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Opinion

What Cathie Wood gets right

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So, Cathie Wood, in a recent Bloomberg interview, predicted Bitcoin will be $1 Million by 2030.

For reference, as of writing, BTC is $16.5k. So, about a 6000% increase from here.

Like with most things she says, a reaction-frenzy follows. It makes you wonder why a fund manager, down over 60% for the year, would make such an outrageous prediction. Why not a sedate $100K, which would still mean a 600% increase?

The BTC $1M prediction makes perfect sense when you unpack Ark’s marketing strategy. What’s more, almost all asset managers (us included) follow it to some extent, but we’ll get to that.

This Twitter thread from earlier this year does a great job of unpacking Ark’s communication strategy.

Most notably:

“From Odd Lots podcast, an interview with ARKK’s Head of Research Brett Winton (notably in February 2021, when ARKK was at peak AUM): “If you’re wrong, that’s fine, as long as you are uniquely wrong. If you’re uniquely wrong, everybody thought you were crazy anyway, & so it’s not priced in. If your forecasts were on average worse–but unique–that is better than having forecasts that are actually closer to the actual truth but the same as everybody else.”

In other words, for Ark, when it comes to forecasts, uniqueness over all else. So, $TSLA at $4,600. $BTC at $1M. Mission accomplished.

This post: Cathie Wood and content strategy gets further into Ark’s messaging

A reference to ARK’s practice of “open-sourcing” their trades so everyone knows and talks about what they are buying.

“It’s become pretty clear in the past decade there’s a correlation between power and the space you occupy in our collective consciousness. This is even more applicable in financial markets (than, say, politics) as this kind of feedback loop can result more directly in a desirable outcome.

Cathie Wood’s sole job is to get others to buy the stocks she owns, and with one email push, it’s magically done.”

Read that again; her “sole job is to get others to buy the stocks she owns.” To that, I’ll add “to create an almost religious belief in her investment thesis making it immune to criticism.”

Think about it: If a fund manager wants others to buy a stock he owns, putting out a powder-puff 30-40% gain estimate will get lost in an ocean of similar forecasts. But a 300% prediction will stand out, and people will anchor to it. The rationale to buy that same stock will be even if their estimate is 2x too optimistic; it still means a 100% gain.

And here’s the thing. All fund managers do it. i.e. draw attention to what encourages more people to invest with them and de-emphasise what’s inconvenient. 

A recent investor letter from a well-known PMS in India referred to their portfolio companies’ superior free-cash-flow generation compared to their benchmark. A subsequent section lists another set of portfolio stocks negative on that same metric, followed by the takeaway; having invested in building capacity, those companies will grow cash flows in the future. No comment on the graph showed they had underperformed the benchmark since inception. Heads, I win, Tails also…  

We do it too. After all, our ability to pay our bills counts on people buying what we sell.

To our chagrin, we make our own lives harder when dealing with clients, prospective and current. If only we could switch from what investors need to hear to what they want to hear.

Some frequent and not-so-frequent examples of questions and how they’d play out:

“Is it the right time to invest?”

What they want to hear (WTWTH): We think now is a specially good time to enter given the confluence of macro developments and local factors playing out, which our portfolio is uniquely poised to take advantage of

What we, unfortunately, say (WWUS): We can’t say what the markets will do over the next 12 months, but if you take a 5+ year view, you should do alright.

“What kind of returns can I expect?”

WTWTH: Our CAGR over the last few years is close to 30%, and if that continues, that means doubling your investment roughly every three years.

WWUS: Any point estimates of future returns will be wrong. If you consider the last 15-odd years, the index has done 11-12%, so if we get it right, little better than that net of costs. We could get it wrong too.

“Your returns are trailing the index for the last 12 months. What you’re doing is not working.”

WTWTH: A combination of macro black swans, Russia-Ukraine, inflation and central bank mismanagement happened over the last year resulting in our stocks getting mispriced. We don’t think that will continue for too long.

WWUS: Yes to the first statement and no to the second. If you recall the information we discussed when you decided to come on board, it said, on average, on a 1Y basis, the strategy trails 1/3rd of the time. So while inconvenient, it is expected. We expect longer-term returns will revert to the mean, but there are no guarantees. 

So, do you think you’ll come back strongly over the next 12 months? (I’ll stay invested if you give me the “right” answer)

WTWTH: Inflation is on its way down, so it’s only a matter of time before central banks reverse their hawkish stance. We’ll likely see positive earnings surprises in our holdings and should see them make up for the last year and more—a great time to top up.

WWUS: See our response above: “Is it the right time to invest.”

If you reread those questions and only the “want to hear” answers, you’d be more reassured and confident in our abilities.

We really need to learn from Cathie.

Doing the Right Thing is the Wrong Thing?

Much about the financial world seems to have a very short memory. Because even if you make atrocious assertions, guarantee unachievable returns or even attempt to defraud your customers, you are forgiven. Sometimes it helps if you’re sorry, but even that is optional.

The crypto world is abuzz with Sam Bankman-Fried siphoning out customers’ money to bail out his personal hedge fund. And is responsible for one of the most significant losses in the crypto exchange world for everyone involved. Yet, when a Venture Capitalist is asked if he’d fund SBF again, he says, and I quote: “Yes.”

It’s not just intent. It’s action. Adam Neumann, the founder of WeWork, was known for trying to pull a fast one over the world by inventing community-adjusted EBIDTA and the small matter of earning millions for himself while the company shut down. WeWork continues its struggle for survival, but Neumann has started his next thing and has been funded $350+ million by a marquee venture firm. Closer to home, examples abound of founders, promoters and fund managers whose actions were obviously not investor-friendly. They continue to thrive.

The point is simple. If you do the right thing, no one cares anymore. An estimate isn’t worth it unless it’s outrageous. A film makes more money if an actor makes a statement that gets an incredible amount of hate on Twitter. There are enough people that offer guaranteed returns, and investors find that reassuring, to the point where even if they are wrong, their answer is to simply ask, “What’s the guarantee for next year?”.

A cynical lens suggests there’s no point in doing the right thing if the wrong thing is what gets the points.

But like Charlie Munger has said: “Always take the high road; it’s far less crowded.”

Also, the view is better.

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