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Beating Cathie Wood at her own game.

First some background on why Cathie Wood has been so successful and why we can beat Cathie at her own game.

Back in 1934 when Benjamin Graham's and David Dodd's Security Analysis was first published stocks were considered speculation and Security Analysis depended heavily on the study of bonds which is a much simpler subject matter. Bonds have fewer imponderables than stocks, mostly the question if the firm is solid enough to pay the interest and return the capital as promised. If the answer is yes, then the investment can be calculated with paper and pencil, slide-rule, or calculator. Stocks are much more complicated. In time newer methods have evolved to calculate the value or, more accurately, to estimate the potential of stocks and Cathie Wood is probably at the apex of this development.

In going from bonds to stocks the quite simple calculation of "Yield to Maturity" was replaced by value investing which is an effort to determine the future by looking at the past as recorded in the company's financial statements. It worked well enough with traditional industry that developed at a more stately pace and more often than not was grounded in large capital investments. Progress rendered these methods obsolete. The greatest disruptor was Being Digital the title of a book by Nicholas Negroponte, founder of MIT's Media Lab. The digital disruption was centered in Silicon Valley and it should not come as a surprise that it was a Silicon Valley marketing guru who published one of the first books outlining a new way of determining the value of stocks. The Gorilla Game by Geoffrey Moore, copyright 1995, was based on his earlier marketing books like Crossing The Chasm. Just from the titles one can see the leap from "deep dives" into valuation calculations into the analysis of how complex systems work. The Gorilla Game was limited to a very small but highly influential market segment. One other very influential work was The Innovator's Dilemma by Clayton Christiansen that highlighted how old technologies get disrupted. This collection of ideas negated a long held conviction, that "Build a better mousetrap, and the world will beat a path to your door." This is true for commodities but not for high tech products and services that exhibit a very different dynamic. Complexity: The Emerging Science at the Edge of Order and Chaos by M. Mitchell Waldrop is a great primer for the layman.

What Cathie Wood has done is to use all these ideas to create a new way of valuing certain segments of the stock market and the results has been phenomenal. But Cathie Wood is up against an immutable law of nature that applies to complex systems from avalanches and earthquakes to the distribution of wealth, the power law distribution. According to Wikipedia examples can be found in:

Astronomy: https://en.wikipedia.org/wiki/Power_law#Astronomy
Criminology: https://en.wikipedia.org/wiki/Power_law#Criminology
Physics: https://en.wikipedia.org/wiki/Power_law#Physics
Biology: https://en.wikipedia.org/wiki/Power_law#Biology
Meteorology: https://en.wikipedia.org/wiki/Power_law#Meteorology
General science: https://en.wikipedia.org/wiki/Power_law#General_science
Mathematics: https://en.wikipedia.org/wiki/Power_law#Mathematics
Economics: https://en.wikipedia.org/wiki/Power_law#Economics
Finance: https://en.wikipedia.org/wiki/Power_law#Finance

There is nothing Cathie Wood can do about the power law distribution but Warren Buffett has given us a hint about how we can beat Cathie Wood at her own game.

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

https://sabercapitalmgt.com/how-buffett-made-50-per-year/


Beating Cathie Wood at her own game

Because Cathie Wood has so much money to manage, ARK Invest has billions under management, she has to distribute this capital over an increasing number of stocks. The power law distribution dictates that the returns of these various stocks will follow a power law distribution. Each of ARK's five thematic ETFs has between 30 and 55 positions. With the overlap, between them they might have 80 to 100 positions. But if you only have a million or ten to invest you can buy just six or twelve of Cathie's positions, those with the highest growth rates, instead of the long tail of under performers.

Instead of looking at the market every day, you could spend a week each quarter to realign your Cathie Wood portfolio. But what the heck are you going to do with so much free time in this age of stupid lockdowns? There is always a fly in the ointment.

Denny Schlesinger
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Very interesting read! Have you back tested your theory on Cathie Woods picks?

I started rotating the portfolio in December. Not enough data yet but YTD my portfolio is up 11.7% in just five trading days. Even removing TSLA it would be up over 6% in 5 days. I have no idea what the bust will look like when it comes but I have been beefing up my reserve cash funds just in case. If this run continues I'll add even more to the reserve.

One thing to remember is that each portfolio has to be tailored to fit the owner perfectly. My parents are long gone and I'm my sole responsibility. Your situation is very different. I can't and have no intention of telling people what to do. I can only paint a possible scenario which should not be construed as investing advice.

I remember very clearly the days and months leading up to my parent's departure. They were certainly difficult times. May you have the required fortitude!

