Cathie Wood Discusses Innovation Investing, Tesla and Bitcoin

all right we are back with kathy wood kathy thank you so much for spending some time with us today oh i'm happy to be here nathaniel thank you for inviting me you bet so there's so much to dig into uh i'm really excited to talk about i just gave a little bit of an introduction before this uh to you and your background and arc but i'd love if you could just in your own words for people who are not familiar describe uh yourself and arc really what what you guys are out of the world doing right well i founded arc invest in 2014 for two reasons the first was to focus exclusively on disruptive innovation i felt that it was a huge unmet need in the market because after the tekken telecom bust and then 0809 so over those 10 years and and even longer we saw risk aversion rise in the market and what did that mean it meant to move towards indexed or passive strategies and at the same time we saw the search for innovation or getting exposure to innovation moving into the private markets and yet there were some amazing companies in the public markets and they were being neglected both from a research point of view they weren't big parts of indexes if they were in the index at all and from a valuation point of view so there was a lot of low-hanging fruit we saw we saw companies in the private markets trading for 10 or 20 or 30 times the valuations uh in the in the public markets so that was the first reason uh and and and really addressing what i believe is the most massive misallocation of capital that has happened ever this move towards indexation more than half of the ownership in stocks today in the united states is in passive uh wrappers like etfs and mutual funds and so we wanted to actually become a hedge against the value traps that are populating those uh those indices increasingly over time so that was the first run the second reason i started arc was to evolve an open research architecture and patterning it after open source software you know there are a lot of contributors to open source software and they are not paid directly for contributing but they may be elevating their status in the community they may be helping their consulting practices they may be trying to solve a problem in their own businesses and so open source software has helped them in the same way i feel that there's so much innovation taking place at the same time now i mean we've never seen anything like this and and we can go into that in a moment uh that uh that it's not possible for one research house to uh to to be able to research these ideas effectively and in fact i think research departments in our business the asset management business are going to have to restructure entirely in order to understand how innovation is going to evolve in the world so right now most of the traditional asset management world is very siloed very specialized very short term in its focus uh what we have now are innovation platforms that are cutting across economic sectors that's not how the world is set up in traditional asset management and and yet that is how it will have to be set up if companies want to capitalize on the exponential growth curves and trajectories that that our five platforms and 14 different technologies are offering today so there's so much to unpack there um and i want to get into all of it i would love to talk more about uh the rise of passive and index investing and that's something that it's amazing because it's a such a um frog's boiling in the pot type of scenario where everyone has been living through it but it's still this vanguard of conversation in terms of understanding or trying to like to really understand the true implications of it so that's something i definitely want to get into but maybe let's start actually going back i think one of the things that makes you guys such a an interesting uh uh phenomenon really is that there was this 10 year period where silicon valley i mean maybe longer but certainly at least a decade where silicon valley got farther and farther away from public markets and there's a lot of reasons for that just the the influx of capital moving to the private sector was part of it but net net what you had was this big information gap this big space almost a hostility to both sides looking at each other and in a lot of ways you guys kind of came in and were like you you blew apart the distinction in some ways between startups and tech which is sitting over here and just public markets which you know is now converging again i mean is that you must have felt a little bit like just kind of wandering off in the wilderness for a while though there yes so so i funded the firm for three years uh by myself and i obviously thought that we were going to take off a lot sooner than we actually did and part of the problem uh that evolved was our first rapper was the etf and my question to the marketplace and uh to anyone who would listen to me is wait a minute this is a really good wrapper for the end investor it is cheaper more cost effective it's more tax efficient it's more liquid and probably most of all and most important of all according to our how our clients have received us is more transparent than the traditional world and i'm saying okay that's great why can't active do this why is this you know only a passive rapper and so just doing that i thought that my sort of network in the traditional financial world would help me uh with this idea but what i learned very quickly is wait a minute you're in a different world you know the the passive world and the active world that that that infrastructure those people don't talk to each other and they also don't trust each other and so uh you know at one point probably two years in i was saying oh my goodness uh wow uh and so we had to pivot and do separately managed accounts and so forth and and that's what really got us going uh getting an institutional account i i think we were somewhere in the 20 to 30 million dollars in assets under management and we had been stuck there for a long time when one of my former clients an institutional fund a state pension fund uh gave us 200 million dollars uh so that that really put us on the map uh i don't think we would have survived if that had not happened and and it happened uh you know seren there was a lot of serendipity involved if uh if i can say so so yes we were in a foreign land i didn't realize that before i entered it but uh it was foreign and there was more hostility than than i had expected i thought we would be welcome because this would be the next big wave for etx for the etf industry's growth um so so yes i wha we were kind of i won't say twisting in the wind i will say i didn't understand why um why there wasn't more acceptance of what we had to offer which was so differentiated and uh as it turns out after that drought and after we got our first a few separately managed accounts um in 2017 uh the combination of bringing in distribution so we we struck agreements with two companies they became they they have minority interests in in ark and they became our distributors both here and in asia pack uh and so we started to take off because in 2017 the market started wrecking the public equity market started recognizing innovation uh in the public space not just in the private space some i'm sure public private players like fidelity and t rowe were saying wait a minute there's a huge arbitrage opportunity here between the public markets and the private markets let's uh let's start making that happen i'm not sure if that's what happened but in 2017 that is what was beginning to happen and then since then i think most many uh portfolio managers or advisors realize that the world is shifting around them or the ground is shifting underneath them and they don't have enough exposure to it they're seeing it in their lives their children's lives or grandchildren's lives and they don't have enough exposure and so we are again solving an unmet need out there because a lot of our companies either are not in indexes or they're very small positions relative to ours i mean tesla is the poster child there it's shocking you know that uh that at 400 billion-ish in market cap uh it's still in not in an index it's kind of crazy it's it's nuts so um but we are filling a void and the way we were selling ourselves is hey you traditional um or advisor with many traditional strategies uh in in your uh asset allocation you are missing us you are missing disruptive innovation and oh by the way uh our companies are probably going to give your companies a very difficult time and we think they're going to either disintermediate or disrupt your companies or bankrupt them so we did get a little of attention attention around that but i do think the 2017 market the swoosh there helped the other thing