With the stock market in the midst of a deep correction, one of the largest shareholders in U.S. cryptocurrency exchange Coinbase is in the spotlight. As the tech boom cools, interest rates look set to shift significantly and more speculative “growth” investments (mainly stocks of rapidly expanding or innovative companies) will experience tough times in the coming months. There is more interest in so-called “value” investments, such as equity investments in companies that are already generating profits.
This has caused huge losses and varying degrees of embarrassment for investors who have made highly forward-looking bets. The tech-dominated Nasdaq has been volatile and is now at the same level as it was in mid-January. Just a few months ago, Chamath Palihapitiya was a prominent advocate of a less-than-transparent kind of initial public offering. Today, he has taken a financial and reputational hit.
Much attention has focused on Ark Invest, which manages ETFs that invest in fintech, genomics and space exploration, among other areas. Ark Invest CEO Cathie Wood has become a popular investment star in recent years, thanks to the 45% annualized returns of Ark’s flagship Innovation Fund (ARKK), which has more than $50 billion in assets under management over the past five years.
But the fund has fallen nearly 30% since mid-February as its stocks in everything from gene editing to Tesla have crashed badly. ARKK is also one of the largest holders of Coinbase stock, which is also down 25% since its initial public offering on April 14.
Overall, this decline has been caused more by a shift in expectations for the future than by the current disappointing performance. Arguably, this is the defining risk for growth investments. Since the current price of growth investments is very dependent on expected returns over a long period of time in the future, small changes in the current performance of a company, whether positive or negative, can translate into a huge impact on the stock. The epidemic encapsulates this perfectly: the embargo has caused tech stocks to rise sharply, as the trend table hints at great future growth. However, the reopening has pulled those expectations back to reality, leading to massive losses for ARKK.
Perhaps more important than an improvement in the epidemic are rising U.S. Treasury yields and rising inflation, which could lead the Fed to raise interest rates more quickly. Bond yields and interest rates in particular pose an immediate threat to growth investments, as they can create more attractive returns in very low-risk investments. At the same time, rising interest rates make debt and other capital more costly for growth companies, which often don’t have the cash flow to fund their own growth.
There’s no real way to hedge these risks when you want to make money in the future. What matters is how growth investors react and, crucially, whether that reaction follows the same forward-looking logic as the original investment theory. Wood is now in the spotlight because of Ark Invest’s troubles, but her response has not changed. She has repeatedly and loudly proclaimed that a plunge in growth stocks is a buying opportunity and that falling prices will only magnify potential future returns.
Since Ark Invest has made their trades public, we know Wood isn’t just talking out of her ass: the Ark fund has been steadily buying assets like Square, Twilio and even Zoom as stocks have fallen. The fund has also been buying Coinbase stock in a big way, increasing its holdings to 624 million shares as of today, which represents 3% of ARKK’s holdings and, incredibly, more than 10% of Coinbase stock’s total float. This is particularly bold because Coinbase can be described as a growth investment squared, with its own growth deeply dependent on demand for assets that are themselves highly speculative.
I suspect Wood’s belief in her bet is sincere, but it’s only good for a growth fund. Stopping buying when Coinbase or other bets are down would imply an admission that buying at high prices before was a mistake. Buying an asset that is declining in the short term is a strong signal of long-term conviction.
Wood’s consistency, along with her track record, seems to be quite effective in helping investors maintain confidence in the face of short-term losses. Inevitably, some people will reflexively sell a stock whose price has fallen 30% in four months, but ARKK has seen only $1 billion in capital outflows in the past week, or about 2% of the fund’s total assets, according to Seeking Alpha.
That’s far from alarming, and at this rate, it could add up quickly. But it’s also far from a worst-case scenario. Selling future profits to a current buyer is more about a question of credibility as well as confidence.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/why-is-the-queen-of-investing-katherine-wood-still-betting-on-coinbase/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.