Venture Fund a nice, fat fee of 2.75% of assets every year. That doesn't include an additional 1.47% fee for "distribution and/or servicing" and "other operating expenses." ARK Invest says this is a good deal because most VC funds charge a 2% management fee and 20% of the profits. It's sometimes referred to as the "2 and 20 structure." But in reality, it all adds up to a 4.22% hit to your account... every... single... year. Believe it or not, it gets worse... Yes, it's even worse than a VC fund that invests in illiquid, private versions of the publicly traded, speculative, "disruptive innovation" garbage that fills ARK Invest's ETFs. And it's even worse than Wood charging 4.22% per year for the privilege of investing in this stuff. To really tick me off and earn the full Friday Digest treatment... ARK Invest had to come up with a way to lure the least knowledgeable and most inexperienced individual investors into its plan and virtually guarantee that they will never see their money again – or at least not much of it. You see, VC funds don't normally let anyone in but wealthy people who agree to have their money locked up for an extended period (often 10 years). But that won't cut it here... Remember, ARK Invest needs to gather as much capital as possible into this new fund as soon as possible. It needs everybody's money – not just that of a few rich people. So the minimum investment required to participate isn't what you typically expect from a VC fund. It's not $50 million... $5 million... $500,000... $50,000... or even $5,000. It's $500. ARK Invest partnered with a company called Titan. They created an app that allows anybody to get into the ARK Venture Fund with a minimum investment of just $500. That's right... The company that invested in unprofitable, high-growth tech garbage that was virtually guaranteed to get destroyed at the first sign of trouble has now turned to risky, illiquid bets on the same type of garbage. And for all the folks who don't know any better, it's making it into something that looks like as much fun as buying fractional Tesla shares on Robinhood. For those folks, it might seem like just another way to go "to the moon." But in reality, they're not getting any closer than we've gotten to the lunar surface in 50 years. ARK Invest strives to 'democratize venture capital'... Oh... so sort of like how Robinhood democratized getting absolutely destroyed in stocks and options for all sorts of clueless retail investors. Wait, not that kind of democratizing? ARK Invest also uses the phrase, "A New Era of Venture Capital." It's almost trying too hard to win a contest for [writing the Economist cover that calls the next big market top](. Of course, ARK Invest says its VC interval fund is "not designed as a trading vehicle." But I promise you... That disclosure will be lost on all those $500-a-pop retail folks once they start losing money. They'll ask for 5% of their money back. And ARK Invest will offer to give them 3%, 2%, 1%, or whatever the ratio will be given the enormous number of folks asking for it. Then, "democratized venture capital" will start to feel like democratized everything else – two wolves and a sheep voting on what's for lunch. Maybe you think I'm hollering about nothing. After all, if folks want to lock their money up for several years with a Bull Club apologist like Wood, who am I to tell them otherwise? My point is that the ARK Venture Fund is a garbage investment from a known purveyor of garbage investment vehicles. Except now, they've added illiquidity to the mix. Sure, folks are free to do as they like, they're 100% responsible for their actions, yadda, yadda... So I get it if you try to tell me ARK Invest isn't forcing anybody to buy anything. But can you also tell me that it's not diabolical to make it easy for know-nothing investors to put money into illiquid securities – and essentially keep it there indefinitely – right as the situation in this little-followed corner of the market is starting to devolve into what has happened to every other asset on the planet? Are you not seeing what I'm seeing? That leads us to the most important thing I want you to remember this week... When the headlines really start to fill up with VC blowups, people with $500 to invest in a bunch of sketchy garbage won't want to get anywhere remotely close to the stock market. In fact, people with $500,000 and $5 million will find it really hard to put money into stocks at that point, too. That will be especially true if they're anywhere near retirement age. The vast majority of investors will swear off stocks and bonds forever. That's when the bear market will finally bottom. And that's when the opportunity begins. I wonder if ARK Invest will even exist when the mega-bubble bear market finally bottoms. I doubt the ARK Venture Fund will. Anyway, I hope I've made it clear by now... This isn't a game of make-believe. Don't put money into the ARK Venture Fund. --------------------------------------------------------------- Recommended Links: ['Sell This Popular Ruined Stock Immediately']( Wall Street titan Marc Chaikin and world-renowned forensic accountant Joel Litman just delivered an urgent crisis warning... and shared their No. 1 step to take with your money right now to protect yourself. Plus, Joel reveals his No. 1 stock you should SELL immediately. It's a beloved American retail giant that he says is headed for disaster. [Click here for details before Monday's opening bell](. --------------------------------------------------------------- [Oil Expert Quietly Predicts MASSIVE Market Event]( It's the top-performing sector of the year, yet most investors are completely ignoring it. And now one company trading under $20 could be at the center of it all... set up to profit big time for what may be the biggest boom in the oil industry's 163-year history. [Here's the No. 1 step to take today](. --------------------------------------------------------------- New 52-week highs (as of 9/29/22): SPDR Bloomberg 1-3 Month T-Bill Fund (BIL) and short positions in iShares Russell 3000 Fund (IWV) and iShares U.S. Real Estate Fund (IYR). In today's mailbag, more feedback on the Federal Reserve and other policymakers. Do you have a comment or question? Send your notes to feedback@stansberryresearch.com. "Why does the world hang on every word of the Fed? The same clowns who let the economy 'run hot' from March 2021 when inflation started ripping above 2% and violating their mandate, an inflation caused by their excessive money printing in March 2020. "Now the world expects the exact same clowns who caused inflation to now rein in inflation by raising rates and crushing the economy and jobs. How does all this benefit the economy and the world? "As the guardians of the world's reserve currency, the Fed has a responsibility to manage the currency soberly – not act like a manic-depressive. In a sane world, the Fed lunatics would be sacked en masse or even shut down completely." – Paid-up subscriber Steven I. "Jerome Powell and Janet Yellen are taking pay reductions, aren't they? How about when people lose their jobs because of all the mismanagement of the Fed, we lose 400 to 500 PhD economists at the Fed? "Throw in a few hundred members of Congress and I think we might have something going in the right direction." – Paid-up subscriber Gary M. Good investing, Dan Ferris Eagle Point, Oregon September 30, 2022 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 848.4% Retirement Millionaire Doc ADP Automatic Data 10/09/08 807.4% Extreme Value Ferris MSFT Microsoft 02/10/12 727.6% Stansberry's Investment Advisory Porter HSY Hershey 12/07/07 532.8% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 487.1% Stansberry Innovations Report Wade AFG American Financial 10/12/12 396.4% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 378.0% Retirement Millionaire Doc WRB W.R. Berkley 03/16/12 363.0% Stansberry's Investment Advisory Porter TTD The Trade Desk 10/17/19 283.0% Stansberry Innovations Report Engel FSMEX Fidelity Sel Med 09/03/08 281.9% Retirement Millionaire Doc Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 3 Retirement Millionaire Doc 1 Extreme Value Ferris 4 Stansberry's Investment Advisory Porter 2 Stansberry Innovations Report Engel/Wade --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ONE-USD Harmony 12/16/19 1,165.9% Crypto Capital Wade ETH/USD Ethereum 12/07/18 1,159.1% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,083.9% Crypto Capital Wade MATIC/USD Polygon 02/25/21 826.3% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 421.6% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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