that did help us uh and this was even earlier on and maybe more relevant to your audience here was in september 2015 we were the first public asset managers to gain exposure to bitcoin now when we did that there was such hostility out there if i might say that the etf journalists out there were saying this is just a marketing gimmick this is just a gimmick they didn't read our white papers clearly because we had done a lot of research on bitcoin uh and so we were still though in that period of who are you and what the heck are you doing here so there was a still that going on and probably writing on and putting bitcoin into our portfolio or gbtc into our portfolio aggravated that that point of view so 2017 we had some breakthroughs and now i think most people understand they must have exposure to innovation because if they don't uh they're not doing they're not doing justice to their clients well innovation is one of these things that you people have a tendency to ignore it for as long as humanly possible and usually that's at least a little bit too long right if you're coming for especially if you're a market incumbent and it sounds to me just like watching kind of your trajectory that you actually were trying to do almost like three innovative things all at the same time you were trying to invest in a different type of asset with a different type of process with a different type of structure you know which is like all of these things made a ton of sense and frankly how are you going to invest in innovation without thinking about whether the structure of researching learning making those decisions and then implementing in the market also needs to go through a process of innovation however i can see how you come to market and all of a sudden people are like wait what you know but i i love you yeah who the hell are you um no it's really it's really fascinating so i guess uh i'm interested in i guess was another challenge for you that you kind of referenced this at the beginning but part of uh the difficulty is that these categories often get changed in the process of being innovated right so things don't fit comfortably in the i mean even just the lexicon that we still use the idea that uh tech has performed well this year but other categories want or haven't it's like well that's sort of true you know the broadest brushstrokes kind of way but what do we mean when we say tech you know where where do we draw those lines well we believe that tech is permeating every sector every sector including industrial utilities every sector and that analysts who are not comfortable and you find this especially in healthcare analysts who are not comfortable with technology because it's either moving too fast or there's a lot of uh there are a lot of dislocations uh and and because the cadence of their own industry is so slow and regulators often get involved you find a lot of you know a lot of dismissal uh you know that there's a um there is a um i often say you've got the old guard and they're in the indexes and they're big parts of the indexes and then you've got the new guard the new guard has completely different dna and they're nipping at the heels of the old guard and the old guard basically is saying off with your heads you know we're going to destroy you this is our installed base it happens all the time and and this also influences analysts so if you think about how the sell side is set up so the brokers are set up these analysts have been following their companies often for 20 30 years because and some even 40 the the business really took off in the 80s and there are a lot of analysts who have hung on for the ride and they know the old guard really well and the old guard was good to them over the years the old guard the old guard once was the new guard right and they were good to them over the years but now uh because of all of these platforms the five platforms 14 different technologies evolving at the same time uh they they have no idea that that that essentially these companies are the equivalent of wiley coyote you know they're already off the cliff and they don't know it and they're going to they're going to collapse and we certainly think a really good example of that right now i used to marvel at how the big television broadcasters had just held on to their 70 billion dollars in advertising revenue as their audience were shrinking well guess what the corona virus and typically a a crisis accelerates the shift to new technologies new ways of doing things why because consumers and businesses both are scared and they're willing to change the way they do things so uh certainly the cord cutting during the during the crisis accelerated and now the advertising is following and we think that after years of holding steady around that 70 billion mark within the next five years they'll be cut in half and we see many many trajectories like that during the next five years you know talk about tesla the entire auto industry is at risk right so um it's it's been i think the move to passive uh went to an extreme and opened up this opportunity for us you know if if passive had not happened the the markets would have been pricing innovation correctly or more correctly than they have been uh and now i think now that the writing is on the wall there is this there is this sort of step function shift to wait wait a minute i need more exposure here one of my favorite mental models is the idea of punctuated equilibrium which is an evolutionary biology concept that basically stephen j gould came out with this uh and we had kind of viewed evolution as the steady line up right and he said that's not how it happens there's these long periods where it feels very kind of uh samey right and then there's these moments of explosive change that happen and they settle to a new equilibrium and once you start to adopt that mental model you see it absolutely everywhere and i think it's interesting because so i mean it seems like your analysis of passive is that it's almost uh enabled that sort of punctuated equilibrium moment where had active managers still been kind of doing their thing perhaps the uh movement over into some of these innovation spaces would have followed that steady line you know each year a little bit more would have proven itself and so on and so forth but instead there's going to be this race to catch up moment i mean is that how you see it absolutely absolutely think about what i said more than half of all equities in the united states are in passive portfolios and that does not even include benchmark sensitive so what happened with active management is after the tekken telecom bust and 0809 you you had a stream of quantitative analysts move into our business and what does that mean uh what quant means is they're worshiping at the holy index you know which i would call an idol and and basically the indexes are backwards looking the companies at the top in these various indices are there because of what has happened in the last 40 years if if there's this dis this if if disruptive innovation is going to be as pervasive as we think it's going to be most of those companies are going to be sidelined at best it's going to be huge consolidation they're going to be bankruptcies restructurings and so forth and so the irony here is the traditional benchmarks may not deliver interesting returns because of that it's been a setup for that unless they move much more quickly towards putting innovative companies in there um there's one company from an index point of view and again consider the source but msci has put together a number of innovation indexes because they realize this was a problem in the marketplace and they i think uh you know the the the strategists over there were thinking for a long time how do we do this because they were watching etfs being you know birthed uh you know it's sort of spaghetti throwing against the wall just to see which ones would hit and they knew there was going to be and there should be a more thoughtful way of thinking about innovation in the public equity markets and so and here's when i i'll say again consider the source they uh wha we're watching our research and i'll get into our research and and exactly what open source means but they um like many others because we give our research away for free they were watching our research and they came to us and said if we we would like to collaborate with you and all we need as an index provider uh are the key words that you think are important uh in guiding us towards where the world is going and so they use artificial intelligence and they go scour the world for these keywords so they're going to have very broad-based portfolios very very uh maybe 400 500 stocks per portfolio whereas we have 40 ish stocks so we're very concentrated we're rifle shot they'll be scatter shot