By Anna Peel. Originally published at ValueWalk.
Cathie Wood on Twitter Inc (NYSE:TWTR), Europe in recession, inflation has peaked & supply chain has gone the other way with fat inventories except autos.
Cathie Wood just made these comments in an interview conducted with Melissa Francis on Magnifi Media by TIFIN. Magnifi is a fintech platform that uses artificial intelligence so individuals and advisors can instantly search stocks, ETFs, mutual funds and model portfolios and trade based on their preferences.
- Elon Musk will bide is time with his offer and will be interesting if any other bidders show up and I’m hearing that there are some other bidders.
- One thing that has hampered Twitter: it’s advertising model and this scares analysts. Advertisers don’t like to have their ads next to questionable content.
- The idea of a subscription service is a possibility but open sourcing the algorithm is the first thing Elon will do so there is transparency on what is censored or not censored.
- Even Jack Dorsey thought Twitter tied itself in knots over censorship and he was wondering what to do with censorship. They do need to do something.
- we know we can unfollow someone , and unfollow, in a civil way. Even Jack was saying we need a change and we have to change and he and Elon are aligned to an open source agorithim to something more subscription based.
- What is Twitter worth?
- So much uncertainty but out Our compound annual rate of return is 25% for Twitter and their model will change.
- we have short term oriented shareholders who want to make a fast buck. the model is going to change. we will revisit once we know what’s going on and we think a lot can be done to improve the model but it may take more than our 5-year timeline investment horizon.
- We probably would have more confidence in the platform and want to hear what Elon has in mind in terms of perpetuating the platform
- Need his ideas on becoming a transparent and sustaining product and people will be open to his ideas
- Are you supportive of Elon taking over? The route Jack was going, which we supported, was opening the algorithm and this is a continuation of that. We have held Twitter because we believe it is a verification platform, it could become a verification platform for NFTs. There are very few vertification platforms out there.
Cathie Wood On Tesla
- Her call on Tesla Inc (NASDAQ:TSLA) at $4600–we have been building out Tesla model for years and publish 5 year projection which started in 2019 when that was misunderstood. WE felt that open sourcing and update people how much share Tesla has and keeping in the electric vehicle space and how capital efficient Tesla and more efficient than any other company out there
- We keep an eye on battery costs and technology and our biggest assumption changes over the past few years marketshare and keeping it, ability to scale and he says is a manufacturer or factories, capital efficiency and we’ve been shocked and ability to increase gross margins over time
- In the five year forecast we had a 50-50 probably of automous vehicles and now its higher
- We know now autonomous is possible because it’s happening
Cathie Wood Defends Criticisms On ARK
- We give away our research away not because we are altruistic but we want to educate and how the world is changing and how to keep so much is going to change
- Five change platforms: genomic sequencing, adaptive robotics, energy storage, artificial intelligence and blockchain technology
- Those platforms are changing and growing at exponential rates and converging. We want the sell side and the buy side and they are used to short term time horizons and they are focused on beating benchmarks but we are focused on new technologies and the technology to transform the future
- We have a 5 year investment time horizon.
- Very few active managers have outperformed the markets in the past five years. In past 10 years 11% of large cap managers have outperformed their benchmarks and 25% of all active managers have outperformed their benchmarks. We have outperformed the NASDAQ, S&P and MSCI handsomely over the past five years and compounded annual rate of return at 22%
- For a six week period during covid we had a risk off epoisde and we underperformed but from the bottom to the peak in Feb. 2021 our flagship strategy was up 360% since then at our worst point we were down 60%
- We believe that disruptive innovation in global public equity markets is valued today at a $10 trillion market cap and that will go to $210 trillion by 2030 so that is a 35-40% compounded rate of growth
- When people talk about risk management people think of us a generalist we have risk control
- We have risk control built into scoring system. When we move to risk off period and concentrate into higher conviction names for our flagship strategy we went from 58 names to 35 names from a risk control point of view. We push more higher scoring names in risk of periods
- Long term studies show that the most concentrates strategies are the most successful the strategy.
- We use volatility to curb the risk by concentrate the portfolio and many people think higher concentrate is riskier and we disagree.
- What about personal attacks by Morningstar
- There are companies that don’t understand we don’t fit into their style box and style boxes will become a thing of the past as technology blurs the lines and across the cap range.
- We are index agnostic and that’s a problem for many companies. Our objective is minimal compounded annual rate of return at 15% over next five years. We are closer you will find like a VC in public market as anyone they have not seen an animal like ours.
- If you look at technology in the S&P 500 we have no overlap on those names and the technologies of the future will be different than the technologies of past. Offer good diversification if you own FANG but our stocks are not in broad based indices
- ARK has seen $17 Billion in inflows last year and that’s because advisors know we are a diversifier and we will protect against the value traps that are populating broad based portfolios.
