Volatility, Skepticism, Retail vs. Institutional Investors | ITK with Cathie Wood

greetings everyone this is kathy wood at arc invest well it certainly has been an exciting week i guess you could call it an exciting week it's given us lots of opportunities um we had an analyst join us uh today first day is today will summerlin he will be uh following artificial intelligence and partnering with uh max friedrich uh on our fintech strategy and uh the first words as he was introducing himself today to the rest of the firm his uh his first words to us were uh it is an exciting time to be alive and arc is at the forefront of all of the amazing changes taking place out there so that was very gratifying to hear especially after the last few weeks i know there's a lot of fear uncertainty and doubt evolving in the world out there but we're doing a lot of original research we have a five-year investment time horizon and we are truly excited about the opportunities that the last few weeks have presented us as you know our minimum hurdle rate of return for any stock to enter our strategies is 15 at a compound annual rate over five years that's a doubling over five years well you can imagine uh what has happened over the last few weeks market activity alone has taken that projected rate and again it's just a projection we could be wrong the world could end there i have to uh i'm sure i have compliance uh monitoring me very carefully when i say this so i want to say it correctly but according to our projections uh what these last two weeks have done is handed those who are averaging in to these sorts of strategies any innovation strategies a gift because we do believe we're on the right side of change and disruptive innovation transformative innovation is is going to deliver exponential growth trajectories for many of our companies in fact most of them uh the growth rates are are enormous and i think some people find them unbelievable uh to give you an example uh electric vehicles we expect unit sales of electric vehicles globally including china to compound at an 82 annualized rate during the next five years uh most people when they see a number like that they'll just say i don't believe it it's not possible and the reason for that the reason we face that uh skepticism often is because uh of where the automobile industry is right now is very mature it's not growing in fact we believe it has peaked and uh and that that means all cars are in secular decline if we are right that we are moving into more of a ride-sharing both human-driven and autonomous uh during the years ahead uh so this idea that electric vehicle sales could grow at an 82 annual rate just not going to believe it uh and uh and so that skepticism festers especially i would say among institutional investors whose analysts on the auto sector for example are mostly value analysts so there are a lot of those disconnects in the world uh that are creating great opportunities for us and uh and so i wanted to say that at the outlet because will is on to something you know uh there are trends evolving here that are really fostering a lot of skepticism especially the growth rates and the sustainability of the growth rates but our research based on wright's law gives us an extreme uh sense of confidence uh that we are on the right track and that truth will win out and uh the other thing i think is going on and and i do think this is going on um we uh we have noticed uh and uh our our intermediaries have noticed that uh there's been elevated options activity in our funds both uh on the strong days and and on the weekdays um well that that probably is the case and uh here i'm going to to give you a sense of why i think that's the case um i think that there are there is a big difference between the way institutional investors look at investing and retail investors i mean we know that that the tesla example is a good one to uh to illustrate the differences and i know there was a lot of frustration and it seems to have been pent up uh over many years uh about uh tesla and uh and uh you know our research on it a lot lots of fear uncertainty and doubt uh with which we had to contend uh but but we thought it was a good thing the the the debate uh the the a lot of institutions are set up are not set up actually to analyze a stock like tesla uh they the the and i'm not saying all institutions but i'm i'm saying most institutions the reason for that is after the tech and telecom bust uh 20 years ago almost to the day march 10th uh it started 21 years ago and then on top of that the 0.809 meltdown in the equity markets and the bond markets there developed a lot of risk aversion and volatility became a bad word uh we have a volatile strategy and we use that volatility to our benefit trading around uh positions uh volatility is not a bad word in a bull market volatility you've seen uh you've seen what happens in a down market uh what has happened is um institutions tend to be very benchmark sensitive and i'm going to use tesla as an example here tesla as you know many of you know did not and enter the benchmarks until last fall when it was over 500 billion dollars in market cap so there was a lot of um uh invest there were a lot of investment returns to have up to that 500 billion and we were happy to be there uh and we're happy that institutions are joining us now but they're joining us primarily because tesla entered the indexes i'm not sure they really are trusting this and the reason for that is their auto analysts tend to follow the traditional auto industry and the traditional auto industry is very mature and as i mentioned before we think it's in decline um and uh we're focu we are focused on exponential growth opportunities uh we believe a sub segment of the auto industry is going to see exponential growth for the first time in 100 years and so that's our sole focus institutions have hired analysts to focus on an industry that is mature and now there's a transformative [Music] really revolution taking place that will alter the uh auto world completely there was a lot of skepticism the auto industry itself didn't expect electric electric vehicles to to amount to much of anything uh for i think they thought it wouldn't take until the mid-20s uh well it's here and uh we we began to invest aggressively in this space on that assumption as we saw battery pack system costs decline as rapidly as they have been declining and so uh i think um that that kind of tug of war between the traditional backwards-looking uh world which is based on benchmarks benchmarks uh and certainly the the top positions in benchmarks are where they are because of past performance uh arc is focused on the future uh especially on the future that involves transformation