but in terms of solving one of the reasons i started the firm and that is helping the markets move away from this massive miss allocation of capital towards something much better i think msci has has the right idea and and the way they're thinking about this is in the day in the 1980s emerging markets were considered exotic much in the way that innovation is today believe it or not and so uh companies asset managers used to you know tiptoe into brazil or malaysia or vietnam and at a time but each of those countries has idiosyncratic risks putting them all together in something called an allocation towards emerging markets helped solve that problem we've had a much more efficient allocation of capital towards emerging markets because that became a category both active and passive right we think the same thing is going to happen to innovation do you going back to i guess the the state of affairs as it is now do you worry that so much of the wealth in this country in the world is wrapped up in these passive vehicles i don't worry i think it's a great opportunity for active managers there are two forces that are going to be very helpful i think to equities going forward one is the shift from passive we think the pendulum has uh swung way too far uh and when you include benchmark sensitive which which is practically the same thing that's probably 80 90 percent of how equities are managed today which is kind of crazy that's the misallocation of capital we think the pendulum is going to start swinging in the other direction as uh companies see that wait a minute there are some companies out there growing exponentially at exponential growth rates and the companies in these benchmarks are growing at maybe four percent that's not very interesting so i think that aha moment is is upon us just because innovation strategies have pulled away from the pack and there's nothing like success to garner the attention of you know the traditional world so that's the first force the second force that i think uh is the pendulum has swung in one direction for 40 years and that is fixed income i believe that fixed income uh which is still seeing believe it or not massive inflows as equities are experiencing outflows if you look at etfs and mutual funds we think that pendulum will swing as well as we move out of harm's way and as these innovation platforms with their very strong growth characteristics i'm talking about 25 30 45 50 growth rates the their base their base is going to grow large enough that they are going to make a big difference in gdp growth as these other companies are being disrupted so as that becomes obvious we think interest rates will start rising and that there will be a shift away from fixed income back into equities now a lot of people when they hear that they think that's kind of crazy look at what's happened to the equity market since uh 2009 and even since the bottom of the coronavirus look at look at how how equities have done and they've done very well uh but we think that now we're going into a different phase where the market is going to be more discerning is going to look for more growth which is which is scarce in the world that uh that we're analyzing at least and uh i think we're going to i think equities again more risk taking is going to see the beneficiary of the move from passive to active and from fixed income to equities so i mean that's a that's a very optimistic scenario i think in a way that's like that's great to hear uh because there's so much doom and gloom i think about the these forces being off the rails and you're basically making an argument or a market-based argument for a shift back that once these things start proving themselves you open up the doors that becomes kind of self-correcting which um i think would be wonderful so i wanted to dig into maybe more of some of the specific theses but i think that would be a good time before we do that to talk about that kind of difference that you guys have in terms of how you research how you design the firm you know i mean everything from who you hire to uh to to how you do research to how you make it available is different so let's talk a little bit about that sure uh so uh we're focused on first principles based our research now many people say yeah so are we but if you look at the traditional asset management world it's very bottom up in its focus you know company by company and so forth and in fact that for a long time macro or big picture thinking was out of style you know consultants didn't want to hear about it and so forth uh interestingly though it's that having a perspective that is top down as a starting point is extremely important in the world uh we are now entering um and so what does first principles research mean and this is not being done in the traditional asset management world in so far as we can see it and i've been around a long time so uh first principles research is uh is first of all first and foremost not using an index as a screen for stock selection it is using our research as the screen now this is how i started in the business in the late 70s when i was in college uh i was a capital group we used research as our screen in fact indexes they they weren't even around you know they we provided them as a courtesy occasionally for our clients you know um and now and now you can see how different the world is so first principles research autonomous vehicles now in 2014 nobody was talking about autonomous vehicles today more people are talking about autonomous vehicles even though they don't know they are drones are autonomous vehicles uh and uh we we believe we're going to see electric vehicles that move on to autonomous taxi networks we believe we're going to see autonomous truck platoons but uh tasha kinney are she was the first analyst we hired uh and we basically sent her out and said okay what's going to go inside an autonomous vehicle what is this and as she started interviewing companies trying to figure out where to look um and started reading academic research she found out pretty quickly and she brought into our brainstorm it looks like the brains of an autonomous vehicle are going to be gpus and at the time we were in a period where pcs were dropping at a double-digit rate so personal computers and nvidia which was the uh the gpu uh it had the lion's share of the gpu market 80 percent uh it was considered nothing but a pc proxy because it was a pc gaming chip company right and so it was being thrown out because pcs were dropping at a double digit rate and here's tasha coming in and saying yeah it looks like this is uh this is uh you know these are the brains or the central nervous system i remember saying are you sure are you sure i've never heard that the market does not know that the market doesn't and then later on james wang who joined us from nvidia said well of course you know a gpu is going to be the brains of an autonomous system that's because gpus are used primarily in the artificial intelligence world for training uh they they probably have 80 90 of that market and i said i didn't know that and i've been around a long time and i've owned nvidia for a long time but i didn't know that let's size this market autonomous vehicles that's one use case for artificial intelligence how big is artificial intelligence going to be well this week nvidia came out and basically said this market is going to be a um a hundred billion dollar opportunity a hundred billion dollar revenue opportunity that's not stocks you multiply that by 10 or 20 you've got a trillion to two trillion dollars in market cap there uh and so we went from not even pricing anything for ai into nvidia in 2014 to now it's it is the most important company in that world so getting doing the research that early on saying okay this is going to happen and why is it going to happen now because battery costs are down low enough one two deep learning which was ignited in 2012 is a thing we're taking the human programmer out of artificial intelligence and just letting machines teach themselves and we've got this explosion of data all around us which finally computing power and storage can begin to catch up with so those forces have come together and is are now giving us this great opportunity to invest in artificial reefs artificial intelligence autonomous vehicles uh uh um and the market doesn't even know it so that was 2014-15 so it seems like one of the things that you guys do as a matter of course that is so different and almost structurally um forced out of category conversations is instead of thinking okay we're thinking about the category of x or y you take a technologically a technology building block so in this case what this sort of chip can do and say what is this likely to do when it intersects with the market and where things are headed and that opens up a