Cathie Wood's Flock Found Her Through God, Money, and YOLO.
Ms. Wood claims that the Holy Spirit compelled her to venture out on her own following an up-and-down career in financial services. However, it is her belief in herself that has earned her the Reddit community's trust.
Cathie Wood found herself in well-known territory. She was listening to someone inform her that she was incorrect.
February 2018 was the month. Ms. Wood, a seasoned money manager and CEO of Ark Invest, spoke on a CNBC panel with Canadian entrepreneur Kevin O'Leary, better known as Mr. Wonderful from the business reality show "Shark Tank."
The subject was Tesla, and the two were at odds. Tesla shares were trading slightly below record highs at the time, despite the business through one of its most difficult periods in history. Mr. O'Leary contended that its stock was unjustifiably costly in comparison to that of other automakers. As automotive behemoths such as General Motors entered the electric vehicle market, the premium that Tesla's shares commanded from investors was certain to dwindle.
“No,” Ms. Wood, the panel's sole female investor that day, responded after hearing Mr. O'Leary out. She then proceeded to list all the reasons why Elon Musk's company was unique. G.M. lacks Tesla's software engineers, distribution network, and battery technology. Software, artificial intelligence, and automobile manufacturing will converge in the future. Tesla was prepared for the eventuality.
“Electricity is the way of the future. G.M. is not yet electrified,” she stated.
Cathie Wood at her best, a mash-up of in-depth business analysis with a near-prophetic confidence about the future. Additionally, that was precisely what the online army of fervent Tesla shareholders desired to hear.
As Tesla suffered in 2018 with production issues, depleted finances, and an unpredictable Mr. Musk, Ms. Wood issued a vehement defense of the firm, her largest single asset. This sparked an odd synergy between Ms. Wood and the new generation of tech-savvy, risk-taking individuals who began trading in droves in 2020.
On the surface, she appears to be a strange standard-bearer for these younger, more diversified, and profoundly irreverent ranks of individual investors. Ms. Wood, 65, is a creature of Wall Street's asset management business and the well-to-do Connecticut suburbs, as well as a devout supporter of conservative political candidates.
However, Ms. Wood and her firm's unconventional approach to investing — which combines a high degree of risk with a high degree of transparency about her views in order to generate, at least last year, astronomically high returns — has connected with new investors in ways the financial industry could only dream of.
Her aggressive wagers on frequently unprofitable technology equities are a better fit for traders bragging on Reddit about YOLO-ing their rent money than they ever were for endowments and institutions reliant on the traditional money management sector, where she worked more than 30 years.
In other words, Ms. Wood has discovered who she is.
“I listened to her and thought, 'That's how I think,'” said Casey Flores, a 30-year-old amateur trader from Richmond, Va., who discovered Ms. Wood on CNBC more than a year ago and began following her every move. “I was just thinking, 'I like this chick.'"
Her ability to interact with individual investors such as Mr. Flores has contributed to Ms. Wood being the most prominent investor operating in today's markets. After the funds she managed posted astounding gains in 2020, many of these new traders have embraced her feast-or-famine investing style in the same way that previous generations emulated the relatively risk-averse methods of stock pickers like Peter Lynch of Fidelity or Warren E. Buffett of Berkshire Hathaway.
Ms. Wood is unlikely to replicate last year's performance, which was fueled by an unforeseeable convergence of events: the economic shock caused by the Covid-19 outbreak; the Federal Reserve's interest rate decrease; and the trading surge among individual investors. In 2021, her funds will be well behind the broader market.
Nonetheless, Ms. Wood has already altered the landscape of Wall Street, potentially permanently, as some of the world's largest financial institutions scramble to implement the types of products she and Ark pioneered.
Ms. Wood currently oversees almost $85 billion, a significant increase from less than $10 billion at the end of 2019.
Her firm invested substantially in technology equities, which thrived while the majority of the country remained at home. Ark Innovation, the company's flagship fund, gained nearly 150 percent, outpacing the S&P 500's 16 percent rise.
Her daily purchases and sales of firms are publicized to any investor who subscribes to her email updates. Her regular — and seemingly fearless — television appearances can generate headlines and cause stock values to fluctuate.
