Inside Cathie Wood and ARK Investment’s Trading Secrets

No one demonstrated the trading opportunities in 2020 more than Cathie Wood, founder, CEO, and CIO of ARK Investment. Her flagship ARK Innovation ETF (ARKK) gained 172% in a year where the Nasdaq gained “just” 46%. Beyond ARKK, Wood’s ARK Next Generation Internet ETF gained 160%, while the ARK Genomic Revolution ETF was up 210%.

Not only did ARK Investment’s funds have stellar performance, but they also had huge inflows that they had to manage, buying new securities at higher-and-higher prices. In 2020, ARKK grew from $1.85 billion assets under management to more than more than $15 billion. In December alone, ARKK attracted $2.9 billion in new capital, according to Barron’s.

That’s one heck of a year. So let’s take a look at her trading secrets.

Know Your Edge

To only look at her 2020 performance would be a disservice to Cathie Wood and ARK Investment’s multi-year portfolio construction philosophy. She holds concentrated portfolios of typically less than 50 stocks, looking for those that have the potential for exponential growth in the future.

One of her big bets: Tesla. While we can take a look at that stock’s incredible two-year run with the benefit of hindsight, Wood had put a $4,000 price target on Tesla pre-split stock years ago. (That price target was exceeded, on a split adjusted basis, in January 2021.)

Cathie joined us for a Market Rebellion Roundtable in October and gave insight into how she looks at her portfolio: over a five-year horizon, which is how she views the companies she holds, it’s a “deep value portfolio,” she said.

Question to consider: What is your edge? A lot of people viewed ARK Investments as running a high-beta, high-risk stock portfolio. However, Cathie calls it deep value, putting the growth rates of the companies she holds against potential stock price growth.

Develop Unshakeable Conviction

In the CNBC clip below, Wood was being challenged for Tesla’s sideways performance at the time. Give it a watch.

 

Queen @CathieDWood pic.twitter.com/sT0om9WqFp

— Ramp Capital (@RampCapitalLLC) January 8, 2021

What is notable in her response is two things: 1) her confidence and conviction that she understands the company, the industry, and the potential for the future; and 2) perhaps more importantly, she acknowledges the position of those on the other side of the trade from her in a way that doesn’t assume her position is the only outcome achievable.

Wood’s unshakeable conviction comes from her deep company and industry expertise. We saw that first hand on the Market Rebellion Roundtable when she talked about why she was an early investor in Tesla and what her ongoing theme is.

But your unshakeable conviction can come from your unique trading strategy. Don’t try to be a fundamental bottoms up trader if you don’t have the time horizon that Wood has.

At Market Rebellion, we watch order flow, primarily through unusual options activity, and marry that with a strong options education to structure trades in favorable risk/reward terms.

Question to consider: What will help you to have unshakeable conviction in your trading style when things go sideways? Cathie’s unshakeable conviction came from her out-working everyone else and sticking to her guns. She didn’t deny those with opposite views 

It’s Always a Stock-Picker’s Market

There’s always a debate raging on passive vs. active investment. It’s always a stock picker’s market—especially if it’s done in a professional, risk managed, process-driven manner. 

OK, so Wood got lucky with her Tesla pick, which gained 820% over the past year. Fine… if we give you that. Let’s take a look at her other top five holdings: Square, InVitae Corp, Crispr Therapeutics, and Roku. Though not Tesla-sized gains, each of those stocks were up more than 200% in 2020. 

If you zoom out to Wood’s five-year time horizon, the worst-performing stock among those is InVitae Corp, which gained “just” 616% compared with a 216% increase in the Nasdaq (QQQ) and 103% gain in the SPY. 

Comparing the whole ARKK portfolio over the past five years, there is no extended time since its inception that ARKK (below blue) was underperforming QQQ (below orange). 

Source: Google Finance

Question to consider: Are you risk managed, process-driven? Or are you just trading what you feel like?