Episode 85 - From The Ark To Tesla with Cathie Wood
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Cathie Wood is the founder and CIO/CEO of ARK Invest. She believes that ARK can identify large-scale investment opportunities in the public markets resulting from technological innovations centered around DNA sequencing, robotics, artificial intelligence, energy storage, and blockchain technology. Basically, she’s a rockstar and the queen of innovative investing. Today, she’s going to talk about how she developed ARK’s investment philosophy, what her role as Founder, CEO, and CIO entails today, and how her faith influences it all.
Episode Transcript
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Cathie Wood: Our job in terms of seeking the kingdom, I think, is in that 12 trillion because again, saving lives, making lives better, increasing incomes and really creating a virtuous cycle as opposed to and turning back the vicious cycle that we've seen. I'll say benchmark style investing caused some of that. You know, the myopia and the misallocation mask, the most massive misallocation of capital in history. This is allocating capital to its highest and best use, which will create miracles. That's bringing heaven to Earth.
Henry Kaestner: Cathy, thank you very much for joining us today.
Cathie Wood: Well, I'm happy to be here, Henry. Very happy to be here. Thank you for inviting me.
Henry Kaestner: Before we get into the investing side of your story, can you share how your faith has guided you throughout your life?
Cathie Wood: You know, I think I was born with the gift of faith, and I do understand what a gift that is. And as I was evolving my faith over the years, first the childlike faith, but then getting into career and so forth. I really began to understand more about the Holy Spirit and the guidance and counsel. And my father would say counselor of the night that the Holy Spirit is and will probably get into this later. But at one moment in my life, I got a big push from the Holy Spirit to start arc. So really important to me
Henry Kaestner: today, you're known for innovative investing. Has it always been your reputation? And what were some of the early ideas you're picking up on that other people are mostly ignoring?
Cathie Wood: Yes, the focus on innovation really came from my startup Jennison Associates at Jennison. I was in economics, but I really wanted to get into equity research, and Segal is the chief investment officer there then and still now. So in the 80s and now, he said fine, but you're going to have to find your own universe because our analysts are lifers and they're probably not going to give you any of their stocks. And so it was serendipitous because at that time we had something called database publishing evolve, and the technology analyst didn't want it because it had publishing in the name and the publishing analyst didn't want it. So here I'm thinking Reuters and tolerate because it had technology in the name, and I said, I'll take it. I love this idea. And of course, that was the precursor to the internet. Same with wireless. No one wanted Vodafone. First of all, it was a foreign stock at the time. And you know, these big bricks, they were never going to amount to anything. And of course, we know what happened in the wireless industry. And so I used to say that I picked up on stocks that fell through the cracks. But what really this was the earliest manifestation of was the convergence between and among technologies, which is moving into overdrive right now and creating amazing investment opportunities.
Henry Kaestner: What did you learn in your professional life up until the point you founded Arc and realized that you need to go out on your own? And where did the name come from?
Cathie Wood: OK. Yes. I started in the business at Capital Group on the West Coast Capital Group had a 10 to 20 to 50 year time horizon, which I just loved. So in 1977, they were looking at Hong Kong, 1997 the changeover. And I was saying, this is the business I want to be in. And it was fantastic for the first 20 years, up until the tech and telecom bust and then the tech and telecom bust and 08 09 the meltdown, the calamity. What happened during that period was our business became very risk averse and quantitative moved in and began to worship at the altar called benchmarks. I would consider this benchmark to be an idol, which basically took over the industry. Well, what is a benchmark? It's backwards looking. The companies and stocks in benchmarks are there because of past success. And if we're moving into a world where five technologically enabled platforms are going to converge and transform the world entirely, that kind of investing is anathema to productive investing. And yet I couldn't get anyone really to embrace this idea in a big way and became more and more of an odd duck within my own firm to the point where they thought the strategy I managed was too volatile and they wanted to risk control it with benchmarks. So I knew the writing was on the wall that if I really wanted to do this, I had to go out and blazed the trail not only in investing but in research, changing research, transforming research so that analysts don't follow industries or sectors. They follow technologies. They are specialists in technologies and they are generalists when it comes to industries and we give away our research. Why? Because we want to engage with and become a part of the communities we're researching. So it was really a shaking up of our industry. You know, this idea of why don't you just transform your own industry with the technologies that have transformed other industries? And the name arc came from. Ark of the Covenant. I did a lot of soul searching, literally starting in 2006, probably 2000 for personal reasons, but for professional reasons in 2006. And part of the soul searching was just going to the Bible and saying, OK, God, tell me what you want me to do. And how many times did I open the Bible up to the Ark of the Covenant, which for as many times as I open to the page and it wasn't the same page each time. It's probably miraculous, and I said, I have to name my firm Ark for Ark of the Covenant and think about it, Ark of the Covenant. So the Israelites took the Ark into battle ahead of them. The presence of God was going to protect them during their battles, and that's what I was going to do a fully active, transparent equity ETF. When the ETF world, which was taking share from the mutual fund world, was all passive, and so shaking things up a little bit in that realm as well to the point where most people thought it would not work. You know, I thought I didn't know what I was doing. And even those and Eric Bell, Tunis basically said as much. But in seeing our success, he had to do a double take and has been very fair in terms of our progression through the ETF world.
