Bloomberg wrote this morning Kathy Wood's 40 return prediction draws rebook after Ark's rough year. The latest projection from the star fund manager is highly unusual according to investment professionals. Well, I never thought that Kathy Wood would make an unusual prediction who'da thunk it? And obviously this comes in the backdrop of the worst year for Arc Invest since the fun started. a year that took Ark's main fun from 159 bucks at highs in February to rotating around the 90s that it's at today.

But at the same time, there's only been one other time that Arkhamvest predictions have been this high. and that's at the end of 2018.. at the time, the Ark Invest fund had been selling off for months on interest rate fears and people thought that it was going to implode. But from the end of 2018 at about 35 bucks a share, it nearly doubled by early 2019 and nearly 5x by February 2021..

So obviously based on the time horizon that you judge run, you're either going to think she's trying to market her failing fund or she's about to hit it big again in the upcoming years. And she posted quite the big analysis piece on the Arc Invest website and linked to it on Twitter saying that innovative stocks aren't in a bubble. they are in deep value territory. One person's deep bags are another's deep value.

She got some big responses from some huge thought leaders. One handsome gentleman said, but Kathy I read on a Reddit form that Evs are a scam. Steamboats are the real opportunity. Fair point, good sir.

But have you considered that Steamboats used water? Water leads to bubbles? A lesser known figure by the name of Elon Musk responded to Kathy Wood by saying, interesting, you had other people criticizing her quote, no Revenue and zero free cash flow is the new deep value after all companies with zero dollars net income all traded at Pe zero That's cheap And then someone else was responding. Tesla was clearly deep value. While unprofitable, the right answer is and will always be it depends on a case-by-case basis. Obviously, with the growth sector, everything has sold off good or bad, And a lot of people just say okay, well yeah, anything that is invested in its future is terrible.

We have another critic with all due respect. I invested in three Arc Etfs back in February. Seeing how historically successful you have been in that time it's been terrible. I'm currently down almost 25 percent in each of them, while my Vanguard S P 500 is up almost 12.

I'm leaving you when break even. Obviously, Arc is a long term time horizon fund usually set at five years, but the nature of it having a record 2020 left a lot of retail traders, especially very, very apt to buy it in early 2021.. So by nature, you're going to get a lot of folks that unfortunately didn't believe in a fund when it was trading well below all-time highs. but all of a sudden start believing in it because hey, everybody else is buying it, so it must be good.

But that of course, is the worst time to buy it. But in the retail trader's mind and emotions, the best time to buy something is when it's more expensive, not less expensive, because when it's more expensive, that means that you're bandwagoning. When it's less expensive, that means that you have to go out on your own and actually research the company. Retail traders love, love, love to buy stocks when they're breaking out into new all-time highs and then sell them when they're getting into new lows.

and then what do they do with that capital? Well, unfortunately, they go and take that capital and invest into something else that's at a new all-time high. and then the process recycles. Somebody else said, Kathy, you got lucky on the testicle and were a product of unprecedented euphoria and fed liquidity. Just be honest with people, there's a lot of truth to euphoria and Fed liquidity propping up Kathy Woods funds.

Nobody's questioning that, but the whole she's the one hit wonder what this Tesla stock thing is? Definitely Bs, you know. I went and pulled up a quarterly filing for a reporting period ending November 30th, 2016. you look at her main Innovative Funds holdings at the time yes, 8.8 of that was in Tesla Motors and it's certainly been one of the biggest winners in terms of sheer capital appreciation. But she also called out a lot of the huge tech euphoria for an alphabet: Amazon, Facebook, Twitter, Paypal, and Square.

A lot of people are gonna be like hey, well yeah, Charlie, but Paypal's been going down for a couple months, but remember it 10x from this point back in 2016. another one of your Etfs had Nvidia, Qualcomm, Twilio Splunk servicenow Salesforce, Adobe Systems. You look at the performance of these companies from a 2016 to 2020 early 2021 peak and it's substantial. She's also been a believer in Bitcoin for years, so certainly isn't somebody that's a one-hit wonder with Tesla.

