ARK: The five platforms of disruptive innovation

so Kathy I wanted to take you back to 2014 when you started Ark what gave you the appetite the thematic investing was sort of the long the way that long-term value sits going forward well in 2014 really before that I was observing and had been observing that since the telecom crash tech and telecom crash in the early 2000s and then the Oh eight oh nine meltdown the crisis we've been witnessing increasing moves towards passive investing or benchmark sensitive investing which is almost the same thing in in my mind and at the same time we were witnessing the search for innovation increasingly occurring especially for large asset managers in in the pre IPO space and so I saw a void opening up both in terms of research and investing in innovation in the public markets and I wanted to fill that void in a traditional asset management firm it really wasn't possible to do that because the second reason I formed the firm was to add new dimensions to research so harnessing social media crowdsourcing opening our research intranet up to professors and venture capitalists so that you know we could network with them and really push the frontiers of knowledge forward together that would not be allowed in traditional asset management firms because compliance departments are very fearful of social media right we're pushing our research out into social media because we want to engage with the communities we're researching it would be very difficult to do that in a traditional asset management firm and now the reason we can do it is we brought on and an attorney who had been at the SEC for four years and had been a bank and examiner during a time when they were evolving Stan for social media and marketing so he's young he's comfortable with social media and he's a really good compliance officer so that's why Ark exists do you think that other more traditional fund managers in this space will be forced to adopt that quest for the innovation or do you see yourself being just light years ahead of everyone oh no I'm we're not lightyears ahead in fact we're seeing a lot of ETFs in the u.s. being thrown up it's a little bit the the scattershot approach so they seize on artificial intelligence and then they'll just screen for any company that looks like it might be involved in artificial intelligence this is more the passive way of investing it's a little bit difficult for me to understand because we're so research driven in our fork and in our research so I mean in our investment process so I think that others are following but I do think traditional asset management firms those who do research are going to have to restructure in some way in order to capitalize on the innovation that's taking place and the exponential growth is taking place and the reason is technology is seeping into every sector so it's blurring the lines between and among sectors and the the five innovation platforms that we're focused on they're converging so we need analysts very comfortable with technology even in the healthcare field and the industrial field and we need them to their responsibilities to be broken out by innovation platform that platforms that cut across economic sectors so a stock like Tesla now being analyzed in the traditional world by auto analysts which are analysts focusing on a very mature industry their value analysts right so priced a book dividend yield all of those metrics are important to them are going to find it difficult to to analyze a company that is not just an auto manufacturer but also a an artificial intelligence chip designer and an autonomous taxi platform provider which is a transportation as a service so we've got three analysts focused in collaborating on understanding how Tesla is going to evolve during the next few years Sam chorus who does our robotics work autonomous vehicles are going to be robots he also does our energy storage work so he's very comfortable with battery technology probably I would say he's the financial industry's expert on battery technology we have James Wang who's focused on artificial intelligence he came out of Nvidia which is the artificial intelligence chip company so we he spent nine years there so great expertise and understands how significant Tesla's latest chip design artificial intelligence chip design is pushing it four years ahead of anything that Nvidia is doing right now and then we have Tasha Keaney who is who is using their inputs and pulling together our autonomous taxi Network model and the autonomous taxi Network model is a very profitable model the gross margins there are in the 80% range the gross margins for auto manufacturers are in the 20 to 30 percent range night and day so you need a completely different kind of analyst and a different way of thinking about the world no longer sectors but platforms I think one of the things that people almost underestimate the most is this impact of innovation how do you use that to exploit some market inefficiencies and find some of these stocks that you look at well we are centering our research on something called rights law now rights law is very specific to innovation it's actually a relative of Moore's law Moore's law however is a function of time rights law is a function of units and it basically says for every cumulative doubling in units produced costs decline at a consistent rate so what