Arthur Laffer seldom allowed undergraduates into his graduate-level economics classes at the University of Southern California in the early 1980s. Most of the time they weren’t ready for it. Laffer, whose work has influenced Republican presidents for decades, sensed he should make an exception for an ambitious undergrad named Cathie Wood.
“You don’t want an undergraduate to come in and get beaten up,” says Laffer, a renowned economist who also has been a professor at the University of Chicago. “And I was very certain with her that that would not happen, and it did not happen. She was able to take the pressure and the discipline of a graduate course while being an undergraduate, which is quite exceptional.”
While he couldn’t foresee that she would become a star stock picker whose every trade is dissected by commentators on CNBC, or that she would go on to start ARK Investment, a $50 billion asset management firm that’s disrupting the investing industry itself, Laffer had a feeling Wood would be one of the students who go on to do something really big.
“She was heavily driven, ambitious,” Laffer says in a phone interview. “The thing that’s amazing about Cathie…even back then, her horizon was forever. She wasn’t in it for next week or next month or next year. She was in it for the long haul.”
His recollections make her sound like a person who would ace the marshmallow test—the social science experiment that suggests children who can delay gratification will go on to greater success in life. Laffer says he introduced her to American Funds, where she was hired. She then rose through the industry ranks as equity analyst, portfolio manager, and hedge fund co-founder before starting ARK in 2014 in her late 50s. Laffer says each step was designed to further long-term ambitions, to make her a better economist and money manager. It’s an approach that sounds a lot like the ways she invests, which has made her a star stock picker. “She wasn’t after it for the highest pay this week or next week,” he says.
Wood has said that Laffer, best known for his views that cutting taxes can boost government revenue, was among her most important mentors. Some 40 years after she graduated summa cum laude from USC with a degree in economics and finance, the two are still in touch. Wood was one of the people Laffer invited to the Oval Office when US president Donald Trump awarded him the Medal of Freedom.
Fighting for scraps and ideas nobody wanted
One of Wood’s early jobs was at Jennison Associates, where she wanted to become an equity analyst. Spiros Segalas, one of the company’s founders and another person Wood cites as a mentor, was willing to give her a shot, but with a catch: He wouldn’t reassign stocks to her from the more established analysts. She would have to find her own companies to cover.
“I was like a little dog under the table looking around for scraps, and I really mean that,” she said in an interview with Goldman Sachs. “I was willing to buy into ideas nobody wanted. I think that’s a big part of success generally.”
Those scraps were companies like the news and financial data concern Reuters. Back in the 1980s, she says, analysts didn’t get it because it wasn’t a pure tech company, and it wasn’t a pure publisher. That left an opening for her to become an analyst, and shares in the company rose from $8.25 in 1984 to about $29 in 1991—a 250% return that edges out the S&P 500’s return of roughly 230%, including dividends, during that span.
Wood still analyzes stocks that way and says it’s one of the things that makes ARK different. Take Tesla, for example, one of the company’s biggest and most famous bets: “The analysts following this stock don’t know how to analyze it,” she said in April 2019 when she went head-to-head with the hosts on CNBC to defend her call that Tesla shares, changing hands at about $55 at the time, would rise to $4,000.
Like Reuters in the 1980s, she said Wall Street analysts didn’t quite know what to do with the electric car company, which Wood says is really a technology company, car maker, robotics firm (automated driving), energy storage company, artificial intelligence pioneer, and transportation-as-a-service enterprise. As Wood and her colleagues see it, Tesla is the automated taxi service of the future—a much more lucrative business than car manufacturing—and its data collected from 30 billion miles of real-world driving will make it the leader in self-driving vehicles.
“We have four analysts collaborating on this,” she said in 2019. “I don’t think research departments out there are set up to analyze this stock.”
ARK’s call on Tesla shares
Laffer says Wood’s approach gives her special insight to the role that a company will play in the economy years into the future. Again, electric cars provide some insight into the cost curves that Wood and her colleagues use to analyze markets. They say these technology trends can be steady and predictable. Moore’s Law, which posits that the number of transistors on a chip would double every two years, is among the best known. Wood and her analysts then try to gauge how much demand will increase as a technology’s cost goes down.
Based on ARK’s analysis, electric vehicles will be “sticker-price competitive” with gasoline-powered cars in about two years, says ARK research director Brett Winton. “We think the median car sold in the US, the Toyota Camry, is going to cost roughly the same as the 350-mile-range electric vehicle,” Winton told Quartz in February. “And two years later, the electric car is going to be much cheaper. So it would be a really tremendous surprise if people kept buying the old technology that costs them more money out of pocket and costs them more money over time.”
It remains to be seen whether Tesla can come good on such lofty hopes. In January, shares blew well past the $4,000 mark she called for earlier but have since retreated to around $3,000, after accounting for a five-to-one share split in August. In March, ARK became even more bullish—the firm’s analysts think its stock will more than quadruple in the next four years. It shows that if you want to invest with Wood you better buckle up.
An investor with high conviction
Laffer thinks one of the best things Wood did in her career was to reject his advice. When she started her investment management business, stock-picking portfolio managers, who hardly ever beat the indexes they are gauged against, were out of fashion, and billions of dollars of funds were flowing into passive investment strategies that robotically track those indexes.
