Lessons Learned from Investors: Cathie Wood
Lessons Learned from Inspiring Investors: Cathie Wood
đź’¸ Cathie Wood is an American investor and the founder, CEO and CIO (chief investment officer) of Ark Invest, an investment management firm that she created in 2014. She is a big believer that technological advances are reshaping the world and that Wall Street needs to take stock.
Today, we look a little deeper at Cathie’s profile, the difference between value and growth investing as well as the importance of investing in companies that are looking to change the world.
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Who is cathie wood?
Cathie Wood is an American investor and the founder, CEO and CIO (chief investment officer) of Ark Invest, an investment management firm that she created in 2014.
She became famous in 2020 as her performance exploded during the era of easy money - after having spent 40 years in the investment management industry.
When both the central bank and the government are doing everything they can to support the economy, a lot of the money created goes to early-stage businesses that are generally very cash hungry.
Ark Invest’s mission is to invest in early-stage businesses with disruptive innovation. That includes autonomous tech and robotics, next generation internet, genomics, space exploration, 3D printing, cryptocurrencies.
ARK invest is an unusual fund since the analysts share all their findings with the public on their website and in the media. In addition to podcasts, webinars, research papers, they publish every year their outlook for the upcoming year. All this is for free on their website to encourage investment professionals or retail investors to look at it, debate it and even prove them wrong.
This is the first lesson we can learn from ARK: discuss your ideas with others to check your information. By the way this is also a principle from Ray Dalio.
What is GROWTH INVESTING?
Growth investing is traditionally opposed to value investing. As per Investopedia definition: “growth investing is typically considered to be the "offensive" portion of an investment portfolio, with the "defensive" portion dedicated to income generation, tax reduction or capital preservation.”
Growth is cash hungry: Innovative companies will require a lot of cash at the early stage. The development of anything new like a product, a system, a process will initially require investments. As the product is finalised and being sold to customers, the company can finally reap the benefits of all that time and effort spent developing it. Unfortunately, it is not always the case that the product makes it to the final stage and in that case investors may not get back their investments. Let’s use the example of cancer treatment. Let’s say a team of scientists come up with a cure after years of research. For the cure to be tried on patients it would need to be approved first by the Federal Drug Association, which is a lengthy process with no guarantee. If the drug is approved, then investors could get handsomely rewarded for the investment. If the drug is not approved, investors could potentially lose everything. We can see the binary outcome that some growth companies offer. Therefore, growth stocks tend to carry more risk than value stock but also greater reward. This is very important to understand when you define your investment strategy.
Favour growth over profitability: you may have heard about P/E ratios before, it stands for price to earning ratio. It helps investors compare stocks. In this case you compare the price at which a stock trades versus its earnings. I encourage you to do more digging into this ratio since it is one of the most basic indicators for stock valuations. According to Investopedia, “P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.” I am bringing this up since you will find that growth stocks are in general valued on its growth outlook and not on its earnings. This can be good since when growth prospects are good, the company’s shares trade at a premium. Should growth slow, the price of the stock could correct abruptly. Remember, markets are forward looking and when the story changes, so does the stock price. The more brutal the repricing will be, the more hope/doom is priced in a company’s stock. Hence when investing in growth stories you should be prepared for volatility.
Volatility is your friend, but I can also be your enemy. Let’s start with the worst case: forced selling. Being forced to do anything never feels good. This is especially true when you are forced to sell when the market is plummeting. You may even occur a loss on your investment which will feel like a waste. Since growth investments can be more volatile than value investments, you should be prepared for large drawdowns. Use these to your advantage to get better entry levels! There is no better investment than one where you welcome lower prices to increase your position. A large drop is also an opportunity to reevaluate the growth prospects of a company. It is always difficult to “stop out” of an investment but it can be the right decision.
Invest in your future: Besides the potential higher reward, growth investing can be exciting since it supports future innovation and helps understand how the world will be like tomorrow. Whether you invest or not, you can learn a lot from following the trend that will shape our future. We picked Cathie Wood since she is getting out of her way to share her findings and educate retail investors. Her funds specialise in disruptive innovations; hence I believe that makes investing even more exciting! Did you know we are planning on building a hotel in orbit? Did you know we can 3D print houses? Did you know that traditional finance is being disrupted by Blockchains? What is artificial intelligence and how will it impact us? How are social platforms making their money? When will cars become driverless and how will it change our cities? How long before we see flying cars zooming into the sky?
Resources:
Ark Invest: https://ark-invest.com
Ark Invest Big Ideas 2022: https://research.ark-invest.com/thank-you-big-ideas-2022
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