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Cathie Wood vs. Rob Arnott: Are Stocks in a Bubble?

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What You Need to Know

  • Arnott expects a reversion to the mean; Wood sees a future of converging key technologies.
  • Arnott says disruptors get disrupted; Wood says disruptive technologies cut prices, increase demand.
  • Wood says the machines are teaching themselves using big data, supercomputing power and algorithms.

A faceoff between Cathie Wood, CEO and chief investment officer of Ark Investment Management, and value investor Rob Arnott, partner and chair of Research Affiliates, at the Morningstar annual conference pit the future against the past with no clear winner.

Wood, as usual, championed stocks that exemplify disruptive innovation, whose doubling of production will cut prices so much as to increase demand substantially. Sales of electric vehicles will increase 20-fold by 2025, she said, because they will be more affordable than gas-powered vehicles as the price of powering technologies like artificial intelligence decline.

By 2025, an electric Toyota Camry could cost 30% less than a gas-powered one, said Wood.  Electric vehicle manufacturer Tesla is the single largest stock holding of Ark’s ETFs.

Arnott said Tesla was in a bubble, which he defined as having a price that would be justified only by implausible assumptions, which are not impossible but unlikely. To justify Tesla’s current price of over $730 requires a 50-fold increase in growth over the next 10 years. “It’s not impossible but not plausible,” he said.

Also, said Arnott, “disruptors get disrupted.” Palm, the manufacturer of the first personal digital assistant (PDA), which was spun from 3Com initially at three times 3Com’s value, was disrupted by BlackBerry, which, in turn, was disrupted by Apple’s iPhone.

Cisco, the tech company with the largest market capitalization 21 years ago and with 2% annual earnings growth and 13% annual sales growth since, is trading at a share price lower than its 2000 peak.

“It was priced for stupendous growth, but it got [just] impressive growth,” Arnott said.

Arnott applied the same analysis to mutual funds and ETFs. Of 108 funds that doubled in one year, 70% lost value the following year and 80% fell an average 53% over three years. “Five of those 108 funds are Ark Invest’s own,” Arnott said.

Arnott believes in a reversion to the mean for investments, but what that implies for the price of Ark’s ETFs, of which the oldest is just seven years old, isn’t clear.

Looking Forward vs. Looking Backward

Wood shot back at Arnott that her firm was “looking forward, not backward and many of your questions are backward looking;” that Tesla is not an auto manufacturer but a robotics company, energy storage company and an artificial intelligence company; and that those three technologies plus genome sequencing and blockchain technology are converging and permeating every sector. AI is the “glue” in that convergence, according to Wood.

The market is missing that convergence because investors are fearful, remembering the 2000 tech bust and great financial crisis, the “muscle memory” of that global volatility, Wood said.

She explained her firm’s strategy is also based on using Wright’s Law, which posits that for every cumulative doubling of units produced, costs will fall by a constant percentage, and that cost decline will increase demand.

“This is no bubble,” said Wood. “We get more questions about the risks than we do about the opportunities … The market is beginning to understand how profound some of these platform opportunities are and how sustained and rapid their growth rates will be.”

In the meantime, said Wood, “The machines are teaching themselves using big data, supercomputing power and iterative algorithms to get to goals [set by humans] faster than any human programmer could have designed … it’s called ‘deep learning,’ which had a big breakthrough in 2012, and the rate of change is only accelerating.”

As for her own funds, Wood said she didn’t think the outperformance that propelled the flagship Ark Innovation ETF (ARKK) to gain more than 150% in 2020 would last. Year-to-date through Wednesday, the performance of Ark’s actively managed ETFs range from a decline of 13.3% for its Genomic Revolution ETF (ARKG) to a gain of 6% for its Autonomous Technology & Robotics ETF (ARKQ). During the same period, the S&P 500 has gained 17% and the Nasdaq almost 16%.

Pictured: Rob Arnott (Photographer: Tim Boyle/Bloomberg); Cathie Wood, courtesy of Ark Invest)