Henry Kaestner: I may come back at the end and ask you a little bit more about the indexing and benchmarking you and I had talked about that maybe six months or 12 months ago, and I'm fascinated by that. I don't think that people understand how that needs to be redeemed and restored, and you have an angle on it. Maybe at the end we can come back in that chair for the first three years. You're funding out on your own. What did that season of life look like and how is your faith tested and what motivated you to keep going?
Cathie Wood: Well, it was really almost four years because I invested in ARK during my gardening leave as well. And I really thought if I built it, they would come because I had a very wide network, lots of clients. But what I didn't understand was that the ETF world and the traditional world that I had come from did not communicate, didn't understand one another. So I had fallen into the trap that many entrepreneurs fall into, not understanding the market completely. And so we sat for three years, so 2014 15 through the middle of 16 and really the end of 16, which is when we struck a distribution deal. But during those years, we were basically stuck at $40 million, 30, 40 million dollars and losing a lot of money. Now did I think we were going to fail? I never thought we were going to fail. I know many others did because our needle was not moving at all. And so there's something called the death watch for ETFs, and I think we were on that death watch list, but I never thought we were going to fail. I knew we needed a distribution partner, but I will tell you during many days when things weren't going so well, you know, when we thought there would be good news and it didn't come or we were rejected entirely, I would just go into the bathroom and just kneel down and pray and say, OK, not in my hands. You are in control. And I know we're going to make it. I know we're going to make it. And so my faith actually was strengthened during that time. And I'm so grateful for that period because of how much it did strengthened my faith.
Henry Kaestner: What was the investment philosophy you originally founded the company on and how does that play out today?
Cathie Wood: Yes. The original philosophy, which is still our today, was if you go back to the 80s and 90s, you will see a period where new technologies were surfacing. The seeds were being planted for what we are enjoying today. Now what happened in the interim is this fear of innovation became apparent during the tech and telecom bust, and there's still a fear of innovation. So much so that, as I mentioned before, many investors started to become very benchmark sensitive, even if they were so-called active investors. They started leaning close to their benchmarks. And, you know, when I say worshiping them and I do call it an idol, they would feel good or bad about themselves at the end of each day because of how their portfolios performed relative to the benchmark. And it became obsessive compulsive. And of course, if your style is benchmark sensitive, then by definition you are looking backwards. You're not looking at the new names that are evolving, the new companies that are evolving, the new creation that is evolving, and that's what we dedicated ourselves to doing. We are not looking at any benchmark. We are focused on the future, on the new creation on these five platforms involving 14 different technologies that are all growing exponentially. And in fact, they're all in what you would recognize as various places on SW curves and news as curves because of the convergence, as I mentioned earlier. They are intersecting, so one curve is feeding, another is feeding another. And I do not believe that most investors understand today how explosive the opportunities are going to be and how destructive they are going to be to the traditional world order or the benchmarks.
Henry Kaestner: OK, so, so many places to go there, but I stick to the script again. And you mentioned the five platform, so talk to us about the five platforms of innovation that you and your team have identified. What are they and why should Faith Driven Investor just pay attention to them?
Cathie Wood: Well, I'll start with the why faith based investors should pay attention to them. This is the new creation we have been put here on Earth to procreate and create right not to mimic what might have happened historically. In fact, to change, transform and make the world a better place, these five platforms are going to do that. DNA sequencing is going to transform health care, bringing science into decision making. For the first time, because now we can identify among the six billion letters in our genome. I call them pieces of code where there are mutations or programing errors. And for the first time, it was impossible before. And we're going to be carrying disease. We're already seeing that happen. And then robotics, many people worry about robots as taking away jobs. Yes, there will be displacement. The history of technology, however, is technology takes over the mundane tasks and adds to the productivity gains of countries around the world and therefore adds to wage gains because the jobs that are being created are much higher value add. So that's robotics, especially adaptive robotics, collaborative robotics, then energy storage. Here is where those who are really concerned about the environment are going to see some wonderful developments. We already are so electric vehicles, battery technology is ready. We're going to transform the world from the internal combustion engine to battery technology. And it's going to scale magnificently because of how quickly the costs are falling. And that's the key. With each of these platforms, costs are falling fast enough that we're beginning to see the uptake at an accelerated rate. Artificial intelligence, artificial intelligence. Again, it's like I described DNA sequencing. We are going to be able to get at information to make better decisions more quickly. Artificial intelligence training costs are dropping at a 68 percent rate per year. Think about that when the cost of something drops out rapidly, more and more researchers and businesspeople harness it to make their businesses better and their lives better, more productive. So AI is going to infiltrate every industry, every company, and we're in a bit of a land grab for the pole positions. And then finally, blockchain technology bitcoin represents the first global monetary system, a rules based monetary system that my mentor, Art Laffer, thinks is wonderful. He's been looking for this all his life as a necklace. And so that's part of it. Then there's DeFi, which is built on top of a Therian. DeFi decentralized finance is going to take away a lot of the middlemen roles in financial services and take away the friction, increasing yields, lowering lending rates. We're already seeing that. So those are the five and there are 14 different technologies involved in them. But I want to get back to this idea of convergence again. Three of the five major platforms are converging and creating autonomous taxi networks. So that would be robotics. Autonomous vehicles are robots, energy storage. They will be electric. It's going to be the much less expensive route to go and artificial intelligence. They're going to be powered by a AI and they're going to save lives there. Thirty five to forty thousand lives lost in automobile crashes every year in the United States. That is going to collapse. There are nearly one and a half million lives lost to fatalities in auto accidents globally. So again, changing the world, making it a better place.