we are looking for in terms of impact is figuring out have costs associated with one of these platforms drop to a low enough level that they're going to unleash waves of demand and get us into that exponential growth curve so whether it DNA sequencing we're there to give you an example DNA sequencing costs now are below $1,000 last year the number of whole human genome sequenced around the world was 2.4 million that was half of all the whole human genomes ever sequenced in history so we're already at the tipping point and we believe that number is going to go to a hundred so that's almost a 40 fold increase in the next five years so that is truly exponential growth and it is going to change healthcare decision making it's bringing real science into health care decision making for the first time so our geneticists and you're gonna have one so am I are going to be able to identify for the first time the needle in the haystack they're going to be able to identify which genes in our genomes have mutated in other words they've developed a programming error and now with CRISPR gene editing following it up we're going to be able to correct those programming errors it's going to be incredible to to catch cancer in in stage one and then edit it away we think that's going to be possible in the next five to ten years and probably sooner than that so that's real impact so almost crowding these super humans well longevity yes human lives will be extended but the quality of human life is going to improve dramatically if we're able to move away from treating cancer as a chronic condition and that's where we've been going recently but to actually correct the whatever the mutation that has taken place very early on that's going to be huge in fact last week there was a journal of New England the New England Journal of Medicine published a report on a man with leukemia whose leukemia after CRISPR gene editing has disappeared and 19 months later it still has not returned so that that that was you know that's a pretty complicated cancer and we've gotten some of the heavy weights in the gene editing community to say wow so we may be closer to this than many people believe a lot of the companies that we talked about today that seem to be seen as innovators in the market often a lot of the good news going forward it is priced in do you think there's a point where the market turns on some of these companies and they're almost becomes like a dot-com bubble if they're not delivering what they say they're going to do you know a lot of these companies that for example aren't profitable yet do you think there's a point where the market has said alright we've had enough I think the markets already done that okay I do many people believe that because we've been in a bull market they call it a bull market I don't call it a bull market it's been for many people the most uncomfortable increase in the market these last 10 years be and and the reason for that is the to the tech and telecom crash the oh eight oh nine but they're not going to let that happen again and instead what we've seen is a move to investing in the past this passive investing and as I mentioned before the Capitol committed to innovation in the public markets has been disappearing because of the move to passive many of these these breakthrough companies are not in benchmarks at all so they're not receiving the funds flows that they normally would and as I also mentioned the large asset managers often have focused on innovation in the private the pre IPO space so we believe there's a void truly a void and I love the question because I do love the question because I believe many people are fearful that after ten years we're in some kind of bubble I'm going to give you a really I think provocative way of explaining this if I had told you or any investor in the late 90s that there were going to be three companies with the foundational patents behind CRISPR cast nine which is the most advanced gene editing flavor I'll say these days and I had told you these companies are going to cure diseases that have been the scourge of human existence right they're going to cure they're going to be able to cure pediatric blindness or cancer as I mentioned before my guess in the late 90s when investors were chasing dreams and too much capital chase too few opportunities too soon that those three companies the cumulant have cumulated in market cap to roughly two hundred to three hundred billion dollars in market cap right they would have because they'd get a royalty on every therapeutic that was going to be developed and today we think the recurring revenue base in terms of the therapies just for single gene cause diseases we think that's a recurring revenue base of 75 billion they'd get 10% of that single genes are responsible for only 2% of all diseases that's just the beginning so the idea of 200 to 300 billion dollars certainly in the bubble easy easy today those three stocks in the market together can't even reach five billion dollars in market cap now think about it Apple is a trillion-dollar market cap company and it's changed our lives and we love our Apple phones and air pods and watches but the Apple is not curing cancer it's not curing disease these companies we believe will but there's so much fear in the marketplace and there are all kinds of reasons to avoid them the cap is too small or and