whole different set of possibilities where if you viewed this chipmaker in the context of its previous framework that you wouldn't even walk down those paths much less come to the conclusions that you had we're also illustrating the convergence of the platforms that are taking place if you think about autonomous vehicles so there are five major platforms uh evolving at the same time and we have not seen this ever in the history of innovation you go back to the early 1900s you see three telephone electricity automobile but we've never seen five and we have a paper on our site called uh disruptive innovation why now and it shows a timeline of innovation and if you look at the what we believe and this is brett winton our director of research did this study uh with the help of some academic research the productivity uplift and the wealth creation that we expect from these five platforms and the 14 technologies that are involved in them is going to dwarf anything that we've seen in the history of the world in terms of innovation uh and it was a pretty rigorous study uh and i think it's fairly conservative if you if you take a look at it so yes the convergence is among three of them robotics autonomous vehicles are robots whether they're electric vehicles drones uh trucks uh even airplanes ultimately and they will be powered uh with batteries battery technology is becoming so good it's dropped low enough in price and with the innovations thanks to elon and team uh it is moving forward faster now than it has in quite some time so again every time you see technologically enabled innovation you see uh increased access it enables access around the world in ways that would not have been possible before and artificial intelligence autonomous vehicles are going to teach themselves how to get from point a to point b safely and quickly and so research departments are not set up this way in fact what you see in research departments or what you would see is and you probably do see when it comes to tesla is um tesla you have auto manufacturers i mean auto analyst following them right absolutely the wrong analyst you need robotics analysts you need energy storage analysts you need artificial intelligence analyst you need software as a service analyst over-the-air software updates you need all of those the auto analysts are not equipped to analyze tesla and yet i i don't know this for sure but my guess is they are fighting to keep control of tesla you know it's a big stock it's a big market cap now they can't pull the trigger and put a buy on it but they want to cover it but they can't cover it and they're very good at what they do uh it's just that uh tesla and ev's autonomous evs are not what they do so you see the disconnect in the market and why they're so why the inefficiencies in terms of valuations are so large it's because of that dynamic this is i mean it's a perfect segue into tesla which certainly is one of the things that you guys are absolutely best known for uh both good and bad if you could go back far enough right in terms of where people's perception was but this is something you've had high conviction of for a long time and it seems to me that part of that core conviction that has been durable throughout is this breaking it out of the auto category and looking at it as a technology convergence category and also being i think sophisticated enough to separate the oh this is tech so it should have a premium type of thinking which is kind of replete in certain analyst circles from actually understanding the underlying but i mean i guess let's let's maybe ask it as a question where did this conviction start to come from what has reinforced it over time so you asked and i did not answer completely the um analyst question how we put our research out there so our analysts uh uh have i they have domain expertise for the most part in the new new world one foot in the new world why because they've just been educated uh in crispr gene editing and have experimented it with it themselves or they've worked in the industry i mentioned uh james wang coming from nvidia well nvidia is the a.i chip company james what already had a a wide network in that space it has grown even wider because of how we do our research first principles is okay what is an autonomous vehicle that tasha tasha sam korres who follows battery uh technology and robotics tasha and james wang who follows uh artificial intelligence the three of them work on that model together so think about that very collaborative no turf no turf fights in fact we're all trying to seek the truth that's that's our mission we are also trying to engage with the communities we are researching we want to become a part of those communities and in many ways we have become a part because we are willing to give our research away we are i often call uh arc one of the first sharing economy companies in the asset management space when it comes to research we are giving our research away we are putting our tesla model up on github we just put our square model up on github whenever we feel there's a glaring inefficiency in the way that a company is being analyzed we're going to put it on our models on github just so other analysts and other people just interested in the space can experiment with them and scenario test them we leave the variables open so so uh others can battle test our assumptions uh and so we have become a part of those communities and we're getting information it is not this is very important from a compliance point of view this is the information we're getting is not material non-public information it is simply trying to understand how the world's evolving generally and the the those who are doing the innovator innovating have a really good idea of how it's evolving what we have to offer for them is we're trying to size the markets they're going after we're trying to figure out where the unit economics are going to be where where it where's the profit margin in this particular space going to land and which parts of this space will be commoditized so in the case of tesla we think battery cells are commoditized but we do not think that about battery pack systems which is what tesla does and what is tesla is going to build into uh the the floor of its cars uh talk about vertical integration so we are helping those innovators say hey this is how we're thinking about the world where could we be wrong well they want to understand where their world is going from a financial point of view as much as we do and so they want to help us do our work and so it's a win-win uh situation and as you can see it's it's transparent we're putting uh we're tweeting with these uh uh researchers or you know about them uh or with them and uh and we're on this journey together and we want our clients to the extent they want to be on the journey uh in terms of in the weeds and understanding why we're doing what we're doing we're happy to have them join us enough so that we post our trades uh at the end of every day and uh we get i can't believe how popular that has become uh many people might be using uh our trades for their own you know personal accounts that's fine um but what you'll find many in the uh etf world didn't think that a fully transparent active equity etf was possible and the reason they didn't is because many growth managers are momentum driven we are not we tr we are some people would say we're aggressively patient certainly you can see from the moment we started arc 2014 to its breakout point last year we we were in a huge trading range and everybody saw our trades they're beginning to understand that uh we are lying in wait for misperception and controversy to visit a stock and we will buy so we are a liquidity provider in the marketplace that's why we don't mind uh being transparent with our disclosing our stocks at the end of every day or our holdings and our trades at the end of every day because if a stock is getting beaten up by some short-term thinking uh um we are usually there picking it up and we don't mind company when it's down 20 30 you know and on the other side we don't mind company if the stock is hyperventilating you know analysts have decided that nvidia is there check the box for uh artificial intelligence uh we're we're quite happy to see nvidia going up and we're quite happy to take profits as it does i think uh so it's it's one of the things that i think is uh very clear to listening to that perspective is how you fit well with the bitcoin community one of the things you'll see constantly is when people uh who are thinking short term would be maybe that's because their mandate uh leave the space the the hodlers flood in and say basically thank you for the sats you know i mean and the thing that's that's interesting is that you see kind of a rising price floor each each cycle because