- Our analyst team on innovation domain experts we don’t have MBAs because it’s much easier to teach a biochecmial engineering a financial statement
- Deflation—disruptive innovation is inherently deflationary in two ways. The good way is truly disruptive innovation is followed by cost declines when more people have access and that causes exponential growth because the cost decline opens up a new markets
- Companies cater to short term shareholder by manufacturing earnings—buying back shares to increase earnings or pay dividends but they are leveraged up to do so and they haven’t invested in innovation.
- Because the companies haven’t invested in innovation they will need to service their debt and they will have to cut prices and we think that the gas powered autos will have to do that first
- Big disagreement today is cyclical inflation—we believe inflation is in process of peaking. Some of the early signs that we are seeing mostly in inventory accumulation especially in the retail world, excluding autos, that the inventories are piling up. Many companies double and triple ordered when they couldn’t get supplies and they they will end up with so much inventory on their balance sheet and they will have to cut prices
- Oil prices is an outlier and food prices with Ukraine
- There is demand destruction underway in energy sector
- Russia hasn’t been turned off yet. It’s oil exports going elsewhere
- Surprised to see oil at $130 and then at $117 and lower high is the first sign demand destruction is having an impact
- Not sure why people aren’t focused on Consumer sentiment– U of Michigan and I’ve watched it for 45 years is down to levels in ’08 and ’09 and people were losing home, jobs and cars and oil prices were at $147
- Consumers won’t be rushing out to buy and that’s a recipe for decline
- We could have a global recession
- Europe is in recession; China feels recessionary and Asia will caught a cold
- Sri Lanka about to default is like the Asian crisis in 1997 and there many warning signs
- Bond yields as Fed talking up interest rate the 10 year yield hasn’t even cracked 3%
- Inflation will start unwinding rapidly now. Last April CPI was up .9 and PPI was up 1.1 and if If we come in below that for April and those YOY cmpareisions will come down and see a lot more economists say they think inflation has peaked and the question is how low will it go
- Surprise will be on the low side because large inventories, disruptive innovation and creative destruction.
00:00:01 Melissa Francis
00:00:02 Melissa Francis
Today we’re here to talk about magnifying bigtiff in a marketplace where you can harness real time proprietary data to help individual investors and financial advisors find, compare and buy investment products like stocks and ETFs, mutual funds, and model portfolios to grow and preserve your wealth.
00:00:20 Melissa Francis
I’m Melissa Francis.
00:00:21 Melissa Francis
I know just a little bit about this subject matter.
00:00:24 Melissa Francis
I’m a former CNBC, MSNBC, Fox business and Fox News anchor.
00:00:29 Melissa Francis
And you will remember if you’ve watched us before we talked about the best crypto investment strategies with Anthony Scaramucci, the best bond strategies with the Bond king himself.
00:00:39 Melissa Francis
00:00:40 Melissa Francis
And the best private equity strategies with martinis.
00:00:43 Melissa Francis
But now we have a very special guest that I’m super excited about to talk about stock.
00:00:48 Melissa Francis
Box and everything hot out there. Kathy would. She’s the CEO of Ark. She is a board member of Tiffin, which is Magnify’s parent company Kathy.
00:00:57 Melissa Francis
So thank you so much for being here.
00:00:59 Melissa Francis
I want to drill down on your latest blog because there were so many good Nuggets in there and I found some of them kind of counter intuitive.
00:01:05 Melissa Francis
So I want to get into those.
00:01:06 Melissa Francis
But first, if I could take you to.
00:01:08 Melissa Francis
The hot story of the day, which of course is.
00:01:12 Melissa Francis
Twitter and I wanted to ask you looking at where things stand today and I know it’s fast moving.
00:01:18 Melissa Francis
It keeps changing, but if.
00:01:21 Melissa Francis
You were Elon.
00:01:22 Melissa Francis
Musk, what would your next move be?
00:01:24 Melissa Francis
What would you do from?
00:01:24 Cathie Wood
Here, well, he’s got a $54.00 I guess is $54.20 offer out there.
00:01:32 Cathie Wood
So I think he’ll bide his time.
00:01:34 Cathie Wood
It will be interesting to see if other bidders show up I’m I’m.
00:01:40 Cathie Wood
I’m hearing that there are some so, so let’s see.
00:01:43 Cathie Wood
Not not quite sure.
00:01:44 Cathie Wood
It’s still quite fluid, right?
00:01:46 Melissa Francis
00:01:46 Melissa Francis
And he says that if this doesn’t work, he has.
00:01:48 Melissa Francis
Plan B, what do you think that is?
00:01:51 Cathie Wood
Goodness, I don’t know if it would be something a little more hostile.
00:01:54 Cathie Wood
Just I have no idea.
00:01:55 Cathie Wood
You know, Elon Musk is has his own mind and and and is I’m, I’m sure, thinking very creatively about this.
00:02:04 Melissa Francis
If he does succeed.
00:02:05 Melissa Francis
And you were him again.
00:02:07 Melissa Francis
What would you do with the company?
00:02:08 Melissa Francis
What do you think that they need to correct?
00:02:11 Cathie Wood
Well, one of the things that I think has Hanford Twitter is its advertising model and.
00:02:17 Cathie Wood
This is what?
