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Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

She came under the spotlight in 2020 when their Inovation ETF was up more than 150% in a year, thanks to the increasing role of technology in daily life during the Covid-19 pandemic.

Who is Cathie Wood?

She was born in 1955 in Los Angeles, California. After completing her schooling in the city, she studied economics at the University of South California (USC). Wood was mentored by Arthur Laffer, famous as the inventor of the Laffer Curve, which theories the optimal relation between tax rates and tax revenue.

After completing her college education, she worked at several investment firms, including Jennison Associates and Alliance Bernstein, where she honed her skills as a money manager. Eventually, she founded her investment management firm in 2014. ARK Investment Management runs nine Exchange-Traded Funds, with Assets Under Management at $24 billion as of February 2022 end.

Three of these ETFs depend on indices, passively managed, and the rest are actively managed. Her most popular funds have delivered 20% to 31% annual returns in the last five years, handsomely beating the S&P 500 index, the most popular benchmark in the US.

Additional Read: 5 Financial Planning Tips for Young Professionals

Investment philosophy

Wood’s investment approach focuses on finding disruptive technologies and companies making a big splash in those fields. Currently, her research is centred around the belief that five innovation platforms are evolving and converging simultaneously: Artificial Intelligence, Robotics, Energy Storage, DNA Sequencing, and Blockchain Technology.

Though, she and her team have identified other spheres of technology that they believe will change the world how we see it today. They include reusable rockets, 3D printing, battery technology, and genome and gene sequencing. She defines her investment approach in two layers: starting with a top-down approach to find the innovation platforms and then identify the companies which can be benefitted by this disruption.  

Her top-down approach involves ideation, which includes figuring out how the world is changing and where it is headed, seizing the opportunity, anticipating and quantifying “multi-year value-chain transformations and market opportunities”.

Once this is done, she select stocks and find valuable companies. This includes building out a valuation and revenue model for each company under review. She states these models incorporate the company’s unit volume growth and how it has helped bring down the cost, leading to greater market adoption and penetration of the technologies. Wood typically identifies companies with an exponential growth rate of 20% to 50% in revenue for the next five years. As per her philosophy, any disruption innovator will maximize the returns to the investors in a maximum of five years and after that, growth will slow down.

Additional Read: Red Flags in Financial statements: Watch where you jump!

Some of her top investments include Tesla, which makes electric cars; Trimble, which develops technology solutions for multiple industries; Block, a leader in digital payments; Coinbase, a leading cryptocurrency exchange, and Exact Sciences, which manufactures cancer diagnostic tools. She avoids technology stocks that do not foster any innovation or try to cut costs, even if they are active in the disruptive fields she tracks. ARK funds don’t hold stocks from consumer staples, high premium paying stocks or value stocks because of the low growth of these stocks.

Additional Read: How to Use Mutual Fund Investment for Financial Planning

Conclusion

Cathie’s approach towards investing differs from traditional means as she takes risks that most value investors or even some growth investors will never do. But, perhaps, there lies her secret to success. Her investment philosophy is identifying futuristic technologies and betting big on them.

Understandably, not all will become successful and hence, are risky, but the rewards will likely be worth the risk even if some become successful.

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