and so uh benchmarks uh i think have been an impediment and and and setting up research organizations in the way they've been set up is also an impediment to some of the new ideas the other difference between what arc is doing what a lot of retail investors focus on is a time horizon i know that institutional investors are much more short-term many not all and they're very focused again on the benchmark so this idea of being graded every year based on how well an analyst or portfolio manager did relative to a benchmark is quite constraining the luxury we have and retail investors have is retail investors really don't have career risk we might have a little bit more of that of course given what we do but we have a five-year time horizon that is a luxury that's a luxury and the difference between linear growth and exponential growth in the early years when electric vehicles are at 500 000 a couple of years in in sales globally last year 2.2 million um in the those early years because the bases are so low uh there doesn't seem to that doesn't look on a graph to be that much difference between linear growth and exponential growth trends you give that a few more years and the difference is quite surprising i mentioned that 82 growth rate we really believe that's going to happen especially now that china is pushing hard i don't think traditional auto analysts still believe that could happen the third uh issue that institutions are grappling with that we are not and that retail investors are not is that the analysts are very siloed and specialized by industry or sub industry or sub sub industry that is just how the market evolved over over the last few years the problem with that is these new innovation platforms around which arc has centered its research and investing are cross sector in their ramifications so it is the platforms that we have centered our analysts responsibilities on and they are generalists and all of them are comfortable with technology um uh very comfortable healthcare oriented analyst very comfortable industrial you do not find that in uh in institutions and i truly believe that research departments in institutions will have to reorganize in order to invest successfully or optimally shall i say in innovation going forward our analyst responsibilities as i said broken out by uh platform and technology and uh and and the reason that's becoming more important is because the platforms are are converging so it's getting even more complicated autonomous taxi networks uh involve three of our platforms um and you've heard me say this before but some of you may not uh autonomous vehicles are robots that's one of our platforms robotics they will be electric so energy storage battery pack systems another one of the platforms evolving out there and they will be powered by artificial intelligence another one of our platforms it is very difficult in a traditional uh institution which is very siloed to have analysts collaborate uh in that way they haven't been set up to collaborate our analysts are all about collaborating so the world is changing we set up arc to accommodate uh or acclimate to this new world and as you know we are sharing our research uh on social media so that we can engage with and become a part of the communities that are innovating so we're we are receiving insights i believe because we're willing to share our research we're receiving research insights about our research from those in the field are we making incorrect assumptions that would be good to know early in an exponential growth trajectory because if you make an incorrect assumption in the early stages of investing an exponential growth trend and you carry that mistake out you can make big mistakes so just wanted to share a little bit why the disconnect between traditional institutions and perhaps what we're doing and by the way how we complement what they're doing we think that because of their focus on benchmarks which is more about what has happened historically they are they're uh the risk of the the the companies in their portfolios being disrupted by the tradition by the new uh technologies um is is going to uh cause uh them to or their portfolios to populate increasingly we believe with value traps so we're a good hedge against the broad-based benchmarks out there so as will said yes uh it's exciting to be alive and uh we're as excited as ever about uh everything we're doing the last few weeks hasn't done anything except increase the the returns that we expect uh from each of our stocks to the extent they've come down it's only the market that has changed that because a five-year investment time horizon um you know doesn't that the the research doesn't change uh we haven't seen anything to change our research assumptions or conclusions in fact during periods of turmoil and elevated risk and fear fear uncertainty and doubt innovation actually gains more traction faster the coronavirus was the best example i've ever seen of it but even markets like uh today will since we're still in a period of heightened risk around the coronavirus will probably encourage decision makers who were maybe on the fence about a new technology to jump off and just say okay let's go so i i am never afraid of times like this and just to address one other question this bubble question we are not in a bubble although compliance would have me say i do not believe we are in a bubble uh rightly uh is is because of how many uh how many questions we get about being in a bubble and uh and how much fear there is uh that we're in a bubble is because the seeds of what um we believe will happen during the next five years so these five innovation platforms involving 14 to technologies the seeds for all of them were planted more than 20 years ago in the tech and telecom bubble and even before that so the pc and the internet together and then the internet of course the bubble caused a rush of capital into what in they were actually the dream at the time the dream was right uh it was just 20 to 25 years too early amazon maybe being an exception an important one and showing the way uh and so therefore we're in the period of reality the seeds are beginning to flourish we are ready for prime time that is what we truly believe and so this notion of a bubble i think is born once again out of the benchmark sensitivity and backwards looking nature of a lot of institutional investors out there so the other thing i'll say about this is what they should be worried about is is not our strategies or innovation-based strategies they should be worried about their strategies because the other side of disruptive innovation is creative destruction and when we're talking about the s p 500 we think creative destruction is going to