00:02:17 Cathie Wood
Scares analysts out there.
00:02:20 Cathie Wood
Oh my gosh, you know he’s going to upend the advertising model.
00:02:26 Cathie Wood
Because advertisers don’t like to be to have their ads shown next to questionable content, which is something different for everyone, right?
00:02:36 Cathie Wood
And so, this idea of perhaps a subscription service is a possibility.
00:02:41 Cathie Wood
Or a tipping service, but certainly open sourcing the algorithm.
00:02:46 Cathie Wood
Will be the first thing he’ll do so that there’s transparency associated with what is and is not censored.
00:02:56 Melissa Francis
So do you think that’s a good or a bad thing for the company?
00:02:59 Melissa Francis
I mean, it might be a good thing for freedom of speech, or however, may you.
00:03:02 Melissa Francis
You may look at it politically, but if you are a shareholder, is it a good idea for him to get that out there so everybody knows how the algorithm really works?
00:03:11 Cathie Wood
Well, I think.
00:03:12 Cathie Wood
Even Jack Dorsey thought that Twitter was beginning to tie itself.
00:03:16 Cathie Wood
And not over the the censorship.
00:03:19 Cathie Wood
And so he was trying to figure out what can we do to overcome this monster really, and so I think they do need to do something and many people would describe what’s happened to Twitter as becoming a cesspool.
00:03:35 Cathie Wood
Now we don’t think that we use Twitter, it’s.
00:03:39 Cathie Wood
It’s become quite important to our business, as have other social media platforms.
00:03:45 Cathie Wood
And so we know that we can unfollow someone that is hampering our research or our ability to engage with others in a civil way.
00:03:57 Cathie Wood
But I I think that I think that even Jack was saying, OK, we need a change.
00:04:03 Cathie Wood
We have to change what we’re doing.
00:04:05 Cathie Wood
And I think he and Ellen probably are aligned.
00:04:08 Cathie Wood
And this idea of an open source algorithm, a shift away from the advertising model towards something more subscription based.
00:04:17 Cathie Wood
And you know more transparency?
00:04:19 Cathie Wood
I mean, Ark is radically transparent.
00:04:22 Cathie Wood
Everything we do is transfer.
00:04:25 Cathie Wood
And it has done nothing but help our business.
00:04:28 Cathie Wood
Sure, you’ve got people out there who are denigrating our work.
00:04:34 Cathie Wood
But we know those people as we’re as we drill into what they’re saying.
00:04:38 Cathie Wood
They’re not doing any research we’re really interested in engaging with people who are doing real research, and I think.
00:04:45 Cathie Wood
Transparency would make that make our experience with Twitter even better.
00:04:51 Melissa Francis
Yeah, the fact that you’re not afraid to engage like that, and to you know, hear from those who might oppose you shows how confident you are about what you’re doing.
00:04:59 Melissa Francis
You have to wonder about a company that wants to hide what they’re doing.
00:05:02 Melissa Francis
Let me ask you though. On the Twitter front. So what do you think the company is worth? I mean, I know I want to talk to you about your Tesla target, but as you look at what Elon’s willing to pay, what do you think?
00:05:14 Melissa Francis
If you had to put a price target on the stock two years down the road, or four years.
00:05:18 Melissa Francis
Down the road, what would you say?
00:05:19 Cathie Wood
Well, I think there’s so much uncertainty right now that I I couldn’t give you one hour based on their existing.
00:05:28 Cathie Wood
Model our compound annual rate of return expectation for Twitter is roughly 25% now their model is going to change.
00:05:40 Cathie Wood
There are going to be a lot of dislocations.
00:05:42 Cathie Wood
We have a lot of very short term oriented shareholders who are probably now have moved into Twitter.
00:05:48 Cathie Wood
To make a fast buck 5420 fifty $4.20.
00:05:52 Cathie Wood
Sense, but the model is going to change, and so we will revisit once we understand what’s going on, we will revisit the upside to the model and we do think that a lot can be done to improve the model so, but it may take more time than even our five year investment time horizon.
00:06:12 Melissa Francis
So if you.
00:06:13 Melissa Francis
If Elon Musk does get control of the company, would you adjust that upward?
00:06:17 Melissa Francis
You think it has more potential with him in charge.
00:06:19 Melissa Francis
Or would it be more of a wait and see?
00:06:21 Melissa Francis
How would you feel?
00:06:23 Cathie Wood
We probably probably would have more confidence in the platform.
00:06:28 Cathie Wood
Arm would want to hear what Elon.
00:06:31 Cathie Wood
And what he has in mind in terms of perpetuating the platform.
00:06:36 Cathie Wood
I’m sure he does not want to run it as a charitable organization or a non profit, so we’d like to see how he thinks it could become.
00:06:46 Cathie Wood
A very transparent but also self sustaining.
00:06:50 Cathie Wood
Model and you know he’s very creative and I think that it is our global town square and and that a lot of people would miss it.
00:07:01 Cathie Wood
So I think there will be a lot of people very supportive and very open to his ideas.
