This ace investor just trimmed its stake in Tesla – should you?

Lots of people made huge profits by owning shares in Tesla (Nasdaq: TSLA). Even those who only have one year under their belt with electric auto maker’s inventory have seen staggering gains. Long-term investors have found life-changing wealth.

Ace Investment Pro Cathy Wood He greatly benefited from Tesla’s rise. Chief Investment Officer of Active Exchange ETF Leading company ARK Invest has significantly boosted the performance of many of its ETFs by owning shares in the auto giant.

So when two ARK Investors‘ ETFs trimmed their stakes in Tesla last week, it raised questions. Could a star investor lose confidence in Tesla? Or does it make wise decisions about portfolio management? Let’s take a look at what Wood did and what it means for Tesla investors.

Image source: Tesla.

2 Tesla stock sales

The nice thing about an active ETF is that you see the moves Wood makes in her money in almost real time. Funds make daily disclosures of their purchases and sales, and you can track them to see if there are any changes in sentiment at ARK Invest.

In the past week, ARK made two moves with Tesla. The ARK Innovation ETF (NYSEMKT: ARKK) It sold around 137,000 Tesla shares on January 19, raising nearly $ 115 million. The ARK is the next generation of the Internet (NYSEMKT: ARKW) This was followed on January 20 with a sale of well under 10,500 shares, generating nearly $ 9 million in cash proceeds.

Sales were part of a wider redistribution. For the next generation internet, the ETF used the money to add to positions in Synopsis (Nasdaq: SNPS). Meanwhile, it included the six stocks that the ETF bought on the day it sold Tesla Regeneron Pharmaceuticals (Nasdaq: REGN) And the Spotify technology (New York Stock Exchange: Spot), Among others.

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Tesla’s still big owner

ARK Invest sales have not changed the lead role in that Tesla shares He plays in the wallets of these two funds. Tesla still has Tesla as its largest position, with a total of over $ 2.8 billion invested in stocks across both portfolios. For both ETFs, Tesla makes up more than 9% of their respective assets under management.

So it would be unreasonable to conclude that ARK Invest has lost any confidence in Tesla’s ability to maintain its pioneering role in the electric vehicle industry. But it raises an age-old dilemma: Do you allow winners to run even after they make up a large percentage of your total holdings? Or are you reducing your trades in favor of reallocating money to other investment opportunities?

Risk versus reward

Long-term investors like to hold stocks for as long as possible. When a company’s core business is successful, it can generate huge rates of growth in sales and profits over years or even decades. Usually an arrow follows the suit, like Investors watched him with Tesla Its vehicle shipments soared and started making a steady profit.

This does not mean that long-term investors never sell. But it usually takes a massive change in company fortunes to drive a full liquidation of a long-term investor position in stocks – something fundamentally inconsistent with the investor’s thesis to buy the stock in the first place.

However, when it comes to trimming the gainers, there is more controversy. Some say it is wise to diversify to reduce the risk of holding a concentrated position. Others argue that if the stock wins, you shouldn’t mess with success.

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When to trim

The question you should ask yourself is: Are you downsizing because you have a stock that you think has better prospects for the future, or are you simply selling for a gain?

Carving out a winning position in favor of investing in a potential winner can be a great step, especially in a retirement account that you don’t have to worry about capital gains taxes. It does not indicate a loss of confidence in your original inventory, but rather a belief that you can do a better job elsewhere.

On the other hand, trimming for trimming is not always that clear. Raising money while looking for better growth prospects is not a bad idea, but you need to be prepared for your original stock to keep rising even as you look. However, taking money out of winners to reinvest in losing stocks is often a bad thing – especially when there are good reasons why these losers are performing.

It certainly appears that ARK Invest’s drive to downgrade its position in Tesla was a reallocation of capital to highly convinced stock ideas. This is a worthwhile move – and it doesn’t say anything negative about Tesla’s ability to continue to dominate its industry for years to come. If you have another stock that you think will be better than Tesla, you may want to consider doing the same thing ARK Invest has done.

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