Investors Should Take a Lesson From This Disruptive Trading Expert

Andy Snyder|March 31, 2021

The financial press have a new frenemy.

In one paragraph, they say they love Cathie Wood and her incredibly successful stock picks. In the next, they scorn her for who she voted for, her religious views and all the ways she could fail.

The sharks are clearly circling… looking to tear down somebody who dares to think differently.

We think Wood is onto something – something long-lasting and powerful.

In fact, she’d fit in quite well around here. She thinks big. She sticks to her beliefs. And, this is the big one, she doesn’t fall for any of the traps in the old-school investing textbooks.

Perhaps that’s why she has a history of market-crushing stock calls.

Four Things Make Her Different

Bloomberg liked the action from her popular Ark exchange-traded funds (ETFs) last year so much that it dubbed Wood the best stock picker of 2020.

She’s most famous for her Tesla calls, but digging deeper, we see where her investment philosophy and research style pay off in much bigger ways.

All investors could learn from her.

If you want to mimic her success, there are four things to know.

First, Wood and her team at Ark Investment Management are specialists. They don’t chase returns all throughout the broad market. No, they’re laser-focused on just one thing… disruptive innovation.

That’s it.

If it doesn’t disrupt… and doesn’t innovate… they don’t want it.

Wood breaks the idea into five red-hot sectors:

• DNA sequencing
• Robotics
• Energy storage
• Artificial intelligence
• Blockchain technology.

Never before, she and her team say, has the market seen such a robust lineup of mega forces all working at the same time.

Manward Letter readers know these categories well. We’ve written extensively about nearly all of them – even including DNA sequencing and its effects on personalized medicine in our “big prediction” issue.

Wood says each of them are actively disrupting major industries. We take things a bit deeper and add these sorts of plays to the “deflation leaders” section of our Modern Asset Portfolio – believing that because of these technologies, prices have fallen while values have soared.

Shun Mediocrity

Perhaps what drives the financial media the craziest about Wood and her strategy is that she doesn’t follow the textbooks. Her actively managed ETFs don’t spread their money across a “diversified” array of holdings.

No. Wood and her team do their research and then go big on the companies they deem have the highest potential.

Just this week, the headline writers are warning readers that Wood’s decision to allocate more than 30% of some ETFs to individual plays is dangerous.

We disagree.

We say the strategy eliminates mediocrity. If her research is strong, her funds will greatly outperform. Her flagship ETF soared by nearly 150% in 2020.

But if her research is faulty, she’ll be a laggard – as she is so far this year.

She’s an active manager. That means folks are paying for her wisdom and research. Ark will live and die by it. If she’s good – as we’d be led to believe by her long-term track record – she’ll greatly outperform over time.

If she’s wrong… she and her investors are in trouble.

Either way, mediocrity (the greatest scourge to serious investors) is out of the equation.

Innovating… Now

Perhaps what sets Wood apart from so many investors is her rather unique timeline.

She’s not a long-term investor. Whereas Warren Buffett often boasts that his favorite holding period is forever, Wood and her team aim for just five years.

Again, they’re searching for the most powerful of disruptive innovations… right now. Those things can disrupt only for so long before they become the norm.

This timeline forces Wood to remain a very active manager and be on the very edge of innovation.

More so, it creates some of the most aggressive profit targets in the industry.

Because the team is not focused on long-term value plays nor what it dubs the “minutiae” of estimating next quarter’s earnings per share figures, it has the freedom to search for the biggest potential returns on the market.

Wood is quite clear with her return benchmarks. She wants a 15% annual return over five years. That means she looks for solid doubles every five years.

Save It for the Holidays

Finally, Wood flat-out ditches tradition.

Most research firms, she says, stick to the benchmarks. Once again, it sets them up for mediocrity.

They can’t accurately value a company like Tesla (one of Wood’s most famous bullish calls) because they’re too focused on traditional models and metrics.

To a “normal” research house, Tesla is just another car company. And the car industry is in the dumps. It has very little growth potential.

That logic has been costly.

Wood says the electric vehicle market will grow at a rate of more than 80% per year over the next five years.

Worst of all for traditionalists, Tesla wasn’t included in a major index until last year, meaning it was off-limits to a lot of old-school fund managers.

That’s silly, Wood says.

We agree.

If a company is truly transformative… it will transform tradition.

If you know us, you know we’re a very traditional guy – perhaps too much so for these times. But we keep those ideas out of our investing. The big money is made in what’s new, not what’s old.

Bottom line… Buy stocks that are transforming an industry.