00:07:06 Melissa Francis
So putting politics aside entirely and just thinking about.
00:07:10 Melissa Francis
00:07:11 Melissa Francis
As a shareholder, you would be in favor of Elon Musk taking over.
00:07:15 Cathie Wood
Well, I do think that the route Jack was going, which we supported was opening up the algorithm or open sourcing it in some way.
00:07:27 Cathie Wood
And so I think this is a continuation of that.
00:07:31 Cathie Wood
We also think one of the reasons we have held Twitter is because we believe it is a verification platform.
00:07:39 Cathie Wood
You know, the little blue check and we believe that it could become a verification platform for shifts.
00:07:47 Cathie Wood
As well and so.
00:07:49 Cathie Wood
You know there are.
00:07:50 Cathie Wood
Few call options here and there.
00:07:53 Cathie Wood
Verification algorithms we think are well respected out there and so I think Elon would also build on.
00:08:02 Melissa Francis
Wow, fascinating stuff.
00:08:03 Melissa Francis
00:08:04 Melissa Francis
I’m sure you just made some news there without question before we stray too far from Elon ’cause he is such a fascinating character.
00:08:10 Melissa Francis
I know that you put a 2026 target on Tesla of $4600. How did you work that math and how?
00:08:17 Melissa Francis
Do you feel about that call?
00:08:19 Cathie Wood
Yes, well we as we have been building out the Tesla model for years of course, and each year we publish our five year projection, we started doing this. I believe in 2019 when we believe Tesla was so misunderstood.
00:08:38 Cathie Wood
And I think our projections were so much closer to the mark for for 2020, two 2324 that we we felt that open sourcing it and and continuing to update people would help them understand number one.
00:08:57 Cathie Wood
How much share Tesla has and is keeping in the electric vehicle space how?
00:09:06 Cathie Wood
Capital efficient the company is.
00:09:09 Cathie Wood
We’re even shocked at how capital efficient it is more efficient than any other company.
00:09:15 Cathie Wood
Out there we keep a constant.
00:09:19 Cathie Wood
Eye on batteries and battery costs and and battery technology.
00:09:26 Cathie Wood
So we like to update that, but I think our biggest assumption changes over the last few years have been market share keeping a lot more than we expected.
00:09:37 Cathie Wood
00:09:38 Cathie Wood
GAIL, in fact, Elon is saying he’s now a manufacturer of factories.
00:09:44 Cathie Wood
That’s one of their core competencies, and we agree with that and capital efficiency.
00:09:49 Cathie Wood
We’ve been shocked at how good that is, and you know, their ability to increase their gross margins.
00:09:58 Cathie Wood
Overtime much, much higher than I think most people might have anticipated, and in our five year forecast was.
00:10:05 Cathie Wood
Uh, last year we we had a 5050 shot at autonomous being a reality now as you can see from the model, we put a 25 percentile, 75 percentile probabilities and we have price targets associated with those. Sort of the the the low end and.
00:10:25 Cathie Wood
High end, we know now that autonomous is possible because cruise automation is autonomous in San Francisco.
00:10:34 Cathie Wood
A big city Waymo has done it in Arizona, so it is possible we no longer have to answer that.
00:10:43 Melissa Francis
Yeah, I can’t wait to not drive my kids around, but I hear you.
00:10:47 Melissa Francis
I I want to ask you specifically about Ark.
00:10:51 Melissa Francis
You talk a lot about your risk management and your research.
00:10:55 Melissa Francis
Can you get into a little bit more specifics about why your risk and research your research and risk management is so proprietary?
00:11:02 Melissa Francis
I mean, I, I know it’s proprietary, so you can’t talk detail.
00:11:05 Melissa Francis
But can you give me, you know, a little sketch of?
00:11:07 Cathie Wood
It well, our research is is not proprietary we.
00:11:10 Cathie Wood
Give it away.
00:11:11 Cathie Wood
And so we, that’s that’s one of the powers of social media, our social media and marketing strategy.
00:11:19 Cathie Wood
We give our research away not because we are altruistic, although we do.
00:11:25 Cathie Wood
Want to educate?
00:11:27 Cathie Wood
Not just investors.
00:11:28 Cathie Wood
But parents and grandparents about how the world is changing and how rapidly is it’s changing and how to keep their children and grandchildren on the right side of change.
00:11:41 Cathie Wood
And even for adults, how to retrain so much is going to change because of the five innovation platforms genomic sequencing.
00:11:49 Cathie Wood
Adaptive robotics energy storage, artificial intelligence and blockchain technology.
00:11:54 Cathie Wood
So much is changing and those platforms themselves are all growing at exponential rate.
00:12:03 Cathie Wood
And they are converging, so it’s 1 S curve feeding another S curve and we want people to understand that we want not just investors and registered investment advisors, but also, as I mentioned, the the sell side and the buy side.
00:12:21 Cathie Wood
You know they’re used to very short term.
00:12:23 Cathie Wood
00:12:24 Cathie Wood
And they haven’t until recently been as focused on these new technologies.
