Warren Buffett is an investing legend. The conglomerate that he has steered since 1965, Berkshire Hathaway, has outperformed the market by a breathtakingly wide margin over those years.
Data by YCharts.
Cathie Wood is newer to the investing scene, and many of the exchange-traded funds (ETF) she manages through her firm, Ark Invest, skyrocketed when the pandemic started. Her impressive results during the ensuing years attracted massive investor interest.
Data by YCharts.
Each of these famous investors takes a very different approach to investing in the stock market. Let's see how they compare.
The Buffett approach: Value investing
Buffett offers lots of investing tips in his annual letters to shareholders, as well as during interviews and conferences. He has a clear and simple strategy: Before he invests in what he views as a great company, he looks for several features. One is excellent management, and another is a long-term competitive advantage.
He has said that he is not a stock-picker but a business-picker. His approach focuses on finding undervalued companies -- those that are trading below the businesses' real value. If a business is great, the likelihood is that its stock price will eventually catch up. The opposite is also true -- an overvalued stock will eventually fall.
This is methodology underpinned by his well-known advice: "Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices."
The Cathie Wood approach: Growth investing
Wood's investing strategy is radically different from Buffett's. Ark Invest's philosophy is to seek out truly disruptive businesses that are leaders in their arenas "with low correlation to traditional investment strategies."
"We're all about finding the next big thing," she has said. I wouldn't call that strategy diametrically opposed to Buffett's, but it's a completely different approach. Ark Invest is hyper-focused on the disruption itself, meaning a company's potential, and not necessarily on its business or performance to date.
One of her top holdings is Roku, which isn't profitable and has been trading at expensive valuations. Her philosophy holds that Roku's business is so disruptive that it will be important for decades down the line, and the stock will prosper because of that.
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What they have in common
Ark Invest says it's investing in the extended opportunity of tech disruptors, which by default won't be fully realized for decades. So there is the long-term focus that the two approaches have in common.
While Buffett is often skeptical of high-growth tech disruptors, he might be interested in one if he determines that it has a clear-cut, long-term competitive advantage. One holding in the Berkshire Hathaway portfolio, Nu Holdings, is a high-growth tech stock that looks like it fits the bill.
Which one should you follow?
Different investing styles work for different kinds of individuals, just like each investor's portfolio should suit them individually based on their age, risk tolerance, and other factors. There are reasons to believe each one of these methods can be successful.
Over time, though, there's a clear winner here.
Ark's flagship Ark Innovation ETF has recorded a year-to-date gain more than double that of Berkshire Hathaway. But measured from the point that ETF was launched, the conglomerate's stock has outperformed.
Data by YCharts.
You can also see that Berkshire's rise was relatively slow and steady, while the Ark Innovation ETF's performance has been incredibly volatile.
Could Wood be right? Will her focus on disruptors eventually outperform the value approach? Only time will tell, but I wouldn't bet against Buffett's methods.
For investors who feel comfortable following in Wood's footsteps, it's still worth keeping some of Buffett's advice in mind and applying his clear framework for picking great companies to her disruptors. That might give you the best chance at growth investing success.
