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Everyone has someone (or several someones) who they just do not like. Hearing their voice makes you grind your teeth. Every time they say anything, or do anything, you hate it and everything associated with it. Sometimes it starts to feel like part of your personality is just detesting that person and everything they stand for.

My Mom has that feeling for a particular famous person. Former Secretary of State, blonde hair, loves pants suits. You know who I'm talking about? That's right. Saturn-award winning actress Tea Leoni (who played the Secretary of State in the TV show Madam Secretary).

The kind of frustration that we feel with certain people is, I think, pretty natural. Sometimes it can be explained (like my Mom saying Tea Leoni is an unemotional chain smoker that doesn't move her eyebrows). Sometimes it’s just instinctual; we can't put our finger on why we're so filled with distaste.

In particular, for individuals who have built their persona in a marketing-rich way, people's reactions are often even more polarized. Think about politicians (who are basically just boomer marketers), or personalities like Jim Cramer, Tai Lopez, Joe Rogan. People either love them or hate them, there's very little in-between.

Cathie Wood is no different. As an investor, she's an incredibly polarizing figure. People are convinced she's either a misunderstood genius or the dumbest person to ever be allocating billions of dollars. One of the things most people struggle to do with polarizing characters is to separate some valuable takeaways or lessons from what they do, while still being able to acknowledge other aspects of what they do are ridiculous.

I'm not going to unpack the myriad of ways that what ARK Invest does is bonkers. There are much better analysts and shitposters who have done that (and I'll quote some of them). Instead, I just wanted to spend time reflecting on how something that sounds so interesting and compelling to me on paper can end up being so ridiculous in practice.

Because the concept of ARK Invest on paper really does sound so compelling to me: a research-driven long-term investor focused on transformational technology, that then democratizes access to that thesis through "innovation ETFs" and very public-facing research; open to criticism and learning. Where does it go wrong?

It feels like Cathie Wood came out of nowhere. Before 2020, I had never heard of her before. She was one of the few women running a hedge fund in the late 90's before going to AllianceBernstein, where she managed $5B.

Her current dramatic underperformance isn't the first time Cathie Wood's funds have raced the overall market to the bottom and gotten further than anyone else. In the 2008-2009 financial crisis, she managed to underperform the broader market that was already crashing down.

ARK got started in 2014, and one interesting observation to me is that ARK took about 3 years to really get going. They hovered around single-digits of returns on the ETF for years before finally getting going in 2017. But the real run-up for ARK was Covid. In March 2020, the ARKK Innovation ETF shot up from 133% to a peak of 628%. Why?

One huge driver of performance in ARK's fund was owning Tesla (led by another massively marketed personality with Elon Musk) and Zoom. That outsized performance in 2020 led many to consider Cathie Wood the best stock picker in 2020. Just as quickly as those gains shot up, they disappeared. If you had invested in the S&P 500 at the beginning of Covid, you would now be performing better than ARK's Innovation ETF.

I come back to this idea all the time that, on paper, how ARK is built is so compelling to me. In case you're not familiar with their full package, here's the highlights:

Cathie Wood is obsessed with the term "disruptive innovation." The word "disruption" is probably the one that the tech industry has robbed of all meaning more than any other word, other than maybe the word "partner." The original 1995 paper introducing the idea of "disruptive innovation" describes it as "innovation that creates a new market and value network or enters at the bottom of an existing market and eventually displaces established market-leading firms, products, and alliances."

In line with this idea of being marketing-centric, its certainly a good term. ARK's focuses extend to categories they consider to have the most significant potential for long-term disruption, things like robotics, AI, etc.

One of the most significant implications of that long-term potential is ARK's focus on underwriting their investments in particular stocks for the next 5 years.

In some ways, the idea of long-term focus is a return to a norm rather than a new kind of game. The average hold time for stocks has decreased to an average of 10 months, down from 5 years in the 1970s.

Since the earliest days, ARK has been publishing their research publicly. In 2017, for example, they co-wrote a white paper with Coinbase on crypto as a new asset class, and have been investors in Bitcoin ever since. They have analysts across all their coverage areas publishing research and many of their underlying models.

If you notice one thing about ARK, it's that they're very active on social media. Cathie Wood has 1.6M followers on Twitter. And pretty much everyone that works there has tens, if not hundreds of thousands of followers.

