The meeting starts with cancer research.
“On the X-axis, you have time. And then on the Y-axis you have disease burden … or the size of the tumor in the person’s body,” explains Simon Barnett on the Zoom call, sharing his screen to display a graph that explains a technology called Minimal Residual Disease testing.
Others jump in with questions: What’s the timeline on this tech? If early screenings are more common, would cancer surgeries become a thing of the past? And if cancer surgeries disappear, how would the hospitals respond? “This is how hospitals make their money,” someone says. “They chop people up.”
Barnett speaks with confidence. He displays a mastery of the subject. He casually refers to a study that just came out the prior week, from the International Society for Liquid Biopsies Conference.
This is not a Zoom call of doctors, medical professionals, or health care analysts. It’s the weekly brainstorming meeting for Ark Investments, the actively managed exchange-traded fund (ETF) founded in 2014 by Cathie Wood, a former economist, hedge fund manager and chief investment officer at AllianceBernstein. Every Friday morning, at 10:30 a.m. sharp, the brains at Ark discuss a handful of “Big Picture” ideas (which often include blockchain – Wood has been a bitcoin bull since at least 2015; more on that in a bit.) There is no mention of stock prices, earnings or PE ratios. The focus is on the tech, on the future, on what might be.
Ark is exclusively focused on the future, or “disruptive innovation.” In a world where passive ETFs – like index funds that track the S&P 500 – stick to the Warren Buffet ethos of “you can’t beat the market,” Wood and Ark have proven that, well, actually, maybe you can. As of late November, Ark’s flagship fund, ARKK, with net assets of $8.9 billion, has fetched a jaw-dropping return of 83.7% on the year, compared to 14.5% for the S&P 500. This isn’t a one-year fluke. Since its inception in 2014, the fund has hauled in average annual returns of 30.97%, trouncing the index funds pegged to the market.
Wood isn’t a fan of indexes. “Indexes represent one of the most massive misallocations of capital in history,” she told me a few days earlier. “More than half of all equities are in a passive portfolio. This doesn’t make any sense and that’s very backward-looking.” Her logic: A basket of companies in the S&P 500, say, simply tracks the performance of these older firms and has a blind eye to the truly emerging tech, which Wood clumps into five buckets: DNA sequencing, energy storage, robotics, artificial intelligence and blockchain.
Ark invests heavily in these five buckets. Most index funds do not. In perhaps the most notable example, Tesla did not crack the S&P 500 until Dece. 1, 2020, meaning that millions of 401(k) retirement portfolios, most of which track the S&P, would have missed out on Tesla’s eye-popping returns. At Ark? Tesla is 10% of the fund.
The big bet
Next topic on the Zoom call: Tesla. The floor is ceded to Tasha Keeney, the first analyst Ark hired, to discuss some breaking news from China. “The news is about a company called Xpeng, in China, which originated as a Tesla copycat,” explains Keeney. She’s a former math major. She wears dark glasses, and some wired Apple headphones, her hair pulled back in a ponytail. Just before this meeting, on Twitter, Keeney had posed a question that’s packed with insider jargon:
“Why is Xpeng using lidar?” she asked her 58,000 followers. “Big deviation from copying Tesla. Xpeng says it will greatly improve accuracy – I believe it, but can severely limit scalability for their autonomous approach. Did they realize they couldn't make their Tesla-copy approach work?”
Immediately after Keeney’s tweet, the replies poured in from electric-vehicle Twitter. One of the replies came from a surprising source: Elon Musk. “They have an old version of our software & don’t have our NN inference computer,” Musk tweeted to Keeney, just 11 minutes after her question.
This is a plum example of Cathie Wood’s strategy of using social media to gain an edge. Ark analysts are not the typical I-banking number-crunchers who toil away in cubicles, anonymously crushing their spreadsheets. Most have public platforms. And they make connections with industry experts and researchers, who can then provide the kind of deep insights that you don’t – can’t – get from skimming the headlines or even reading the tech journals.
“Information attracts information,” Ark’s director of research, Brett Winton, explained to me. “We try to be as transparent as possible about what we believe.” After Ark published a white paper on the declining cost of lithium batteries, for example, a professor from Carnegie Mellon University in Pittsburgh, Venkat Viswanathan, chimed in with his own research. And he was impressed.
Viswanathan happens to run a weekly global webinar series for the electric battery community – a group of 1,000 or so deeply technical academics and engineers and the like. He invited Ark’s energy storage analyst, Sam Korus, to speak at this battery nerd-fest, and share Ark’s research model. “It would be difficult for me to find another firm of this kind that would come and present to a deeply technical audience on batteries,” says Viswanathan.