Despite her many declarations about openness as a basic tenet of her firm, Ms. Wood denied repeated requests for an interview for this article, which is based on interviews with former colleagues and workers and on her frequent public statements to business and religious groups.
She consistently characterized her late-career choice to open her own investing firm as more than a commercial leap of faith at similar engagements.
It all began with a face-to-face meeting with the Holy Spirit, she claims.
A Strategic Business Plan, From Above
Ms. Wood — a fund manager slogging through a difficult quarter at AllianceBernstein — was struck by the silence inside her elegant house in Wilton, Conn., on a sunny day in August 2012.
Her three children were gone for the summer, out to camp and other activities. She faced two weeks alone in the almost 6,000-square-foot house she purchased in the 1990s with her ex-husband.
Then she was aware of it.
“Wham,” Ms. Wood remarked last year on the podcast "Jesus Calling," which is based on the devotional writings of best-selling Christian novelist Sarah Young. “I truly believe that was the Holy Spirit simply communicating to me, 'This is the plan.'"
Ms. Wood's idea was to leverage her experience as a technology investor to create a new type of money management firm that was optimized for the social media era and embraced a level of transparency that was unprecedented on Wall Street.
To accomplish this, Ms. Wood had to resign from her employment and risk her personal riches at the age of 57.
“The majority of my friends warned me I was insane, but I ignored them. In 2016, she told a Christian outreach organization, "I understood I needed to follow God's will for me." “That was the only way I could be content.”
Ms. Wood was the first of four children born to Irish immigrants. Her family moved frequently during her youth — her father was an Air Force radar technician — before settling in Culver City, Calif. She graduated from an all-girls Catholic school in 1974 and subsequently studied business administration at the University of Southern California.
She found a mentor in Arthur Laffer, one of supply-side economics' patron saints, after petitioning for admission to one of his doctoral classes.
“That required a great deal of chutzpah,” Mr. Laffer, 81, stated.
He described Ms. Wood as an exceptional student who was unwilling to forsake any subject until she grasped it completely.
“I've never seen someone so meticulous, so conscientious, and so research-oriented in my life, which gives her a sense of self-confidence,” he said.
Former coworkers frequently discuss Ms. Wood's work ethic and voracious consumption of material. She frequently awoke early each morning to catch one of the earliest trains to Grand Central Terminal, considering the almost two-hour commute from Connecticut as a sort of continual cram session on rails.
Colleagues recall her dragging bags stuffed with research findings into and out of the office each day in the days before smartphones, tablets, and laptop computers.
Sig Segalas co-founded Jennison Associates, a New York money management firm where Ms. Wood worked from the early 1980s to 1998 as an economist, analyst, and fund manager. His office was adjacent to hers for many of those years, and he recalls her as being one of the last individuals to leave the office each day.
However, Mr. Segalas, who began his career on Wall Street in the early 1960s, noted that Ms. Wood's penchant to pitch her investing decisions as near certainty was rare.
“I've never encountered somebody with such conviction,” he stated. “To be completely candid, it's almost mystical.”
Of course, even the most informed forecaster occasionally makes a mistake.
For example, when Ms. Wood was a portfolio manager at Jennison in the early 1980s, the firm owned a sizable position in Mexican stocks. Rumors began to swirl that Mexico was considering devaluing the peso, which would have a devastating effect on the firm's assets there.
While many economists believed the change was improbable, Ms. Wood was particularly certain it would not occur, Mr. Segalas said.
“She was unflinching. 'There is no way they will do it. 'There is no way they are going to do it,' he stated. “Indeed, they did it. And everything came crashing down.”
Such an investment strategy results in strong ups and downs, which is why volatility has been a defining feature of Ms. Wood's career and, at times, a hindrance.
Ms. Wood joined AllianceBernstein in 2001, where she eventually handled a solid $5 billion in assets. As is customary for her, her performance at the Manhattan firm was an emotional roller coaster. Consider the AllianceBernstein Global Thematic Growth Fund, which she took over during a particularly trying year, 2008, when it lost 45 percent of its value. The following year, it increased by 55%.
