This Fund Manager Has Taken the World by Storm. Will You Invest With Her?

If you track global finance closely, you may not have missed Cathy Wood and her phenomenal achievement.

She has taken Wall Street by storm courtesy her unconventional style of stock picking.

Here's her modus operandi in one line: Zero in on hyper growth stocks with game-changing technology.

The approach has paid dividends for her investors and how.

Five out of her six funds posted more than 100% returns in last one year alone. Her funds have seen a massive inflow of US$ 20.6 bn. She is now the top manager over any period in the past five years.

However, despite all these accolades, I am not sure I would be willing to invest with her given a chance.

At least not just yet.

There are two big reasons for this. The first one has to do with the most powerful force in investing.

It is called 'Reversion to the mean.'

You see even the greatest investors with a fantastic long term track record, have their up and down years.

If they have outperformed for a few years, a few years of underperformance will inevitably follow.

In some cases it has to do with the hubris of fund managers. It forces them to take risks they shouldn't be taking.

In others, it is simply the ebb and flow of investment styles.

A fund manager with a value investing orientation will outperform when the broader market rewards value investing.

And he/she will underperform when it starts rewarding momentum investing.

Thus, all said and done, it's almost impossible to escape the curse of the reversion to the mean.

There's no doubt Cathie Wood has had a dream run. However, the principle of reversion to the mean would mean there's a strong chance she will have a few years of underperformance.

Thus investing with a star fund manager who's had a great few years, isn't the most sensible thing to do in my view.

Does this mean you should reject every fund manager who has outperformed in recent years and only invest with the ones that have underperformed?

Of course not.

You should certainly invest with a winning fund manager if you are willing to stick with him/her through thick and thin.

You should also be convinced they have a sound stock picking process.

Well, when I looked up Cathy Wood's investment style on the internet, I wasn't very impressed.

As per Quartz.com, her strategy often starts by figuring out the total addressable market of a technology, like battery storage, and then finding companies that can benefit from such a fast-growing area of opportunity.

She also seeks out what she calls technology platforms, from genome sequencing to blockchain, which can disrupt and transform the economy.

Well, so far so good. I don't see anything wrong here. If she understands futuristic technologies well and is willing to bet on them, more power to her.

But what concerned me are her stock picks for playing these themes, especially the valuations they trade at.

Cathie Wood's biggest holding is Tesla.

Apparently, she expect the stock to go up another 4x over the next four years and become the biggest company in the world.

For perspective, Tesla's market cap is already higher than 9 of the largest car makers combined.

Thus, to expect it go up another 4x is being irrationally exuberant in my view.

Then there are other big holdings like Roku, Square, and Shopify that are also trading at insane valuations.

Last heard, Roku was commanding a valuation of 27x sales, Square a PE of a massive 320x, and Shopify, available at a staggering 700x its earnings.

Unless the world of investing has been upended and valuations can grow to the sky, there's very little chance these companies can continue to go up in price at the same rate as before.

In fact, a movement in other direction and a pretty big one at that, is a much stronger possibility in my view.

It's often said that one should buy stocks as if one is buying groceries and not perfumes.

Cathy Wood seems to have bought the most expensive perfumes in the house.

They are certainly spreading their fragrance far and wide right now.

But I'm worried about the foul smell that is to follow. Especially when these stocks fail to meet the lofty growth expectations currently embedded in their valuations.

It's my experience that when stocks are bought at such steep valuations, they cease to be investments. They acquire speculative characteristics where the only way to make money is to offload it to a greater fool.

And this is not a smart way to make money.

After all, you could well be the greatest fool of them all with no one willing to buy it from you at a higher price.

It will be interesting to see if Ms. Wood is left holding these stocks at expensive valuations or is hailed as a true Rockstar fund manager.

My bet is on the former. What about you?

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter