Submitted by QTR's Fringe Finance
If you read Cathie Wood’s letter on December 17, 2021 and were excited to invest because it suggested that Wood was assuring investors in her ARKK fund a 40% compounded annual return, you already need to realign your expectations.
Wood has updated her now infamous December 17, 2021 blog post/standup comedy skit in which she argued that “innovation stocks” were in “deep value territory” and in which she estimated specifically that their “flagship strategy” could deliver "a 40% compound annual rate of return during the next five years”.
If you invested in the hours after that letter, based on Wood’s statements, it would be a great time to revisit the letter as it stands today.
The same section of the letter now reads:
The change is explained in a footnote where Wood says it didn’t apply to “any particular product or fund”, despite the fact that she references their “flagship strategy” in the first example:
In addition, the newer version of the letter has realigned Wood’s expectations from “40%” to “30-40%” and has added a lot of qualifier language, not the least of which is directing the return expectation away from their “flagship strategy” and onto - well, some vague benchmark of ARK Invest, in general.
What could have possibly changed in your investment outlook in 48 hours that would result in such a massive 10% delta, compounded annually, that you had just days prior?
In other words, in 48 hours, Wood has gone from an expectation of 40% from her “flagship” fund to a 30-40% expectation of her “strategies broadly”.
Did something profound happen in markets? Or, are you just throwing shit to the wall and checking to see what sticks?
Surely these numbers aren’t coming out of thin air - right Cathie?
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I mean, there’s something to be said about active managers who admit they are underperforming instead of simply making excuses for their poor performance before doubling down.
The former is behavior that I see as congruent with a responsible capital manager. The latter is behavior I associate with the pissed off old men who used to spend their days at the Turf Club/Off Track Betting before coming into the Irish pub I used to work at to guzzle $1 mugs of Budweiser and prattle on about how they missed a $0.10 superfecta by one horse, and how they’re certain next Saturday they’ll have the winner.
In fact, I remember years ago, both David Einhorn and Bill Ackman penning hedge fund letters while they were underperforming. Both managers basically threw their hands in the air, apologizing profusely to their limited partners and attempting to humbly take responsibility for their less-than-stellar performance without hiding behind excuses.
“Over the past three years, our results have been far worse than we could have imagined, and it’s been a bull market to boot,” Einhorn wrote back in Q2 2018.
“Yes, we have made some obvious mistakes – the worst of which was not assessing that SunEdison was a fraud in 2015 – but there have been others,” his letter said.
“Right now the market is telling us we are wrong, wrong, wrong about nearly everything,” he wrote.
Ackman, after falling 6% on the year following two years of double digit losses, wrote in an investor letter around the same time in 2018: “It is much worse to generate losses for shareholders who are relying on our efforts for their needs. You can be assured that we are working very hard to deliver the results that you expect from us."
“While the overall record is satisfactory for early investors, it has been disappointing for PSH investors who invested in recent years,” Ackman acknowledged in 2018.
I remember reading these letters at the time and thinking to myself: what else is there left to say? At some point, when your fund is taking on water or your strategies aren’t working, you have to suck it up and serve up the cold hard truth. Once the damage has already been done, excuses - and as I’ll note today - rosy sounding promises for the future are meaningless. In fact, they can add insult to injury.
And let’s just get it out there: I have been a strident critic of Cathie Wood over the last few months, writing about her ARKK innovation fund numerous times.
It’s not because I wake up every day obsessing about ARKK, it’s because Wood keeps making headlines, and I find her and her ilk to be somewhat of a bizarre psychological symptom of what has gone terrible wrong with capital markets over the last decade.
It’s not like I just started being critical of Wood for no reason. I have been quietly confused and befuddled about stock selections she has made over the course of years. To me, it appears Wood wishes to have her hand in almost every bloated IPO (Robinhood, Coinbase), every trendy over-valued Covid play (Teledoc, Zoom) and even companies that have been accused of wrongdoing and don’t even have steady revenue streams yet (Workhorse).
She harps on the prowess of her analysts and her team’s ability to model out situations and scenarios, yet I can’t fathom her investment decisions reflecting any type of modeling, let alone simply cracking open a couple of Form 10-Ks and reading them. The “models” she has released publicly have drawn intense scrutiny.
But it has only been recently that I have started to write down my thoughts about why investors may want to exercise caution while investing with Wood. As of the morning of December 21, 2021, pre-market, ARKK is -23.9% for the year while the NASDAQ is up 16.2%.
Yet, instead of taking to media and humbly admitting that she has under performed, Wood seems hell-bent on “doubling down” on her strategies.
As a reminder, Wood’s double-speak and optimistic projects come during an environment where I believe tech stocks are set to crash heading into 2022.
You can read about that here: Why We Could Be Staring Down The Barrel of A Catastrophic NASDAQ Crash And Not Even Know It
I also believe the market in general is going to continue to be volatile heading through the Holidays, the New Year and into 2022: It's The Taper, Stupid!
If the luster wears out for ARKK names or we see a tech wreck, as I have predicted might happen, there’s no doubt that Wood’s “Innovation Fund” will wind up facing more volatility, possibly disproportionately. Investors should be aware of this before clinging to whatever promise Wood has edited her investor letter to contain this hour.
It’s not bothersome that Wood made her equity selection the way she did. After all, one way or another, they led to her “success”. Far be it for me to not give credit where it is due. But now, it appears she’s clinging to this strategy is a tapering environment instead of reassessing it. That, I believe, could be a mistake.
Even worse than the claims in her letter changing is the fact that she has made similar claims before and is rarely challenged by the financial media, who instead is content sniffing Wood’s throne.
Have things been “spectacular” for ARKK this year?
In fact, one could argue that a lot of Wood’s success (inflows) hasn’t just come from the everything bubble increasing in value, but also from endless appearances in media.
Let us just remember over the next couple of years, while supposedly entering into a period of Fed hawkishness, who has enabled Wood.
In other words, if Wood doesn’t perform up to the 30-40% compounded rate of return she has touted, not only should investors hold her feet to the fire, they should also blame those in the financial media that listened to Wood pontificate about why the world’s worst stocks were “deep value” with a straight face, and without losing their lunch on live TV.
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