However, according to a March review by Morningstar, her investments at AllianceBernstein were renowned for their extreme volatility and "underwhelming long-term returns." Her worldwide fund performed particularly poorly in 2011, falling nearly 24% on a flat market. In 2012 — the year she realized she should start her own firm — she again undershot her benchmark's rise, even after expenses were deducted.
Such a return profile was incompatible with AllianceBernstein's focus on conservative fiduciary institutions such as pension funds and endowments. Many were unable to handle Ms. Wood's demeanor.
“I believe she was regarded as brilliant,” said Lisa Shalett, a former AllianceBernstein colleague and current chief investment officer at Morgan Stanley Wealth Management. However, Ms. Shalett stated that she was also perceived as "not institutional."
Ms. Wood resigned from AllianceBernstein in 2013. She created Ark in January 2014.
Chris Burniske, a Stanford senior at the time, knew little about the woman he was meeting that day in 2013, but he had heard she was some type of financial powerhouse.
A mutual acquaintance had requested that he show Cathie Wood and her son, Robert, around the school.
Mr. Burniske, a surfer from Hawaii who studied ocean science, rolled up barefoot on his skateboard and spent the better part of a weekend squiring Ms. Wood and her kid, using the opportunity to make several casual barbs at the banking industry. Ms. Wood desired to hire him nonetheless.
He initially declined her offer. The prospect of relocating to New York and spending his days sitting in front of a computer seemed unpleasant. However, following a brief stint as a fishmonger at a Whole Foods Market in Austin, Texas, he decided to give it a shot.
Ark is unlike any other money management organization philosophically, not just in terms of investment strategy and products, but also, and perhaps most significantly, in terms of hiring.
Mr. Burniske finally assisted Ark in its transition to cryptoassets. (He has since published a book on valuing cryptoassets and joined a venture capital firm as a partner.) Another analyst, who covered automation for the corporation shortly after it began, lacked experience, despite the fact that he had written a book in 2012 about how to strike it big by searching for silver coins accidentally included in coin rolls. The analyst, who covers a broad range of very sophisticated technology, has two brief internships on his resume: one as a brand manager for the energy drink Red Bull and another as a skipper of a 43-foot sailboat.
The unusual approach extends to Ark's preferred investment vehicle: actively managed exchange-traded funds, which enable investors to purchase and sell shares throughout the trading day, just like stocks. The great majority of exchange-traded funds are designed after widely traded indexes, which saves money by eliminating the need for experienced stock pickers. However, Ms. Wood is continually buying and selling stocks.
And everyone can join in.
Ark produces an endless stream of podcasts, white papers, YouTube videos, and newsletters, exposing both Ms. Wood's image and her firm's views on investments ranging from Bitcoin to biopharmaceuticals to millions of followers. And purchase and sale choices are made public via a daily email blast that has become essential reading for many traders.
Such transparency is frowned upon on Wall Street, where corporations normally reveal their holdings quarterly and keep their strategy hidden from counterparts and competitors.
“Cathie is a firm believer in her investments and actively promotes them,” Ms. Shalett explained. “So for her, it's almost as if she's saying, 'I don't mind having an open kimono.'"
Additionally, open access appears to be a significant reason why Ms. Wood has been able to interact with the type of investors who have recently been interested in stock trading.
“That is extremely punk rock,” said Maximillian Lawrence, who started investing in the Ark Innovation fund earlier this year. Mr. Lawrence, a 46-year-old artist and educator based in Philadelphia, like Ms. Wood's candor, which fit well with the do-it-yourself mentality of the art and skating groups he frequents.
“What distinguishes her from a lot of these other people is that she genuinely believes these things and then doubles back on them,” Mr. Lawrence added, adding an obscenity for emphasis. “It's evident in her trades.”
And investors are not required to hand over their money to Ms. Wood in order to invest with her. Many, like Mr. Flores, simply pick up shares of whatever she is purchasing.
Mr. Flores, who works in sales at a financial technology start-up, was unfamiliar with several of the firms he began buying last year when he began duplicating her purchases. However, this was irrelevant.
