They are going to start citing specific days that were negative soon! LOL. Let's all be honest. Over the past 5 years ARK has crushed it. They had a bad 3 months from mid-Feb to mid-May. That's the story. What will happen in the future? Nobody knows.
i question her valuation approach, but do so while acknowledging her multi-year performance has been remarkable. My comments are more directed to how her methodology may impact her future returns.
A lot is written in this thread comparing, or rotating, from growth to value. I’ve hinted at this in the past, but to make it more explicit, that’s a false choice. All intelligent investing involves receiving more in value than what you pay. To assess, you need to value the businesses in question. If the valuation you are paying is meaningfully less than the intrinsic value of the business, you should consider an investment. If not, you are leaving little or no margin for error. Growth is one comoonent of value. Often, growth adds value but just as often, it does not.
Think of value along three areas. First, what would it cost a new entrant to enter a market? How much would they have to spend to replicate the assets of incumbent firms? That includes obvious items like building, office space and workforce, but also customers and product portfolios along with staff. It’s the base form of value. It’s where you should start.
Second, what is the company worth at its current earnings level assuming it does not grow? That assumes the business spends nothing on growth initiatives, so you’d need to adjust for such expenditures. The vast majority of the time, this no growth earnings value will mirror the asset reproduction value. That’s because the vast majority of businesses earn a return on invested capital equal to their cost of capital. Yes, they can grow, but to finance that growth, they need to spend. If they earn a return on that spend equal to their cost of capital, growth adds no value, This is an absolutely critical point. Only when returns on incremental capital exceed a firms cost of capital does growth add value. And the only instance that happens is when a firm has a competitive advantage preventing competitors from entering their market. In Morningstar lingo, that’s called a moat.
It is true that more businesses today have moats than in the past, Google and Apple, for example. Many software businesses. And I’d argue that group excludes, for example, Tesla.
Tesla enjoys no barrier to entry. Zero. To say they do would be akin to saying they are single handedly changing a century of auto OEM. Yes, they have opportunities for other revenue streams outside of auto but those are all into equally competitive markets. They may have a lead in certain areas, but that lead is not synonymous with a barrier bestowing sustained reruns above cost of capital,
I don’t think CW considers the growth consideration as stated above at all, and that’s why I’d be skeptical of her prospects to earn 25% + going forward. And it’s a lot harder to compound at high rates when you have a large AUM.
But back to the original point, though. Nothing in the above methodology considers multiples, book value or other metrics typically quoted to classify stocks as potential value plays. Food for thought.