of that um but before we get into bitcoin i want to just stay on uh tesla for just a minute i guess actually it's it's a broader question than tesla but one of the things that i tend to see when it comes to you know i came out of a silicon valley perspective and now i pay more attention to kind of traditional markets and i think that there's this perception of innovation as a venture capitalist thing right where where you're winner-picking almost uh exclusively and so i guess you know what how does your research process differentiate you from the work of say a late stage venture capitalist who maybe is starting from a similar macro place as you but isn't thinking in terms of day-to-day trades right uh what the biggest surprise to me in doing the research uh we've been doing and sharing is that when we engage with innovators let's say and they may have vc owners uh the venture capitalists are not doing the kind of research we're doing this first principles based you know i mean when you think about it our autonomous vehicle autonomous truck drone models they started in 2014 2015 and they are evolving we're going as the technology progresses and the costs drop uh our models are becoming even more useful to us and why is that because the venture capital world they they will only go so far and then they want a liquidity event uh the world we're looking at and we call ourselves the closest you'll find to a venture capital firm in the public equity markets we believe that these opportunities that the platforms the technologies are uh all the seeds for all of them were planted in the tekken telecom bubble uh we weren't ready for prime time back then and it ended badly back then but 15 to 20 years of gestation of these new technologies they are ready for prime time now it's interesting that many people are are nervous about the volatility now that they're ready to take off but they didn't mind the volatility during the uh tech and telecom bubble so but whereas vcs will be looking for that liquidity event and they're out we think they're leaving so much on the table because these exponential growth opportunities have just begun they've just begun and you actually need the public equity markets to fund the kind of trajectories possible here and the and you know it's interesting i am very happy when i see one of our companies saying uh we're doing a deal we're doing an offering and why am i happy because we want our companies to invest aggressively now the more they aggress invest now the better shot they have of capturing the lion's share of whatever market they're going after because so many of these exponential growth opportunities are powered by artificial intelligence and the companies with the the largest amount of data and the best data and and and the best understanding of how to label the data uh are going to win are going to win uh and so these are winner take most and if we're on the right horse as i think we are just to go back to your tesla or our tesla um i think they're in the poll position for uh the autonomous taxi network of in the united states and we're even surprised in china at how well they're competing against the chinese incumbents and we're trying to figure out wow could they get a piece of that autonomous action as well that would be that would multiply the opportunity many fold where we are right now i actually want to come back to the geopolitics of innovation it's i think it's a really interesting question for you but um one one more kind of uh piece that connects to what we were just discussing how do your models or do your models uh take into account or intentionally ignore when there is momentum when there is narrative right so obviously this year has seen a large narrative around the retail day trader set rising right is that something that you guys kind of just it's it's too short for your time scale or is it something that you know doesn't really change your your long-term conviction but you're still going to pay attention to right so our investment time horizon is five years and the minimum hurdle rate of return for any stock to get into our portfolio is a a compound annual return of 15 so that's a doubling over five years that's our minimum hurdle so when we see short-term trading if you watch our trading you'll see we are as i said before a liquidity provider will be very opportunistic around it and just to give you an idea of how productive that can be if you look at just tesla let's just take tesla in 2018 which was a down year for the market take away tesla's performance which actually was up for the year but take that away and just look at uh the contribution to return uh that our trading uh accounted for in 2018 it was 175 basis points in a down market uh and i believe in 2019 it was roughly 200 basis points right so in a market where many think we're we and as we're seeing from the s p 500 we're up five six percent for the year in the s p 500. if you can get one stock like a tesla and we do this for all of our stocks to deliver you know 175 to 200 basis points just because of wild trading you know that's that's uh that's nice alpha generation right if alpha is a portfolio that does not trade around opportunities compared to one that does trade around opportunities so we use the volatility to our advantage but you know it's not going to change our short-ter our point of view about where this uh company is going you know one of the exercises we do every monday during stock meetings okay which of our stocks has dropped below a 15 compound annual return expectation for the next five years and uh you know those are we we will take profits from from those stocks because we have a lot of ideas trying to get into these portfolios makes sense so i want to shift because i know there are a lot of people who will be chomping at the bit for this so let's talk bitcoin for a minute and and uh the disruption of financial services writ large maybe so first i guess let's talk about when you started to get interested in bitcoin and how it evolved for for you guys as a firm okay when we were at so brett winton and i have worked together for more than a dozen years uh brett was at a lion's bernstein when i was there as well and i remember brett coming into one of our brainstorm meetings we have a brainstorm we had one there every friday as we do still and uh i remember he was talking about this crazy thing called bitcoin and we were just trying to get her that would have been probably i'm going to say that was 2011. and you know it was interesting but it was so esoteric at that time when we started the firm we we did not break out blockchain technology as one of the five platforms uh uh today the five platforms are dna sequencing robotics energy storage artificial intelligence and blockchain technology but we didn't break it out then we simply included it in what we used to call next generation internet and we've broken that out into artificial intelligence and blockchain technology because we think both of them are going to be so profound now i remember uh so chris burniske did our original research on on bitcoin and he'll tell you uh he's now one of the partners at placeholder he'll tell you he was following next generation internet and was given this task and he just fell down that rabbit hole and didn't want to cover anything else anymore period he knew and uh i brought art laffer um i don't know if you're familiar with art laffer uh uh the laffer curve supply side economics he uh was my mentor at usc university of southern california and he's a very well-known economist austrian school you know he's been a wonderful mentor i asked him he was on our board of advisors and i asked him would he review this paper and say that he collaborated with us on it and he had had a lot of offers like this because his mentor is robert mundell who won a nobel prize for monetary theory and so he is a global monetary expert as well and so he said okay i'm not going to tell you yes until i read the paper and the paper was so long he said okay i'll say yes to that part but no to that part the yes part was bitcoin the no part was network security because he just didn't understand it was too tech oriented the bitcoin though what he said was wow he said this is this is rules-based monetary policy and he had been yearning for that ever since really 1971 when when the u.s went off the gold exchange standard under richard nixon he happened to be in that administration and he knew that was a mistake but he was so young he had no influence over it and ever since then he's been looking for a rules-based monetary policy we kind of had it with volcker when he was trying to crush inflation we we moved into a money supply price rule money supply could only go up so much each week uh and boy every every thursday just waiting at believe it or