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Hey everyone, how's it going? If you read the video title, you know what this video is about. Cathie Wood is the founder of ARK Investment Management, an asset manager founded just 6 years ago. During that time, Cathie and ARK have made a name for itself through their focus on investing in innovative disruptive technologies, which they think will outperform the market over 7 or more years.
According to Morningstar, ARK runs at least three of the 10 best performing ETFs over the past 1, 3, and 5-year periods. Because of this incredible success, along with their strong social media presence on platforms such as YouTube and Twitter, as well as just their general openness about the trades they're making on social media, ARK has attracted many copycat investors who try to copy their trading strategy.
This is especially true for their most popular fund, the ARK Disruptive Innovation ETF. This fund has performed extremely well, especially over the past couple months, where it's up 83.71% year-to-date. And they've grown their assets from $2 billion at the start of the year to an almost $9 billion today.
This kind of growth is almost unheard of among larger investment funds, and a big part of that growth was driven by their largest stock position in Tesla. But looking at such a short-term time horizon can be a little bit misleading, especially because ARK themselves look at a 7-year plus investment time horizon.
But if we look at their longer-term performance over the 6 years that the fund has existed, they have around 30.97% return, which is still a very respectable return. To achieve these gains, ARK is not just a passively invested ETF which follows some kind of benchmark. They actively search out and try to find companies which they think will outperform the market in the long term.
And I respect ARK's position for trying to take an active approach over a purely passive one. While historical data has shown that the vast majority of active investment funds will underperform passive investing, there are exceptions to that rule. For example, Warren Buffett's Berkshire Hathaway has averaged around 17.1% over its lifetime, nearly double what the stock market returned in that same period.
And while we don't know that ARK for sure will be able to maintain their performance over a longer-term time horizon, like over 10 years, we do know that it is certainly possible. Now, ARK has performed well. Let me say right off the bat that if I was in Cathie's position, there is absolutely no way I could have matched her performance when investing $9 billion in assets.
And I think there are extremely valuable lessons to be gained by looking at ARK's investments and understanding their rationale for the companies they invest in. But where I have a problem is when investors blindly follow ARK's investments without understanding why they're making those investments. I think of it like buying any expensive item, like let's say a TV.
I'm going to go out and look for recommendations on what TV to buy, but ultimately I'm going to do my own research before I actually purchase it. It should be the same way with stocks. And interestingly enough, that's pretty similar to Cathie Wood's own advice. Wood says you need to have conviction in your ideas in order to be successful.
But if you were simply following the investments that somebody else is making, how strong can your convictions really be? Now, I think it is important to look at all possible sources for possible investment ideas, especially if those sources, like ARK, provide explanations for why they're making those investments.
By reading what investment someone is making and then also trying to understand their rationale for making those investments, you can compare their explanation to everything you know about a certain company or stock and see if their reasoning seems potentially flawed. By doing this, you get two benefits.
One, even great investors can make bad calls sometimes. And by always asking why someone is making an investment, you can try to catch their flawed reasoning before putting your own money behind it. And two, by always asking why someone is making an investment, over time you can learn to think the same way they do about investing and finding companies.
This is like the old saying, "If you buy a man a fish, he'll eat for a day, but if you teach a man a fish, he'll eat for a lifetime." The goal of looking at more experienced investors should be to learn how they think and how they pick investments. That way, once they're gone, you can continue to replicate their success going forward in your own investments.
Now, there are plenty of websites out there that will let you just track the portfolios of successful investors like gurufocus.com. Those websites will let you look at people like Warren Buffett, Carl Icahn, or even Bill Gates. The problem with using websites like these is they only give you part of the picture.
What if an investor is buying a stock, but unbeknownst to you they also hold options as a hedge against that stock? Well, in that case, you won't be seeing their whole investment strategy, you'll only be copying part of it. There's also the issue of information lag. By the time you find out what these successful investors are investing in, they've already put their money behind that, sometimes weeks or even months beforehand.
By the time you find out somebody else has invested, the upside may already mostly be gone. So, in addition to missing out on the potential learning opportunity to understand how these billionaires pick these investments, you also can't really match the timing of those investments. So, avoiding a short-term mindset of just copying successful investors is the first reason I say you shouldn't just blindly follow someone's investments.
But, there's a second reason you specifically should not trust ARK Investing to model your own stock portfolio off of. And that is because chances are Cathie Wood is not investing for the same reason you are. ARK's goal is to invest billions of dollars in other people's money into stocks that will outperform the market in the long term.
Your goal is to invest thousands or maybe even millions of dollars into the market of your own money. Now, while these might seem like small differences in goals, they can result in vastly different strategies for investing. First off, even though ARK says that their goal is to make investments with a seven or more year time horizon, they've only existed for six years, and the number of assets under their control has exploded during that time.
