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Cathie Wood Says Investors Making Emotional Decisions is a Mistake

In a recent interview with Cathie Wood, ETF Trends’ CEO Tom Lydon, asked the popular fund manager about her expectations for the markets, and specific strategies for recent volatility for the Ark Innovation Fund (ARKK). The ETF has fallen over 50% from its high. Wood discusses specific plays while highlighting the importance of the technology companies the fund invests in. She explained her belief that deflation, not inflation, is the more worrisome risk over the medium term.

Longer-Term Outlook

Cathie Wood’s advice to investors who have experienced drawdowns or realized losses on her strategy is to know that, “We have never underperformed the market on a rolling three-year point of view.” Wood stressed the importance of taking a long-term view in a well-managed future-looking portfolio.

In the past Wood has stressed that Ark Invest takes a five-year outlook when it places investments. With the steep sell-off amid inflation fears, she says the bond market confirms are unwarranted, and a more hawkish Fed stance, Wood expects a rebound to begin to unfold. “What this means is that this rubber band has been stretched so tightly, that we believe, and consider the source, but we truly believe given the valuations in our portfolio, the growth in the portfolio, and the fact that we’re probably looking at very choppy waters from a cyclical point of view so that our secular growers are going to shine,” Wood said.

As the Chief Investment Officer of the Innovation Fund, Cathie says that investors would be wise to take advantage of the potential for a sharp rebound in Ark’s investment strategies. “I certainly would be using this downdraft to increase that allocation [to ARK funds], because if anything during the last year, and it is quite a year for me to be saying this if anything our conviction in how rapidly the world is going to change and how transformative these technologies will be as they converge and feed one another, our conviction in that outlook has increased dramatically,” Wood said.

“Well, and I will harken back to ’08, ’09. How many people do both of us know who just couldn’t take it anymore? They became very emotional. Their life was flashing before their eyes. They thought they were going to be destitute. You conjure up all kinds of fears as downward momentum continues relentlessly day by day. They finally can’t take it. They sell and they regret it for the rest of their lives. They think of about it every day the market goes up after that.”

“… An emotional response, just avoid it. It is usually catastrophic to long-term performance. What is additive and significantly so to performance is averaging down. It doesn’t feel good maybe as you’re doing it, but you would be shocked how little it takes if you’re consistent and you just keep averaging down.” _C. Wood

According to Wood, it’s crucial that investors avoid making emotional investment decisions, as that can be catastrophic to their portfolio performance. Instead, investors can improve performance by averaging down, according to Wood. The 65-year-old added that the undervaluation in Ark’s portfolio holdings “has reached an extreme I’ve never experienced in my career.” Wood used Tesla as an example reminding of the amount of skepticism the company faced for years until it soared from $35 to $1,000 in a short period of time. “It was a major surprise to some people, and it was because they didn’t understand the story. We feel that is a theme that’s going to play out again and again and again, in our portfolios,” said Cathie.

As for some of the top holdings in the AARK portfolio, like Teledoc, Roku, and Zoom Video, “they are ready like a coiled spring,” Wood said.

On Inflation

Cathie addressed interest rates and inflation while discussing the ETF’s healthcare holdings. She said many think inflation means higher interest rates. She pointed out, “Interestingly, long-term interest rates are not confirming that by the way. We do believe inflation is transitory. I know that’s become a bad word recently, but we believe people are going to be shocked at how low inflation goes this year. We’re going to see negative year over year in many, many categories.”

Take-Away

An ETF that invests in one sector is likely to underperform the overall market when the sector underperforms, and overperform when the sector overperforms. Individual stock holdings can do the same. The sector Cathie Wood’s ARKK ETF invests in has, in the past, performed well above the S&P 500, and is now experiencing performance well below. The CIO says the time horizon they take when adding to holdings is five years. She suggests that those in or considering investing in the fund that concentrates on disruptive technologies, use the same time horizon. Cathie Wood believes, with that timeframe, the selloff makes timing very good.

Paul Hoffman

Managing Editor, Channelchek

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