not the teletype machine for that money number to come over to see what the market was going to do the next week was every thursday at four o'clock 4 15. so that was good and it did squeeze inflation out of the system but as you might imagine he believes i believe that monetary policy today is unhinged and fiat money we don't know what the ramifications of this experiment are going to be i think a lot of people are complacent now because we were all worried after 0-809 when the monetary base went up i think it was to four and a half uh trillion dollars here in uh in the u.s and uh you know we thought what what's going to happen here you know what we're going to have a an inflation explosion which we didn't and we didn't because the velocity of money started falling and started falling at an accelerated rate with 0809 um accelerating the the the downward trend in velocity so what that meant was all of the reserves that the fed had put out there were on the central bank's balance sheets and it had not had not been able to enter the real world because there was so much caution and fear out there okay so now we are that much uh further uh beyond and i should say the velocity of money has come down uh it's been i guess i i uh uh i didn't contradict myself it accelerated during 0809 but it had been falling uh and now everyone's betting it will continue to fall but i'm not so sure that's a good bet i think and you can see it in the housing market housing has taken off in this crisis this is 100 different from 0.809 it's the other side of it so why aren't we going to see the other side of a lot of other trends versus 0809 and why won't velocity turn around you see walmart giving wage increases of 11 11 waging i remember starting in the business in uh the late 70s and hearing this phrase we have an inflation problem because of wage push well is walmart starting another wage push i don't know here is what i do think is going to happen i think for the next three years the innovation that we're seeing explode right now is going to drive productivity growth to a a significant extent and that's a potent anti-inflationary force so this complacency that we're talking about will probably continue and uh i remember stories about the 60s when um i i forget who it was there was a an economist who basically said you know the business cycle is dead this was the 60s we were basically working into one of the worst recessions we've ever seen that was because of the quadrupling of oil prices and that's because of the complacency you know and that's one reason we went off the gold exchange standard so i think after all these years with inflation not taking root uh we're probably got another few years thanks to productivity growth but if we get velocity turning around to any great extent then what you see as kindling on the bank's balance sheet right now that is going to turn into a fire it'll be loan growth and it will be inflation so uh for those of your listeners who own uh bitcoin as an insurance policy we think that's our really good bet um so much there i think the uh that i mean speaking of punctuated equilibrium models right too it's the same thing it's not a problem until you realize it is and usually it's too late and that contributes to the whole rapid sort of uh catch-up you know um i guess you know for for people who are interested in what you guys are looking at either uh you know so you tend it seems from what we've been talking about before to not just say okay here's an asset you know or here's a stock and we're interested in it what's the set of things around bitcoin around this ecosystem that you're paying attention to and it can be also we can expand it to financial services kind of more broadly too sure uh well now yasin almandra is our analyst uh hand-picked by uh chris burniske and he's he's doing an amazing job uh super super sharp yeah running with the ball here uh he just uh we've just published uh uh yaseen's authorship uh uh two papers one of them with coinmetrics and so you can read all about it there those are on our website uh one of them the one with coinmetrix is really trying to help uh help institutions understand are we ready for prime time in terms of institutional involvement in the space um uh so many people ask are institutions ready for bitcoin uh we did the opposite is bitcoin ready for institutions and he did uh yaseen did a terrific job at framing you know the liquidity profile of bitcoin in the market i mean you can look at it i mean the the summary is you know it's trading like one of the large fang stocks right now so sure institutions can get involved but you know they'll have to move in slowly and and then scale with it uh as time moves on um so that's that one the other the first one was you know the use cases and the insurance policy uh i think uh confiscation of wealth in emerging markets that's that's a risk everyone understands venezuela zimbabwe and so forth but i think um you know even with our own election here or uh if you looked in the middle east when um uh mbs basically confiscated his own cousin's wealth i bet a few of them wish they had uh rem you know some bitcoin and the private key uh um you know memorized uh so i think more and more people are thinking okay we do need an insurance policy and so what you seen did that in that paper is said okay if five percent of uh all of the people in the world with more than one million dollars in net worth i think that's roughly it we're to take out an insurance policy uh and try assuming that there's a five percent chance their wealth will be confiscated if they put five percent that would be a trillion dollar opportunity for for bitcoin just there today present valuing it to today um we also took a look at demonetization so again that can happen in a number of ways it can it can happen because of hyperinflation and you know uh currencies becoming worthless as corrupt regimes uh you know basically lose control and so i think that opportunity he he characterized it using monetary measures from emerging markets uh or or markets other than the developed world uh that was another trillion dollar opportunity and um oh i'm blanking on the third one but uh those two use cases alone two trillion dollars uh we're starting from and that's present valuing them right uh this is going to scale with time uh from 200-ish billion right now for bitcoin uh that that those two alone we think are um are are going to be the most important use cases now one of the refinements of our thinking about bitcoin is the first paper we wrote chris wrote in collaboration with art laughter at laffer um basically uh was titled something like could bitcoin serve as the three rolls of money so means of exchange uh store value unit of account um and i think our we've morphed our view a bit uh and uh out of recognition that um that the the means of exchange role for bitcoin is really on its net we're on the bitcoin blockchain uh on the base layer is for very high value uh transfers right uh anything small like uh like a cup of coffee or a pizza or however no too expensive takes too long it's not set up for that lightning network is making progress that's interesting what's also interesting though and raises a lot of questions that uh come up at our our brainstorm is the fact that bitcoin is uh the transactions in bitcoin are more on the ethereum network or larger than on the bitcoin network is really interesting that's really interesting now store of value we we believe that's the case mathematically metered unit of account still uh most of the crypto world is is quoted in terms of bitcoin um but uh means of exchange what does this mean that more is trading is it truly that bitcoin is the reserve currency we do believe it is and this is another manifestation of it that transaction activity taking place on on ethereum is higher than on the bitcoin uh blockchain itself um and does this mean that the velocity of a theory or of ether is going to speed up if uh if bitcoin is fulfilling some of the transaction roles maybe so we're going back and forth on that because this concept as you know from chris's original work this concept of velocity increasing or decreasing is a very important one to figure out who's going to be left standing in terms of cryptocurrencies we think it's only three or four uh potentially and and we're specifically interested in arc is in currencies uh because we do think it's going to be winner take most it's like a lot of our other innovation platforms uh you know the most secure network or the roast more most robust network the first one there gets the lion's share of the market but there has been this refinement of our thinking in terms of means of exchange super interesting i we could dig so much deeper into that but i'll i'll make sure to share in the show notes the uh