It's just true that the market was willing to price in her success a lot earlier than perhaps it should have, but a lot of the companies still have huge growth rates in terms of the business model themselves, despite the valuations going deep deep deep into bear territory. But anyways, I made a spreadsheet breaking down the basics of her argument in this post that she tweeted out and we're gonna go through it and then I'm gonna give you my thought process. So she says, after correcting for nearly 11 months, Innovation stocks have entered into what she calls a deep value territory. A lot of stocks that people say are stay at home pumped slash attributed stocks.

I think I was one of the people that said that for at least Zoom, Teledoc and a few others. Well, she says these stocks have erased most of their pandemic error gains, yet earn substantially more revenue, and have substantially higher growth rates than they did over the same period. For example, Zoom Dog Q and Teledoc are down 68, 56, and 70, respectively, yet have an annualized revenue percentage change at 58, 59, and 188, respectively. So you have these companies that are getting destroyed in terms of valuation, but the companies themselves are growing dramatically with all three of these.

the big story as well. They're gonna have dwindling numbers because we're heading out of a pandemic, so people are overselling them in order to prepare for bad, bad, bad quarters. But she's making the argument that, hey, all of these stocks are getting beat down dramatically, but their numbers are still growing, so this doesn't make any sense. This is an inefficiency going to the goals of why she's writing this piece.

She says she's writing this because she's worried clients are going to turn temporary losses into permanent losses, and she reiterates the five-year investment time horizon. She says it seems that every time disruptive stocks fall out of favor like they are right now. negative headlines in the media, and the volatility of the strategy tend to have some clients sell near bottoms of market cycles, of course. Overall, the media did encourage people to buy Arc at all-time highs in December, January, and February, and last year she was praised pretty much all year as the Big Guru, and this year the media is running constant hit pieces on her.

But she says that despite outflows, the year to date net inflows outweigh outflow significantly. And importantly, she says historically, the concentration of our portfolios during corrections has led to significant absolute performance and relative outperformance as the market rebounds. So she's saying, hey, it's doing really, really bad this year, which means that historically it's setting up to do really, really well during the next cycle. They think that their flagship strategy could deliver a 40 compounded annual rate of return during the next five years.

Going into why her stocks are down, basically because inflation scares have rotated capital away from growth stocks towards value and defensive stocks. This isn't a shocker. We know that she also says the tax law selling or harvesting at the end of the year has accelerated down trending innovative stocks, making them worse. We know that's true.

Then she reiterates that stocks that are sacrificing short-term profitability and investing aggressively to capitalize on substantial growth opportunities are being hugely punished, obviously during risk-off environments. What does the market look at? It looks at what companies are providing short-term profitability and boosting their quarterly reports, and it says you to companies that are investing in their future because the future isn't going to come. When you're going risk off, the market no longer cares about the future. It's like, okay, well, what's going to happen in the next six months? What's going to happen in the next year? I'm only going to buy stocks that are in the next year.

And worse yet, during the period of risk off that we've had this year, the market's not even looking at what the companies are doing in terms of numbers. The market's just going and completely removing price discovery. It's not asking what's the price, it's asking what's the company, if it likes a company, and it's doing fantastic. It's willing to pay any price for it, regardless of what money and value the company's creating and how much it's investing in the future.

Says that quant strategies and algorithms are exaggerating. Inflation fears Algorithmic trading accounts for nearly 70 percent of all trading in the Us. And she says that as inflation and interest rates flared, they seized the algorithms in Quant funds seized on one variable: high valuations based on the short-term earnings of stocks that benefited during the coronavirus. It's also worth mentioning that while she's bagging on these algorithms and quant funds for helping beat down her funds, these are the same ones that helped prop them up during 2020..

the algorithm does not care about what it's buying. It cares about how it can make money in the fastest way possible, willing to accelerate momentum in any given direction based on any variables that make sense during that market condition. Algorithms don't trade on conviction, they trade on volatility. But of course, buying and selling based on one or two variables isn't a justified way to value companies.

This favorite energy and financial services which Arc believe are in a bubble themselves and will be disrupted by Defy and of course the Krypto space amongst some other tailwinds she insinuates very strongly throughout this piece that people and quants are buying companies investing in looking good for shareholders, especially over the short to medium term, but are not companies that are playing offensive. These aren't companies that are trying to expand their businesses, these are companies that are trying to expand their valuations. She says that investors are a lot more concerned about playing it safe than in investing in the right companies. And as a result of doing that, what are they doing? They're just buying stocks that they see as oh, these are good stocks that have done well over the last year.