The firm has consistently emphasized the value of "thinking in public." They post widely and try to articulate every aspect of their models and thinking supposedly so that people engage with the ideas and push their thinking. I certainly appreciate that idea. There's a great quote from Adam Grant's book, "Think Again: The Power of Knowing What You Don't Know" about engaging with people that don't agree with you.

ARK Invest is not a traditional hedge fund. Hedge funds, like venture funds, typically raise money from accredited and institutional investors. Instead, ARK Invest operates as an Exchange Traded Fund (ETF). This isn't the same as an index strategy, that seeks to create representative exposure by creating a broadly diversified collection of assets. This is a concentrated portfolio, but one that gets its capital from individual contributors to the ETF rather than institutional investors.

A typical hedge fund (similar to other managed funds) makes money by charging a 2% management fee, and a 20% performance fee (aka 2 and 20) Most hedge funds have a return threshold before their performance fee kicks in, like 8%. If a hedge fund returns 15% then they get to keep 20% of the upside on the 7% after the 8% threshold.

ARK doesn't have a performance fee. They charge 0.75% of AUM as a fee to their investors (compared to other ETFs, like QQQ which charges 0.2%). Recently, ARK announced their introduction of a venture fund ETF to let investors get exposure to private companies. But even on that fund, they're not charging carried interest (like a normal fund would). Instead, they're charging a 4.22% management fee.

So what does all that mean? Across the $13.3B in ARK's ETFs, each year ARK generates ~$100M of "revenue" in fees. Regardless of performance. That's where ARK Invest really starts to cause problems for me.

I've written a fair bit about the business model of venture capital. Any industry that offers fees for just having capital will eventually encourage everyone to just amass as much capital as possible. And in some ways, that creates some perverse incentives.

But at the end of the day, institutional investors are professionals. If LPs want to pour money into funds that are managed not for long-term performance, but for short-term capital agglomeration, then that's their prerogative. They're professionals. And their careers and net worths will be rewarded or punished as a result.

But ARK Invest's "democratized" ETFs expose a very different level of risk to a very different kind of person. I was reminded of AOC being angry because WeWork's plummeting private valuation from $47B to $20B could leave mom and pop investors "fleeced." And a lot of folks laughed, because it wasn't individuals that got "fleeced." It was professional VCs, and asset managers, and Masa.

But when ARK's assets drop from $27B in early 2021 to $7B, a lot of that is the wealth of individual investors getting wiped out.

Granted, some of it is people pulling their money out of the ETF. There is this concept of net inflows or outflows that is critical to an ETF like ARK. In order to keep investing (and making money on fees), ARK needs to continue to attract people who want to invest in their ETFs.

At the beginning of 2020, ARK Invest only had ~$2B of AUM. Over the course of 2020, that shot up to $18B. Even as the fund performed terribly in 2022, declining 54.6%, ARK still managed to attract $1.78B of inflows. The highest inflow across 256 thematic ETFs. That means that of all the thematic funds folks could put their money in, they chose ARK more often than not. Why??

That's where we come full circle to the marketing-led persona of Cathie Wood. The entire business of driving ARK's revenue off of inflows to their ETFs brings us back to a Charlie Munger quote I've used a number of times:

If you go looking for Cathie Wood's predictions of the future on platforms like YouTube you'll find the most click-baity, FOMO-obsessed collection of attractions. It's important to note that none of these are from Cathie Wood or ARK Invest directly. But it's like she has become the patron saint of get-rich-quick investing.

Sometimes, professional investors lose sight of what an "average investor" looks like. One of the biggest dangers in modern marketing, generative AI, deep fakes, and algorithmic content engines is the impact that it has on the "average person" who believes the things they're served up by a system dripping with incentives. The same is true for the impact this information engine can have on investors, but they're pouring fuel on the fire by not just believing the things they see, but then pouring their money behind it.

And the counter-argument to ARK being incentivized by just being buzzy and driving net inflows is that in the long-run, if performance isn't good then inflows will eventually shut off. But theres no shortage of examples of what people will do for a $100M now, despite what could lead to $500M later. Short-term incentives are clear and shiny, long-term incentives are fuzzy and boring.

And here's the thing. If it felt like ARK was making calls like the rest of us that were based in reality, had a healthy dose of "dream the dream" and maybe a sweetener of "proprietary research" or "unique insight," and it still crashed? I might feel differently. But it feels like there is so much evidence that "dazzle" is a bigger function of their investments than diligence.