This clearly shows that the people who are giving their money to ARK to invest are looking at ARK's performance over a much shorter time horizon. This shows that even if ARK's management wants to maintain a seven-year time horizon, the people investing in that fund clearly have a shorter term outlook.
And I think that means that if, over say the next two years, ARK tends to underperform the market, they're going to see at least some excess of money from their funds because some of the people invested don't share their same 7-year outlook. Now, management at ARK can do their best, but when you see money actively leaving your funds, it's going to be hard not to focus at least some on short-term gains.
I think anytime you're playing with someone else's money, there's going to be pressure put on you to maintain short-term profits, a pressure which individual investors don't have to worry about. Additionally, the sheer amount of money that ARK Investments wields prevents them from investing in companies that have low trading volume because if they tried to buy into those stocks in any significant way, they would just drive the price up.
This results in two basic differences between how Cathie Wood makes an investment and an individual investor would invest. One, she has to be more diversified to hedge against short-term losses. And two, she can't move in and out of stocks as nimbly as an individual investor without affecting their stock prices.
So, let's look at Wood's investments and see how you can make a better return potentially than even she has done. And yes, that is possible. ARK is up just over 83% year-to-date and I'm up over 107% during that same time period. And that's without having one stock like Tesla, which is up 6.5 times this year.
It's not because I'm some great investor, it's because I don't have to manage as much money. Let's just look at Wood's perspective for her most popular ETF. She has 50 companies in one fund. If you're an individual investor trying to copy ARK, there is absolutely no way you can do all the due diligence on all 50 of these companies, understand what issues they might face in the future, and track all current events that might affect those companies.
If I had 50 companies in my portfolio and I didn't have to worry about responsibilities to shareholders to maintain short-term profits, I would absolutely focus on narrowing that down to the top 10 best positions within that portfolio. Do you really think you can't pick out 10 stocks from within that group that will outperform the basket?
If not, you might not want to be investing in individual stocks and you should instead focus on index funds. Now, there's nothing wrong with that. I personally have a lot of money invested with index funds. But diversification, I hear you we Look, if you're investing in individual stocks, you've clearly decided that you're willing to take on higher risk in order to pursue potentially higher reward.
If you try to diversify your individual stock holdings too much, the better and better diversified you get, the closer and closer your portfolio is going to look to a broad market index fund. And at that point, just buy the index fund. It will literally be no work for you, and you'll get the same returns as a well-diversified stock portfolio.
If, however, your goal is to get the maximum possible returns and you're willing to take on extra risk to do that, why not focus on your highest conviction positions, which you can actually put the effort into understanding to hold in your portfolio? Now, I'm not just making this up on the fly. This is the strategy that I follow.
I personally only have six stock positions in my stock portfolio. This is a small enough number of companies that I can actually track them effectively. I can read every earnings call, and I understand what would make me either buy more or sell out of each stock position. And then I also hold a separate account to diversify my funds by holding you guessed it, index funds.
So, now we get into how you pick those stock positions. You should not just trust ARK's investments to guide you on what to pick. Number one, you'll always be buying a stock after the price has already been driven up by ARK's announcement. And two, you'll handicap yourself by tying yourself down to the buying and decision-making speed of a billion-dollar fund.
How can you actually beat the market as an individual investor? Well, I can pretty much guarantee that you don't have a better mathematical model of a stock than Wall Street. I can pretty much guarantee you don't have some analysis that they haven't thought of. The only edge you have in this game is you're a smaller investor who can pay more attention to a small number of stocks, and thus act swiftly and aggressively when something changes in that stock story.
As an example, I went from being bullish on Fastly to selling out entirely just before their Q3 earnings within a matter of minutes. If Fastly reports another bad quarter, and ARK Investments decides they want to exit the position, they're going to have to start to slowly offload stock, and they're going to have to tell everybody what they're doing while they're doing it.
It's a fundamentally different process investing for yourself versus investing for a large fund. And if you just try to copy what the big funds are doing, you'll just end up underperforming what they achieve. So, to summarize, ARK Investing has had some incredible performance over the last couple years, and I absolutely think it's a great source for ideas on potential stocks to invest in.
I do not think that anybody should blindly trust their investments or try to model their own portfolio off of one of ARK's funds. I think any small investor can outperform any large fund simply because they do not have responsibilities to shareholders, and they don't have enough money invested to influence the price of the stocks.
As always, if you agree or disagree, let me know in the comments, and sign up for WeBull using the link in the description to get four free stocks with one valued up to $1,600 when you deposit $100. That's only available for a limited time, so sign up while it's still there. With that said, I hope you enjoyed this video.
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