I asked Cathie Wood the question no one else will

Key Concepts

Disruptive Innovation: Technologies that create new markets and value networks, eventually disrupting existing ones.
ARK Innovation ETF: An exchange-traded fund managed by ARK Invest, focusing on disruptive innovation.
AI (Artificial Intelligence): The simulation of human intelligence processes by machines, especially computer systems.
Autonomous Driving: Technology that enables vehicles to operate without human intervention.
Blockchain Technology: A distributed, immutable ledger that records transactions across many computers.
Multiomics: The study of multiple "omics" data types (genomics, proteomics, metabolomics, etc.) to understand biological systems.
Embodied AI: AI that interacts with the physical world, often through robotics.
Learning Curves/Rights Law: The principle that the cost of producing a unit of a product decreases by a consistent percentage each time cumulative output doubles.
Algorithmic Trading/High-Frequency Trading (HFT): Automated trading strategies that execute trades at high speeds.
Rebalancing: Adjusting the allocation of assets in a portfolio to maintain a desired risk level.
Compound Annual Growth Rate (CAGR): The mean annual growth rate of an investment over a specified period of time.
Venture Capital (VC): Funding provided by investors to startups and small businesses with perceived long-term growth potential.
Carry/Carried Interest: A share of the profits of an investment fund, typically taken by the fund manager.
Mag Six: Refers to the six largest technology companies (often Apple, Microsoft, Alphabet, Amazon, Nvidia, and Meta).

Humble Origins and Early Career

Kathy Wood's career began with humble beginnings, starting her first job at McDonald's as a cashier at age 16, earning a quarter an hour while babysitting prior to that. She also worked at a supermarket, being the first girl allowed to push carts. This early experience in customer-facing roles and the contrast in earnings highlight a significant journey to managing substantial assets.

Wood attributes her "first big break" to her economics professor at the University of Southern California, Art Laffer, who advised presidents on supply-side economics and monetary policy. Laffer, a proponent of deregulation and lower taxes, was a significant influence. Interestingly, Wood and her team later introduced Laffer to Bitcoin in 2015, which he saw as a potential global, rules-based monetary system, akin to what he believed was lost when the US went off the gold standard in 1971. This led to discussions about stablecoins like Tether and Circle.

The year 1971 is highlighted as a pivotal moment, marking the US departure from the gold standard, which is argued to have led to massive inflation and significant shifts in monetary policy, as illustrated by the website "WTF happened in 1971."

Wood's entry into the investment business was through an introduction by Laffer to Capital Group, a prominent firm in Southern California at the time. Despite not knowing the investment business, having previously worked as a waitress, she was recommended highly. She joined Capital Group as a "half" person to replace a highly competent individual moving to Harvard Business School, but she aimed to be more than that.

Making an Impression and Early Career Strategies

Wood emphasizes that beyond simply putting in hours, a crucial element for making an impression during the early stages of one's career is mindset and bringing new value. Her objective at Capital Group was to introduce new technology into the firm. She utilized early time-sharing systems for economic analysis, generating charts that would cost significantly more in today's dollars. She focused on creating original charts and presentations for her superior, Don Conlin, demonstrating a proactive approach to adding value.

A key principle she learned and shared is: "You'll get what you want when you help other people get what they want." This philosophy suggests that by focusing on fulfilling others' needs, one can achieve their own goals. For young professionals lacking experience or networks, leveraging new technologies and a willingness to learn can be a significant advantage.

A Day in the Life and Research Methodology

Wood's daily routine is structured around research. From the moment she wakes up until 10:30 AM, her time is dedicated to this pursuit. This includes a research meeting involving the entire research, investment, and portfolio management teams. The first half of this meeting is for information sharing, while the latter half focuses on one of four specialized teams:

Autonomous Technology and Robotics: Focusing on automation and robotics.
AI and Cloud: Covering artificial intelligence and cloud computing, which has branched into a separate team.
Consumer Internet and FinTech: Examining online consumer platforms and financial technology.
Multiomics: Concentrating on life sciences and the transformative impact of AI on healthcare, which she considers the most inefficiently priced market segment.
Blockchain Technology: Dedicated to the study and application of blockchain.