00:12:29 Cathie Wood
They’ve been much more focused on benchmarks and how to beat benchmarks.
00:12:34 Cathie Wood
They haven’t been.
00:12:34 Cathie Wood
Thinking as much about the future and and the technologies that are going to transform the future.
00:12:40 Cathie Wood
So we give our research away because we want to engage with.
00:12:44 Cathie Wood
And become a part of the communities that are innovating and I feel like we’ve done that.
00:12:49 Melissa Francis
So if I could just jump in, I mean ’cause this has been a very successful strategy for you, especially during the pandemic and the lockdown economy.
00:12:57 Melissa Francis
It’s been tougher, obviously more recently, and you know you’ve seen a lot of correction within the portfolios, and you know you’ve taken a lot of criticism from the outside.
00:13:08 Melissa Francis
I would ask you.
00:13:09 Melissa Francis
First of all.
00:13:09 Melissa Francis
Is there any part of the criticism that you feel like you’re receiving that rings true?
00:13:14 Cathie Wood
So let me put in perspective what has happened over the past five years.
00:13:18 Cathie Wood
We have a five year investment time horizon, so we’ll start with the past.
00:13:21 Cathie Wood
Five years and.
00:13:22 Cathie Wood
Then we’ll look forward at the next five years.
00:13:24 Cathie Wood
Past five years.
00:13:25 Cathie Wood
As we as we stated in one of our research pieces recently and fund pieces, very few active managers have outperformed the markets during the past five to 10 years.
00:13:41 Cathie Wood
I think in the past ten years, which is a recent study that we read.
00:13:47 Cathie Wood
11% of large cap managers have outperformed their benchmarks, and 25% of all active managers have performed outperformed their benchmarks. We have outperformed the NASDAQ, the S&P and the MSCI handsomely.
00:14:05 Cathie Wood
Over the past five years, I think our compound annual rate of return is around 22%.
00:14:10 Cathie Wood
So that’s the past five years.
00:14:12 Cathie Wood
Then we go into the pandemic and the crisis period we had for about a six week period.
00:14:19 Cathie Wood
A significant risk off.
00:14:23 Cathie Wood
Episode and and we underperformed, as we usually do in a risk off period and then from the bottom of the coronavirus to the peak in February of 21, our flagship strategy was up 360%.
00:14:42 Cathie Wood
Since then, at our worst point, we were down 60%, so I just wanted to put that in context.
00:14:48 Cathie Wood
If we are right now, I’m talking about our innovation platforms.
00:14:52 Cathie Wood
Broadly, we believe that disruptive innovation in the global public equity markets is valued.
00:15:02 Cathie Wood
Today, at about a $10 trillion market cap and we believe that is going to 210 trillion by 2030, so that’s anywhere from a 35 to 40%.
00:15:17 Cathie Wood
And compound annual rate of growth for those platforms and we would hope to outperform because we are focused only on the future and and we have centered our research and investing around those platforms.
00:15:30 Cathie Wood
When people talk about risk management, they they seem to think that we’re a general.
00:15:37 Cathie Wood
Just kind of asset manager.
00:15:40 Cathie Wood
We are not.
00:15:41 Cathie Wood
We are focused exclusively on disruptive innovation and when they say where is the risk management or the risk control, we have many levers of risk control, including our partners who oversee the risk in.
00:15:58 Cathie Wood
Their portfolios and I’m talking our minority partners and our distribue
00:16:01 Cathie Wood
Partners so we are fielding questions and and are thinking carefully about the risks we’re taking in the certainly in the context of the questions we’re getting.
00:16:11 Cathie Wood
But it’s been built into our scoring system.
00:16:15 Cathie Wood
Our top and bottom, top down and bottom up modeling there’s there are risk assessments.
00:16:21 Cathie Wood
Each step along the way, I think.
00:16:25 Cathie Wood
Many people confuse generalist portfolio managers who have to shift between this sector and that sector, or between cash and no cash.
00:16:34 Cathie Wood
We’re not doing that right now, we.
00:16:36 Melissa Francis
And so I.
00:16:37 Melissa Francis
Absolutely hear what you’re saying and I’m wondering that is that the same as you wouldn’t do anything differently in terms of what about?
00:16:45 Melissa Francis
Even in the approach with the media and the way that you’ve engaged people you talked about social media and elsewhere, is there anything that you would do differently, or do you feel like everything is going according to plan?
00:16:55 Cathie Wood
So after a one of one of the rougher interview is out there.
00:17:02 Cathie Wood
I was trying to figure out why don’t they understand how we are controlling risk and and one of our clients actually said well, you sounded like you know you wouldn’t do anything differently.
00:17:19 Cathie Wood
We actually do when we move into these.
00:17:22 Cathie Wood
Risk off period.
00:17:24 Cathie Wood
Since we concentrate our portfolios to our highest conviction names and what that means in this last go around for our flagship strategy, we went from 58 names in that strategy to 35. So we basically said from a risk control point of view.
00:17:44 Cathie Wood
That OK using our scoring system?