Denny Schlesinger
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Denny

Thanks for the response. I don’t look at it as you telling me what to do because I really do assess the stocks myself. I hold some of the old favorites from here and Sauls but I stay away from stocks I don’t share the enthusiasm for such as NTNX, ZM, RDVT ...sometimes it lowers my returns but I need to understand AND agree with the thesis and opportunity. I’m looking to explore some other stocks because the valuations are getting a little rich on some of my holdings. I was the first one to bring SMAR to Sauls board. mad at my self because I paused to add ENPH when it was in the low 60’s, I thought it would drop a little more. Your theory aligns with “water your flowers and trim your weeds”. As a side note some of the stress from my Moms situation is behind me because I fixed up and sold her property (which was an hour away) and I setup and organized most of her needs here. Take care

Caps (Matt)
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Yes I agree Denny this is exactly aligned with what I’ve been thinking. The Ark funds have been getting so much new money its clear she is constantly needing to allocate new capital... Unfortunately or fortunately it also makes our stocks pricier as she is surfing on the same wave as us.

I think they also post their trades daily..would it be helpful to regularly post their new additions here for discussion? Seems like we don’t really have a lot of people here anymore but at least the politics are gone..
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ctneedham began a post on ARK strategies under Investing Strategies in the Premium Boards zone. That thread has 124 posts with some ideas on how to invest in ARK outside of the ETF's. ctneedham has regularly posted a spreadsheet that makes it fairly easy to see what ARK is buying and selling in all its portfolios. However, it seems like ARK interest is fading there.
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Very helpful thanks fivesolas!
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Good idea, but I have some friends buy and hold ARK ETFs, it seems ARK ETFs are actively trading stocks, not long term holding stocks, except few stocks like TESLA.
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YTD my portfolio is up 11.7% in just five trading days. Even removing TSLA it would be up over 6% in 5 days.

Hmm. Mine is up 18.7%. But that's mostly TSLA winnings, partly from 1/8/21 puts I sold. TSLA is up eleven trading days in a row now, a new record, from 640.34 to 880.02 (37.43%).

When TSLA sees a down day soon it will probably be a big one, as all the momentum traders will bail. Me, I've been in forever and my holdings are mostly stock now; I won't be selling.

I'm also 20+% in ARKK and ARKW. I like Cathie. And 20+% cash. Because I'm conservative. :)

As to beating Cathie, that's easy in hindsight. Like everything is. But it's going to be very interesting to see how ARK does in a bear market, which I'm sure we'll see one of these years.

-IGU-
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I have seen studies indicating that generally the market does about the same, no matter which party is in power. However, I heard or read Cathie recently saying innovation does not do well with increasing taxes and regulations. If so, then we may soon see a bear market, at least with ARK. For now the market, including innovation, does not seem concerned.
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Good idea, but I have some friends buy and hold ARK ETFs, it seems ARK ETFs are actively trading stocks, not long term holding stocks, except few stocks like TESLA.

I don't follow ARK in detail but I did hear them comment about their trading. They seem to combine a mix of holding and trading. The five theme ETFs are not like index following ETFs which do little trading. ARK has other funds beside the five theme ETFs. I don't think their trading activity matters much to the thesis of beating Cathie Wood at her own game.

Denny Schlesinger
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I think there has to be some trading because of fluctuations in the amount of capital they have to allocate... worth digging into how much turnover there is relative to other funds..
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So . . . copy what Cathy buys. . . but don't copy what Saul buys?

Throw away an extra 100% YTD profits?

🤔
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So . . . copy what Cathy buys. . . but don't copy what Saul buys?

Throw away an extra 100% YTD profits?


Saul doesn't like TSLA. Relies too much on growth of physical stuff, so inherently limited. Not to mention it being a megacap at this point. This past year though, if you just held TSLA you would have been up 743% and blown away the sorts of returns you see on Saul's board.

On the third hand though, Saul's returns seem to be repeatable year after year. The 2020 action in TSLA was after five years of fairly flat stock price while the company grew revenues at 50% per year. So even with another several years at 50% growth in Tesla revenues, I expect we won't see a 2020 type explosion in TSLA again. It will grow with revenues, so what I expect to see is 50% per year at a minimum.

And on the fourth hand, ARK funds hold lots of things beside TSLA, so singling out TSLA is just cherrypicking.

-IGU-
(much respect for those who can pick stocks)
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-IGU-
(much respect for those who can pick stocks)


Excellent point. Giving both sides.
I did add matching amounts of TSLA and ENPH and Saul hates both of them. TSLA because, like captaincc said, "soilent green is people!" No, wait, he said "the battery is the chasis". And I have always thought ENPH was a better mousetrap and it helped my gains for 2019.
But I too am like you. I really respect the real pickers.
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Don't copy what anybody buys. Get ideas from them, learn from them, that's what Saul says too. In addition to Tesla there are a lot of international stocks never discussed on the Saul board due to rules over there.. he has a great formula that works for him but there are a ton of great stocks that were missed or not discussed over there due to board rules. Very little discussion of biotech or medical devices for example, which is a segment that is booming right now. Which we could discuss here if people are interested.
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De acuerdo
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It really doesn't matter what Saul does not buy. Nor what he sells too soon. Even the best pickers miss a lot. What counts is the subsequent performance of what he does buy. And Saul has been a fantastic stock picker over the last few years.
Not to say he should just be copied (though so far that as worked out OK). Since Tesla was twice within hours or a day or two of not being able to meet it's employee paychecks over the last few years, almost by definition it was very risky.
As Taleb writes in Fooled by Randomness one should not always judge strategy exclusively by the outcome. Random unpredictable Luck often plays a part.

