Gather ‘round, everybody! Two super investors are fighting!
While it may lack the melodrama of the Kim and Kanye split, the public spat between Michael Burry, the hedge fund manager who famously bet against the country’s housing market and won, and Cathie Wood, the celebrated head of ARK Invest, adds to an important discussion taking place in the investment space.
After a year in which retail investors flooded the market, chasing meme stocks and bidding up cryptocurrencies, which assets, and which sectors, are dangerously overvalued?
Burry, skeptical of its valuation, is currently shorting ARK Invest’s flagship technology exchange-traded fund, ARK Innovation ETF (ARKK).
Wood has countered by accusing Burry of not understanding growth in today’s environment. With ARKK having generated an average return of more than 40% by investing solely in innovation over the past five years, it can be argued that few know the space as well as she does.
Wood and Burry have repeatedly proven that they know what they’re talking about. But in this case, they can’t both be right.
Why Burry is shorting ARKK
Michael Burry’s introduction to most of America came in the form of the movie The Big Short, which detailed his uncovering of the fraud at the heart of America’s subprime mortgage madness (Burry was played by Christian Bale).
By shorting the US housing market, the collapse of which he felt was inevitable, Burry generated a reported $700 million for investors and pocketed about $100 million for himself.
So when the guy who saw the Great Financial Crisis coming before anyone else bets against a certain company or fund, investors might want to pay attention.
Burry’s issue with ARRK is the seemingly unsustainable growth expectations being priced into its valuation.
In a since-deleted tweet from February, Burry compared Wood and ARKK to investor Gary Pilgrim and his PBHG Growth Fund, which soared in the mid-1990s by backing innovative technologies, much like ARKK does.
While the market turned against growth stocks, something that appears to be happening today, the hype around PBHG Growth continued building — and the investors who continued pouring money into the fund after its 1996 peak wound up getting hammered. From 1996 to early 1999, the fund barely broke even. After the brief explosion in value tech stocks enjoyed later in 1999, PBHG Growth fell by 34% in 2001 and another 30% in 2002.
Could ARKK be following the same path? After increasing by an eye-popping 153% in 2020 on the back of investments in companies like Tesla, Zoom, and Shopify, ARKK has produced negative returns this year.
The fund is down 4% year to date; they’ve fallen almost 25% since peaking at $156.58 in February. And yet, the fund has drawn in another $6.5 billion in assets this year, according to ETF Stream.
“If you know your history, there is a pattern here that can help you,” Burry, who is also shorting Tesla stock, tweeted. “If you don’t, you’re doomed to repeat it.”
The case for ARKK
“To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market,” wrote Wood in an August 17 tweet. “I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.”
Wood went on to tout her belief that the technologies ARK believes and invests in “should transform the world” in the next decade.
“If we are correct, GDP and revenue growth will diminish until the opportunities in nascent technologies begin to move macro needles. In this environment, innovation based strategies should distinguish themselves.”
Technology has always been humanity’s way of solving problems, so there’s a good chance Wood will inevitably be proven right. But at their current levels, do the sectors and companies she and ARKK are backing have substantial room to run?
Shark Tank host and Dallas Mavericks owner Mark Cuban believes they do. After Burry’s short position in the ARKK fund was made public, Cuban came out in support of ARKK’s investment strategy, particularly its healthy exposure to the artificial intelligence space.
“There are 2 kinds of companies in the world: Those who originate their own AI successfully, and everyone else,” Cuban tweeted. “The top companies are AI dominate [sic] and running away from their Non-AI competitors. AI’s competitive advantage is exponential, but nowhere to be seen on a Balance Sheet.”
So, what have we learned?
While Cathie Wood and Michael Burry have different opinions on the future of the ARKK ETF, they both approach the question of the fund’s value the same way: through careful, exhaustive research.
Burry’s analysis might be more backward-looking and Wood’s more speculative, but they’re both weighing the available evidence and making informed decisions — exactly what successful investors would be expected to do.
Whether you’re investing for short-term growth or long-term stability, it’s important not to rush out and throw your money around until you’re sufficiently educated about the sectors you hope to round out your portfolio with.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