00:17:47 Cathie Wood
Where is our conviction the lowest?
00:17:49 Cathie Wood
They’re all getting hit equally practically in this risk off period.
00:17:54 Cathie Wood
So why don’t we push towards the higher scoring names and it gives our analysts and and me and our associate portfolio managers the the psychological wherewithal to say, OK, this is.
00:18:10 Cathie Wood
A risk off market, all of our stocks are being treated the same.
00:18:14 Cathie Wood
Why don’t we come out right now with all of our concerns lurking deep down inside and then concentrate.
00:18:23 Cathie Wood
So that’s we do take risk off the table and if you look at long term stuff.
00:18:27 Cathie Wood
These they will show you that the most concentrated strategies are the most successful because typically active managers have a very high degree of confidence in several of their names.
00:18:40 Cathie Wood
But there are a lot of names.
00:18:42 Cathie Wood
They would be the tail of the portfolio, where they they.
00:18:45 Cathie Wood
They just don’t have as much confidence, so we use.
00:18:48 Cathie Wood
The volatility to curb the risk by further concentrating our portfolios and the only thing else.
00:18:54 Cathie Wood
There is many people say wait a minute, that’s not risk control concentration is higher risk.
00:19:00 Cathie Wood
00:19:01 Melissa Francis
Yeah, no, I I’m glad you explained that because that that is really interesting and I’m I’m not sure a lot of people out there understood that.
00:19:07 Melissa Francis
That’s what you were doing just in terms of some of the personal attacks. I mean, for example when I saw Morningstar’s downgrade.
00:19:15 Melissa Francis
They were focused so much on succession which.
00:19:19 Melissa Francis
Uhm, you know?
00:19:20 Melissa Francis
Obviously it’s important.
00:19:21 Melissa Francis
But there have been a lot of other funds out there, and.
00:19:23 Melissa Francis
Fund managers that.
00:19:24 Melissa Francis
They haven’t had that same criticism and focus.
00:19:26 Melissa Francis
Do you think it has anything to do with your gender?
00:19:28 Melissa Francis
You think it’s sexist at all?
00:19:31 Cathie Wood
I really don’t, I I do know there are companies like that one that do not understand what we’re doing.
00:19:40 Cathie Wood
We do not fit into their style boxes and I think style boxes will become a thing of the past as as sectors.
00:19:50 Cathie Wood
As technology blurs, the lines between and among sectors.
00:19:54 Cathie Wood
And as innovation goes, global and goes across the cap range, you know.
00:19:59 Cathie Wood
So I think those style boxes are are going to be will seem quite provincial.
00:20:06 Cathie Wood
At some point we are index agnostic.
00:20:10 Cathie Wood
That is a big problem for many of these companies.
00:20:12 Cathie Wood
Our objective is.
00:20:14 Cathie Wood
A minimum compound annual rate of return of 15%.
00:20:18 Cathie Wood
At an annual rate over the next five years, we are the closest you will find to a venture capital company in the public equity markets.
00:20:27 Cathie Wood
And I think organizations like that one have a very difficult time like that.
00:20:32 Cathie Wood
They’ve never seen an animal like ours where we are thrilled that our active share
00:20:38 Cathie Wood
Relative to the broad based indices is in the high 90% range we have. If you look at technology in the S&P 500, we have no overlap. We are doing something.
00:20:49 Cathie Wood
We are saying the technologies of the future.
00:20:53 Cathie Wood
Are going to be very different from the technologies of the past, and so we offer a good opportunity for diversification for registered investment advisors.
00:21:04 Cathie Wood
They own the fangs and Microsoft NVIDIA and now even our beloved Tesla, ’cause it’s in indexes but they don’t own our stocks ’cause they’re not.
00:21:14 Cathie Wood
In these broad based indices.
00:21:16 Cathie Wood
So I think many much of our success because we have had despite the performance we discussed earlier.
00:21:22 Cathie Wood
We’ve had inflows last year, 17 billion in inflows.
00:21:25 Cathie Wood
This year we’re still in flowing, even though we’ve been in this pacing period and no one sure if the next move is up or the next move is down, but we are.
00:21:36 Cathie Wood
In in flow and I think that’s because advisors know we are a diversifier and we will protect them against the value traps that we believe are populating broad based benchmarks which are becoming part of their core portfolio.
00:21:53 Cathie Wood
We are a hedge against the DIS intermediation of the old World order.
00:21:59 Melissa Francis
Yeah, it just to clarify for people that are watching so you have your inflows have exceeded your outflows.
00:22:05 Melissa Francis
You have more people coming in more money coming in.
00:22:07 Melissa Francis
Right now, yeah.
00:22:08 Cathie Wood
00:22:09 Cathie Wood
We are in that inflow mode, yes.
00:22:11 Melissa Francis
I I’m also fast. I mean, you’re so contrarian. And I do think that your fun. If you truly understand what it’s about, it it sort of becomes we’ve talked on this show and magnify a bunch of times about how the old model of you know however you want to slice it. The 4060 is is really broken and that you have to have a whole bunch of.