the papers that you referenced just so if people haven't had a chance to look at them yet they can um i want to be respectful of your time i could talk to you for hours but i want to kind of round out with maybe zooming back out at the highest level and i'll kind of ask two questions and you can figure out how to how to kind of take them on the first which is a uh i wanted to get into is where china and just geopolitical competition in general have to fit in an innovation portfolio construction how do you think and you know take that seriously how do you figure out what's worth paying attention to and how do you factor in the political dimension of this and i guess maybe we can kind of broaden that out to uh what are you expecting from uh from next year or the the coming years you know we're coming off of what is a was a totally unpredictable 2020 how have your kind of broad picture theses changed or not or been reaffirmed so you know i'll kind of ask them together and let you figure out how how to tackle them sure uh so china we pay a lot of attention to china uh i was presenting at a world economic forum event in china on an innovation platform when ark had barely started i was so grateful to be up there and up there with me was china's minister of innovation and i think it was also malaysia's uh minister of innovation china is taking innovation very seriously and they want to dominate and personally i think that's great i think that's great because there's nothing like competition to stir animal spirits here in this country that's our dna and so i don't look at it as a bad thing i do wonder you know we were looking uh just this week at uh autonom the autonomous taxi platform in china china's really trying to catapult that forward now we just had an analyst join us he's our asian innovation analyst and he's able to he's from shenzhen and he's able to translate some of the papers out there that you know we would never have translated we probably couldn't even find them and he found that 11 ministries in china are working on this autonomous taxi network now when i hear that i say okay they're going to get all caught up in their netting bureaucracy competition power plays and so forth if i'm wrong it will be because that xi ji ping himself says no we're doing this and we're going to be number one and off with your heads you're you're in the way uh that you know command and control so uh uh if i had any pause about china's ability to to uh catapult itself into number one on innovation it would be these ministries and this the the kind of tension there is between uh the chinese provinces and the national government um so we'll see what happens that's the the pause i have i think uh on chip technology i was in china when smick uh went public uh and that was going to be there uh so this was maybe 10 15 years ago and this was going to be their marquee play well it didn't work uh it didn't work so there's something about the dna in the united states when it comes to semiconductors uh that that gets us over the hurdles but has not helped them get over the hurdles and i'm really surprised about that because i think they've even imported talent from taiwan semiconductor which is the most advanced out there that said when it comes to artificial intelligence because the country is so surveillance oriented and because their population does not expect any privacy at all they they can do more of what they want in terms of ai than we can and and even even more so relative to europe given all the privacy concerns legislation politics and so forth so their population 1.4 billion uh is is going to produce enough data to be very meaningful for artificial intelligence which is determined by the most data and the highest quality data no one will have better data on china than china will and we're seeing their chip companies started to starting to move up the league tables especially those focused on ai chips so again we want to make sure we're looking behind our shoulder and not dismissing the possibility this is not another japan we think i remember in japan everyone thought in 1989 japan would rule the world and it has not uh and they were able to get so far but then something stopped them and that's why i mentioned those 11 ministries and the tension between the provinces and the national in terms of the way our government is treating technology and china i actually think uh that in hindsight when history is written that um we will look at this as a very important moment for leveling the playing field uh and so we are seeing some success i think one of the reasons tesla was allowed in without any local partner is because the pressure our government uh was putting on it um so i don't think china wants to to blow it this time i think you know they're going to try and find a way to continue to push push push um but we don't just the way they're the way we're dancing around each other we're both going to be uh we're going are going to be advocating for our own countries it's going to be no more from the us china come on in world trade organization uh we're going to give you most favored nations and that's done that's done and the playing field will be more level uh as far as 2021 well you know we obviously are looking at the election like everyone here is and on a purely economic just from an economic point of view it is clear that they're they're there there's black and white or i won't maybe i shouldn't say it anything like that there's these two uh administrations will be very different a trump administration we know what what they'll do they'll continue to cut taxes meaning probably a flatter tax for individuals a capital gains tax cut more corporate tax reform estate tax reform and more deregulation that's that we know that is extremely capital friendly that is why innovation stocks i believe have taken off remember i said 217 2017 was the beginning i believe that was because of corporate tax reform uh in and and what that does is uh it it improves our terms of trade you know uh our dollar goes up capital what seeks to come into the united states we are a friendly place for capital i'm not saying that for crypto because we've been unfriendly with our chaotic regulatory regime and i realize that some funds in the rest of the world will not allow us investors in so not perfect but certainly in the crypto world but uh much better than than otherwise would have been the case uh abide in administration has been very clear it will increase uh marginal tax rates especially on um especially at the high end it will increase corporate tax rates and will probably increase capital gains tax rates and it will re-regulate um i so to have said that what uh since 2017 that's what's really helped innovation here in the united states i have to be honest on the other side that will hurt innovation in this country however i do believe the five platforms 14 technologies around which we have centered our research they are all ready for prime time they've been germinating for the past 15 20 years they are unstoppable now and we will see exponential growth what will happen is these platforms in the united states will not serve as much as a launching pad or launching pads for more innovation i think innovation will move to other countries we know we've seen it you look at drone regulation for example the reason rfaa has finally gotten off its duff and is moving a little more quickly to allow drone manufacturers to test in this country and they're beginning to play ball with them is because australia hong kong china's way ahead of us on on drones um uh the uk many of india many other countries are vying for our innovators to come and innovate where they are better regulatory better pay better tax incentives and so forth and so i believe that future innovation will be in harm's way you know i don't think i'm speaking out of both sides of my mouth we've spent 15 20 years in the united states working on these technologies and now the costs have dropped to a low enough point where they're just going to take off and in fact if we do if biden is elected then as costs go up for corporations they're going to seek more productivity gains and more ways to cut costs and maybe more ways to create products and services from the technologies that are evolving and so they're uh that they'll perhaps gain even more traction than might otherwise have been the case well we'll have to come back and circle back on that exact question i think it'll be fascinating to see um kathy thank you so much for spending so much time with us today uh like i said we could talk about this for a lot longer but until the next time just thank you and i'll make sure to include all of your details and all these papers so people can follow along if they're interested thank you nathaniel it's been my pleasure you

