During every market cycle, there are always a significant number of stock-picking investment “heroes” who become goats—usually sooner than later. And I don’t mean GOAT as in the Greatest of All Time. That ship has sailed, and its name is Warren Buffett.
This time around, one of the goats is Cathie Wood. Ms. Wood is 66 years old, a graduate of Notre Dame, and a long-time promoter/practitioner of active investment management strategies. After the ancient Wall Street firm of AllianceBernstein rejected her idea for a “disruptive innovation” ETF as too risky, she started her own firm and named it after the Ark of the Covenant.*
On January 14, Jason Zweig of The Wall Street Journal wrote about the extraordinary rise and fall of Wood’s ARK Innovation fund (symbol: ARKK). Of course—because who in journalism these days cares about the people they affect more than the institutions that pay them?—Zweig gave the article a cute title: “How a Flood of Money Swamped Cathie Wood’s ARK.” But the wealth destruction for her investors is anything but funny, and the Zweig analysis of it is just sad and pathetic.
So, there are two themes I want to cover in this article: Cathie Wood’s questionable ethics in launching such a fund as a legitimate investment vehicle for serious investors and Zweig’s shifting of blame away from Wood’s personal responsibility.
A 66-year-old professional fund manager in the industry for 40 years knows the US stock market is exceedingly efficient at pricing individual stocks. All the fund carcasses lying around and the rapidly expanding Hall of Shame for failed investment managers are unavoidable proof. All that’s left, as she knows, is “the forming of a theory or conjecture without firm evidence” (i.e., speculation).
We have something called research that collects and analyzes data to prove what we observe anecdotally (that is, 80% or more of active managers fail to beat the market). Standard and Poor’s (S&P) publishes its SPIVA reports quarterly, and Dimensional Fund Advisors produces its Mutual Fund Landscape report every year. People like Cathie Wood are aware of them. They hope you are not.
So, what happened with Wood’s fund?
Over the first two calendar years of ARKK’s existence, the fund produced a cumulative return of only 2%. Then Ms. Wood got lucky.
In 2017 the fund rose an amazing 87% (fueled mostly by her largest single holding, Grayscale Bitcoin Trust, which soared 1,600% that year). Not enough, as we’ll see, to attract much of a following. By mid-2018, the fund had assets of only $1.1 billion. Woods also struggled in 2018 with a gain of only 4%.
But in 2019 the fund jumped 36% and assets almost doubled to a still-modest $1.9 billion.
Then COVID-19 hit. And her highly concentrated, speculative portfolio soared 157% in 2020. Did she know Anthony Fauci and possess some insider knowledge of what was going on at the Wuhan Institute of Virology? Not likely. She simply gambled with a billion or two of her investors’ money and hit the jackpot when the world went into lockdown.
By the end of 2020, as word of Cathie Wood’s “unique genius” for recognizing profitable innovation became more widely known, a flood of new money moved into her fund and instantly made her extremely wealthy.
Then the bottom fell out. Since early February 2021, the price of Wood’s ETF has crashed 60%.
Now, you might be thinking, Well, stocks go up and stocks go down. So, what’s the big deal? The big deal is what Amy Arnott wrote about in an article for Morningstar titled “ARKK: An Object Lesson in How Not To Invest,” and that is illustrated by the following chart from Zweig’s article. Only a fraction of investor dollars in the fund benefited from the lucky early returns. Tens of billions of investor dollars have been lost since as a result of Wood’s incompetence and questionable ethics.
Am I being too harsh? Well, let me reflect a bit. Wood knew that her chances of success of beating a simple S&P 500 index over even 10 years was about 20%. (Did she tell that to her investors?) She also knew that concentrating her fund portfolio in a small handful of very hot growth stocks could result in extraordinary performance very quickly and generate a flood of money into her new company.
She was right. At a peak of around $28 billion in assets in 2021, the ARKK fund alone was producing $210 million in annual fees—enough for a pretty good retirement for Wood. With the success of ARKK, her other funds attracted more money—to the point where total assets were around $54 billion. Is this (voluntary) redistribution of wealth at its worst?
Since the fund was founded in late 2014, it became eligible for 401(k) plans after 3-5 years (based on common fiduciary guidelines). Do you think maybe a few retirement plan consultants recommended the fund to their 401(k) clients after the 87% return of 2017? And do you think maybe just a few investors saving for their retirements chose that fund for a significant part of their stock allocation?
This is redistribution of wealth at its most contemptible—validated by an unintellectual Wall Street-financed media and implemented by overpaid retirement consultants peddling past returns with no sustainable investment strategy behind them.
So how does Jason Zweig feel about this?
When you title your article “How a Flood of Money Swamped Cathie Wood’s ARK,” you immediately shift blame from Wood’s poor management and questionable stock buying and selling skills to investors making the classic mistake of trying to “buy past performance.”
Zweig blamed these performance chasers—and the ETF structure itself—for putting Wood in essentially an untenable position that resulted in the performance collapse.
At no place in the article did Zweig criticize Wood and her delusional belief that she could outsmart all the other delusional egomaniacs buying and selling stocks in an effort to beat an inexpensive and much more diversified index fund.
Zweig mentions in his article that ARK (i.e., Cathie Wood) declined to comment. I’m sure he would have asked her about the “problem” of too much money coming into her fund so fast and limiting her ability to trade her handful of stocks without significant market impact (rather than the more obvious and investor-friendly question of why she rode a lot of her picks down so far this year—in some cases by 70%!).
Ironically, and consistent with her ongoing delusion and arrogance, Wood has stated in the past that her funds would be able to “scale exponentially” (another lie she knew better than to sell to naive investors).
What would you do to keep the remaining assets in the ARK Innovation fund while building back to that $210 million of annual income?
Well, you might become humble and rethink your strategy, right? After all, it’s not based on systematic, measurable, and compensated risk and solid academic research. It’s based on your fake ability to recognize undervalued stocks in a highly efficient market better than the other delusional opportunists speculating with other people’s money.
Humility? According to this article, Wood said on CNBC’s Halftime Report:
Think about this. In the span of less than 12 months (and especially the last three), Cathie Wood did not become more humble, reflect on her mistakes, and change her strategy. Instead, she allowed the market to change her strategy for her.
Now she likes low-priced value stocks. Welcome, Cathie, and enjoy the ride. We’ll see how long you last and whether you learn anything new.
We can only wonder how many “expert” consultants who placed this and other ARK funds in the 401(k) plans of hardworking Americans are watching this intellectual meltdown and changing their ways. I’m guessing not too many. It’s past time enlightened company insiders take control of their retirement plans and fire these clowns. Act like fiduciaries!
So, what’s Cathie Wood’s latest gift to her investors?
In other words, “Please don’t fire me. I promise I’ll do better next time.” Shameful.
*When you face overwhelming odds of beating the market with a very concentrated portfolio of very high-priced “growth” stocks while gambling with other people’s money, it’s always a good idea to bring some reference to God and Moses into the picture. As it turns out, that didn’t help.
Correction: Cathie Wood did not attend Notre Dame University. She graduated from the University of Southern California after attending Notre Dame Academy in Los Angeles, an all-girls Catholic high school.
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