On this season of The Switch, host Ren Leggi, Client Portfolio Manager for ARK, is joined by ETF Trends CEO Tom Lydon and CIO Dave Nadig, with plans to focus on four market inefficiencies found within the public equity markets for innovative stocks. Kicking things off, episode one is a discussion of the market’s short-term time horizon, which revolves around how investors need to take a longer-term look at where to put their money.
Lydon starts out with a clear aim, stating that: “When you think about the average investor out there and all the technology you have available, we just can’t help ourselves. But look at our portfolios every day – what is it about human nature that messes with our minds where we feel we have to be trading almost weekly to be productive in our portfolios when we know, long-term, if we just let the managers do their job, we’re going to be much better off?”
For ARK, there is always a focus on the long-term time horizon, looking at things from a minimum of five years out. With that in mind, it’s clear that many investors are missing or misunderstanding the exponential nature of technology specifically.
Does it come down to a disconnect between the way capital markets and investors invest in large cap companies? For Leggi, it’s more about how many investors have flooded into passive vehicles over the last decade. This has essentially taken away the incentive to consider what to do after a year. “They’re so homed in on earnings,” Leggi adds.
ARK’s strategy is about understanding where the firm is investing, and seeing if that is leading to strategic acquisitions, increasing capital expenditures, or putting the company into other various positions that will allow their investors to have an advantage. That’s why the long-term view is important. At the same time, it’s still perfectly acceptable to incorporate short-term information. After all, that’s the nature of the news cycle.
The Key Is Research
Turning the subject towards how ARK plans its investing strategies five years out on technologies that haven’t necessarily been adopted in the present, Leggi explains that it comes down to first-principles research.
It’s all about looking at the cost declines associated with technologies. What allows ARK to come up with these technological adoption curves is looking at the associated cost decline and identifying if it has hit a tipping point, then unleashing a tremendous amount of demand. From there, ARK can build these adoption curves and ultimately get at understanding the total addressable market for various forms of tech.
Leggi adds: “If that is substantially higher than what Wall Street is expecting, it’s likely that the stocks associated with EVs is likely undervalued. So, that’s where we’re looking to play and identify the leaders in each of these areas.”
When it comes to keeping to accuracy in the short- and long-terms, Leggi points to the analyst team. As news events from either the tech level or the individual stock level could have an impact, it’s important to have a schedule to keep track of the comings and goings and make adjustments as needed.
“One of the great of managing public equity portfolios, not being venture capitalist investor, is that we can sell out of a stock. If something changes, we can exit and do it very quickly,” Leggi adds. “When the world is changing, you want to have that ability to exit and find new opportunity.”
As far as how public ARK makes its high-conviction stock choices and taking on different opportunities, Leggi notes how the company is perfectly happy to be open about everything. It’s a valuable feedback loop as far as taking in the comments and thoughts, while ARK can rely on its high-quality research to inform market debates.
“There are many cases where taking inputs from both sides; we’d become more in agreement over time from learning from one another.”
For more episodes, check out The Switch Video Series playlist.