which is the kind of circular reasoning the cap is too small or they've just entered human trials I'll wait to see what happens well that'll be too late if these human trials are successful one of the first one being pediatric blindness a baby born blind you correct that programming error the baby can see it works in mice it works in non-human primates if it works in human beings think about how how what the reaction will be well we'd prefer to be in the stocks before that reaction and you know one thing I'd like to emphasize our analysts have domain expertise in monisha Sammy one of our to genomics analysts worked in Stanford University's biology research labs for eight years she experimented with CRISPR gene editing she's now volunteering at Memorial Sloan Kettering with one of her Stanford professors and she's still experimenting with different technologies like CRISPR and DNA sequencing but more important she's seeing the researchers reactions to these new technologies their excitement so I really believe we we have domain expertise here and and monisha really believes this is going to work so is that are those breakthroughs and innovation are they causing value traps on traditional indices like can you can you see they're happening every day oh yes there are so many value traps evolving because of the five innovation platforms so the five innovation platforms are DNA sequencing that's foundational to find those mutations energy storage so the shift from the internal combustion engine to electric vehicles robotics especially with collaborative robots which will be covered in sensors and able to work alongside human beings increasing the productivity of human beings artificial intelligence which is going to change the line item of well every line item of the income statement so every company every industry every sector is going to be transformed in fact a good good proof of concept there salesforce.com about two years ago released Einstein which is artificial intelligence as a service Einstein from zero two years ago maybe two and a half is now making eight point six billion predictions per day for companies it's phenomenal and then blockchain technology is the fifth the fifth platform that we think is is going to be quite disruptive so value traps where are they today banks you know their value stocks but we think they're going to be disrupted in many ways inverted yield curves we think are not just a passing phenomenon we think they're they're going to stay flat to inverted which is really difficult for banks because of innovation and you can go back to the go back to the 50 years ended in the roaring 20s and you will see that yield curves were inverted more than 60 percent of the time on average a hundred basis points this is a killer for net interest margins right and that the steepest inversions occurred during periods of strongest growth it's the opposite the way people are thinking now and the reason that is is because with innovation comes very rapid unit growth and we think growth is understated in the economy we're still operating with industrial statistics when we're in the digital age it doesn't make any sense so we think that real growth is understated and productivity as well and we think that inflation is overstated so we might already be in a deflationary period so the short end of the curve is responding to unit growth very strong the long end of the curve is responding to inflation very low so it makes sense back then the average short rate averaged or the short rates averaged four point nine percent long rates three point nine percent and we do think if we're right about what's going on with innovation and the exponential growth opportunities ahead here that those kinds of interest rates will return so that will be negative for the bond markets but it won't be a disaster so you see negative yields and being just happening for the next X amount of years so due to this innovation that two inverted yes I don't know we have back then there was no Federal Reserve the Federal Reserve didn't come into place until 1913 and there was little government intervention so today there's a lot of government intervention and especially on the monetary policy side so it may not play out exactly the same as that but we wouldn't be surprised to see much flatter and and sometimes inverted and maybe more than sometimes inverted over time I want to take a step back and you know just on on the disruption of banks it's not just the yield curve it's complete companies like square and and PayPal that essentially are going to allow people to carry their banks around with them in their in their pockets through their cell phone we've already seen mobile payments explode in China they went from 1 trillion dollars in 2014 to 2016 dollars two times their GDP in 2018 that's a 26 fold increase over four years that's crazy that's all that's disintermediating the banking system in China we think the same thing is going to happen in the developed markets and that digital wallets will take the place of bank branches and we see this with venmo these end and with cash app and these are networks that are going viral because of social networking to give you a sense cash app squares cash app merchants use it it's just entered Australia by the way and merchants can swipe the square swipe a credit card through the square for payments and and