Wood was shaking things up by creating the first actively managed ETF—an idea she had at AllianceBernstein that didn’t go anywhere. She told Forbes in 2014 that the experience inspired her to try to disrupt her own industry: “I have been watching disruptive innovation for my entire career—why don’t I help my own sector along?”
ETFs were seen as pretty similar to index funds that are linked to a benchmark, with the main the difference being that you can trade them during the day like a stock. (Some people use the SPDR S&P 500 ETF Trust to make rapid-fire bets on the movement of the entire US stock market, for example.) But there are some advantages to sticking an active fund in an ETF wrapper, such as lower tax expenses than a mutual fund.
The recent boom in commission-free retail trading has also been a tailwind for her funds, as it means armchair investors can easily and cheaply access her ETFs through their trading apps. Some people actively trade her active ETF, like active management squared. There’s a burgeoning options market linked to ARK’s ETF, giving traders yet another way to speculate on ARK’s bets.
But in the early days, starting ARK was a big, risky bet. There was no guarantee that the US Securities and Exchange Commission would allow Wood to start an actively traded ETF, and Wood burned through her own savings to pay her staff. Laffer’s advice was to be careful and not to risk blowing her nest egg. “I was very worried that she’d go under,” he says.
Laffer may have been worried, but he doesn’t think Wood, who declined to be interviewed for this article, was. “She rejected my advice quite well,” Laffer says. Partly, he thinks, it was a sign of Wood-esque conviction. It also showed she looks at things differently than other people. “She has an infinite horizon,” he says. “She doesn’t look at her life savings the way you and I do.”
Over time investors began to take note of ARK’s eye-popping returns—her flagship innovation fund has gained more than 400% since it was created in 2014. And as money pours in, ARK has gone from burning through Wood’s cash to generating lots of its own. The company’s portfolios have sucked in about $47 billion of assets as of March 10, according to FactSet data. ARK charges about 0.7% to manage that money, which suggests her firm could be making around $330 million or so in annual revenue.
Wood loves a good debate
Investment companies aren’t always the easiest places to work. SAC Capital founder Steve Cohen reportedly kept the trading floor at 69°F to make sure people stayed alert, and often yelled: “Do you even know how to do this fucking job?” Bill Gross, the former bond king, was said to be a control freak on the trading floor, requiring absolute silence and issuing “demerits” to traders who fell out of line.
By contrast, Laffer says Wood is remarkably normal, the kind of person you’d want to talk to at a cocktail party—and if you did, she’d be unlikely to talk about herself. He describes her as a devout Christian (ARK’s acronym stands for Active Research Knowledge, but is also a reference to the gold-covered chest containing the tablets inscribed with the 10 Commandments) whose faith infuses the way she treats people and does business. He says she relishes debate, especially when it comes to her investing ideas, but she doesn’t let those arguments become nasty, and doesn’t consider other people to be her enemies. She’s not above firing people, but she doesn’t bad-mouth them on their way out.
“She’s very capable of making very hard, tough decisions that are unpopular,” Laffer says. “She can do that and does it all the time. But she does it nicely.”
That zest for debate is evident just about everywhere. You could see it when she defended her views on Tesla on television, and it is baked into ARK’s methods. In the early days, the company’s weekly brainstorming sessions took place in a conference room with Wood on her feet in the middle and her analysts surrounding her, according to a Forbes article in 2014. Wood says social media is a way of crowdsourcing to further interrogate ARK’s ideas, and she has likened the process to open-source investing.
“People have no reluctance to criticize research when they don’t know the people,” she says. “We like that. We want to know when we are making a mistake.”
Wood’s iconoclastic style isn’t for everyone
Money managers live and die by their reputations. Wood has tied hers to risky bets like bitcoin, which has, so far, proven to be a speculative asset par excellence but has a long way to go before it establishes itself as digital gold or the internet’s native currency.
Then there is the piece of her reputation she has staked on Tesla, which is run by Elon Musk—who is, depending whom you ask, either a brilliant visionary or a self-destructive CEO, or perhaps both. Meanwhile, executives at powerful companies from Apple (reportedly) to German automakers like Volkswagen have set their sights on Musk’s market.
ARK made at least one bad bet even though warnings lights were clearly flashing. ARK’s ETF focused on fintech had a position in Wirecard, a German payment company that turned out to be a fraud. According to FactSet data, ARK increased its position in Wirecard even after the Financial Times began publishing articles about irregularities at the company, which soon collapsed.
Wood’s investing style isn’t for everyone. Her flagship ETF is down about 10% this year, showing the ARK rollercoaster doesn’t just go up. Some of her bets will take years to pay off, if they ever do. They may go out of fashion, for a while at least, if they miss their marks. Winton, ARK’s research director, has already forecast the company’s own backlash. “I think it’s likely that at some point, people will think that ARK was a scam, and that we don’t know our left from our right,” he told Bloomberg in February.
If Laffer’s impressions of her are any guide, Wood isn’t worried about the troughs that follow the peaks. Had ARK failed in its early days, he thinks she would have taken it in stride because the point was to use her time and money to chase a dream. Likewise, he says ARK is a vehicle for her do something she loves: “She likes risk in the sense of investing for big payouts over long periods of time,” Laffer says. “And she doesn’t take money off the table quickly.”