Let me go ahead and plow into these stocks at any prices because they have done so well. She says that after being ravaged by the Telecom bus the meltdown in 08 and 09, investors are a lot more risk-averse especially institutional ones, and less willing to handle volatility. Instead, they cling to what indices slash benchmarks. They look to the past for future success instead of looking for new opportunities.

Obviously, if you do that, you're going to avoid all of the biggest companies that are going to grow in the next 20 to 30 years. She says that as a result, broad-based public indices are near record highs to levels that are not seen since the tech and telecom bubble. Unlike many innovation related stocks, equity benchmarks are selling at record high prices and near record high valuations 26 x for the S P 500 and 127 for the Nasdaq on a trailing 12-month basis. She's saying, hey, wait a second.

The market thinks that disruptive innovation isn't a bubble. What about the massive, massive, broader market that everybody's clinging to as the safe bet? She asks whether it's broad indices that are in a bubble or if it's disruptive innovative stocks with actual growth rates in the business to match the multiples that are well down from all-time highs that are in a bubble. In terms of predictions for next year, she says that consumption growth is likely to slow significantly during the next three to six months, just as supply bottlenecks are clearing, and that is what is going to saddle businesses with excess inventory, creating potential for deflation during deflation. Adoption of innovative technologies accelerates as businesses and consumers rush to change behavior and become more efficient Right now from the financial media, the only thing that they want to talk about is, hey, we have inflation and it's permanent supply chain Bottlenecks are always going to be bad because guess what? Covet and Covert has variants.

Variants are always going to be here, so bottlenecks will never be solved. You're going to have inflation going to the moon forever. We're going to be like Turkey, but she said hey, in the next three to six months, consumption growth is going to drop off dramatically. A lot of companies are going to have excess inventory, A lot of these supply chain bottlenecks are going to be east, and what happens when you have all of those factors calming down at the same time? Well, you have a lot of deflationary pressures on the horizon.

Most importantly, she says the main platforms for growth in the next five to ten years are Dna Sequencing, Robotics, Energy Storage, Ai, and blockchain technology, and she says these are not represented much amongst the broad indices right now. The market wants to focus on technologies that have been around for 50 to 100 years because those are safer. We know how the wheel works. We are very, very aware of how pencils work.

We understand how oil works, horses and buggies are something that have been around for a long time, and they're very reliable until they die. If you feed them, they work. But she's saying that sex is like that. Hey, those aren't going to be the ones that are going to be the big growth stories those are going to be based in Dna sequencing, robotics, energy storage, Ai, and blockchain technology.

Very few companies, especially not in the top 10 besides Tesla, are even focusing on one of these new emerging industries. So I mean what we have here is somebody that is an excellent researcher and an excellent long-term investor who understands innovation, understands where innovation is going to come from, knows how to evaluate growth companies, and also has a pretty good understanding on the timeline of adoption. It takes a while, but she's also an excellent marketer. perhaps even more so, an excellent marketer than she is an excellent researcher.

She knows how to create a vision of the future and sell it so hard that you believe that the industries that she's calling out aren't only going to be the biggest winners in the next 10 to 15 years, but also the companies that she's picked in those industries are going to be able to survive the competition. It's one thing to say: hey, in the next 10 years, Blockchain is going to be a huge developing industry. or in the next 10 years, Evs are going to be a huge developing industry. But it's another thing to say: hey, yeah, but Coinbase is going to be the biggest winner in that, or Tesla is going to be the biggest winner.

in that analyzing an industry and identifying potential is hard, but picking winners in that industry is much, much harder. She's also been around the block. She knows that no matter how much her companies are growing in terms of the business, the market doesn't have to reward that valuation. The market rewards valuations and swings and it also punishes it and swings.

Her research is more long-term focused, but because people are so emotional and are fun, she has to spend all this time explaining away all of these negative catalysts that happened to her fund's valuations on a short term basis, when instead, she'd probably be much better off just buying and holding and shutting up. I say that respectfully, But you get my point. I think in totality, Kathy wouldn't really. anyone that likes innovative growth stocks simply have to deal with periods of being really wrong in order to get to periods of being really right.

and sometimes that time horizon can stretch quite a lot. I'll leave you with one quote that she wrote in this piece. She said the strongest bull markets do climb a wall of worry. Anyways, that caps off this video.

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