payments will accumulate in the in the cash app and what squares competitive advantages to a bank is Square knows every second of the day how this Merchants business is doing right because it sees every payment and it's able to anticipate working capital needs and it's able to anticipate maybe capital needs oh and by the way payroll processing and then it's got consumers using it right and then these consumers have the consumers are responding to cash up Friday or super cash app Friday when Square is giving away maybe in conjunction this did happen with Burger King they'll repay ten thousand dollars of school loans the if if the winner is chosen I mean if never is chosen so of course everybody starts applying for the cash app they would like to have access to that opportunity same thing with super cash app Friday they were giving away one Bitcoin that's ten thousand dollars these days that caused another surge in cash app applications so their cause cost of customer acquisition is roughly twenty dollars whereas a bank to get one credit customer has to pay anywhere from 300 to $1500 there's no comparison it's going to be very difficult and then so you've got square and cash app I mean cash app and PayPal nipping at the banks heels you have goldman sachs marcus their online banking solution coming for the the head of the banks or the heart they're offering 3% plus for online deposit accounts they will pay three and banks are at 0.2 or 0.3 or wherever they are again no comparison bricks-and-mortar it takes a lot to sustain those these are online digital much much lower cost so if you look at that in the Australian context obviously banking is such a huge part of Australia yes do you see then the end of traditional banks inside well I I don't know how your regulators are going to try and protect the banks it could be they do because they feel it's such an important industry so I don't know enough about your how your regulators feel about innovation and how they're reacting to it I think it's hopeful that they've allowed square into your country and I think that's a very good thing right but I do believe that banking is going to be commoditized I mean we're seeing that happen right now it's going it's already gone through tough times and I think it continues to go through tough times because of FinTech and inverted yield curves so yes and another industry we see disrupted is the oil industry if you if you look at how you have you can't go buy electric vehicle sold you have to go buy electric vehicle miles traveled to understand the impact of autonomous vehicles on demand for oil autonomy vehicles will be electric and they'll be used 60% of the day whereas we just use our gas-powered cars now 5% of the day so the vehicle miles traveled are going to grow we think exponentially I'll give you an example of personal example of how quickly my demands have changed F for oil I got my Tesla Model 3 a year ago in September now I grew up in Southern California and so freedom as a teenager in California meant you get your license when you're 16 years old and and I did and I've been going to the gas station every Saturday every set is rhythm you know and built into my life for these many years right every Saturday since I got my Tesla Model 3 I've gone to the gas station once look up they've lost me they lost me commodity prices are made at the margin this is going to destroy commodity pricing and I mean oil pricing now we may have flare-ups with Saudi Arabia you know and and and we've seen that recently and you know there could be all kinds of geopolitical turmoil that you know will levitate oil prices but from a secular point of view we think they peaked in 2008 and eat their each high has been lower than the last one and we think that will continue and then we'll probably unwind oil prices and this is my personal opinion we haven't actually crossed T's and dotted eyes in our own research but I think we will go back into single digit oil prices per barrel you know from 5560 where they are today you know within the next 10 to 20 years well and when do you see almost this mass adoption of electric vehicles happening when you know we've all been told about you know driving around the streets everyone's got to test what how realistic is that on the years ahead we believe that the average electric vehicle price mostly because Tesla is pushing the envelope here will drop below that of the of a Toyota Camry within two years so that means that it will drop below 25,000 and that it will continue down and that by 2023 2024 we will be looking at the and this is US dollars the average vehicle price at $15,000 it'll be a no-brainer to switch to an electric vehicle already the total cost of ownership is lower for an electric vehicle so much so that I've had a bur drivers asked me about my Tesla the costs and so forth so they're seriously thinking about switching over so as soon as that happens and the price is going below gas powered more and more people will be trying out these electric vehicles and they'll see that they're a better driving experience so we think the shift is going to be pretty rapid and that and the traditional auto industry and traditional auto dealership model with a servicing as such a big part of their revenue base is going to be in real trouble and and another industry we see disrupted since you're asking about value traps and