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The Fall of Saint Cathie

“A rising tide lifts all boats,” President John F. Kennedy said. Warren Buffett added that a receding tide shows “who’s been swimming naked.”

Put together, it’s a good reminder that anyone can benefit from a good market. But when good times turn bad, as they always eventually do… stocks trading at unsustainable levels will fall, leaving their investors hurting as well.

Speaking of falling stocks…

Enter Cathie Wood, founder, CEO, and CIO of ARK Invest, which only buys up “disruptive technology.” Ms. Wood was in the news earlier this week when her company announced a $60 million position in Elon Musk’s AI startup, xAI.

The investment was for the ARK Venture Fund (ARKVX), a fund that holds private, venture-backed companies. It has even larger positions in OpenAI and Anthropic, which runs Claude AI.

The fund was launched in September of 2022. And I wish Ms. Wood – and the entire ARK team – the best of luck with their foray into private investments.

Because her track record with public equities is spotty… and that’s being generous.

The Face of the Tech Bull

In many ways, Cathie Wood was the face of the tech bull that kicked off from the COVID lows of March 2020. The flagship ARK Innovation ETF (ARKK) soared 150% that year. She was revered, admired, and lovingly referred to as “Saint Cathie” in some circles.

But then the ETF dropped 23.5% in 2021.

And 66.9% in 2022.

In fact, Morningstar reported this year that it “accounts for about $7.1 billion of value destruction over the trailing 10-year period.” Worse yet, the wider array of ARK funds “wiped out an estimated $14.3 billion in shareholder value.”

Morningstar analyst Amy Arnott added that they “managed to lose value for shareholders even during a generally bullish market.”

And the numbers back that up. The tech-heavy Nasdaq 100 – as measured by the QQQ ETF – is up some 11.7% year-to-date. ARKK is down about 17% over the same period.

Stock picking is a tough gig, and I don’t mean to come off as the guy throwing stones. All the same, I can’t help but think that it could have all been avoided.

Choose To Be an Intelligent Investor

One of my favorite investing books is Benjamin Graham’s The Intelligent Investor.

Known as the Father of Value Investing, Graham was Warren Buffett’s mentor back in the day. He lost a whole lot of money in the 1929 stock market crash but made even more afterward.

The Intelligent Investor sums up much of those lessons learned, such as:

  • “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

  • “The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.”

  • “Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.”

Much has changed since Graham’s days, but those basic principles have not. I’m not sure if Wood ever read Graham. If so, she must have missed the lesson on “suitable securities at suitable prices.”

Many of the ARKK holdings were the darlings of the 2020-2021 timeframe. And judging by the fund’s average cost basis, most of the positions were established back in those heady days. A quick look at the top holdings tells the story.

  • Tesla (TSLA)

    • Average Cost: $108.39

    • Current Price: $176.53

  • Coinbase (COIN)

    • Average Cost: $254

    • Current Price: $238

  • Roku (ROKU)

    • Average Cost: $243

    • Current Price: $56

  • Square (SQ)

    • Average Cost: $134

    • Current Price: $65

  • UiPath (PATH)

    • Average Cost: $62.44

    • Current Price: $18.25

Ms. Wood has come out ahead with TSLA. COIN is about breakeven. But the situation with ROKU, SQ, and PATH is rather dire.

And one ARKK position in particular is emblematic (not in a good way) of the “innovation first, valuation second” mentality.

In July of 2021, Ms. Wood “loaded up” with an additional purchase of Zoom Video Communications (ZM). At the time, her ETFs held some $1.24 billion worth of the stock.

I can’t imagine what she possibly saw…

With a market capitalization of some $114 billion, ZM traded at approximately 35 times sales and 134 times (!) earnings.

It really doesn’t matter how great a business Zoom is. Buying a stock that large at 134 times earnings is – and I mean this sincerely – not investing. At best, you’re what Graham would call a speculator.

And if Ms. Wood liked ZM at 134 times earnings, you’d think she’d love it now – after an 80% slide – at 23 times earnings. But perhaps it’s too little too late. As of January – with the stock down some 83% from its highs – ARKK finally started selling.

Don’t Swim Naked

It’s hard to resist the urge to speculate. People get caught up in share price potential, seeing nothing but dollar signs.

They hear hype on TV, around the water cooler, or from friends (who heard all about it from their dentists, who heard it from their cousins’ barbers twice removed). 

But that only gets you so far.

It makes much more sense to focus first on the company behind the stock and to – as Graham said – ask if it is a suitable security at a suitable price.

I’m not saying Cathie Wood is stupid. I don’t think she is, and she seems like a very hard worker who genuinely believes in what she does.

But she’s also a cautionary tale…

She fails in Graham’s admonition to seek out stocks that promise “safety of principal and an adequate return.” She’s so focused on amazing returns and disruptive tech that safety goes out the window, and sustainability with it.

Worse yet, instead of acknowledging where she’s erred, she’s doubled down on her beliefs year after year. It must be remembered that an active equity manager should be measured not only in the ability to pick winners, but also in the ability to manage volatility, hedge, and/or exit position in a shifting marketplace.

I’m sure she researches the companies she buys into, but she’s already made up her mind about disruptive technologies to begin with. That blinds her from doing real, worthwhile analysis of their fundamentals and what they can realistically achieve.

With time, some of those companies might indeed be disruptive. But it means nothing if they never produce investment profits.

The ARK team is welcome to continue speculating.

At Wide Moat Research, we’ll stick to investing.

Regards,

Brad Thomas
Editor, Intelligent Income Daily