Summary: Hot Streaks and Headlines – Cathie Wood & Warren Buffett
In 2020/2021, Cathie Wood of ARK Investment Management had been on an impressive hot streak. ARK’s ETFs are distinctly innovation-based, with separate funds investing in the likes of genomics, fintech, and autonomous technology. Its largest fund, the ARK Innovation ETF, had posted annual returns of over 36% since its inception in 2014. Explosive returns of over 150% in 2020 led Bloomberg to select Cathie Wood as its stock picker of the year (more on this here).
Cathie Wood is the latest in a long list of investment managers to be put on a pedestal on the strength of recent performance or one fantastic call. Mike Burry has been granted a lifetime of credibility based on his massively successful bet on the collapse of the US housing market in 2008 and his subsequent star turn in The Big Short. I still often see clickbait articles with headlines like, “Why The Big Short’s Mike Burry is investing in water”. These are just two of the more recent examples, but the most frequent comparison is to the Oracle of Omaha, as any business periodical aimed at retail investors is always eager to crown the next Warren Buffett.
Both Wood and Burry have demonstrated brilliance, leading to massively rewarding outcomes and admiration from market enthusiasts. However, there is danger in exclusively adhering to their perspectives.
Here are a few of the issues associated with hero worship in investing:
1. You focus on outcome instead of process
If someone doubled their money by correctly calling a coin flip, I wouldn’t assume they have some expertise on the decision between heads and tails. Just like in all facets of life, the history of investing is written by the winners. Rather than making an effort to understand process, we focus on outcomes. Just like in poker, sometimes the strategically correct move may lead to an unfavourable outcome and vice versa. Before blindly following someone’s financial “expertise”, take the time to understand and verify the process that they follow. Luck is more important than skill in the short term; don’t allow the outcome of one great call to be your deciding factor.
2. You get caught up in what’s working right now
I find it hard to believe that the successful value investors of the 2000s have underperformed growth investors in recent years because they collectively lost their ability to discern what was going on in the market. Certain assets come in and out of fashion during market cycles, but it is often the effort to keep up with trends that leads to underperformance. Think of the speculators who piled into internet stocks with shady business models at the peak of the dot.com bubble in 2000 and subsequently saw their wealth erased as the NASDAQ dropped 78% from its peak.
Present-day gurus, like Cathie Wood and Warren Buffett, for example, are those individuals who have benefitted from a huge run-up in their target area of investment. In most cases, we adopt their strategies after the majority (or all) of the gains have already been made. This fear of missing out (FOMO) leads to a destructive feedback loop of chasing after past returns. Chasing gains is usually a path to losses. Work with your trusted advisor to determine an optimal asset mix and adhere to it.
3. You don’t view things through a critical lens
For a certain subset of the population, Elon Musk can do no wrong. His words on all matters are taken as gospel. Even when he wantonly contradicts himself (such as when he tweeted that Bitcoin is “almost as BS as fiat currency”, only to buy $1.5 billion worth less than two months later) his support base remains unwavering. His cult of personality and salesmanship singlehandedly dragged an unprofitable auto manufacturer to a market cap greater than the world’s nine largest car companies combined. His tweets of support or dissent can cause tectonic shifts within asset classes. Despite his demonstrable brilliance, adhering to Musk’s every whim is a mistake because being an expert on one thing doesn’t make someone an expert on everything. Even being one of the richest people in the world shouldn’t make you an authority on all things related to the financial markets.
This level of hero worship reminds me of an old Dave Chappelle joke when he discussed Ja Rule being brought onto CNN to weigh in on the 9/11 attacks. Chappelle wondered what it said about society when the expertise of Ja Rule was sought after such an event. Society has always turned to celebrities for thought leadership. We want athletes to tell us who to vote for; actors to instruct us on climate change; rappers to guide us through terrorist attacks. Don’t allow this mindset to infect your investment portfolio. Your hard-earned wealth deserves a critical eye. Cathie Wood & Warren Buffett would probably say the same.
If you would like to discuss this subject in greater detail, feel free to reach out to me directly. If you are interested in reading more on the pitfalls of “popular” investment strategies, click here.
Opinions are those of the author and may not reflect those of BMO Private Investment Counsel Inc., and are not intended to provide investment, tax, accounting or legal advice. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the author nor BMO Private Investment Counsel Inc. shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance. BMO Private Investment Counsel Inc. is a wholly-owned subsidiary of Bank of Montreal.
