What Lessons Can Investors Learn From Cathie Wood's Ark Invest's Aggressive Investment Philosophy?

Cathie Wood has become best known for a relatively aggressive investment philosophy. She and her team at Ark Invest target companies promoting cutting-edge technologies, which bring with them high risks but the potential for considerable rewards.

This differs from investors like Warren Buffett, who focuses on premium stocks at fair prices, or Carl Icahn, who buys large stakes in companies to encourage changes in the business.

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Nonetheless, the investing world offers numerous paths to success. The question at hand is whether Wood's approach can work for investors, and that requires a closer look at her philosophy, along with the results delivered.

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The focus on innovation

Wood's approach stands out by focusing on companies leading the way in innovation and operating exchange-traded funds (ETFs) around that theme. Admittedly, this has been a wise philosophy, as companies like Amazon and Netflix made some small investors wealthy by pioneering new industries.

Wood and her team at Ark Invest focus specifically on five key areas of innovation:

• Blockchain technologies
• DNA sequencing
• Artificial intelligence (AI)
• Energy storage
• Robotics

Indeed, economic history bodes well for her approach. If one looks back 100 years, innovations such as the automobile, airplane, and telephone dramatically changed people's lives and made some investors wealthy. Today's technology could do the same.

Successes and failures

Wood and her team have benefited from notable successes. Seeing the potential for blockchain early, Ark Invest purchased Bitcoin in the $250 per coin range. Today, the market values each coin above $95,000.

The same goes for early picks like Tesla, which Wood first purchased in January 2015 at a split-adjusted price of around $13 per share. Wood was also an early bull on Nvidia and began buying in Q4 2016 at a split-adjusted price of around $2.10 per share.

Both have contributed to the advancement of artificial intelligence and robotics and, in Tesla's case, energy storage. Ark Invest's initial Tesla investment is up nearly 2,100%, while its first Nvidia shares climbed by approximately 5,200%.

However, other investments, particularly those geared toward AI, have not necessarily fared well. In 2022, Ark Invest speculated that Zoom Video Communications would reach $1,500 per share by 2026. Amid slow growth, Ark Invest later closed its Zoom position.

The company also owned more than 21 million shares of Teladoc Health. Now, with that stock down around 98% from its high, Ark Invest has since sold all its shares.

How Ark Invest's flagship fund fared

Ark Invest's holdings have also not fared well overall more recently, though this was not always the case. In early 2021, during the peak of the 2020-2021 bull market, total returns for the Ark Innovation ETF (NYSEMKT: ARKK) had climbed by around 1,000% over the last five years.

Unfortunately, the 2022 bear market appeared to catch the company off guard, and the ETF never recovered. Over the last five years, the Ark Innovation ETF's total return is down by nearly 6%, and that includes an 11% gain over the previous year.

Worse, the Ark Innovation ETF has an ETF expense ratio of 0.75%, well above the average estimated by Fidelity at 0.48%. Although investors might overlook that expense ratio with 1,000% gains, the Ark Innovation ETF is a hard sell when investors pay that fee to lose money.

Can investors win with Cathie Wood's philosophy?

Overall, the history of Ark Invest seems to bode poorly for trying to build an innovation-only portfolio.

Indeed, life-changing innovations bode well for investors and the public in general. Investors have become wealthy by buying into specific innovations and their corresponding companies.

Unfortunately, the hard part is picking the right companies. Wood and her team had great success with Bitcoin, Nvidia, and Tesla, and could see further success with other innovative stocks in the future.

However, the negative returns of the Ark Innovation ETF show that the search for innovation will often result in negative returns. Although investors should still consider buying stocks leading the way in innovation, going all-in on Cathie Wood's investing philosophy may not be the best choice.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Bitcoin, Netflix, Nvidia, Teladoc Health, Tesla, and Zoom Communications. The Motley Fool has a disclosure policy.