Elnora H. and William B. Quarton Professor of Business Administration and Economics, Coe College, Iowa
Cathie Wood and Nvidia, 5/29/2023
After Nvidia’s epic run last week, Cathie Wood was caught selling Nvidia at its lowest point last year and missed the big AI opportunity. She rationalized the miss by initially stating that Nvidia's cyclicality had worried her. She believed that overhyped demand would lead to an inventory buildup and eventually, Nvidia would suffer a downturn. Then she shifted her justification to the following nonsense:
“Since 2014, @ARKInvest has believed that Nvidia saw the AI future before most other chip companies, and now we believe it will continue to power the AI age. At 25X expected revenue for this year, however, $NVDA is priced ahead of the curve.”
Excuse me? Who was the biggest advocate for Tesla in 2020 when its expected revenue was many times more than 25X? She never declared that Tesla was priced ahead of the curve.
She would have garnered more respect had she simply acknowledged her oversight. But she couldn’t do that. There's a reason why Cathie Wood must navigate her way out of this situation. Here's why.
Ben Graham didn’t believe in the traditional risk and return trade-off. He wrote, “The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task.” In other words, if we aspire to earn more than the market return, we must exert more intelligent effort than the average investor who can merely buy an index fund.
Cathie Wood’s business model is interesting and innovative, but I always question why her investors don’t select the portfolio themselves, especially when her holdings are fairly transparent. For her to yield extraordinary returns (through fees), she needs to add value to her investors. Her forte is in presenting the technological impossibilities to her investors. She needs to boldly predict that Tesla will sell for $5,000 a share when it was trading at only a few hundred. She needs to incorporate many ambitious moonshot startups to justify her reputation. Consequently, it is pretty damning that she missed Nvidia, the AI bet of the decade, if not of the century. This calls into question her business model and stock-picking skill. Those who never saw her extraordinary ability already found her record to not justify her fees, but we don’t matter. We never invested in her funds. However, her misstep with Nvidia has caused her loyal investors to question the unquestionable. This is a critical moment for Ark Investments. We will see how it unfolds.
But what about the patient growth investors? We don’t trade stocks the way Cathie Wood buys and sells tech stocks. We trade infrequently. How do we gain extraordinary returns ? We don’t seem to exert any “intelligent effort” in buying stocks. I buy Tesla and Nvidia because they have tremendous growth opportunities. Many, many other investors do the same. They are so obvious. How do I distinguish myself to deserve a 10X return? Or more broadly, how do growth investors warrant a rate of return higher than the market average?
The ability to hold a position is
the intelligent effort that enables growth investors to earn extraordinary profits. It sounds simple, but is quite challenging in reality. Don’t believe it? Let’s see how long you can hold on to Nvidia's profits without being tempted to sell. Can you hold on when it hits $500 a share? How about $1,000 a share? Remember, a self-proclaimed growth investor like Cathie Wood sold Nvidia at $180.
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