Cathie Wood is the kiss of death. This one-time pandemic Darling, down 66% this year, thanks in large part to declines in one of its top holdings, tesla, her signature investment fund, faring poorly in 2022, hitting a fresh five-year low. The stock is down now 35% this month, 20% this week alone, starting with Tesla shares dropping more than 6% to a new two-year-plus low today. ARC’s downfall is very reminiscent of some of the.com bubbles bursting over the last year.
All of Cathie Woods’s funds have collapsed by around 50% or more. And RK Arc Invests flagship innovation fund is down by more than 60% for the year and down a whopping 80% from its all-time high. That’s because while everybody is focused on inflation, Cathie Wood has been betting billions of dollars on deflation. But is she right?
Is Cathie Wood looking too far into the future for her funds to survive 2023?
So let’s get right into it before we dive into Arc investors trading data for the past year to see what Cathy Wood has been buying and selling. Let me start by saying this as somebody with a background and a career in electrical engineering and artificial intelligence, I personally believe that Arkinvest’s technology research and market analysis will be right over the long term. But there’s no doubt that many of Cathie were predictions haven’t come true, at least not yet. And the problem is how long it could take before Arkinvest’s market thesis does come true, thanks to longer-than-expected supply chain issues and higher-than-expected interest rates. And when it comes to the stocks that are going into the Ark Invest funds, being too early can be just as dangerous as being wrong.
For better or worse, while everybody is waiting it out with cash or bonds or diversifying to manage their risk, Cathie Wood has been concentrating Ark and Best funds down to her highest conviction positions. That seems pretty crazy, right? So to answer why let’s turn to Cathie Wood’s last episode of in the Know for 2022. I’ve cut the episode down to a single four-minute clip that really answers some of the biggest questions that everyone’s been asking about Arkinvest for 2022. Then, with that context, we can take a look at the stocks that she’s bought and sold over the past year.
Why do we believe that now is a once-in-a-century investment opportunity?
Well, a couple of reasons. We know that we’re getting a lot of deflationary signals, but the Fed isn’t really buying into that yet. And we also know that the market always leads the Fed. So inflation will come down and innovation actually is going to be part of that equation. We have corporations now experiencing margin pressure and we have individuals, and consumers perhaps worrying about their jobs. And when we get into a period like this. Businesses and consumers are willing to change the way they do things and they embrace innovative solutions to their problems. Now, this one century is not an understatement. Our confidence there is building. We’ve been right on the inventory build, and the commodity price decline. And I think normally the market would have responded already. The market is waiting for the Fed and we think the Fed’s rhetoric will change first and then its actions will change. And we think that’s all going to take place in 2023, given that our strategy, from our strategies, their peaks have dropped anywhere from 60% to 80% since February 21.
Why do we not turn defensive like most managers are doing?
We do one thing. We do not pretend to be an asset. Allocator, we are our research and our investment investments are centered on disruptive innovation. And so when advisers and individuals choose our strategy, they’re not choosing it alone. They have more diversified portfolios, of course, and therefore we would never be using cash. We would expect advisors and individuals to basically raise cash and segregate it from their investment portfolios. In terms of our strategies, we, during downturns, concentrate on our highest conviction names. History would suggest that that concentration strategy plays out very well in the subsequent rebounds. And we do think this rebound will be quite powerful. The inflation rate has peaked. Almost every measure of inflation has peaked. So typically that’s a good thing for innovation. But as I just mentioned, I think the market is so skittish and has been so terrorized by the most rapid increase in interest rates ever. We have never seen an 18-fold increase in interest rates within one year. So we have an incredible amount of fear in the market.
And that actually is the best time to average into these markets. The best time to invest, according to Warren Buffett and the great investors of our time and of all time, is when markets are deeply into bear territory. All right, there are a couple of important points that are worth unpacking before we take a look at the stocks that she bought and sold. First, it might surprise you to learn that Arc Invest is not trying to make you the most money possible. Kind of like how the spy isn’t trying to do that either. The spy tracks the S and P 500, which is an index of the 500 biggest US companies, weighted by the relative market caps. So spying is just a financial tool, and it’s up to asset allocators to decide how much money to put into it versus holding cash or spending on other things. Those allocators would be your financial advisor or your retirement fund manager, or you if you’re managing your own investments. Cathie says that Arc Invest funds should be treated the same way. We can disagree with her on that. All we want especially since her funds are actively managed. They don’t track a specific index, and they do expect at least a 15% return per year over a five-year period. That’s very different from other financial tools. But arguing about how Cathie Wood should manage her own funds is kind of like yelling at your own TV when the ref makes a bad call.
This is how Cathie Wood manages her funds. She sticks to her themes, and she concentrates them on technologies that you won’t find in the indexes of genomics, autonomous cars, and so on. The only other piece of context that I really feel needs to be called out is that Cathie Woods seems to expect the Fed to pivot very hard in 2023 by lowering interest rates, which is very different from what the Federal Reserve is currently saying and doing. Ultimately, that question about how high to raise rates is going to be one that we make looking at our progress on inflation, looking at where financial conditions are, and making an assessment of whether the policy is restrictive enough. I’ve told you today we have an assessment that we’re not at a restrictive enough stance even with today’s move. And we’ve laid out our individual assessments of what we would need to do to get there. At a certain point, though, we’ll get to that point, and then the question will be, how long do we stay there? And the strong view on the committee is that we’ll need to stay there until we’re really confident that inflation is coming down in a sustained way, and we think that that will be some time.
The Federal Reserve has raised its expectations on interest rates in almost every single meeting in 2022. Just between the most recent two meetings, the Federal Reserve’s expectations for interest rates in 2023 went up by another half percent, and they expect a quarter percent higher in 2024 and 2025. Keep in mind that Jerome Powell also said that he might hold interest rates higher for longer. Think of interest rates as kind of like a chokehold on the economy. Once he’s done tightening his grip, he still gets to decide how long to hold to make sure that consumer and business demand really taps out and prices begin to fall. And speaking of tapping out, I appreciate you taking the time to understand all this context. I really want to make sure that you’re getting the full story and not blindly making any big decisions. For about two years now, I’ve been grabbing Arkinvest Holdings’ data and looking for trends over time. So before you tap out, let me show you the trades that Cathie Wood has been making over the last year. So here’s a table of Arkinvest’s biggest position changes when you combine Cathie Woods’s six actively managed funds.