A unique aspect of ARK Invest's methodology is their Friday "brainstorm" sessions at 10:30 AM. These sessions involve not only their internal teams but also approximately 40 external individuals who are passionate about innovation. This group includes venture capitalists, entrepreneurs, retired engineers, and university professors. The purpose is to foster pushback and avoid the "not invented here" syndrome, encouraging a collaborative effort to anticipate future trends and position the firm accordingly.

This open-door brainstorm with external participants is described as unique. Wood has practiced this since 2001, believing it's crucial to have research battle-tested. This philosophy was amplified when she founded ARK, with the commitment to share their evolving research openly.

Information Dissemination and Social Media Strategy

ARK Invest's strategy of giving away their research has evolved with technology. Initially, in 2014, they anticipated LinkedIn as their primary social network. However, X (formerly Twitter) has become the most important platform for them, even for crypto discussions, where they find crucial conversations often happening on X rather than Telegram. They actively use X to "stir the pot" and generate debates around their research.

Wood contrasts the current information landscape with 1977, when information was expensive and difficult to access, making closed research departments a "secret sauce." Today, information is ubiquitous, but the challenge lies in discerning real from fake. ARK's focus is exclusively on "technologically enabled disruptive innovation," and they believe their approach of harnessing and prioritizing information is key.

Investment Philosophy and Trading Strategy

Wood describes ARK Invest as a "deep value manager" with a five-year investment horizon, akin to Warren Buffett. However, she notes that Buffett himself does not typically invest in technology, whereas that is ARK's core strength. She positions ARK as a complement to a Buffett-style strategy.

The high volume of trading, particularly in stocks like Tesla, is explained by the significant volatility in the market, especially in disruptive innovation stocks. This volatility, driven by algorithmic and high-frequency trading (over 75% of trading), is used to their advantage. When a high-conviction stock like Tesla appreciates significantly, becoming a large percentage of the portfolio, ARK rebalances by selling a portion to lock in gains. This allows them to move back into the stock at lower prices during market downturns or "sinking spells," which they anticipate due to the controversial nature of some of their holdings.

Performance and Market Criticism

A common criticism leveled against ARK Invest is its performance relative to simple indexes like the QQQ over the last 10 years, despite significant fees. Wood addresses this by stating ARK's objective is to deliver a minimum 15% compound annual rate of return (CAGR) over five years. While they haven't consistently met this over the last decade, they have achieved it since their inception.

She points out that performance metrics are often benchmark-dependent. Using Morningstar's quantitative metrics, which are benchmark-agnostic and use mid-cap growth as a benchmark for ARK, they are in the fourth percentile. She argues that the mid-to-mega cap growth space, particularly in tech, has been challenging.

The year 2020 is highlighted as a period of significant growth for ARK, with a 150% return, partly due to their open research and trading on social media during the pandemic. However, she acknowledges a miscalculation regarding supply chain bottlenecks, which interrupted unit growth and impacted their models. They anticipated a V-shaped recovery, which occurred, but underestimated the time needed for supply chains to reorient. This led them to not fully capitalize on the "Mag Six" stocks with large cash positions, despite owning them.

During 2021, as their smaller and mid-cap stocks declined, they rebalanced, taking profits from appreciating stocks and buying into the downturns, which they believe was too soon. She notes the classic investor behavior of buying at the top and selling at the bottom. ARK's strategy moving forward involves emphasizing rebalancing and taking profits during strong periods to provide psychological resilience for buying during market dips.