He adds that Ark’s willingness to engage with the scientific community– and even teach them a thing or two – is a “testament to how they’ve been able to navigate these challenging, exponential technologies,” and how they’ve been able to predict the “hockey stick” of future growth.
Why the obsession with lithium batteries? Ark’s research suggests that a plunging cost of electric batteries – along with the possibility of a self-driving taxi service – is the key to Tesla’s growth. And that brings us back to the brainstorming call. There is no mention of stock price, moving averages, or the usual bread and butter of financial traders. (Most Ark analysts don’t even have a Bloomberg terminal. As Wood puts it, “I’ve seen so much time wasted by looking at stocks going up or down.”) “Don’t underestimate the power of the China government,” warns Yulong Cui on the call. “They want to put in V2X and scale to 100% of all vehicles in China by 2030,” says Marcel Münch, an expert on the company NIO. (V2X, or vehicle-to-everything, allows cars to talk to one another.)
The analysts are trying to read the tea leaves, essentially, wondering if changes in China’s self-driving infrastructure – like if, hypothetically, the government hatched a GPS network that Tesla couldn’t access – would impact the company. “Would it cut Tesla out of the ecosystem?” Wood asks the team. Then again, she also adds that Ark never counted on significant autonomous inroads for Tesla in China, so “this doesn’t surprise us.”
Some of the analysts do seem a little surprised, and amused, that Elon Musk is live-tweeting Tasha Keeney during this very call. Elon Musk has 40.4 million Twitter followers, and only follows 103 accounts. Four of them, including Cathie Wood and Tasha Keeney, work for Ark.
Musk has a good reason to follow.
On Aug. 23, 2018, the price of Tesla hovered around $320 per share. This seemed absurdly over-valued to many, who viewed the automaker as more fanboy hype than substance. “Is it too late for Tesla?” asked William D. Cohan in a New York Times op-ed, noting the firm’s “precarious finances” and warning that Musk “is on the verge of becoming a cautionary tale about a Silicon Valley genius felled by hubris.”
Musk flirted with taking the company private, and buying back all the stock to the tune of $420 per share, which would have given each Tesla shareholder a handsome premium. That would mean guaranteed profits.
But there was one shareholder who did not like that idea one bit. “Taking Tesla private today at $420 per share would undervalue it greatly, depriving many investors of the opportunity to participate in its success,” wrote Cathie Wood in an open letter to Musk, pleading him to reconsider. According to Ark’s research at the time, in five years (2023), Tesla should be valued at $700 in the bear case, with her bullish price target at $4,000…or roughly 10X of Musk’s $420 going-private price. “In our view, given the right investment time horizon, TSLA is a deep value stock today.”
Wall Street snickered. Tesla, a “value stock”?! Daniel Ives is a tech analyst who has covered Wall Street for 20 years. He says he can “count on one hand” the number of audacious calls like Wood that have actually paid off. “She’s a rare breed,” says Ives. “So many on Wall Street just go with consensus, and are afraid to deviate. But if you go back over the last decade with Tesla, she was bullish when 99.9% of the street was bearish.”
Could Wood’s open letter (titled “Dear Elon: An Open Letter Against Taking Tesla Private”) have actually influenced this growth? At the very least we know that he read it, as he soon hopped on Ark’s FYI (For Your Innovation) podcast. “He did tell us that the letter had made a difference in terms of the way the board was thinking, and I’m sure he was including himself among the Board,” says Wood.
Since that open letter, the price of TSLA has soared from $320 to $2,858 (adjusted for a 5-for-1 split), for a bitcoin-esque return of 793%.
And as Tesla has boomed, so has Ark – in both financial returns and reputation. Ives says that “they’ve always been respected,” but that the Tesla call has given additional credibility and launched them “into a rarefied air.”
Looking for scraps
Third topic of the brainstorming meeting (there are four in total): Gaming. An analyst named Nicholas Grous takes the virtual floor, suggesting that gaming, specifically the growing revenue of in-game purchases, is an under-appreciated story of the pandemic. Grous looks to be in his 20s or early 30s (like most Ark analysts), wearing a baseball cap and a bit of stubble. He notes that there are 2.7 billion global gamers (“I have it pegged at 33% of the global population”), spending an average of an hour a day on gaming platforms, and that global monetization is expected to be $175 billion this year.
As with the earlier topics of cancer research and electric vehicles, the conversation skews more philosophical than financial. They discuss the merits of gaming (such as sharpening strategic thinking, and boosting visual spatial skills) and consider the downsides. “It’s also addictive,” someone notes. “I wish I spent more of my high school reading books by dead people.”
