Many investors have followed Cathie Wood’s bold approach at Ark Invest with interest. Her investment philosophy centers on cutting-edge technologies and innovation, taking a markedly different path than value investors like Warren Buffett or activist investors like Carl Icahn.
But has this innovation-focused strategy delivered results for investors? Let’s examine Wood’s approach and what we can learn from both her successes and setbacks.
The Innovation-First Philosophy
Wood and her team at Ark Invest have built their investment thesis around five key innovative technologies they believe will transform the future:
- Blockchain technologies
- DNA sequencing
- Artificial intelligence
- Energy storage
- Robotics
This focus on innovation isn’t without historical precedent. Looking back a century, technologies like automobiles, airplanes, and telephones revolutionized society and created substantial wealth for early investors. Wood’s approach aims to identify similar transformative opportunities in today’s technological landscape.
The Hits: When Innovation Paid Off
Ark Invest has made several remarkably successful early investments:
- Bitcoin: Purchased around $250 per coin, now valued above $95,000
- Tesla: First bought in January 2015 at a split-adjusted price of approximately $13 per share, delivering nearly 2,100% returns
- Nvidia: Initially invested in Q4 2016 at a split-adjusted price of around $2.10 per share, yielding approximately 5,200% returns
These investments, particularly in companies advancing artificial intelligence, robotics, and energy storage, demonstrated the potential upside of Wood’s innovation-focused approach.
The Misses: Innovation’s Downside
However, not all of Ark Invest’s technology bets have succeeded:
- Zoom Video Communications: Ark predicted it would reach $1,500 per share by 2026, but slow growth led them to eventually close their position
- Teladoc Health: After accumulating more than 21 million shares, Ark ultimately sold its entire position as the stock plummeted approximately 98% from its high
Performance Reality Check
The performance of Ark Innovation ETF (ARKK), the company’s flagship fund, tells the broader story. During the bull market peak in early 2021, ARKK had delivered impressive five-year total returns of around 1,000%.
However, the 2022 bear market severely impacted the fund’s performance. Over the past five years, ARKK has declined by nearly 6%, despite gaining 11% over the previous year. This underperformance is particularly concerning given the fund’s above-average expense ratio of 0.75% (compared to the industry average of 0.48%).
The Lesson for Investors
The mixed results from Ark Invest highlight important lessons about innovation-focused investing:
While transformative technologies can indeed create tremendous wealth, picking the right companies within those innovation sectors remains exceedingly difficult. For every Bitcoin, Tesla, or Nvidia success story, there are numerous disappointments like Zoom and Teladoc.
The negative returns of ARKK suggest that an all-in approach to innovation-only investing often leads to underperformance. Even with some spectacular individual winners, the overall portfolio results have failed to deliver consistent returns to investors.
The Bottom Line
Investors should consider innovations and the companies leading them as part of a balanced portfolio, but Cathie Wood’s track record suggests that building an investment strategy exclusively around innovation comes with significant risks. The negative returns of ARKK demonstrate that the search for the next big technological breakthrough often results in more misses than hits.
While innovative companies will undoubtedly create wealth in the future, going all-in on an innovation-only approach like Wood’s may not be the optimal strategy for most investors seeking consistent returns.