Like I said, there are much better analysts out there that have articulated the bonkers moves by ARK. So I'm not trying to reinvent the criticism, I'll just point to it. Chris Bloomstran has a great thread unpacking the implications of ARK's price target of $2K by 2027.

Right now, Tesla is at $193 after a high of $407 at the end of 2021. Chris makes the point that a $2K price target would mean Tesla is a $7 TRILLION company (about the size of Microsoft, Apple, Google, Amazon, and Meta combined as of today).

To get to that target, their model requires you believe that Tesla is producing 20% of all cars purchased in the world. You have to believe in $1 trillion of revenue by that point! You have to believe Tesla becomes one of the largest insurance companies in the world as well. And they have to do all of it in the next *checks watch* 4 years!

As part of my Cathie Wood YouTube rabbit hole, you manage to find about as many Cathie hit pieces as you do disciple videos to her prophecies. And they're all about as click-baity as the rest (is it... YouTube that is the problem? 🙃)

But this one video I found was a pretty good unpacking of ARK Invest's expectations for Zoom going forward. ARK Invest's prediction for Zoom is to hit a $1.5K price target in 2026. Today, Zoom is at $66, down from a high of $559 at its peak (when it was a $160B company!)

ARK's bear and bull case have Zoom becoming a ~$240-680 BILLION company by 2026, up from $19B today. Plenty of time just *checks watch* three years away...

Their bear case. Their downside case. Their worst case scenario? Puts Zoom becoming a $240B company. In order to do that, Zoom would have to compound their growth rate at 63% per year. Their bull case requires 97%!

Zoom is the quintessential Covid darling given they literally became the metaverse upon which we all lived and relied on for 2 years. But even before Covid, the company was trending towards ~80% revenue growth. After skyrocketing to 300% growth during the pandemic, they've now come down to ~5-10% growth.

Zoom's revenue growth is a perfect example of a pull forward, not a sustainable trend. Zoom's growth has dropped precipitously because Covid allowed them to get just about everywhere they would have gotten anyways over the course of a few years, they just did it more quickly. But that doesn't mean they can sustain the types of ~100% growth they saw during Covid!

Eventually, all these calls start to feel like the crazy person at the party where, not only has the music stopped, but the guests have gone home and this person is standing on the couch screaming Chainsmokers lyrics at the host as they're trying to clean up, just convinced the music hasn't stopped.

For hedge funds, you would take a lot of these calls as outlandish, and indications of being a bad investor. Cathie Wood defends these claims by saying that traditional wall street refuses to price in the exponential power that will come in the future from disruptive innovation. Maybe.

In a recent panel, Cathie Wood sat down with Alyson Shontell at Fortune, and Shontell asked this great question:

Cathie's response doubled down on the entire thesis we've been talking about. The first core idea in her response?

The idea that their long-term strategy can play out because of the declining cost of these technologies could unlock things you would never expect. Another idea that Wood reinforces in her response strikes of a tribalism that feels like a perfect part of the marketing machine:

If you really read the research, you’ll see the light. Maybe. Maybe I'll look back at this post using my Tesla brain glasses and be shocked to see that I scoffed at the company becoming a $7 trillion company as they rocket past that mark. But every aspect of their results strike of marketing, and excitement, not based in any model for rationality or even hyper-optimistic rationality.

Just this week we've got an example where there is clear cut results of innovation and ARK was just in the process of getting out, rather than doubling down. For months, people have looked for ways to ride the wave of AI, and Nvidia seems to have found that attention. In the last 10 years, the company has grown 100x to nearly $1 trillion in market cap.

Meanwhile, ARK had just recently managed to reduce almost its entire position in the company. The company that feels like its positioned to be the foundation for a lot of the required hardware in the AI revolution, and AI is one of their core pillars. But ARK is selling down.

I know Hunter, I'm starting to ramble. I'll end with this point that I bring up all the time. My biggest concern is with investors who have built their incentive engines around stories, regardless of fact vs. fiction. Chamath rode that same power of story to the moon on the back of a number of terrible SPACs in 2020.

Everyone has to do marketing. Everyone has to express their vibes to the universe. In an increasingly noisy world, its an expected form of engagement. But let your goal in your storytelling to build trust, not hype. The best articulation of that comes from a quote I reference all the time, even as recently as last week, where Morgan Housel explains the power of storytelling from folks like Warren Buffett:

Build trust. Not attention.