In February 2020, Bloomberg published an article, “Cathie Wood, the Best Investor You’ve Never Heard Of.” Not any more.
She is now the most well-known portfolio manager around, called everything from “Money Tree” to “The Godmother” to “Momma Cathie” to “the Tom Brady of asset management.”
There are many fascinating aspects of the story of ARK Investment Management, Wood’s firm. Rather than tackling a number of them, this posting looks at issues related to investment research and decision making at ARK, but they also pertain to the industry as a whole.
Experience
In 1977, Barton Biggs wrote an investment strategy memo for the institutional clients of Morgan Stanley, in which one of the themes was how hard it is for portfolio managers to keep an open mind. Experience can be a great benefit, he said, but “the problem is that in accumulating experience, [the manager] also acquires prejudices against industries and stocks because he has lost money in them.” He continued:
Unless a money manager understands and compensates for this natural inclination to develop prejudices, these biases can block and impair his ability to receive and respond to new investment ideas . . . he should not permit the accumulated scar tissue to block his perception.
But that is easier said than done. And so, new generations often come to the fore during times of change:
Remember the Great Winfield in The Money Game who found himself unable to participate in a speculative junk market because his memory was getting in the way. He had heard all the stories before and he remembers how the stocks died when the market went down. “Now you know and I know,” he says to Adam Smith, “that one day the orchestra will stop playing and the wind will rattle through the broken windowpanes, and the anticipation of this freezes us. We are too old for this market. The best players in this kind of market have not passed their twenty-ninth birthday.”
The Great Winfield’s very sensible solution was to go out and hire some kids to give him the fresh perspective, to get the feel, of a “kid’s market.” “The strength of my kids,” he says, “is that they are too young to remember anything bad, and they are making so much money they feel invincible.”
Another excerpt that Biggs quoted from The Money Game included a swipe at the old ways of a veteran, “You can’t make any money with your questions like that. . . . Tell him, Johnny. Johnny the Kid is into the science stuff.”
Alas, in the end, as Biggs wrote, “They buried the kids and their science stuff.”
This comes to mind because the ARK research function has been characterized as Wood and a bunch of kids. You can judge for yourself by looking at the “research/investing” tab of the team page of the firm’s website — and by watching the video that’s linked at the top of the page. ARK has been perfectly structured for the environment that we have been in. The question is what will happen in the environments to come; will this cycle end like other ones have?
Research focus
Wood believes that most investment firms are ill-equipped to deal with this new era, because they structure their research efforts based upon old industry categories and on notions of importance that are grounded in current market capitalization.
Instead, she is an advocate for a thematic approach, moving research resources to areas where disruptive innovation is taking place. An analyst in that video on the website said, “We’re trying to figure out the macro trends of technology over the next five to ten years, and that’s much more exciting than maybe working out the minutiae of the next quarter or so.”
It’s true that investment organizations are frequently hamstrung (or even strangled) by entrenched categorization schemes. The reality is that alpha is often found by those snooping between the lines and finding the ill-fitting ideas, or by those going boldly at times when others are only timidly considering a possible foray. There’s nothing timid about ARK’s approach.
By hiring people with relatively little in the way of financial experience, but with what she believes is expertise in the emerging trends of the day, Wood is touching on two key issues.
The first concerns the organization of research analysts within a firm. Fundamental investment analysts (whether specialists or generalists) mostly follow industry norms — and the templates of their firms — when studying companies and recommending their securities.
Very few asset management firms have experts in individual fields who are there to provide advice that feeds the investment process without themselves being traditional analysts. Most organizations have trouble figuring out how to make that happen. Instead, if they are looking for specialized expertise outside of the standard channels of investment information, they opt to take people with industry experience and make them analysts (almost always a misuse of their talents) or to use expert networks and other contacts for that insight.
The second question that could be asked: “What mix of industry knowledge, trendspotting, innovation, and financial experience on a team makes for the best results?”
ARK has come in for some heat because other industry participants question the quality and depth of its research and the specific claims that it makes about the prospects for the companies in which it invests. (As an example, here is ARK’s March report on Tesla and a Twitter thread from Christopher Bloomstran regarding it, in which he said, “The fantasy involved is simply spectacular.”)
Around the table
Bloomberg Businessweek featured Wood on its cover in late May. It was titled simply: “The Believer.” The related story supports that characterization, although anyone who has watched Wood already knew of her steadfast belief in a particular vision of the future. One person was quoted as saying, “You listen to her and you go, ‘Wow. Either she’s right or she really thinks she’s right’.”
That raises the issue of whether people in the firm can stand up to Wood and engage in a way that leads to better decisions, or if the keeper of the vision will always win out — a cultural dynamic that has led to the decline and fall of many firms.
The article talks about a weekly investment ideas meeting that includes analysts and outside experts, “part business school seminar and part free-form bull session.” Who those outside experts are and whether they hold contrary views would determine whether there’s more exploration or theology at play. One who has been attending for a time was quoted as saying, “The lovely thing about it is you don’t have to talk the party line. You can say things that are heretical.”
An ARK employee said, “Cathie believes in a circle table as opposed to a rectangular table. She wants everyone around the table offering their ideas.” Anyone who has vetted investment organizations has heard something like that before; sometimes it’s true but often it isn’t.
No doubt the “circle table” was a metaphor, but the ARK video shows Wood at the center of long rectangular table, the focus of those seated around it, just as she is the focus of everything related to the firm. Whether she can lead a sustainable organization that is multidimensional remains to be seen.
These considerations — the role of experience, the structure of research activities, and the balance between firmly-held beliefs and the openness to other voices — are by no means limited to ARK; they should be of concern for every asset manager (and, therefore, for those who allocate capital to them). But as the archetypal firm of this era, the spotlight will be on the future choices that ARK makes regarding them.
Published: October 15, 2021
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