- Ark Invest’s Cathie Wood touted disruptive businesses and defended her valuation methods.
- Billionaire investors Dan Loeb and Cliff Asness ridiculed her comments on Twitter.
- Ark’s holdings have plunged as Inflation, interest-rate hikes, and recession fears spook markets.
Ark Invest’s Cathie Wood defended her aggressive approach to valuing disruptive businesses, and took aim at some more staid companies and their shareholders, in a commentary this month. Two billionaire investors, Dan Loeb and Cliff Asness, fired back via Twitter on Wednesday.
What did Wood say?
Wood’s flagship Ark Innovation (ARKK) fund more than quadrupled in value between March 2020 and February 2021. It has given up all of those gains since then, as investors continue to sour on growth stocks and lossmaking technology companies in the face of historic inflation, surging interest rates, and a looming recession.
The tech investor — whose top stock picks include Tesla, Zoom, and Block — brushed off doubts about her favorite companies in her commentary. They’re sacrificing short-term profits to capitalize on huge opportunities that will generate far bigger profits in the future, she said.
Wood explained that to properly value next-generation tech companies, she adjusts their profits to include deferred revenues and exclude research and development, stock-based compensation, and sales and marketing costs. Her goal is to evaluate companies’ potential growth, future cash flows, and “underlying profitability,” she added.
“Often, short-term oriented traders, analysts, and portfolio managers distinguish ‘good’ from ‘bad’ earnings based on headline GAAP-based EBITDA,” she said, referring to a standard measure of company profits.
Wood also took aim at some mature companies that take on debt to pay dividends, and buy back shares to boost their earnings. Their failure to invest in the future makes them vulnerable to disruption, she warned.
“Companies catering to short-term oriented investors and leveraging their balance sheets to pay dividends or manufacture earnings with share repurchases do not seem to us to be investing enough to catch these waves of innovation,” she said.
What was the backlash?
Loeb and Asness took issue with Wood’s implication that investors who prize headline profits are traders who are too focused on the short term.
“Anyone teaching a value investing class or one on investment psychology should use this memo as a treatise to study the mindset of ‘stonk hodlers,'” Loeb tweeted. He was referring to the pandemic boom in amateur investors piling into meme stocks and egging each other on via social media.
“Note the disparaging comments on luddites who look at archaic measures of value like cash flow as short term traders,” the Third Point boss added.
Asness, the founding principal of global investment fund AQR, echoed Loeb’s comments.
Sing it Dan,” he tweeted. “Value investors who have to ride out manias driven by people like her are the ‘short-term’ investors. So wrong.”
“But her forecasting a bazillion percent GDP growth and forecasted returns of a bazillion were a hint,” Asness continued.
He also called out Wood for exaggerating the magnitude of the Federal Reserve’s interest-rate hikes this year. The Ark chief has framed the rise in terms of a multiple, such as a “13.5x increase,” to make the case that Fed Chair Jerome Powell has acted more aggressively than his predecessor Paul Volcker did in the 1980s.