The Cathie Wood Effect

Warren Buffett, affectionately known as the “Oracle of Omaha”, is one of the most successful investors of all time. He has a few basic rules that have guided his investment decisions for decades. 

For example, Buffett recommends only buying businesses that the investor understands, and he is strongly focused on buying companies that are undervalued in the marketplace. It is worth noting that Buffett almost never invests in IPOs – he waits to see results before committing a dime. 

Over the years his investment philosophy evolved to buying great businesses at a fair price vs so-so businesses at bargain prices. And his lieutenants have scooped up shares of Snowflake (SNOW) pre-IPO in a rare purchase of a pre-public company. But some rare exceptions aside, his main investing tenets haven’t changed much in half a century.

The effectiveness of Buffett’s value-based investment strategy has made it possible for his holding company, Berkshire Hathaway, to generate average returns of 20 percent per year since he took charge in 1965.

That figure is even more impressive when compared to the S&P 500, which has returned an average of just 10.2 percent per year over the same period. 

Buffett has made it clear that he has no intention of leaving his role at Berkshire Hathaway any time soon, despite having celebrated his 90th birthday in 2020. In fact, he said that he plans to retire about five years after his death.

Nonetheless, he has a succession plan in place for his company – an individual who has similar philosophies – and time will tell whether Berkshire Hathaway’s next leader will deliver the same astonishing investment success. 

In the meantime, another type of investor is turning heads on Wall Street – one that is focused on what’s next – not what has already proven its value. Cathie Wood, through her firm ARK Invest, puts money into disruptive innovation – the technologies that will transform business in coming years. 

Is the “Cathie Wood Effect” as powerful as the “Buffett Effect”? Not yet. But can it get there? Some experts say yes. 

What Is The Buffett Effect? 

Warren Buffett’s reputation for investing genius means that every move he makes is carefully scrutinized.

Investors at every level of experience and expertise mirror his investments in hopes of matching his above-average returns. The impact of so many investors matching Buffett trade-for-trade moves markets. That phenomenon is referred to as The Buffett Effect. 

For example, in late August 2020, Berkshire Hathaway revealed a $6 billion stake in five Japanese trading companies: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Within two days, Berkshire Hathaway’s investment gained 9 percent – a total of $570 million – as adherents followed his lead. 

Do Cathie Wood’s decisions have the same impact? Is Cathie Wood the new Buffett? 

Is Cathie Wood The New Buffett?

Cathie Wood’s investment philosophy is unapologetically opposite of Warren Buffett’s.

She isn’t guided by most traditional investment theories – even those proven fruitful by Buffett himself. Instead, Wood is focused on disruptive innovation – the technologies of the future.

She and her firm identify companies that are most likely to produce tomorrow’s technologies or be affected by those technologies, and she places her bets on their long-term success. 

ARK Invest offers a family of funds that target the most exciting areas of opportunity for innovation: 

• 3D Printing
• Autonomous Tech & Robotics
• Cryptocurrency
• Fintech Innovation
• Genomic Revolution
• Mobility-as-a-Service
• Next Generation Internet
• Space Exploration

So far, her strategies have been spot-on. In 2020, five ARK ETFs made massive gains that put Cathie Wood directly in the spotlight. 

• ARK Genomic Revolution ETF (ARKG) — 208.4 percent gain in 2020
• ARK Innovation ETF (ARKK) — 169.9 percent gain in 2020
• ARK Next Generation Internet ETF (ARKW) — 156.9 percent gain in 2020
• ARK Autonomous Technology & Robotics ETF (ARKQ) — 119.4 percent gain in 2020
• ARK Fintech Innovation ETF (ARKF) — 102.9 percent gain in 2020 

That success has prompted what some are calling the “Cathie Wood Effect”.

The Cathie Wood Effect

Cathie Wood invests in disruptive innovation, but that isn’t her only strategy. She also chooses opportunities that others turn their noses up at – when share prices drop, she buys in.

Analysts have started to see a pattern reminiscent of the Buffett Effect. The very fact that Wood is willing to take a risk on questionable stocks prompts others to do the same – and that boosts share prices. 

For example, in late July, the online brokerage firm Robinhood (HOOD) held its IPO with shares prices set at $38. Almost immediately, the stock dropped 8 percent, and that’s when Cathie Wood took action.

She invested $45 million in Robinhood stock, which brought skepticism from market experts. However, within days prices hit a whopping $85. Was that due to Wood’s confidence in the company?

Perhaps not entirely, but Wood’s influence certainly prompted doubters to reconsider. 

Cathie Wood Stocks

There are plenty of other Cathie Wood stocks that have garnered public attention, whether because the investment decision went against traditional wisdom or because her case for the company was so persuasive.

Some Cathie Wood stocks that have gained media attention include: 

• DraftKings (DKNG) – Fantasy sports and sports betting are quintessential American pastimes. DraftKings has taken both activities digital, and Cathie Wood has taken notice. ARK Invest was already a fan of DraftKings. Now that share prices have dropped a bit, Wood added to her DraftKings holdings, fully expecting share prices to trend back up in short order.
• Etsy (ETSY) – Talented artists and crafters have always had one big challenge: to get their one-of-a-kind creations in front of interested buyers. Etsy transformed the process by creating an online marketplace dedicated exclusively to handmade items. Cathie Wood knows innovation when she sees it, and that’s why Etsy made it into ARK Invest’s portfolio.
• Twilio (TWLO) – Specializing in cloud communication, Twilio has a hand in the success of companies like Lyft, Stripe, and the American Red Cross. Twilio shares account for 3.66 percent of the ARK Innovation ETF’s value, which means it is in the top 10 of ARK Innovation ETF’s holdings. 
• Zillow Group (ZG) – The process of buying and selling real estate is changing. New kinds of lenders and digital real estate “agents” are replacing more traditional transactions. Zillow is on the cutting edge of real estate innovation, connecting buyers, sellers, agents, and lenders through one easy platform. Cathie Wood has faith that Zillow is ushering in a new era of homebuying, prompting the purchase of considerable Zillow stock. 

It’s true that the Cathie Wood Effect isn’t as powerful as the Buffett Effect, but no one can deny her influence. Wood’s ability to identify the companies most likely to lead innovation has made her one of the most closely watched investors of the decade. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.