00:22:27 Melissa Francis
Different approaches to your portfolio and having a slice of what you do is something that is so different from what you would get elsewhere and is backed by huge brain power and huge research that it’s a way to take.
00:22:40 Melissa Francis
You know this this oppositional point of view, almost, but do it in a very smart way along those lines.
00:22:47 Melissa Francis
And we talked to Jeff Gundlach a while ago.
00:22:49 Melissa Francis
Of course, the bond king he was saying that, you know, he’s really obviously a lot of people are worried about inflation right now.
00:22:54 Melissa Francis
I I read, I think it was in your Blogger.
00:22:56 Melissa Francis
I heard you do an interview.
00:22:56 Melissa Francis
You talked a lot about the possibility of deflation.
00:22:59 Melissa Francis
A year from now.
00:23:00 Melissa Francis
Walk me through that.
00:23:02 Cathie Wood
Sure, and before I do that, Melissa, I do you hit on something that I think is critically important?
00:23:08 Cathie Wood
This the the analyst team that we have focused on truly disruptive innovation. Innovation is unmatched out there. I am sure of that because it is our sole focus. We have domain experts. We do not have MBA’s. It is much easier.
00:23:27 Cathie Wood
To treat, to teach a biochemical engineer or a rocket scientist how to read financial statements than it is to teach me.
00:23:38 Cathie Wood
Uh, biochemical engineering and rocket science.
00:23:43 Cathie Wood
This is an A throwback to the Bernstein days Sandy Bernstein set up his company with that in mind and I think it’s absolutely right when it comes to innovation.
00:23:54 Cathie Wood
So now I have to.
00:23:57 Cathie Wood
00:24:00 Cathie Wood
Disruptive innovation is inherently deflationary in two ways.
00:24:04 Cathie Wood
One good, one bad, the good way is just truly disruptive.
00:24:10 Cathie Wood
Innovation follows learning curves, which are expressed as cost declines over time, and as costs decline, demand increases.
00:24:21 Cathie Wood
For new technologies and and more people around the world have access to them.
00:24:27 Cathie Wood
So they can reach mass markets, and that’s what causes exponential growth.
00:24:33 Cathie Wood
The costs decline.
00:24:35 Cathie Wood
They open up.
00:24:35 Cathie Wood
A new market costs continue to climb.
00:24:37 Cathie Wood
Even so, we’re seeing we’re seeing massive opportunities from those five platforms.
00:24:44 Cathie Wood
The other side of disruptive innovation is creative.
00:24:47 Cathie Wood
Destruction, and this is a little bit back to what I said before, but a lot of companies in the broad based indices in particular are very short term oriented in in terms of wanting to cater to their shareholder base.
00:25:05 Cathie Wood
And so we have watched them for years, especially since the tech and telecom bust and the 0809 meltdown and the risk aversion that pushed everyone towards these benchmarks.
00:25:16 Cathie Wood
We’ve seen companies cater to that short term.
00:25:21 Cathie Wood
Shareholder, by manufacturing earnings buying back shares to increase earnings per share or paying dividends.
00:25:28 Cathie Wood
But they’ve leveraged up to do so, and they haven’t invested enough in innovation.
00:25:34 Cathie Wood
And so we believe that another source of deflation.
00:25:38 Cathie Wood
Secular deflation out.
00:25:39 Cathie Wood
There will be bad.
00:25:41 Cathie Wood
And that is these companies products going obsolete.
00:25:44 Cathie Wood
Wait, they need to service their debt and to do so, they’ll have to cut prices.
00:25:48 Cathie Wood
We think that’s going to happen to the auto market big time.
00:25:52 Cathie Wood
The gas powered side of the auto market.
00:25:55 Cathie Wood
The big disagreement today is cyclical inflation and we believe it is in the process of peaking.
00:26:04 Cathie Wood
And we also believe some of the early signs that we’re seeing, whether it’s mostly in inventory accumulation, especially in the retail world, excluding autos.
00:26:17 Cathie Wood
And then the inventories are piling up.
00:26:20 Cathie Wood
And because I think many retailers and maybe wholesalers double and triple ordered when they couldn’t get supplies because of supply chain issues that they are going to end up with so much inventory on their balance sheets that they’re going to have to cut prices.
00:26:37 Cathie Wood
Dramatically, now, of course we have oil prices as well.
00:26:42 Cathie Wood
As the outlier here, oil and food with the Russian invasion of of Ukraine, the bread basket of Europe and of course Russia being such a big factor in energy, we think that demand destruction is underway in the energy sector.
00:27:00 Cathie Wood
Seeing a lot of substitution.
00:27:01 Cathie Wood
I see a lot more bikes in Saint Pete and scooters, and you know.
00:27:06 Cathie Wood
And I see people deciding to make fewer trips to the grocery store each week and what have you?
00:27:10 Cathie Wood
So we’re seeing downright demand destruction and we’re seeing.
00:27:16 Cathie Wood
Russia hasn’t been turned off yet.
00:27:18 Cathie Wood
It still may be.
