The Power of Cathie Woods’ Long-Term Perspective
Cathie Woods—the founder, CEO, and Chief Investment Officer of Ark Investment LLC—became something of a financial Rockstar in 2020. Her flagship portfolio, the Ark Innovation ETF (ARKK), has returned close to 50% in the last 12 months and has an annualized return of over 25% since its inception in November 2014. Much of this success has been attributed to the explosive growth of stocks in emerging or disruptive industries, affirming Woods’ foresight in key areas of growth and innovation over the last 6 years. These include an emphasis on autonomous vehicles, fintech disruptors like cryptocurrency, space exploration, and the advancement of genomics, all of which Ark has additional ETFs to capitalize on specifically. As you may expect, Ark’s innovation-focused investing strategy can require a great deal of conviction, and with that the resolve to prioritize a long-term outlook over daily price movements of stocks and quarterly results when making decisions. This may sound obvious, but it is a key aspect of markets that investors and company managers alike often struggle with.
Ark has always remained steadfast in its priority on long-term investing over short-term stock performance, and even after their outstanding fund performance over the last year and a half they continue to stand by this philosophy. Unfortunately, many investors and the majority of the financial media do not project this same focus, often overemphasizing short-term results to the point where managers may harm their company’s long-term outlook for the sake of profits now. This often takes the form of managers choosing to raise or initiate dividends and stock buybacks rather than investing the cash back into the business and into growth projects. Sometimes, companies will even take out debt to conduct these dividends and buybacks. Woods has been highly critical of such behavior, stating in her 2021 interview with Bloomberg that “Companies who have leveraged up to satisfy short-term oriented shareholders…if unlucky will lose their business.”
Many analysts at Ark Investment don’t come from traditional financial backgrounds, and they have proven themselves to be far less accepting of these methods of short-term emphasis all too common in traditional management. Ark employs engineers, computer scientists, and mathematicians among other STEM professionals and often reference experts in the fields their investment strategies are most centered upon. These analysts focus on long-term innovation trends in key areas Ark believes to have the most profound developments over the next decade and beyond. Because many stocks in new, developing industries are usually pre-profit and sometimes even pre-revenue, they are often highly volatile, with their day-to-day price movement largely being manipulated by day traders and speculators. Take Skillz Inc, for example. This is the first esports company to ever go public. And a sizable holding in Ark’s ETFs. Since going public last year via a SPAC (Special Purpose Acquisition Company; An alternative to the traditional IPO) the stock price has fluctuated from around $10 to over $46, and is currently trading in the low $20s. Another example is Desktop Metal, a next generation manufacturer of 3D Printers. They also went public in 2020, and are currently trading near $11 after coming down from a high of nearly $35.
Despite their strong emphasis on long-term results and underlying company performance, this volatility in many of Ark’s holdings has left the fund open to some criticism by those in finance more focused on short-term and immediate performance. Although the flagship Ark fund has substantially outperformed the market since 2014, Ark’s 2021 YTD performance has actually been negative as growth stocks par some of their recent gains and continue to experience volatility. Upon zooming out to a larger time frame, it is easily acknowledged this as a pullback off the fund’s all-time highs after more than doubling in 2020, and in fact has been something Ark acknowledged to be expected for many months. Yet, major news sources, including CNBC, still published articles in May, the low point for Ark’s ETF dip, that the funds were in a “deep freeze” and emphasize 2021 underperformance, despite the fund, even at its low point of the year, being up at least 75% from what it was 52 weeks prior.
Woods and the Ark Investment team are not alone in their pursuit of long-term holdings. Peter Lynch, one of the greatest investors of the later 20th century and former manager of the Fidelity Magellan Fund, revealed in his book “One Up Wall Street” that oftentimes his holdings perform the best in their 4th or 5th year rather than their 1st or 2nd. This, of course, makes sense, as there is no reason to assume that once you buy a stock at an apparent bargain the rest of the market will catch on to your thinking and send the price higher. This sentiment refers to another nugget of wisdom Lynch shares: “the stock doesn’t know you own it.” Many other great investors, such as Warren Buffet and Jack Bogle, and also strong proponents of long-term investing, and their historic returns more than validate the legitimacy of these methods. Yet, Wall Street, and many of the managers of companies being trades, continues to overemphasize the day to day of market movements, and throw long-term thinking to the wayside.
Fortunately, Ark has faced its fair share of criticism in the past, and the team is not easily swayed from their investment strategies. Back in 2018, Woods became widely criticized for her $4000 price target on Tesla, which the stock hit (split adjusted) in January 2021. Today, Woods is a frequent guest on a number of financial news stations, as well as Ark’s own YouTube channel, which has over 420 thousand subscribers. These platforms have allowed her the opportunity to defend her investments, especially those bringing the greatest criticism such as Bitcoin, and has allowed Ark, and Woods specifically, to amass a sort of cult following of retail investors prepared to hold Ark’s ETFs through thick and thin in their own portfolio. Ark has also found more contemporary allies in management of companies such as Palantir Technologies, a data analytics and AI development company that went public in late 2020 via a direct listing. Palantir CEO Alex Karp has been vehemently critical of Wall Street’s short-term horizon and the “destructive” impact it has on companies. Karp has also made it clear that his company is in it “for the long haul” and that if investors are looking only at the short-term that they should place their money elsewhere. Such sentiment is exactly what Woods and her team looks for in company management, and since their public market Ark has added substantially to their Palantir holdings.
The short-term peaks and troughs of the market can be quite thrilling, and such attract much of the attention of the financial press and active investors. Yet, Cathie Woods and her Ark Investment team, like many other great investors, have demonstrated the discipline to look beyond the here and now of markets. The return of this focus has been great for Ark thus far, and, as history has shown, it is more than likely this strategy will continue to prove one of their most valuable assets in the future.
Works Cited
CNBC, “Tesla Shares Will Hit $4,000, Says Ark CEO Catherine Wood | CNBC.” YouTube, YouTube, 7 Feb. 2018, www.youtube.com/watch?v=j7oPJZG_boA.
Kevin Stank, “Palantir CEO Rips Wall Street as Having a 'Destructive' and 'Corrosive' Short-Term Focus.” CNBC, CNBC, 16 Mar. 2021, www.cnbc.com/2021/03/16/palantir-ceo-alex-karp-on-wall-streets-destructive-short-term-focus.html.
Lynch, Peter, and John Rothchild. One up on Wall Street: How to Use What You Already Know to Make Money in the Market. Easton Press, 2003.
Stephen, Stephen. “Last Year's Hottest Wall Street Fund Manager Enters a Deep Freeze.” CBS News, CBS Interactive, 18 May 2021, www.cbsnews.com/news/cathie-wood-ark-investments-hot-etf/?ftag=CNM-00-10aac3a.