Brett Winton, who facilitates the meeting, zooms the lens out. “From a very high macroeconomic perspective, once you’ve met all of the basic needs of people, then you need a mechanism by which you can have people expend luxury resources that doesn’t actually draw natural resources out of the ground,” he says. “Rather than competing for the last ounce of gold on earth, you would rather somebody spend $1 million on a digital figment.”
Ark tends to think in these kinds of macro-economic forces, which shouldn’t be surprising given that Wood began her career as an economist. She studied under Arthur Laffer, of the supply-side and tax-reduction Laffer Curve fame. (Or Laffer Curve infamy, depending on whom you ask. “Economists tend to roll their eyes when the Laffer Curve is mentioned,” writes sociologist Elizabeth Popp Berman in a blistering critique.) And progressives might roll their eyes at Wood’ support for President Donald Trump’s re-election. “We’re looking at this from a strict economic view. We know a Trump Administration will continue to lower taxes and lower regulation,” she said in October, warning of a stifling of innovation. “If we move into a regime where taxes are starting to go up again, I think we’ll see more success stories migrating to the rest of the world, and we will migrate with it.”
I spoke to Wood shortly after the election, on Nov. 16, and she says her darkest fears of a Joe Biden presidential administration have mostly been quelled. “The worst of my concerns was a doubling of capital gains tax, with a threat of a tax on unrealized capital gains. That would have been nuts,” she says, but now considers that unlikely, given the Democrats’ (likely) failure to take command of the U.S. Senate.
On a more optimistic note, Wood believes the five innovation platforms central to Ark’s mission – DNA sequencing, energy storage, robotics, Artificial Intelligence, and blockchain – have reached what she calls “escape velocity” and that there’s “no stopping them.” Again she’s thinking long term. This is a mindset that dates back to 1977 when, as an intern at Capital Group, she was tasked with analyzing the impact of the Hong Kong changeover from the U.K. to China. That changeover would happen in 1997…two decades away. “Wow, wow,” Wood remembers thinking. “I want to be in this business! Trying to understand how the world is going to work.” She loved the idea of macro research – big sweeping ideas, far out into the future.
She continued that long-range research in the mid-1980s as a young equity analyst at Jennison Associates. This gave her an edge, and she needed one. As Wood remembers it, the founder of the firm, Sig Segalas, told her, “Look, these analysts here, they’re lifers. You’re going to have to figure out your own universe. We’re not going to take anybody’s stocks from them.”
So the twenty-something Wood hunted for stocks that others neglected. “I was really like a dog under the table, just looking for scraps,” she says. “I had to pick up stocks that nobody wanted.” One example of these scraps was what Wood calls an “odd duck” in database publishing – Reuters. “The tech analysts didn’t want it because it wasn’t really a database company,” Wood says. “Publishing analysts didn’t want it because it wasn’t really a publishing company. And oh, by the way, it was foreign, and nobody really wanted foreign stocks at that time.”
Wood didn’t mind foreign stocks. She didn’t mind these squishy-to-define categories. She raised her hand and said, I’ll do that. “Very early on I learned when everyone’s dismissing something because it doesn’t fit nicely into any sector or industry, take a very careful look,” she says. “Because very often there are gems in the rough.”
Wood learned the power of what she calls “converging technologies,” and she views Tesla as a convergence. “The reason auto analysts have made mistakes is that they’re not the right analysts for this company,” says Wood. She thinks of Tesla as a robotics company (“because automatic vehicles are robots”), and also an energy storage company (“because autonomous vehicles will be electric”), and an artificial intelligence company (“because AI will power autonomous vehicles”). Traditional auto analysts, in her opinion, “don’t know what to do with that.”
This philosophy of “convergence” has shaped how Ark is organized, how it thinks, and how it hires analysts. Instead of covering specific companies, it focuses on areas of tech that span across sectors. Ark doesn’t pluck analysts from MBA school, but instead prefers those with tech or industry experience.
James Wang, their AI analyst, spent nine years at NVIDIA. Allie Urman, an analyst for gene editing and stem cells, conducted clinical cancer research at the Memorial Sloan Kettering Cancer Center. Wood lifted the concept from her old firm, AllianceBernstein: “We hire rocket scientists, because it’s much easier to teach a rocket scientist financial concepts and modeling than it is to teach an MBA rocket science.”
Finally, the fourth topic on the two-hour brainstorming call: Bitcoin.
Ark began scooping up bitcoin in 2015, back when the price was $250. In what looks like a shockingly prescient movie, Wood sold much of the crypto position in December 2017, just before the crash. “It was better lucky than smart,” Wood tells me with a bit of a laugh, as the sale was less about sniffing a bear market, and more about complying with a nuanced, in-the-weeds regulation from the SEC.
