Legendary value Investor Warren Buffett (Trades, Portfolio) couldn’t be any more different than star growth stock picker Catherine Wood (Trades, Portfolio) in terms of their approaches to investing.
Buffett is a traditional value investor who likes to invest into “wonderful companies at fair prices” and then hold them for the super long term. Buffett dislikes investing into technology, as he stated it’s “out of his circle of competence,” and he even famously avoided the tech bubble of the late 90’s.
Wood, meanwhile, is a growth stock investor who believes innovation and technology are the key to great investing returns. Wood also invests for the long term, but her time scale is approximately five years as opposed to Buffett’s forever. Ark Invest also trades daily positions, which is assisted by a quantitative model, whereas Buffett famously only uses his computer to play bridge.
Who has a better track record?
From the data I have compiled together below, Wood's Ark Invest (ARKK, Financial) has outperformed Buffett's Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) on a percentage basis over the past five years with an annualized return of 39.7% vs. 12%.
This may shock many investors. However, there are a few major caveats to this. For one, Ark was sinking in 2021. If we include the data for 2021, we see Ark Invest’s flagship fund (ARKK, Financial) is down a massive -23% for 2021, while Berkshire's equity portfolio booked a 22% gain.
Was Ark Invest just lucky?
From the data above, Ark Invest has had good returns most years but tremendous returns in2020 (+152%). Thus, the question of whether luck could have played a part must be asked.
Ark Invest was founded in 2014, and their official website only shows data for the ARKK ETF from 2016. Thus, this is not a substantial time period to prove their disruptive growth stock investing strategy is effective in the long term, as luck can play a large factor in such small data sets.
The Tesla effect
The elephant in the room for many growth funds is Tesla (TSLA, Financial), the darling of the “roaring 20’s” bull market, and ARKK is no exclusion. Tesla was Wood's largest and highest-conviction position coming into 2020, making up 10% of Ark Invest's Innovation ETF.
Tesla's stock experienced astonishing returns and was up 700%+ in 2020 alone. This was a major driver behind Ark Invest's returns in 2020. Thus, the question is, can Wood consistently pick the “next Tesla?"
Buffett's long-term success
Buffett is considered to be the greatest value investor of all time for good reason. Berkshire Hathaway has achieved an average annual return for investors of20% since the beginning of 1965. This is over 56 years; after this long, things can no longer be attributed to just luck. The cumulative returns are a whopping 2,810,526% (keep in mind, this is over the course of more than half a century).
The problem that Berkshire has increasingly run into is that the larger a company is, the more difficult it is for them to grow (on a percentage basis) and also find big enough investment opportunities. For this reason, many investors have criticized Buffett for not being able to find big enough investment opportunities during 2020.
Ark Invest has $42 billion in assets under management as of 2021, whereas Berkshire Hathaway has a whopping $239 billion in assets. To put things into perspective, Berkshire Hathaway has $149 billion just in cash on hand; this is enough to buy the entire Ark Invest (and all ETF’s) three times over.
Takeaway
So when comparing Berkshire Hathaway to Ark Invest, it's not comparing apples to apples; it's more like comparing an apple to a watermelon. It is a much greater feat to continually achieve great compounded returns at such a large size than it is to make high cumulative gains over a short period.
Personally, I admire both Buffett and Wood. There are many different strategies to achieve success, as these two very different investors have shown. I think Wood is extremely smart, forward thinking and a great technology investor. Ark Invest’s strategy of disruptive growth stock investing has been negatively affected by macroeconomic issues such as high inflation and suspected interest rate hikes, as well as the creation and popping of stock bubbles. Thus, I do believe her strategy will recover if the macro situation improves in the future.
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