these are all value traps is railroads and the railroad industry today now this is in the United States and I'm sure it's different in each country but not too different the cost the cost per mile for Freight to go from point A to B in a human driven truck is about 12 cents per ton mile by rail today that that number is 4 cents per ton mile now it's this isn't point to point but still you know that's a big gap so there's a lot of freight transportation by rail we believe that autonomous truck platoons will be able to deliver Freight for three cents per ton-mile and so it will undercut Rails for the first time ever and I don't think the railroad industry is ready for this we don't we don't hear many people talking about it well said no railways no petrol stations you know I'm sure there won't be a disappearance I mean there would be a repurposing of rails I've we've been thinking about it could it be that we'll finally get our first you know high-speed rail system which we really don't have one in the United States No yeah so maybe the rails which have been used for Freight can be repurposed in some way you know I don't know if they can it may have to do with property rights rights of way and so forth that might have to be renegotiated but it is one possibility one of the centralized things about all the areas that you invest in is around data last weekend on a bit of free time I had I watched a fascinating documentary on Netflix called the great hack and it talked about the Cambridge analytically campaign and the scandal around them the brexit the Trump elections one thing I noticed that was was fascinating was Cambridge analytical was saying they have enough data points on people that they could start to influence the way they live their lives by putting ads on Facebook all those kind of things that could essentially manipulate them to think a certain way what do you see as being the biggest risk to market of having so much data available to these companies it's interesting I think because of Cambridge analytic ah the the data channels many of them are starting to shut down and you're right and they're right we had no idea how much data these companies data on us these companies had I now I think that the publicity is surrounding this has made everyone a little bit like you you know I don't I don't I don't think I want all of that data out on me I don't want them targeting me I don't so I think half of the solution is understanding the problem and I think that has exposed it in such a way and then of course we've had in Europe GDP our you know the privacy regulations which are putting in pediments in the way and I think other countries are now starting to adopt some of those regulations so I think the dangers are actually diminishing now now now that brings us to artificial intelligence and competitive advantage so in China no one expects privacy they don't get it and you know facial recognition is all over the place on the streets in China it could be that the Chinese develop a competitive advantage because they're going to be no impediment to their use of data and artificial intelligence getting getting to an answer requires big data getting to a correct answer requires big data not not interrupted by regulators and so forth so we're watching that carefully and seeing how that dynamic might impact our competitive advantage in the in the rest of the world so I hope I hope we understand what we're doing I'm glad that people like Elon Musk are very fearful of what's going to happen because of artificial intelligence again half of the solution is understanding the problem so I'm happy that the alarm bells are ringing and you know you can see what a lightning rod Facebook has become you know we thought they're Libre announcement Libra and Calibra another digital wallet which could become a bank we thought that was pretty interesting but it is their bad reputation now based on the lack of privacy or the invasion of privacy that has caused a lot of governments already to say we're not going to allow that so it's going to be pretty interesting moving forward you know I actually saw Ron Libre I think you might have retweeted or liked one of the tweets but I saw that both France and Germany have come out essentially their governments have said the money is not a private thing it's it's it's it's a sovereign matter yeah so we will not allow labor into the country yes do you think that Libre is almost the start of a fundamental shifts on how governments are going to have to deal with this kind of influence and this kind of innovation well I think the reason why they've targeted Libre is because there's one choke point it's called Facebook and Facebook book has you know has you know become a whipping boy or a lightning rod however you want to say it in the in in political circles so it was an easy mark it's too bad it could have been from a remittances point of view it could have you know allowed migrant workers to transmit their money for free through Facebook and Facebook would be collecting data but you know they would be providing a service as well so you know we were intrigued by that use case because that's a six hundred billion dollar transaction market right now and they would have gotten a slice of all of that what's interesting around this is no one's saying this about Bitcoin right what's so interesting about that is