Venture Capital and Fee Structures

Wood discusses the venture capital (VC) model, describing it as a "rigged game" where managers earn 2% annually on fees regardless of performance. ARK Invest, however, offers a venture fund with a higher fee of 2.75% but without a "carry" (carried interest). This allows individuals with as little as $500 to invest in companies like SpaceX, OpenAI, and Neuralink directly on the cap table, avoiding layered fees.

She explains that their 2.75% fee was determined by analyzing the returns of top VC firms and the benefit they derive. While acknowledging the guaranteed fees in fund management, she contrasts it with Warren Buffett's early model of taking no fees for the first 6% of returns and then 25% of profits above that. She believes the industry has moved towards guaranteed fees because it's more lucrative.

Wood notes that while competition exists in VC, the disproportionate returns are concentrated in the top 10 firms. A unique aspect of VC is that the "security selects the investor," meaning hot startups choose to be funded by top VC firms, creating a network and brand effect that perpetuates their success.

The Future of Innovation and Market Swings

Wood believes the market is at the beginning of a pendulum swing away from the dominance of the "Mag Six" and towards disruptive innovations in areas like robotics, energy storage, AI, blockchain, and multiomics. She points out weaknesses in each of the Mag Six companies, suggesting they will participate in the wave of new technologies but also face disruptions.

Regarding AI, she believes Nvidia is well-known but potentially misunderstood or mispriced. ARK Invest sold Nvidia in 2014 at a low price, holding it for years before it gained traction with ChatGPT. They have since re-entered the position. She highlights Palantir as a company that has performed well from the point of their Nvidia sale and Coinbase as another successful investment made with Nvidia proceeds.

Embodied AI, the intersection of physical and digital worlds through AI, is considered underappreciated. Tesla is presented as the largest AI project on Earth, with potential in robo-taxis and humanoid robots. She estimates the robo-taxi opportunity to be $8-10 trillion in revenue over the next 5-10 years, with Tesla capturing a significant portion. The humanoid robot market is projected to be a $26 trillion market in the next 7-15 years.

Tesla's Valuation and Future Potential

A significant point of discussion is the cost of transportation. A slide presented shows that the cost per mile for horse and carriage was approximately $2.10 (inflation-adjusted), and for the Ford era, it remained around $1.10 for nearly 100 years. ARK's estimate for self-driving electric vehicles is a mere $0.25 per mile, a four-fold decrease. This cost reduction is attributed to learning curves and the maturity of internal combustion engines versus the potential of EVs.

The massive revenue projection for autonomous transportation (estimated at $8-10 trillion globally) is explained by expanding the scope from ride-hailing (Uber, Lyft, DoorDash, currently around $50-60 billion combined) to encompass all forms of transportation. Waymo's success in San Francisco, where people are willing to wait longer and pay more for their service, surpassing Lyft and heading towards Uber in daily miles driven, is cited as evidence of this shift. The initial cost for autonomous rides is projected to be around $2-2.50 per mile, dropping to $0.25 at scale.

Regarding Tesla's market capitalization (around $1.3-1.4 trillion), Wood believes that while Elon Musk's leadership is crucial, the company has made significant progress in Full Self-Driving (FSD) technology. If FSD is largely solved, the robo-taxi opportunity can be captured. However, she notes that their current price target for Tesla ($2,600) incorporates very little for humanoid robots, and this would be significantly higher with Musk's continued direct involvement in that specific area.

Conclusion

Kathy Wood's insights reveal a career built on a foundation of early hustle, a deep understanding of economics, and a relentless pursuit of disruptive innovation. Her firm, ARK Invest, operates with a unique research methodology, emphasizing open dissemination of evolving ideas and external validation through brainstorms. While acknowledging past performance criticisms, she defends ARK's long-term vision and their strategy of leveraging market volatility for high-conviction holdings. The discussion highlights the transformative potential of AI, autonomous technology, and blockchain, with Tesla positioned as a key player in multiple future growth areas. The conversation underscores the importance of embracing new technologies, understanding market dynamics, and maintaining a long-term perspective in the face of short-term market fluctuations.