Cathie Wood and Warren Buffett could be considered two opposite poles of the investing spectrum. While Wood is known for specializing in hypergrowth stocks, Buffett made his name as a value investing genius. With big differences in their respective focuses, it shouldn't come as much of a surprise that the performance of their companies can diverge dramatically in conjunction with shifts in the market at large.
Lately, Wood's Ark Invest funds have been getting hammered as growth-oriented stocks have been losing favor with investors. Meanwhile, Buffett's Berkshire Hathaway (BRK.A 2.24%) (BRK.B 1.97%) is back to crushing the S&P 500 index this year. A panel of Motley Fool contributors convened to discuss some of the things the hypergrowth guru gets right -- and why the Oracle of Omaha still has an edge.
A whole lotta tradin' goin' on
James Brumley: First and foremost, kudos to Cathie Wood for focusing on bigger, theme-based trends and not merely managing the same basic funds that so many other managers offer.
ARK's approach to stock picking, though, comes at a price. That's the frequent turnover of their portfolios. Take the ARK Innovation ETF (ARKK 1.24%) as an example. Its most recent prospectus indicates its full-year turnover is on the order of 71%, meaning that for every $100 worth of the exchange-traded fund you're holding, $71 of it wasn't held a year earlier, or that $71 of that fund's holdings will be replaced within a year.
There are two key consequences of this sort of willingness to be so active.
The first of them is taxability. While Wood is tax-conscious and wisely willing to harvest tax losses when it makes the most sense rather than just at the end of a tax year, profits or losses on these trades can still create unexpectedly big taxable distributions if ARK's exchange-traded funds are held in a taxable account.
The other, bigger 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, timing trade entries and exits is difficult for the average amateur investor -- the market never telegraphs its next near-term move -- it's difficult for professionals as well. Making the approach even more curious is the fact that this ongoing swap-out of stocks suggests she's not entirely committed to theme-based trends but is instead just looking for relatively overvalued and undervalued stocks within a particular industry.
Buffett and his acolytes avoid these pitfalls altogether by sitting on positions years at a time, ensuring they reap all the prospective long-term gains a stock is going to dish out.
Embracing change for the right price
Daniel Foelber: Between 1965 and 2021, Berkshire Hathaway produced a compound annual growth rate (CAGR) of 20.1% compared to the S&P 500's 10.5% CAGR -- which includes dividends reinvested. Buffett is undoubtedly 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 picking Tesla (TSLA 3.11%) early and sticking with it even as sentiment reached peak bearishness right around May 2019. Wood and her team's research is impressive and takes an ultra-long-term multi-decade approach to investing -- which is something we can all learn from.
However, Wood's biggest weakness is getting caught up with what a company could grow to become and where it actually is today. The result is overpaying for companies that are years away from profitability and have yet to establish a definitive edge over the competition.
Buffett, by comparison, is a stickler for value. Aside from Apple, Berkshire's top public equity holdings include some of the most stable, stodgy, and arguably some of the least innovative companies out there. Companies like Bank of America, Chevron, American Express, and Coca-Cola. Not exactly paradigm-shifting growth opportunities. But they are the kind of companies with a track record for growth over the long term.
So, what does this mean for you and me? Well, I think we can all find a middle ground between Buffett and Wood. For example, Wood has ideas that are definitely worth following, such as the genomic revolution and fintech -- to name a few. And while Buffett and Munger still dislike Bitcoin and cryptocurrency, Wood and the Ark Invest team think that cryptocurrency is one of the greatest growth opportunities for the next few decades.
By combining Buffett's patience and discipline with Wood's creativity, an individual investor can unlock a nice blend 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 amid a backdrop of favorable market conditions. There's admittedly some truth to that.
It's much easier to find winners when winners are numerous, and a rising tide will, in fact, lift many boats. On the other hand, how much you're winning when times are good counts for a lot. There's a big difference between beating the market and crushing the market, and notching explosive gains during strong bull phases can have a huge impact on your long-term returns even if the bear winds up clawing a big portion of those gains back.
Across 2020, Cathie Wood and the Ark Invest team managed several funds that delivered returns greater than 100%. The components of her company's funds were perfectly positioned for the conditions at hand, and the performance was undeniably impressive, even if some of those wins can be attributed to "bull-market genius." Now that market sentiment has shifted, and growth stocks have fallen out of fashion, it may seem easy to scoff at the hypergrowth approach.
Bull markets are much more common than bear markets. However, when tough times hit, they can hit hard.
With the ups and downs in mind, Buffett has delivered incredibly consistent, market-beating success across his decades running Berkshire Hathaway, and it's not hard to see why he's considered by many to be the greatest investor in history. Of course, it's also worth remembering that people have, and will, come out of the woodwork to say he's washed up when Berkshire is underperforming the S&P 500.
People love a winner. To his credit, Buffett has done an immense job staying lovable.