impact nearly 50 percent of the s p 500 and and that uh and that we measure um uh in two ways by uh uh looking at the fixed assets out of there that will become stranded and there are hundreds of billions if not trillions of fixed assets out there that will be stranded and of course we also look at the market at cap exposure in those groups i'm going to fly by now the um usual drill which is monetary policy fiscal policy uh economics and uh markets because i did uh give uh or i did speak about these things last week but but a few things did happen this week um uh chairman powell of the federal reserve uh i guess in a wall street journal article um was not forceful enough according to investors in saying that we are going to draw keep interest rates down at all costs i think a lot of investors wanted to to hear uh him say yes we're going to try and control the yield curve well by the way that that really has never worked in our country so i don't know why investors would think uh that it would work this time but and he um he did note uh the disorderly market although i think a lot of people uh misinterpreted some of what he said um we believe that interest rates going up and and it has been a shock when you think about it uh going from uh one percent to 1.5 on the 10-year treasury uh in the span of a few months is like an a tsunami through the bond market right that's a 50 increase in yields this is crazy talk in in the um in the bond world but it's happening and i think there's a lot of confusion and risk aversion which has uh spilled into the equity markets we'll take the other side of that trade interest rates going up long-term interest rates uh i we believe are suggesting that real growth is going to pick up now i know there's an infl inflation component there and we are going to see the base effect of last year's drop in prices during the coronavirus so we could see the cpi in the three to four percent range it will be temporary and we do believe that deflationary forces associated with um with disruptive innovation and they're massively deflationary uh combined with the deflationary forces of those companies who are going to be put in harm's way by this disruptive innovation and who have leveraged up too much historically usually to cater to short-term uh oriented shareholders and to buy back their stock uh not invest enough in innovation they are going to have to cut prices ultimately in order to uh in order to service sell goods and service their debt so i think those two forces are going to combine now this isn't today or tomorrow we think that today part is the deflationary under current associated with innovation but we do believe that as those forces come in and disrupt the traditional world order this other source of deflation is going to occur the one deflationary force is good deflation and will spur growth the other the other force is deflationary and bad in that it will probably lead to duress and bankruptcies and reorganizations and so forth so i think there will be a lot of confusion out there in the marketplace um and so uh keeping your eyes and and and portfolios on the right side of change is going to become very important so fiscal policy um government spending is is nothing more than future taxation in one shape in one shape or form um whether it's inflation which is a regressive tax whether it's outright taxation which this administration seems to be uh veering towards this is not good uh capital gains taxes corporate taxes uh tax rates going up um i i think uh it shouldn't surprise the market uh the the fiscal policy the fiscal stimulus has been in place for more than a year now or for about a year now and and with that is going to come taxation well now rubber is going to meet the road we'll find out what kind and um but i will say the closer we get to next year uh the lower the odds of some very harmful taxes because we'll be looking into a congressional election year and um the house is very close in terms of the number of democrats and uh the number of republicans uh nonetheless i can't i ca i can tell you uh that's not good news we don't have our rose-colored glasses on there in fact we never have rose-colored glasses on contrary to what some might think and then on the economy we did get the employment report today the employment report was a very good one much stronger than expected from a headline point of view again looking into the guts of it uh there was an offset there was a big offset the average week work week dropped by 0.9 percent uh so that's month to month annual and that of course has a big impact on income so we think the two pretty much wash each other out and we also think one of the things that's happening here is especially in leisure and hospitality a lot of people would not show up for work because they were being paid by the government uh not to show up for work effectively and uh so maybe some of uh them are going back to work uh that's a source of the employment gains and and and leisure and hospitality was the biggest one um and those uh therefore the people who had been picking up on their shifts they may they may be taking a lower work week now we still think we're in a v-shaped recovery this this report does nothing uh to suggest otherwise uh inflation if you look at the wages in the report quiescent 0.2 in line with expectations no change there um interest rates have gone up uh this week i think that's a manifestation of growth that's revving up and is going to gain more momentum as the vaccine spreads and i think that's going to be great for profits we think profits i used to say they'd uh end 20 and 21 at a 200 rate for the s p 500 now we're thinking it could average that for the s p 500 so uh the market on this year is selling at 19 times uh if you start looking into next year which we will starting june that's how the market cycle tends to work it's even um less expensive than that uh so now one of the things that a lot of investors say well interest rates have gone up of course this is a killer for your strategy uh i don't think the markets ever priced in uh interest rates at 0.5 percent on the 10-year treasury or today 1.5 i think that the market uh and we i went through this in a previous uh uh video the market has been assuming that interest rates would normalize somewhere in the four four percent uh or or even five percent range uh and that's how taking the inverse of that uh uh we we got to sort of a normalized p e in the 20 to 25 range couldn't get through there uh one over four percent uh is 25 one over five percent is 20. uh so we don't think the market has uh priced any of these low interest rates in uh and so to say that uh these strategies should uh go down um because of interest rates uh we