May 31, 2021 issue of Bloomberg Businessweek had an article about Cathie Wood, who is the manager of the Ark Innovation ETF fund, with an incredible 150% gain in 2020. The article is very interesting to say the least.
There are a lot of things that are outright dicey for any value oriented investors. However, there are certain things that forced me to think differently and perhaps change a thing or two about my investment philosophy.
Are you with the Old or New Economy?
As always, the economy is transforming. Some industries are changing rapidly and some with snail’s pace. If the process of investing is tough, its mainly because of this single variable i.e. change. It is hard to expect changes and even harder to measure them. To make the situation worst, changes could also be backward.
Cathie seems to be the front runner when it comes to accepting and believing changes. She believes and lives in the better future.
Cathie’s investment philosophy is to invest in the companies with ground breaking innovations. Per her, AI, Blockchain, DNA sequencing, Energy storage, Robotics are the key areas that are transforming or are going to transform the economy. She believes that this transformation leads to higher wages, falling prices, and wider profit margin. This is the new economy.
In the new economy, the more repetitive and mundane jobs are going to robots. People will be doing more creative and higher paid jobs.
Being working in IT industry, and half of Cathie’s age why am I so reluctant to accept and acknowledge innovation? Why am I not so excited about these new technology and innovation?
These questions dawned on me since reading that article. I should be the one excited about innovation. Why am I so complacent about changes and updates. Why?
On the other hand, the old economy is where things have changed for the worst or have not changed at all. Some of those bad Ideas are Physical Stores, Bank Branches, Linear TV, Freight Rail, Traditional transportation. She believes that the hardest hit companies will be those who spend the part decade juicing earnings rather than investing in the future. These are all realities and we have seen many of those.
Netflix eating away Blockbuster, once the market leader, is a prime example of change for our generation. People have not stopped watching movies, its just the way the content is delivered has changed. Companies accepting these facts are flourishing and that don’t have now become case studies in Business Schools.
Conclusion
I think Cathie is right but just too early. Epic breakthrough can be costly and slow to deploy in the real world.
The prime example is Dot Com bubble, where the dream was right, but it was just 20 to 25 years too early. Having said that, we do need to invest in the future today.
Also, her investments may not work out so well. Well, at least not like last year because it is a lot easier to identify the companies that are vulnerable than the companies that are going to come out ahead.
Her investments are down almost 40% since they peaked in the beginning of the year. And this is what she has to say about that.
“Don’t sell at the bottom.”
“The Innovation is on Sale”
Arrow of Performance 