“They would increase by 11%, and sometimes by as much as 17% the following day,” Mr. Flores explained. “It was... awe-inspiring.”
As additional amateurs joined in, the effect was amplified. “It was insane to see her purchase list, and then every single item on the purchase list would increase by an absurd amount the next day,” he explained.
Markets continued to react to Ms. Wood's disclosures. Her acquisition of more than 1.5 million shares of the stock-trading app Robinhood, which went public late last month, was attributed with causing a price spike in late July and early August when it was made public. On Aug. 4, the stock increased by more than 50%.
“Cathie Wood's golden touch continues to carry significant weight,” Chris Vecchio, a market analyst with DailyFX.com, wrote in a client note.
Increased Funding Equals Increased Scrutiny.
As Ms. Wood has garnered increased attention, money, and influence over markets, some examining her company believe that Ark's unique structure may pose hazards to its investors — not to mention her online adherents.
Ms. Wood is the sole portfolio manager for assets worth about $85 billion. She exemplifies what is referred described as "key man risk" – the possibility that a significant leader would be unable to function due to illness, accident, death, or something else. Many investors would abandon Ark if Ms. Wood were not in charge.
Additionally, she may be a victim of her own success. Ark now has far more money available for investment than it did 18 months ago, and using it presents a difficulty. The type of technology equities that the company has historically preferred are small and thinly traded, which means that large wagers can significantly influence their prices. Ark has the danger of bidding up the price when it buys and then taking a significant loss when it sells, as such equities sometimes have few buyers.
Additionally, many of the equities Ms. Wood purchases appear to be strongly connected – they rise in lockstep — which worked well last year. However, they also fall in lockstep, exposing her to catastrophic losses should market circumstances deteriorate.
Investors received a preview of how a brutal sell-off might look this year. Between February and May, the flagship Ark Innovation fund lost more than 35% — significantly more than the market — as investors shifted their focus to established sectors positioned to benefit from the economic rebound.
Recent volatility — exacerbated in part by the increase of the Delta strain of the coronavirus and fears about an unequal recovery — has aided Ms. Wood's fund's recovery, but the Ark Innovation fund is still down roughly 7% year to far. By comparison, the Nasdaq has gained almost 14% and the S&P 500 has gained approximately 18%.
However, her funds' dismal performance this year pales in comparison to last year's leap. And the area in which Ark has become nearly synonymous — actively managed, fully transparent exchange-traded funds — is one of the fastest expanding segments of the money management industry.
Investors have poured approximately $110 billion into actively traded funds that disclose their holdings daily, according to J.P. Morgan analysts in a recent research report, noting that such massive inflows demonstrate that “portfolio transparency does not have to be an impediment to the success of an active E.T.F. strategy.”
Major Wall Street businesses are coming in to seize a piece of those investment funds. Late last year, BlackRock, the world's largest money manager, expanded its service with three transparent funds that report their holdings daily. Goldman Sachs Asset Management launched its first transparent, actively managed exchange-traded fund (ETF) just last month. Additionally, JPMorgan Chase's asset management division revealed intentions this month to convert four of its mutual funds to "active transparent" exchange-traded funds, similar to Ark's offerings.
Others believe that Ms. Wood's good fortune is soon to run out. According to recent reports from many renowned hedge funds, they purchased 'puts' — bets that profit when the value of an investment decreases — against her fund during the second quarter.
She, for her part, is still on the lookout for fresh opportunities. In May, when technology stocks tumbled and cryptocurrencies plummeted, she predicted on Bloomberg News that Bitcoin might reach $500,000 within five years. It is currently valued at approximately $45,000.
Additionally, her firm has filed with authorities intentions to launch a Bitcoin-themed exchange-traded fund that would track the performance of the S&P Bitcoin index.
And, despite the fact that her funds have lagged the market, Ms. Wood insists that her conviction in her decisions remains unwavering.
She acknowledged to the interviewer that the last few months had been difficult for her clientele. However, in the following breath, she hurriedly imparted some counsel.
“Maintain your faith,” she said.