Cathy Wood is running into the rule of large numbers and will be had put to produce 2020 numbers in 2021. Even if her technique still works . Now that others have caught on to SaaS.
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So . . . copy what Cathy buys. . . but don't copy what Saul buys?

Throw away an extra 100% YTD profits?


A bit easier to know exactly what ARK is buying as the details are published each day. But Ark does a lot of trading around their positions so I am not sure if anybody would really want to follow what they are doing. Either use them for ideas on what to hold or buy the ETF.
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VitaminD,

Which we could discuss here if people are interested.

I, too, agree. For those of us who, or whatever reasons, do not want to just copy the Saul portfolios, this board could be reinvigorated. High growth stocks with lesser recurring revenue, SaaS stocks with high, but not hyper-, growth. Pot. Medical devices, biotech. I have to work on a couple of non-investing projects right now but later I will list stocks that I own that are not discussed over at Saul's.

KC
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Great! Thanks KC! I will work on writing up some ideas too. Maybe we can also petition the Fool to remove this from the "Best of" ban given that politics are no longer on the agenda here which I think would get us more visitors. thanks
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Interesting, Saul has medical background by profession, he likes to invest in Saas stocks only but not biotech, and his holding seems very concentrated on those Saas stocks, making me wondering If Saas stocks have lower Beta than others.. .
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Saul's concentration on SaaS stocks is relatively recent... as is the appearance of the whole category of SaaS. Why back in 2016-17 he even owned Amazon for several months.
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Interesting, Saul has medical background by profession, he likes to invest in Saas stocks only but not biotech, and his holding seems very concentrated on those Saas stocks, making me wondering If Saas stocks have lower Beta than others.. .

In market speak "SaaS stocks might have lower Beta than Biotech" but Beta is just a measure of volatility and therefore not very informative if you want to understand the business. With SaaS Saul does not look at Beta but at Revenue growth rates and Gross margins. Biotech has a totally different risk profile, more of a home run or strike out risk pattern. Nassim Nicholas Taleb called Biotech a "good black swan prone" industry.

Saul likes a concentrated portfolio while with Biotech you need diversity to catch those rare "good black swans." By contrast, ARK's Genomic Revolution ETF has between 30 and 50 positions, enough to catch a few of those good black swans.

Denny Schlesinger
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Thanks Denny, always learned a lot from your message, Well said about biotech as black swan prone industry, I plan to buy Arkg in market dip ahead.
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More grist for the "outdoing-Cathie Wood-game."

The Final Frontier comes to the ARK...

https://seekingalpha.com/article/4399074-be-buying-ark-space...

Cheers!
-s
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Oh, sorry, forgot...

Due out-->maybe later March....

-s
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More grist for the "outdoing-Cathie Wood-game."

The Final Frontier comes to the ARK...


I was reading about it this morning. Cathie is a great source of outstanding research who puts her money where her mouth is, a feature most "analysts" lack. The new ETF should fit in seamlessly with the Beating Cathie Wood strategy.

But it should be "The 'Next' Frontier comes to the ARK..." because Mars is just a stepping stone to the Stars! 😇

I was very impressed with Virgin Galactic's 747 mobile, reusable space launch. I discovered that the 747-f freighter is one of the largest capacity aircraft.

11 of the Largest Cargo Planes in the Sky

https://www.popularmechanics.com/flight/g2467/11-of-the-larg...

Denny Schlesinger
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First time I saw a Super Guppy was overhead on a takeoff from Lindbergh during basic training.
Somehow we all managed not to fall out of step or mess up the formation with our jaws dropping at the sight.

Probably was flying Titan or Atlas missiles from General Dynamics to wherever NASA or USAF needed them.
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"Saul's concentration on SaaS stocks is relatively recent... as is the appearance of the whole category of SaaS. Why back in 2016-17 he even owned Amazon for several months."

When I first started follow Saul's board, one of his favorite stocks was SKX. Times have certainly changed.
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as is the appearance of the whole category of SaaS.

Depends on what you mean "recent". Back in the mid 90s the DB vendor for which I was an ISV was helping a number of their ISVs convert to a SaaS model.
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