just don't buy and then in terms of what's happening in the markets today let's address the equity market there's a a big rotation taking place it's moving from growth into value now this started in the fourth quarter and the surprise to us is that our strategy had held up as well as it did until the last two weeks uh and uh we were beginning to think oh maybe maybe they can coexist um well we don't think they can coexist but what i'm about to say might surprise you um if you're the the algorithms out there and and the market is highly algo driven these days we learned that from the coronavirus when algos just ripped through the market and you know sold stocks that had uh small cash cushions and were in a cash burn situation and uh many of those stocks uh are held solutions to the problems so you know they were cut by two-thirds at that time it made no sense made no sense but these algorithms if they're uh if they're given just two uh two variables uh they're probably going to make a lot of mistakes uh if the variables they're using today are price to book and uh dividend yields then then we think that they're going to be very wrong because those kinds of value stocks probably haven't been investing a very very aggressively to become a part of the new world and the innovation that's burgeoning today there are value managers out there very good ones who understand their biggest risks are value traps caused by innovation so they're picking their spots uh very well but be careful because value we believe is going to continue to face massive headwinds especially those companies uh that have not invested uh to move into the new world and even retail many people say well can't possibly hurt retail any more than than it already has um uh i can tell you that's not true so if you look in the united states online retail as a share of total retail uh is is roughly 20 now it um it it grew at four times the pace uh this year or la in the last year as it did the prior four years so four years into one so it's close to 20 if you look at s curves where does the sweet spot occur it starts happening in the 10 market share 15 20 and then there's the takeoff and given the coronavirus now we're all much more comfortable shopping online there were some who just wouldn't do it before they they had too much of a habit going or something that's changed and so i think anyone who thinks we're going back back in time is mistaken and of course retail financial services energy energy this increase in energy that's almost what makes me feel good about what's going on if you look uh year to date energy stocks are up 37 and a half percent and financials up 13. much of that occurred in the last month 22 increase in energy just in the last month and eight percent in financials uh so that accelerated appreciation is what has caused this uh rotation algorithm saying okay past is prologue it's happening faster let's get rid of our growth stocks and let's go into value uh the fact that those two sectors are at the top of the league tables this year and in the last month makes me feel good from a couple of points of view one the bull market has broadened out it did not narrow into one strategy like the internet in the late 80s that was a recipe for uh the tekken telecom bust that we saw so this rotation is healthy a good correction shakeout is healthy great time to average in to strategies you like and i do believe on the other hand that energy and financial services are going to be two of the most disrupted sectors thanks to electric vehicles autonomous electric vehicles and thanks to digital wallets um those are two and three of the biggest opportunities brewing out there so the fact that energy and financials are leading uh the pack um suggest to me that this is not going to be long lived i'm happy they've had such a burst and the the other of course the other algo rule here is move from high value stocks high valuation stocks to low valuation stocks so again be careful a lot of low valuation stocks are gonna be set up for disruption and uh then the there are rules like okay let's follow the price momentum just it's a momo trade and again if truth is going to win out that will be a losing strategy so i guess the last thing i'll leave with you is a stat that i saw just today it's cash in money market mutual funds now cash in money market mutual funds soared during 0809 for understandable reasons there was so much fear and uh and and of course uh that led to sort of the deflationary disinflationary period i was surprised to see that cash in money market mutual funds now maybe there's a technical explanation but i don't think it can be this big uh is higher now than it was in 0.809 it had started to come down and now it's moving back up again and and i think this makes sense because as i've mentioned many times equities have seen outflows pretty consistently since 0809 there's been a flurry here and there but pretty consistently fixed income has seen inflows uh cash is part of fixed income these last two weeks probably has um has renewed the decline in equity outflows and the uh and yet at the same time potentially a a decline in fixed income especially long duration fixed income funds what do you do with that you put it into cash so that's that's very interesting the cash is building on the sidelines and uh we do believe there is going to be um an asset uh reallocation you could see it towards stocks and bonds away from cash bond yields have gone up let's extend our duration so that we earn a little bit more on our money and uh for stocks let's uh let's have a barbell strategy bonds and um and equities maybe even higher octane higher octane equities so we are we're looking forward to sharing with you more videos like this and probably focusing more on the exponential growth trends just how powerful they are out there how unstoppable they are if we're right and the cost declines associated associated with wright's law are going to be as powerful as as as rights law suggests and there then you will see how getting on the right side of change will be a very good idea and not just in investing getting uh your children focused on the the right side of change or your grandchildren in terms of their education and and um you know and inspiring them uh i think will become very important as well so um i hope you all have a wonderful weekend and uh we will be uh updating these videos uh during this tumultuous time we're going to be there for you we want to know we want you to know what we are thinking as you know we're radically transparent we're not a black box um and we want you to share this journey with us because we think it's going to be an exciting one okay so thank you very much have a lovely weekend you

