Here’s How Cathie Wood Picks Her Winning Stocks
Cathie Wood has been called a “star stock-picker” by Forbes thanks to her flagship fund, ARK’s Innovation ETF (ARKK), which holds $22.28 billion in net assets and boasts a 46% return over the past five years. She founded her money management company, ARK Invest, in 2014 after working at two mutual fund firms, and is known for investing in innovative technologies like self-driving cars and genomics. As of October 2020, Wood was worth $250 million, making her one of the richest self-made women in America.
So, how did Wood get so rich? Here’s a look at Wood’s investment philosophy and how she picks her winning stocks.
Innovation Is at the Heart of Her Portfolio
ARK’s Innovation ETF holds shares of Tesla, Roku, Square, Shopify, Zoom and other companies that live on the cutting-edge. Wood specifically focuses on “disruptive innovation,” which ARK defines as “the introduction of a technologically enabled new product or service that potentially changes the way the world works.”
When Wood started her fund in 2014, investing in “disruptive innovation” was seen as a risk.
“We wanted to dedicate a portfolio to innovation that didn’t exist in the marketplace,” she told Benzinga. “Innovation was out of favor. It was too volatile. In fact, when we started the firm in 2014, it took a lot to get people’s attention, because they thought we were too risky, too crazy. And I see now it’s coming full circle, because I hear that again.”
She Looks for the Winners in Categories With High Growth Potential
Wood and her team use a bottom-up analysis to pick winning stocks. First, they identify the technology sectors that are true disruptors, like electric vehicles and digital wallets, Think Advisor reported.
“It all starts with sizing [up] these opportunities at the technology level,” Renato Leggi, client portfolio manager at ARK, told Think Advisor.
Then, the ARK team identifies the potential winning stocks in each of these technology segments using a scoring system with six metrics: 1) Company, people and culture; 2) execution of objectives; 3) moat or barriers to entry; 4) product and service leadership; 5) valuation: five-year return (requires a 15% compound annual return hurdle rate); and 6) thesis risk.
She Focuses on the (Long) Long Term
Wood and her team specifically look for stocks they believe will perform over the next five to 10 years, Think Advisor reported.
“If you talk to most analysts and managers, they’re really focused on the next year or 18 months in terms of guiding their buy-and-sell decisions,” Wood told Benzinga. “We are not. In fact, we want our companies to sacrifice short-term profits to be in the pole position to win [long term].”
She Seeks Out the Advice of Other Experts
Although Wood takes a very research-based approach to her stock picks, she also takes into consideration insights from experts across a number of fields before making her final decisions. The ARK team has a weekly brainstorming session during which invited guests, which can include academics, venture capitalists and entrepreneurs, are asked to share their thoughts and opinions on the stocks the team has selected.
“It is very helpful in the ideation process, and [guests] provide different vantage points [vs.] what we’re looking at from a research perspective,” Leggi told Think Advisor. “Those are valuable insights our analysts can [use].”
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Last updated: May 24, 2021