Henry Kaestner: What are the areas where you'd like to see Faith Driven Investor get more involved? How would you like to see in the answer to that may very well be and being involved in what God is doing in redeeming restrain all things. How would you like to see our audience step up and use their influence for good?
Cathie Wood: Well, I think if they're in the financial world, perhaps leading the charge at their own companies into directing and allocating resources towards the new creation, again making the world a better place solve. Problems in aviation took off during the coronavirus crisis because innovation solves problems, in fact, we have an impact fund in Japan, hopefully coming to the US at some point, which it takes the 17 Sustainable Development Goals of the U.N.. They were developed around well about six years ago, and we've mapped our 14 technologies against those sustainable development goals. The first one is eliminating poverty just to give you a sense, and that matrix is beautiful and is filling in day by day with new technologies that are going to solve problems. The second way, I think, is to encourage education leaders to bring innovation into the classroom. I founded the Innovation Foundation. It's primarily for education right now. We just got our IRIS designation and we are developing a pre-K through 12 curriculum of education through the lens of innovation, starting with Montessori method in the early years. And just to give you an example of that battery technology and high school, the students will be learning about the chemistry of batteries, physics, the design, the applications and so forth. And how are we going to start this knowledge base in those kindergartners? What are we going to talk about? How could we get them to understand this concept of energy storage? Well, what do they understand? They understand sunshine. So in their earliest days, they're going to be learning indirectly about energy storage, but beautifully. And I do believe that educating individuals about innovation to inspire them is going to level the playing field and the opportunities we just did. Two pilots at Jericho Partnership in Danbury economically disadvantaged areas, one on drones for high school, one on 3D printing for fourth and fifth graders. And at the end of that six part seminar, we were able to say to each group, OK, now you know more about drones and 3D printing than 99 percent of the people in the United States. Does this inspire you? If so, follow our analysts on Twitter. Read everything you can about this. Educate yourself and you'll be far ahead of the game.
Henry Kaestner: OK, that is super cool. So I want to ask that one other question that unites all of our different interviews that we do, which is, is there something that you're hearing from Guy through his word right now? And maybe it's this morning. Maybe it's last week. Maybe it's over the course of last month or so where you just like he's he's speaking to me.
Cathie Wood: Well, I guess I can come at that from many directions because I feel, thank God that he is speaking to me all the time and that I must pick up on these cues and run with them. And I think a big one for me has been, you know, having gone through this journey for seven years. And then all of a sudden, the Bible, as I'm opening it, I'm seeing more about giving back, you know, sharing and evangelizing in some way. So I think that means two things to me. I've been criticized by many in the financial community for bringing my faith into this discussion. And yet I feel that's one of the things that God is asking me to do. And especially this idea of new creation. Now, do I at Ark Invest, you know, go in and talk in the way I'm speaking to you now? No, I am deeply involved in our research and investing, which is all about the new creation and others in the firm. They may have the same faith I do, or maybe not, but we know we're doing something meaningful together. We know it and it speaks for itself. And then the second is, OK, take that research and move it into our educational system. So that's what I'm doing.
Henry Kaestner: So tell me just a little bit. If you have time and Lisa can interrupt at any point. But I'm fascinated by this concept, of course, of the new creation and reading the books they're talking about. You know, as we pray God's kingdom come about on Earth as it is in heaven. And he writes, speaks about this. Spend a little bit more time talking about how you see that playing out on Earth as it is in heaven and what are the things that Christ's followers really need to be paying attention to? I suppose that a lot of that are the five platforms, but it's maybe speaking to the fact that this is how you see God at work and the sooner we tap into it, we'll be able to unleash that power.
Cathie Wood: Well, I think we're talking about miracles here now when we think about the power of God and causing miracles on Earth. I do believe we're going to be curing disease. We're going to be saving lives not just because of the genomic revolution, but because of autonomous taxi networks and autonomous technologies, generally drones, trucks, ships and so forth. And we will be increasing productivity so that by our calculations, because of this innovation explosion, GDP in the United States alone in 2035 will be 12 trillion dollars higher. So instead of 28 trillion, $4 trillion, our job in terms of seeking the kingdom, I think, is in that 12 trillion because again, saving lives, making lives better, increasing incomes and really creating a virtuous cycle as opposed to and turning back the vicious cycle that we've seen. I'll say benchmark style investing caused some of that. You know, the myopia and the misallocation mask the most massive in allocation of capital in history. This is allocating capital to its highest and best use, which will create miracles that's bringing heaven to Earth.