3 reasons why Cathie Wood is a great stock picker but Warren Buffett is a better investor
Cathie Wood and Warren Buffett could be seen as two opposite poles of the investor spectrum. While Wood is known for specializing in hypergrowth stocks, Buffett has made a name for himself as a genius in value investing. With big differences in their respective goals, it shouldn’t come as much of a surprise that their companies’ performance can diverge significantly in conjunction with changes in the market as a whole.
Lately, Wood’s Ark Invest funds have been hammered as growth-oriented stocks have fallen out of favor with investors. Meanwhile, Buffett Berkshire Hathaway (BRK.A -0.40%)(BRK.B 0.06%) is back to crush the S&P500 index this year. A panel of Motley Fool contributors sat down to discuss some of the things the hypergrowth guru does — and why the Oracle of Omaha still has an edge.
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James Brumley: First off, kudos to Cathie Wood for focusing on big thematic trends and not just managing the same core funds that so many other managers offer.
ARK’s approach to stock picking comes at a price, however. It is the frequent rotation of their portfolios. Take the ARK Innovation ETF (ARKK -4.44%) for example. Its most recent prospectus says its annual turnover is in the range of 71%, which means that for every $100 of exchange-traded fund you own, $71 was not owned the previous year, or that $71 of this fund’s holdings will be replaced within a year.
There are two main consequences to this kind of willingness to be so active.
The first of these is taxation. Although Wood is tax-conscious and wisely willing to reap tax losses at the most logical time rather than at the end of a tax year, profits or losses on these transactions can still create surprisingly large taxable distributions. if ARK’s exchange-traded funds are held in a taxable account.
The other, more important, consequence of this high turnover is the risk of not being in a particular stock position when a rebound takes shape. For the same reason, it’s difficult for the average amateur investor to time trade entries and exits – the market never telegraphs its next short-term move – it’s also difficult for professionals. What makes the approach even more intriguing is the fact that this continuous exchange of stocks suggests that it is not fully committed to thematic trends, but rather seeks relatively overvalued and undervalued stocks in a particular sector.
Buffett and his cronies avoid these pitfalls altogether by sitting in positions for years at a time, ensuring they reap all the potential long-term gains a stock will yield.
Accept change at the right price
Daniel Foelber: Between 1965 and 2021, Berkshire Hathaway has produced a compound annual growth rate (CAGR) of 20.1% compared to the 10.5% CAGR of the S&P 500, which includes reinvested dividends. Buffett is arguably one of the greatest, if not the greatest, investor of all time. But Cathie Wood is arguably a better stock picker than Buffett.
Cathie Wood deserves a lot of credit for choosing You’re here (TSLA -0.87%) early and stick to it even when sentiment peaked around May 2019. Wood and his team’s research is impressive and takes a very long-term, multi-decade approach to investing – something we can all to learn.
However, Wood’s greatest weakness is getting caught up in what a company could grow to become and where it Actually it’s today. The result is an overpayment for companies that are years away from profitability and have yet to establish a definitive advantage over the competition.
Buffett, by comparison, is a value follower. Besides Apple, Berkshire’s top public equity holdings include some of the most stable, heavyweight and arguably least innovative companies in the market. Companies like Bank of America, Chevron, American Expressand Coca Cola. Not exactly paradigm-shifting growth opportunities. But these are the kinds of companies that have a proven track record of long-term growth.
So what does this mean for you and me? Well, I think we can all find common ground between Buffett and Wood. For example, Wood has ideas that are definitely worth pursuing, like the genomics revolution and fintech, to name a few. And while Buffett and Munger still don’t like Bitcoin and cryptocurrency, Wood and the Ark Invest team believe cryptocurrency is one of the biggest growth opportunities for the next few decades.
By combining the patience and discipline of Buffett with the creativity of Wood, an individual investor can unlock a good mix of upside potential and value.
Bull market genius is underrated, but consistency is key
Keith Noonan: The term “bull market genius” has a negative connotation. The implication is that it doesn’t take too much skill to pick stocks that perform well in favorable market conditions. There is certainly some truth in that.
It’s much easier to find winners when there are many winners, and a rising tide will actually lift many boats. On the other hand, how much you earn when things are going well matters a lot. There’s a big difference between beating the market and crushing it, and making explosive gains during strong bull runs can have a huge impact on your long-term returns, even if the bear ends up recouping much of those earnings.
In 2020, Cathie Wood and the Ark Invest team managed multiple funds that generated returns in excess of 100%. The constituents of his company’s funds were perfectly positioned for the conditions at the time, and the performance was undeniably impressive, although some of these victories can be attributed to “bull market genius”. Now that market sentiment has changed and growth stocks are out of fashion, it might seem easy to scoff at the hypergrowth approach.
Bull markets are much more common than bear markets. However, when times are tough, they can hit hard.
With the ups and downs in mind, Buffett has achieved incredibly consistent, market-beating success during his decades at the helm of Berkshire Hathaway, and it’s not hard to see why he’s considered by many the greatest investor in history. Of course, it’s also worth remembering that people have come out and will come out of the woodwork to say it got stranded when Berkshire underperformed the S&P 500.
People love a winner. To his credit, Buffett has done an immense job of staying personable.