Welcome to the Insightful Investor podcast, a weekly series that seeks to share industry, investment, and market insights. Learn more about our show at insightfulinvestor.org.
I'm delighted to have Cathie Wood joining us today in our podcast studio in Los Angeles. She's here in person. Cathie, as many of you know, is the founder, CEO, and CIO of ARK Investment Management. Cathie, thank you for joining us today.
Thank you for having me, Alex.
Let's start high level. What experiences and turning points in your career do you feel most shaped how you think about markets, risk, and the future, and ultimately led you to found ARK?
Yes. Well, I was watching our industry, especially since the tech and telecom bust, and even more so after '08, '09, our industry started really going passive or benchmark sensitive, highly benchmark sensitive. And so, I noticed that the research that investment banks and others used to do, and the buy side and sell side used to do on technologically enabled innovation, that seemed to be disappearing.
Because of the global financial crisis?
Well, yes. There were cutbacks of all kinds, and so innovation was associated with risk and being further away from benchmark. So, I figured—and even at the last firm where I was, they were going very quant. And in quantitative research, what is at the center of that? It really—those are benchmarks of some sort. And so, I felt that there was an unmet need out there, and that's the only reason to start a business. And I also felt that it would be important, especially after '08, '09, to try and bring trust back into the process, bring investors along with us. And so, we made the decision to give our research away, to give it away on social media, not when it was finished, because it's never finished, but as it's evolving, so that we could engage with our audience, including innovators, people we would not ordinarily meet. I felt it was an important moment of time because I had no idea we were going to be so right in the sense that I believed we were going into a technology revolution, and that it was going to be pretty profound, and that's where we are.
Timing is everything. And also the social media part is a good way to get your name out there and get a followership, especially if it's authentic and, you know, "Take a look over our shoulder, look at the research that we're doing. This is what we're seeing," and then it gets people more engaged.
Yes, and it's true not only for me, but for our analysts. Each one is really evolving a reputation in our industry in a particular technology vertical. So, we see 15 different technologies evolving at the same time. We have organized our research around them, not around sectors or industries. So, our analyst directors of research and chief futurists are all becoming pretty well known in their realms as well.
Is there something about the traditional investment industry that you feel that it's maybe not built to fully understand how the future may transpire?
Well, I think born out of especially '08–'09, short-term time horizon.
It seems to be getting shorter and shorter.
It definitely is. And of course, the other thing that has happened is high-frequency trading, algorithmic trading, and so the markets whipping around incredibly, especially during this moment as software, hardware, software, hardware, and it's just black and white, and we know the world is not quite like that. So, we use that volatility to our advantage. You'll see on days when some of our stocks are down 10 or 15% because the companies have reported earnings and something hasn't gone right in the short term, if that stock is down and our long-term thesis has not been disturbed, we'll be a buyer. We're a liquidity provider in the market these days. Buy low, sell high.
It's as simple as that. So, ARK stands for Active Research Knowledge. How do those three words still shape the way you approach investing today?
So, I have to tell you the genesis of ARK. As we were writing the prospectus and our attorney was getting ready to submit it, she found out that we could not use three capital letters in our name unless each one stood for something. And so, literally, she came in to me, told me, and I said, "Okay, active..."
I did. And it's strange. I didn't expect the question. We had not named it for that reason. But active equity management, we're as active as they come. Our overlap with the indices is very low. So, we're highly differentiated exposure to innovation. Research: original research centered on Wright's Law. Even today, even though we've advertised Wright's Law as a really important variable to understand the cost declines associated with new technologies, we're not seeing a lot of people following us. And maybe they're following our research and they're trusting that we know what we're doing as we do this original research, but original research is very important to us. And knowledge: again, truth, knowledge, just trying to get to the truth of the matter. So, the real reason I named it—do you want to know why? And I don't know why I felt so strongly about three capital letters, but I did—was I had been trying to figure out, all right, how would I like to go about fulfilling this unmet need? And this was over a number of years. And when I am soul searching from time to time about anything, I will go to the Bible, just open it randomly and say, "Okay, God, talk to me. Just tell me where I'm going, what I need to do." And how many times did Ark of the Covenant come up? And I think it depends on the Bible, it's mentioned only 60 or 70 times in the market—
I was not on the same page rarely. And it came up so much. I said, "Okay, well, whatever happens, that's the name of the company."
I love it. So, today's AI boom is drawing a lot of parallels to the internet boom and subsequent bust.
And you lived through that period. Would you talk about what your mindset was at the time? What you were thinking at the time? What you were saying at the time, and how that relates to your views today and maybe mistakes people are making?
Yes. Well, I had started a firm. It was a global hedge fund with a partner from my previous firm. And we were able to buy puts, and we started loading up on them as that market seemed to go crazy out of control. And it was very interesting during that time, the lead-up to 1999. Even though the market was soaring, we were buying puts on names that were getting hit, and a lot of it was in the banking sector. We did see the financial risks, and there were some cracks, but they weren't obvious until we got into the actual bust. So, we were concerned, and we knew we would get hit. We weren't a neutral strategy, and so we were building some protection in consistently.