The bitcoin forking of late-2017 caused a happy windfall of “unqualified income,” but Wood soon learned – less happily – that any unqualified revenue above 10% of a fund’s gross revenue the Internal Revenue Service can confiscate. (In other words, if $5 million of a $10 million fund came from “unqualified income” – like crypto proceeds from a fork – the IRS can filch $4 million.)
“Just think about that,” Wood says. “Think about that. If we moved into a ‘black swan’ scenario where equity markets collapse and [cryptocurrency] soars, then our clients would only get 10% of the upside, which is crazy.” So they pulled out in December 2017 and January 2018, just before the crash. “Better lucky than smart,” Wood says again.
Ark’s first crypto analyst was Chris Burniske, who later authored the widely-respected “Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond.” His successor is Yassine Elmandjra, a 24-year-old who got the job after seeing a tweet, at 11p.m., that Burniske would host a book-signing in Manhattan at 7 a.m., before Wall Street’s opening bell. Elmandjra lived in Philadelphia at the time, attending UPenn. So he took a 4:30 a.m. train to New York, met Chris Burniske and Wood at the “Cryptoassets” book signing, and he was hired soon thereafter. (Elmandjra had already been interviewing with Ark through a job posting, but the hustle seemed to put him over the top.)
On the Friday morning call, Elmandjra walks the team through a new piece of research from Nic Carter, “Nine Bitcoin Charts Already at All-Time Highs,” showing how, according to Carter’s metrics, this bull run is different than in 2017.
Wood was bullish on bitcoin in 2014, and since then her conviction has only increased. “It’s the reserve currency of the crypto-assets economy,” she tells me. “I have an economics background. And being a reserve currency is quite the exalted role, right? It’s the flight-to-safety currency. It’s the insurance policy currency.”
Just as Ark used models to try and quantify scenarios of price targets for Tesla (which they publicly share), they’ve done the same for bitcoin. In September 2020, Elmandjra published a white paper (in collaboration with Coin Metrics) that outlines the bullish case for bitcoin, attempting to quantify the opportunity. Elmandjra outlines four buckets that could spur the price: Bitcoin as a global settlement network, bitcoin as protection against the seizure of assets, bitcoin as digital gold and bitcoin as a “catalyst for currency demonetization in emerging markets.”
This is not that new for the crypto insiders. Then he takes it one step further. For each of these four variables, he quantifies the bear and bull scenarios. If bitcoin grew to 5% of the physical gold market, for example, then that alone would justify a price of around $22K. Or take emerging markets. “If bitcoin were to capture 5% of the global monetary base outside of the four largest fiat currencies – U.S. dollar, yen, yuan, euro – its market cap could increase by $1 trillion,” Elmandjra writes, “a six-fold increase from $200 billion today to roughly $1.2 trillion.”
When you tally up all of these four buckets? Elmandjra arrives at a 2025 market cap of $3 trillion, or a price of roughly $140K. But this is not his bull scenario. When you factor in the chance of more companies plunking their treasury reserves in bitcoin (such as Square allocating 1% of assets), he lands in the ballpark of $300K to $500K.
I happened to speak to Elmandjra on the week bitcoin surged from $15K to $18K. (It would jump another few hundreds dollars in the course of our call.) Elmandjra admits that it’s “thrilling” to see this kind of price action, as it’s a vindication – at least for now – of the bleaker days when Ark was “buying in the blood” of the bear market. “The decision to be in the space was not as obvious,” says Elmandjra. “We’ve had very high conviction for the last five or six years, and it’s exciting to see that pick-up.”
It’s possible, of course, that the big bet on bitcoin – and the bigger bet on Tesla – can flop. Ark is not a low-risk portfolio. Aggressive strategies look brilliant with triple-digit returns, less so if the tech goes bust. There is also a looming threat that Wood could lose control of Ark to one of its shareholders, Resolute Investment Managers, a recent development on which she declined to comment. (Wood cited legal reasons, referring me to Ark’s public statement.)
But judging by the current scoreboard, 2020 has been a banner year for Ark. Its long-term bets are paying off. “Disruptive innovation” hasn’t just been a pair of buzzwords, it has delivered real returns. So far it is working. It has worked since its inception. People thought Cathie Wood was crazy when she suggested Tesla could hit $4,000 by the year 2023, and now here we are, at nearly $3,000 (adjusted for the 5-way stock split), right on track.
And if her team thinks $500,000 bitcoin is in play?
Bet against her at your own risk.
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