What comes next for growth stocks and one of the world’s most famous investors?

The last couple of years have been wild for CEO Cathie Wood, her Ark Invest firm, and investors who put money in the company’s exchange-traded funds (ETFs).The company’s flagship Ark Innovation ETF ( ARKK -1.44%) posted gains of roughly 149% across 2020’s trading, but its performance has looked drastically different since the beginning of last year. Ark’s ETFs are heavy on the kinds of growth stocks that have gotten crushed amid bearish conditions shaping the broader market, and there’s plenty of uncertainty on the horizon. For better or worse, Wood’s funds could be at a tipping point. Read on to see what a panel of Motley Fool contributors thinks will happen next. Image source: Getty Images. Beware of recency bias

Daniel Foelber : On May 11, Cathie Wood’s flagship ETF, the Ark Innovation ETF, fell to a fresh 52-week low of $35.10 — a 78% drawdown from its all-time intraday high of $159.70 on Feb. 16, 2021. Even into the end of 2021, ARK Innovation was handily beating the Nasdaq-100 , but has since found itself underperforming the Nasdaq Composite and even the S&P 500 over the last three years with a negative overall return. Wood and her team put out impeccable content, both through their research reports and podcasts. Yet all investors have their weaknesses. And for Wood, I think it’s safe to say it was valuation.

Wood’s turbulent investment strategy highlights a major mistake that new investors miss, which is the difference between a great company and a great stock. There’s no denying that many companies Ark invests in are well run and lead their industries. And many that don’t lead their industries certainly have the potential to break paradigms. The issue is that Wood and her team were valuing many of these companies as if they had already done much of what they hoped to do, which discounts uncertainty and leads to poor risk management.

Price and valuations should always matter. But they matter even more during a recession. Companies that lack profits and positive free cash flow are heavily dependent on economic cycles, industry growth, and low interest rates. Take that fuel away, and you have a far dimmer fire.

I have a lot of respect for Wood and her team and find it unfortunate that they were, in many ways, the poster child of the growth stock boom from 2019 to the end of 2021 and have since become the poster child of the tech stock sell-off. For everyday investors, the turbulent ride of Wood’s funds shows just how quickly an investing strategy can go from in favor to out of favor. The reverse is true for Warren Buffett’s Berkshire Hathaway , which was underperforming the S&P 500 but is now all the rage as Buffett’s value investing bent becomes more attractive during times of economic uncertainty. The best thing an individual investor can do is recognize the power of recency bias — which is the tendency to overweight recent events over long-term trends. Recency bias can cloud your judgment by emphasizing whatever is working in the short term and making you lose sight of the big picture.

Zoom out, and all that matters is achieving your financial goals over a multidecade time horizon. There are many paths to get there, and it’s important to take the one that best suits your personal risk tolerance. Strategy shift ahead

James Brumley : When most people hear or say the words “tipping point” they’re usually talking about a change of fortune. In this case a change would be for the worse. Wood and Ark Invest were on top of the world for the better part of 2020 and 2021, when the planet’s most popular tech stocks were soaring. Now they’re untouchable, and Wood as well as most owners of Ark exchange-traded funds are paying an exaggerated price.

The thing is, I don’t think Ark’s (or Wood’s) future marketability is the tipping point to be talking about. I’ve got a feeling that the bigger change afoot is going to be how most of the Ark funds are managed.

I mentioned this a couple of weeks ago , but it bears repeating now: Ark’s managers are doing a whole lot of trading, with most of its funds looking more like actively managed instruments rather than passive ones. That strategy works when the bull market is a full-blown stampede; just throw money into the rising tide. The downside of this approach […]

source Are Cathie Wood’s ETFs at a Tipping Point?

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