On the other side of it, I made a transition, I guess one year after that. So, we had gone through the first year and held up very well relative to, you know, traditional benchmarks and so forth. But then I moved over to AllianceBernstein, and that was just long only. And as an economist—and that's how I started into the business—I knew that if there was a rush of capital into a narrow space, and it was narrow at the time, because, sure, the internet had arrived, but the assumptions about how it was going to transform the world were wrong. The technologies weren't ready. We didn't get the cloud until '06. The two big technology breakthroughs in AI, ending with transformer architecture—deep learning being the first one—until 2017. And so, what I had the luxury of observing, starting in economics and thinking about capital flows, was, okay, 20 years there were with the PC and the internet, it was a very exciting time. But we had a lot of time to analyze how much was too much capital flowing. And so, when I moved to AllianceBernstein, I inherited portfolios that had 38 to 40% technology. And I took it down, I would say within six months, to 11%. Now, at the time, most organizations were becoming quite benchmark sensitive. Technology was 35% of the benchmark. So, this was considered a little crazy, and yet it worked out very well because we had this—2001, we had two more years to go in the bear market. So, many people think of ARK and me as such avid technology, almost blinded by almost any technology, and that's just not true. It's not true. I went down to—
I was on the opposite side: too much capital chasing too few opportunities too soon. This is kind of an economics concept: returns will go down.
Especially if the innovation isn't as real as the market is discounting.
Exactly. And if the valuation is on the number of eyeballs potentially 10 years from now—think about it, we just talked about the short-term time horizon today. Back then, in order to justify positions, there were 10-year time horizons and a lot of analysis on how many people ultimately will be using this service. And of course, we know now 10 years out wasn't anything like we thought it would look like. So, it was an interesting time, and you're right. So now think about today. We just talked about how short-term everything is. The irony is investors should be much longer term in their time horizons now. They should not have been back then. The seeds for the technology revolution that is happening now, they were planted, but they were seeds in the 20 years that led up to the tech and telecom bubble. And they really have been germinating for 20, 25 years. And now they're exploding. And yet, oh my gosh, investors are scared to death even of the hyperscalers increasing their capital spending budgets. Now, they're increasing them enormously, but you have to understand how profound this revolution is. And I think they do in order to make the kinds of bets that they are, especially with the shareholder bases they have. The shareholders of the Mag 6—we exclude Tesla here, right?—the shareholders of the Mag 6, they got used to massive cash, massive free cash flow. And yesterday, for the first time in its public history, Google reported a negative free cash flow quarter. First time. And so it's a radical shift. These companies—and I think they know what they're doing—understand how provocative and compelling this technology revolution is.
Yeah, and I think it's a really important point, because on the surface, you can look at '99 and today and say high-tech exposure in the index, that's check the box on both sides.
Great promise looking forward into the distant future and everything that is possible, so similar type of story.
And what you focused on is let's look at the underlying technology, let's look at the actual fundamentals, not just the earnings, which there's obviously—
More today than in the past.
Definitely. But let's look at the fundamentals of what the story is, and is that compelling? And so that's, I think, where you draw the distinction.
Yes, and a lot of the investment is being done by very well-funded and cash-rich organizations who have a shareholder base that is—as they are getting their questions on the quarterly earnings calls, this shareholder base and investor base generally is quite nervous about this. Now, as a portfolio manager, I'm very happy about this. I am happy that there is so much concern out there. Does it cause incredible volatility because we've got algorithms whipping around and playing on all of the sentiment? And literally, algorithms sometimes are just listening for sentiment, the kinds of questions and so forth, and playing with that. So, it's kind of a wild world, I will say. This is more wild in a sense than the tech and telecom bubble was. That was just straight up. This is extremely volatile and seemingly convulsive on days when there's just so much doubt that we can't be in a world that justifies this valuation. So, SpaceX, $1.75 trillion, or the trillion-dollar valuations of OpenAI and Anthropic. But then you throw back and say, "Well, wait a minute. Have you looked at what's happening to their revenue growth?" And I'm not sure if you've heard, but Anthropic's annualized revenue run rate in December was $9 billion; in June, it was $47 billion. Think about that, because of Claude Cowork and Claude Code. And it seemed, and did, surpass OpenAI. Now, OpenAI has pivoted aggressively toward enterprise, and now we're seeing its developer base skyrocket. So, I think that we've never seen anything like this before. There was nothing like this in the tech and telecom bubble, not this kind of—I mean, think about that. That's multiples of not just a strong double-digit growth rate.
And in some ways, the experience, both positive and negative, of the late '90s boom and bust can help make this potentially survive and last longer because it introduced skepticism that may not be there had we not experienced that.
Absolutely. I do think that we have to take a point of view on what's going to be disrupted. And that's probably a better place to put shorts, because I think we are in a world full of disruption, and it'll be from all kinds of levels: company level, if you don't get your productivity up as much as your competitors are, and they become much more efficient and therefore can price more aggressively, you're going to be in trouble. And that's true for a lot of companies. But then when you move up higher level and you look at the tech stack and say, "Okay, what within the tech stack? How do we handle this?" We did this research 2 and 1/2 years ago. The tech stack is comprised of infrastructure—so chips, data centers, power, all of that—and then platform as a service, so Palantir, OpenAI, Anthropic, xAI we would put in there, and then applications. And we think that the old-time applications—it's becoming obvious now, SaaS—they're going to be usurped importantly by platform as a service. SaaS is one-size-fits-all. Platform as a service is enterprise by enterprise using proprietary data that they probably don't want others to have. So, even within technology, there's disruption.
And how do you distinguish between a genuinely transformative technology that generates a lot of excitement, but ultimately doesn't matter as much?
