14 Billion Reasons To Avoid Fast Growth

It seems every generation needs to learn the same lesson the hard way. In 2000, when technology stocks were flying high but fundamentals failed to justify the valuations, the fear of missing out on big gains caused many to chase higher highs and regret it.

More recently, a similar type of investment, draped in narrative and shy on fundamentals, captured the attention of the investing public. It was none other than ARK Invest, run by Cathie Wood.

In a damning report, Morningstar researchers announced that Wood’s ARK Invest has been responsible for destroying $14 billion of wealth. Even during broad market upswings, Wood’s ETFs have failed to keep pace with the market.

So, what’s a better way to invest?

Key Points

• The track record of ARK Invest was stunning when the fund first launched but has since vastly underperformed the market.
• Berkshire Hathaway far underperformed the market during the initial starry days of ARK Invest but has since substantially outperformed.
• To spot great investments, start with fair value, an economic moat and persistent growth in all economic environments.

Why ARK Faltered

No doubt, Cathie Wood had her moment in the limelight, and it may well be her turn again but her track record over the past few years has been very disappointing to say the least.

In 2020-21 when narratives dominated around lockdowns, Wood was the poster investor for owning Zoom among other stocks that soared.

Around the same time, Buffett and Berkshire Hathaway was largely dismissed as a has-been, once again. Old Warren in Omaha didn’t know how these new fast-growth companies would revolutionize the world, or so the saying went.

At the time, the argument seemed to have merit. After all, Cathie Wood’s ARK Invest vastly outperformed Berkshire Hathaway. But as time went by, the fundamentals caught up to the narratives, and soon it was Berkshire Hathaway that started to gallop and ARK Invest slowed to a trot.

Fast forward to present day and the outperformance has been stunning. Berkshire Hathaway over the past few years is up by about as much as ARK Invest is down, just shy of 70%.

Looking back, what’s the better way to invest?

How To Invest Now

The simple fact is companies are valued over the long-term based on one key criterion: the present value of future cash flows. Short-term hype and narratives and sentiment can impact the share price but long-term the cash flows will dominate.

One of the best ways to spot those stocks that are going to do well is to peek inside the portfolios of billionaires who are value investors. We regularly feature such stocks here. But once you’ve got a handful of ideas, stick with the old Buffett suggestion to imagine you can buy just twenty stocks.

Of course, not even the Sage of Omaha sticks with his own rule, but it does create a forced constraint that demands higher screening than simply hearing about a stock cursorily and buying it.

Ask yourself whether the stock is trading below fair value, does it have an economic moat of some sort, and is it growing and generating profits year after year no matter what is happening in the world? Companies like Apple, Microsoft and Alphabet have earned the plaudits of top investors because of their robustness and ability to withstand a wide variety of economic conditions.

If you’re not sure where to begin, we’ll continue to share them here and do the heavy lifting for you. Stay tuned!