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How The Holy Spirit Moved Cathie Wood To Become The Pied Piper Of Robinhood Traders

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by Tyler Durden
Tuesday, Aug 24, 2021 - 03:21 PM

After reading the latest profile of Ark Invest founder Cathie Wood (published this week by the New York Times) readers will likely be left with the following conclusion: Cathie Wood is a Walt Disney-level optimist.

Of course, Wood has already received the profile treatment by WSJ, Bloomberg and other members of the American financial press. But this week, a broader swath of Americans were introduced to the breakout portfolio manager of 2020. Whether this portends a turnaround for Ark Invest's funds remains to be seen.

But in the latest profile, entitled "God, Money, YOLO: How Cathie Wood Found Her Flock" the NYT focuses on how Wood's faith inspired her to launch Ark, with the Holy Spirit leading her to become a billionaire. Right at the start, the NYT notes the incongruity between Wood - a deeply religious, deeply conservative "creature of Wall Street and the Connecticut suburbs" - and her army of retail trading devotees.

Unsurprisingly, co-workers tell the NYT that Wood has been known for her "prodigious" work ethic since college, persistently ranking among the last to leave the office every day, while treating her 2-hour commutes into the city from the CT suburbs as "a cram session on rails".

But even more striking was Wood's preference for "high beta" strategies became apparent early on. After a few rough years at AllianceBernstein, Wood decided in 2012 that she would strike out on her own - putting her own fortune on the line - after being touched by "the Holy Spirit" (this according to an interview with Wood from a popular Christian podcast).

Another characteristic that helped Wood stand out, according to the NYT, was her "high conviction" calls. Several sources close to Wood (who refused to participate in the profile herself) told the paper that she helped sell her investment ideas by characterizing them as near certainties. "I've never met anybody with as much conviction," said Wood's former boss Sig Segalas, a co-founder of Jennison Associates, where Wood worked early in her career as an economist, an analyst and - eventually - as a portfolio manager.

In the hedge fund world, fund managers disclose their holdings once a quarter. But Wood's daily updates about her trades have attracted an immense following: many investors simply buy shares of whatever she is buying, rather than directly buying shares in her fund.

Of course, this dynamic still ultimately benefits Wood by creating a halo effect for her stock picks. As one source said, Wood "doesn't mind having an open kimono." Another source described the transparency commitment as "very punk rock."

But mostly, traders love Wood because she has the conviction to double down, even when trades are in the red.

"That’s very punk rock," said Maximillian Lawrence, who began buying the Ark Innovation fund early last year. A 46-year-old artist and teacher in Philadelphia, Mr. Lawrence respected Ms. Wood’s transparency, which fit well with the do-it-yourself ethos of the art and skateboarding communities he runs in.

"The difference between her and a lot of these other folks is she legitimately believes in these things, and she doubles down,” Mr. Lawrence said, injecting an expletive for emphasis. “You can see it in her trades."

Many of Wood's retail followers don't stop to research the companies they're buying - they simply take Wood's word for it.

And investors don’t have to hand Ms. Wood their money to invest with her. Many, like Mr. Flores would do on occasion, just pick up shares of whatever she’s buying.

Mr. Flores, who works in sales at a financial technology start-up, didn’t know anything about some of the companies he was buying when he started mirroring her trades last year. But that didn’t matter.

"They would go up 11 percent, sometimes like 17 percent the next day,” Mr. Flores said. “It was … wow."

The effect was magnified as more amateurs followed along. “It was just insane to see her buy list, and then every single thing on the buy list the next day would be up a ridiculous amount,” he said.

Most recently Wood has been credited with inspiring the stock surge in Robinhood in the days after its disappointing market debut.

When it comes to managing Ark, Wood's presence at the firm she created is so dominant, that some investors are already struggling with the "key man risk" that Wood represents. If Wood were to die suddenly, or become too ill to work, investors would likely yank money from her ETFs (with an aggregate $85 billion AUM) faster than many realize what is happening.

But ultimately, the NYT warns, the most likely fate to befall Wood will likely be the same thing that catches up with many investors as they transition to managing massive pools of capital: with $85 billion to invest, Wood's universe of potential growth plays is now extremely limited.

Another threat to Wood's approach: the institutional firms she managed to out-compete are rapidly copying her model. Last year, ETF powerhouse and world's largest investor BlackRock added three transparent funds (which disclose positions daily like the Ark funds) to its offerings. And just last month, Goldman's asset management business GSAM began selling its first transparent, actively managed ETF. JPMorgan Chase’s asset management group also announced plans this month to convert four of its mutual funds into “active transparent” ETFs similar to Ark's offerings.

With her flagship fund still in the red for the year, more big name investors are stepping up to take the other side of Wood's trades. Perhaps the most notable is Dr. Michael Burry, who rose to fame after his story was featured in the book "the Big Short" and its ensuing film. Dr. Burry recently revealed that his firm, Scion Asset Management, had purchased puts against Ark's flagship "Ark Innovation" ETF (ARKK), along with Tesla puts, (Wood is perhaps the market's best known long-term Tesla bull, indeed her stridently aggressive price targets on Tesla shares helped to establish her reputation early on).

Even with her flagship fund in the red for the year, Wood is still sitting on last year's rally of nearly 150%, handily beating the S&P 500's 16% gain. And her conviction remains undiminished.

She is asking her followers to keep the faith. Last year's performance has certainly bought her some time. But in a market where retail traders are constantly searching for the next trend, whether Ark can transition into an institution with a lasting footprint remains to be seen. Just ask SoftBank's Masayoshi Son how fixating on momentum stocks worked out for him.

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