Channel: CoinDesk

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Keywords: bitcoin, blockchain, cathie wood, ark invest, ark etf, arkk etf, arkk stock, arkk etf review, arkk catherine wood, arkk investments, arkk price prediction, coindesk, coindesk tv, coin desk, coin desk tv, bitcoin analysis, cathie wood bitcoin prediction, ark investment portfolio, catherine wood, cathie wood ark, cathie wood, cathie wood ark investment, cathie wood bitcoin, cathie wood tesla, cathie wood elon musk, cathie wood crash, cathie wood crypto, cathie wood coindesk

Id: yLzSjuDAeDs

Length: 75min 54sec (4554 seconds)

Published: Mon Oct 12 2020

Reddit Comments

[u/altcoinmaximalist]

In this conversation, NLW and Wood discuss:

Why she had conviction in Tesla before the market caught up

Why her fund offered the first bitcoin investment opportunities to Wall Street

Why it doesn’t hire traditional Wall Street analysts

Why it gives away all research for free

Why it shares the trades made in a completely open-source way ARK’s recent Bitcoin Investment Thesis white paper

What the prospects are for innovation in 2021

[u/apostolic3]

What are the time stamps for when she discusses TSLA?

[u/beemerteam]

The ‘Data is the New Oil’ Thematic Investment Basket: Tesla, Vectorspace https://medium.com/@christopheraberman/the-data-is-the-new-oil-thematic-investment-basket-palantir-tesla-vectorspace-snowflake-ad0412b62423