00:27:19 Cathie Wood
Europe may may stop, but we’re seeing that its oil imports are going.
00:27:24 Cathie Wood
Our exports are going elsewhere and we’ll have a reshuffling of of where the how the supplies get from one country to another.
00:27:32 Cathie Wood
So I actually think I was surprised to see in early March.
00:27:36 Cathie Wood
Oil prices peaked out in the one 30s and then they tried again and they peaked out in the one 15117 range.
00:27:43 Cathie Wood
So let’s see if that could be lower.
00:27:46 Cathie Wood
Highs are often the first sign that demand destruction is beginning to have an impact as supplies are starting to.
00:27:54 Cathie Wood
Increase including production in the United States.
00:28:00 Melissa Francis
Yeah, we just talked to Mark Fisher a couple days ago.
00:28:01 Melissa Francis
Who courses master of that space and he said similar things and they actually if you listened to him.
00:28:06 Melissa Francis
He had said that Nat gas was going to explode and it had.
00:28:09 Melissa Francis
It had a definitely that was a prescient call at the time, so it’s interesting to hear you talk.
00:28:14 Melissa Francis
That way about energy and also about the supply chain.
00:28:17 Melissa Francis
That makes a lot of sense, because this idea that you can’t get what you.
00:28:20 Melissa Francis
One has been going on for a long time and I know that you also said you have a consumer that doesn’t feel particularly good about his or herself right now.
00:28:30 Melissa Francis
In addition to that, the fact that wages aren’t really keeping up with the prices that you’re seeing out there is another reason why we could see these supplies stack up.
00:28:38 Melissa Francis
A final word to you on that.
00:28:40 Cathie Wood
So I’m asking.
00:28:40 Melissa Francis
And and maybe I don’t want to forget.
00:28:41 Melissa Francis
To ask you.
00:28:42 Melissa Francis
Where you see the 10 year bond trading a year from today so.
00:28:45 Melissa Francis
Those two things real quick if you don’t mind.
00:28:48 Cathie Wood
So the consumer sentiment, I don’t know why many people or many economists.
00:28:53 Cathie Wood
Strategists are not focusing on.
00:28:55 Cathie Wood
This consumer University of Michigan Consumer Sentiment survey, which I’ve watched it for 45 years, is the best out there at measuring consumer sentiment is down to levels that we have not seen since 0809. In 0809, people were losing their homes, losing their jobs, losing their cars.
00:29:15 Cathie Wood
And and oil prices were at $147. And and here we are there feeling that badly that tells me this idea of velocity, the velocity of money.
00:29:27 Cathie Wood
Consumers not going to be racing out to buy because the consumers becoming risk averse.
00:29:33 Cathie Wood
That’s a recipe for a continued decline in the velocity of money, which which diffuses the inflationary impact of the reserves out there.
00:29:42 Cathie Wood
So that’s the first thing I’ll say, and that and we I think we could.
00:29:47 Cathie Wood
End up in a global recession. I think that there’s such a fine line now. I think Europe’s in recession, China feels very recessionary to me, which means Asia is going to catch a cold. We’re seeing.
00:29:58 Cathie Wood
Thing and and these are Canaries in the coal mine. But tree Lanka, you know threatening to default. This is like the beginning of the Asian crisis in 1997 when the Thai baht devalued.
00:30:09 Cathie Wood
So you know, I think there are a lot of warning signs out there, and so is the US going to fall into a technical recession or not, I don’t know.
00:30:18 Cathie Wood
I don’t think it matters, I just think I just think there’s a lot of weakness out there and then finally on the bond yield.
00:30:25 Cathie Wood
I think it’s been really interesting as the Fed has been talking up interest rates.
00:30:31 Cathie Wood
That the the 10 year yield has has not been able to even crack 3%. So in the 2 1/2 to 3% this is the 10 year Treasury yield and I believe that inflation is going to start unwinding pretty rapidly now because if you look if if for no other reason.
00:30:51 Cathie Wood
Then the base effect last April, the CPI was up .9 and the PPI was up one or one point 1. Those are the comparisons.
00:31:00 Cathie Wood
Now if we come in below that for April, then both of those year over year comparisons will come down for the first time and I’m seeing a lot more economists saying that they think inflation has peaked and now the only question is how?
00:31:15 Cathie Wood
Low it will go.
00:31:17 Cathie Wood
And we think the surprise will be on the low side.
00:31:21 Cathie Wood
For cyclical reasons, inventories I just described, as well as secular reasons, disruptive innovation, and creative destruction.
00:31:30 Melissa Francis
Yeah, well, you know you never fail to disappoint.
00:31:33 Melissa Francis
We always go against what is out there and makes so much sense it is such a pleasure to talk to you.
00:31:39 Melissa Francis
Thank you so much for doing this today, I think.
00:31:42 Melissa Francis
Everybody out there really gained a lot from it. Thank you for joining us For more information on Art, Cathy Wood, or anything you’ve heard today, please go to magnify.com/media.
00:31:53 Melissa Francis
We’ll be right back.
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