there's no choke point you know when China tried to shut down Bitcoin basically in various ways shut down mining and trading it migrated to Japan South Korea Vietnam they became centers so it's like I don't know if you have the game whack-a-mole you whack this one it'll pop up somewhere else right and that's what's happening with baby because it's decentralized there's no choke point and if you'll notice bitcoin is not or I haven't seen it mentioned much in the same context as as Libre and it's because there's no way the government's can stop it yeah it definitely seemed that Bitcoin was kind of the hot thing sort of this time last year yeah this has taken the heat off of Bitcoin now India has banned all kryptos including Bitcoin and the penalty is jail time for for using it so maybe that will work but maybe it will backfire right because in in this world all you have to remember if you're worried about confiscation of wealth either directly as in Saudi Arabia or indirectly through inflation and a depreciating currency let's say the Indian population wants an insurance policy against that all they have to remember is a key in you know it'll it takes a lot to remember this but you know there's no gold that can be confiscated this is digital gold you can't you can't confiscate it so it'll be very interesting to see what happens so do you do see Bitcoin and cryptocurrency in general only getting stronger as the years progress yeah I think in in in watching the drop in bit in Bitcoin in the Bitcoin price from $20,000 at the end of 2017 to $3,000 in the early part of 2019 it's now back to 10,000 of course we've witnessed an increase and that bitcoins share of the crypto asset network value think market cap in our language but network value so there are more than 2,000 crypto assets Bitcoin share has gone from the low 30s since that peak at 20,000 to roughly 70% and so what that has told us or the way we interpret it is that bitcoin is the reserve currency of the crypto asset ecosystem which is an exalted role and so our confidence has increased for that reason it's also increased because of confiscation of wealth that we are seeing in the form of hyperinflation and Venezuelans and Bob way where now Argentina's in trouble so these hats you know boiling over and so this idea of Bitcoin as an insurance policy against actual confiscation of wealth or confiscation of wealth because government policies are destroying purchasing power we think is we think that's a rising concern around the world and that bitcoin is an antidote and and we've dimensioned it in many ways but that's at least two to three trillion dollar opportunity and and that's just for the super wealthy if they decide to have an insurance policy whereas Bitcoin today is roughly at a two hundred billion dollar market cap so a long way to go just for that one use case I want to finish you have in your office in in art a lot of original patents on the wall what's the next one that's gonna go up what's the what's the next big exciting thing that over the next you know years is gonna be the next thing that goes up goes up on that wall you know what's interesting about that question is innovation in the old days was very much associated with patents and in healthcare there's still a lot of that I think you know that the foundational patents for CRISPR and there will be next gene therapies those are all be patented and they probably will have a 17-year life like much of the patent life is in in healthcare but when you think about technology you think about Bitcoin and you think about open source software there are no patents involved there right it's very few what we have is this open architecture and if if people whether they're software developers or I'll say in terms of or their researchers or consultants you know they want to build their livelihood on an open source ethos they want to protect it but the way you protect it is by having all eyes looking at it and preventing bad actors becoming a part of the ecosystem so I'm sure in healthcare there will be a of patents because some of these technologies you know really transforming lives are going to be very important but I'm also looking at the open source ecosystem and Bitcoin being a part of that you know in terms of the payment system and saying okay patents are still important for some industries and I would say healthcare is probably the most important one right now but this open source view of the world is changing I think the important importance and meaning of patents I just want to say thank you thank you so much for coming in and sharing your time with us oh my pleasure Eddy thank you very much for taking such a great interest and and doing your homework I can tell you about that so thank you

Channel: Livewire Markets

Views: 535,689

Rating: 4.9257765 out of 5

Keywords: catherine wood, ARK Invest, disruption, innovation, tesla, blockchain, robotics, genomics, dna sequencing, energy, artificial intelligence, digital wallets, banking, elon musk

Id: m4_AAmLpwR8

Length: 40min 52sec (2452 seconds)

Published: Thu Oct 03 2019

Reddit Comments

[u/csreddit8]

Specifically autonomous trucks.

[u/Adamshmadamladam]

Their pick is Tesla to disrupt the autonomous trucking industry, they didn't buy any hyln I am afraid

[u/Masterfund325]

I believe Ark invested in Paccar, a Hyln partner. This should be goods news for us