ARK Invest’s Cathie Wood is Searching for the Next Big Thing

WOOD: We are probably going to focus on the convergence among the 14 technologies around which we have centered our investments. One of the most important convergences taking place in technology combines robotics, energy and artificial intelligence. That is going to create revenue opportunities that are going to scale so quickly that people won’t believe the numbers. Robo-taxis, we believe, will generate $8 trillion to $10 trillion in global annual revenue in 10 years. The biggest autonomous vehicle provider we believe in — and our conviction has only increased on this — is Tesla. I have two Teslas, a Model 3 and a Model Y. They are effectively robots collecting data for Tesla to help evolve their robo-taxi software. Tesla now has 5 million robots roaming around collecting proprietary data of real-world driving. 

We think Tesla is involved in the most important and biggest artificial intelligence project in the world. Another convergence we think is going to transform healthcare is the convergence of AI and genetics. It is unlocking the code to life, health, disease and death. Companies like CRISPR Therapeutics AG are combining AI with gene-editing and therapy tools to diagnose and treat disease in its very early stages, or even before something evolves into a disease. The United Kingdom has approved CRISPR Therapeutics’ gene-editing therapy for sickle cell disease. The Food and Drug Administration (FDA) is scheduled to decide on whether doctors in the U.S. can use it.

WOOD: We’re very focused on fintech. Which companies are going to be the winners in the digital wallet — which includes services that enable chat, sending money to one another, commerce, and crypto activity? We are looking for the winners in the developed world along the lines of WeChat in China. 

One of the most important fintech developments is the rise of digital assets, which many people call crypto. Bitcoin is a digital asset. Its volatility has obscured its long-term returns. Despite five drawdowns greater than 75% since its inception in 2009, bitcoin has delivered positive annualized returns over three-, four and five-year time horizons.

WOOD: We have a three-step process. We start with research to size the market. Then we do an analysis of each stock. The third step is to score each stock on six factors: the company’s people; its moat, or barriers to entry in its industry; market share; execution, which in our world is not whether managers meet quarterly profit numbers but whether they are spending enough on research and development and are spending on the right things; the stock’s valuation; and, finally, risks, such as the risk of increased regulation.

WOOD: We’re very focused on valuation, but not today’s — the valuation in five years. To put a stock in our portfolio, we need a minimum expectation of a 15% compound annual rate of return over the next five years. We look for stocks that will meet that target based on revenue growth and increases in profitability.

WOOD: This was a decision we had to make with Nvidia (NVDA) as it was moving into the $400-pershare range. As the projected five-year return dropped below 15%, we reduced our holdings. We saw so many other opportunities. AI is not just a hardware play, it’s also software, and we want to make sure that our portfolios are exposed to that. Companies that harness AI in thoughtful ways will increase their productivity dramatically. UiPath is a company whose software harnesses AI to help other companies increase the efficiency of their workflows. We added to our position in 2023; it’s now one of the top five stocks in our innovation fund.

WOOD: Our strength is to bring other sources of innovation into a portfolio at a very early stage. We’re not going to add much value if we invest in stocks people already know about. 

We have a small holding in Microsoft. It has a lot going for it, but everybody knows it and owns it already. Also, we have been reducing holdings in Alphabet, Google’s parent. We don’t think it is in a good place. Chatbots are going to eat into its advertising model. We have also sold some Amazon. Soon we’re going to be able to say to AI: Go around the world to any website and find me the cheapest whatever item.

WOOD: While interest rates were going up in 2021 and 2022, long-term-oriented investments of all kinds, including long-term bonds and our strategy, were clobbered. During that time, we concentrated our holdings in our highest-conviction names, based on our scoring system. Because the markets are beginning to believe that we’re near the top in long-term interest rates, our strategies have had a very good year. 

We think investors should ask themselves whether they have sufficiently incorporated disruptive innovation into their portfolio construction. We believe innovation should be considered as a strategic allocation with a five-year or longer time horizon. What I suggest to my family members is that they dollar-cost average. Invest $20 every two weeks or $50 a month into various strategies. Over time, that should be a winning proposition.