Channel: ARK Invest

Views: 1,146,174

Rating: 4.8956499 out of 5

Keywords: innovation, technology, tech, Cathie Wood, ARK Invest, ARK, market research, stocks, market volatility, invest, investing, investors, how to invest, fintech, finance, stock market

Id: Qb8uQSQi8bc

Length: 37min 28sec (2248 seconds)

Published: Fri Mar 05 2021

Reddit Comments

[u/newnew818]

I added a Cathie Wood poster on my wall, next to Cindy Crawford and Elle Macpherson.

[u/IdidMyJob]

Love Cathie! I don’t understand why they bought more SPCE however

[u/ontariohunter]

I appreciate her perspective. It helps after a difficult week overall. She does a nice job of breaking things down.

I’d be interested if anyone has any videos on some “counter points” to what she’s saying. Just to get a different perspective than her. Please share if you have anything on that front. We can all benefit from alternative perspectives.

I’m happy to hear her thoughts on big energy, big financial, while I agree on her long term ideas on those two industries I’m using them as hedges in my portfolio in the short term (XLE/XLF) and that has eased some of the bleeding in the short term on the innovation names.

Happy with the uptick in video sharing. Commutation is key in times when you feel like the sky are falling (they aren’t but can feel like that sometimes).

[u/LeoUbb]

Anyone so kind to wirte up a TL;DR?

[u/BabbleandPrune]

When are you coming to Europe 🥺

[u/hoodrichcapital]

Long cathie

[u/littlefiredragon]

This is ARK's toughest week and she just made her best ever video that addressed every recent critic. From Cramer calling her daily trade publishing a parlour game, to liquidity fears, to the current rotation towards value stocks, to overvaluations and bubbles.

But wished she talked more about how she traded around volatility, because I am not understanding her constant buy high sell lows (pretty sure she lost more money from trades than she would have from taxes) and why she isn't going a little cash-heavier when a out-of-growth rotation has been clear since last week.

[u/me_3p]

Was anyone able to see her in that video? Her holiness made it hard to see anything 😣

In Cathie we trust 👼

[u/None_2_Soon]

Marketing genius!

It's cool that the most sought after portfolio manager for interviews takes the time and puts in the work to make videos to speak directly to investors like that. I would be an interesting study to see how/if the ETFs bounce after her videos.