We’re just kicking off the Crypto Bahamas event down in Nassau. The day started with a panel called Investing in Crypto: How Digital Assets Fit Into Modern Portfolios. I was fortunate to attend because I didn’t have to film during this hour.
It featured Mike Novogratz, founder, and CEO of Galaxy Digital. And also Cathie Wood, CIO and CEO of ARK Invest. As the event started, I turned to my right. Author Michael Lewis – famous for The Blind Side and The Big Short – was sitting two seats away from me. That’s when things got interesting.
Takeaways from the Panel
Wood and Novogratz argued that FAANG stocks were in trouble during the conversation. The ongoing decentralization of technology will hurt legacy players in their industries. Facebook, Netflix, Alphabet, Apple, and other major tech players today operate on “centralized” platforms that give them total control of data, information, and content.
It’s hard to argue against the fact that a decentralized ecosystem of finance, content, data sharing, and more would crush “old” business models. Innovation comes at a price. Wood did state that she anticipates a more deflationary world in the future. I think that’s half correct. Technology and decentralization will be deflationary in nature.
But so long as the Federal Reserve commands the “cost of capital” in the economy, inflation is the default mode. That is why there is such an incredible battle in the future of finance. Cryptocurrency and blockchain are decentralized, promote abundance (less for more), and drive down costs.
The Fed – by default – operates a system fueled by debt. As a result, more debt is required to pay off previous debt. That inflation is baked in because most Americans are afraid of lower nominal prices in wages and housing.
I am trying to wrap my head around how this world creates “wealth” in the traditional sense. Perhaps that will require a radical redefinition in which we enjoy higher living standards, more abundance, and less reliance on a centralized banking system.
Updating the Numbers
Cathie Wood’s talk was on my radar. I’ve talked about her buying strategy over the last year. Before I left for Nassau, I read an article in the Wall Street Journal that caught my surprise. It centered on the fact that investors kept flowing money into it even though the ARK Innovation ETF was off another 45% in 2022.
My simple question to the latter fact was… “Why?” Why is money pouring into this fund right now? The ARK Invest ETF has had a basic problem with its buying-the-dip strategy since last year. Corporate insiders are the most important market anomaly (Do Insiders Exploit Anomalies? Anginer, Hoberg, Seyhun, 2018). This is a subject of severe academic finance.
Corporate insiders exploit stock price value, and when these executives buy their stock with their own money, they do so because they believe the stock is mispriced and going higher.
Of the top 10 holdings in ARK Innovation ETF from April 20, 2021, to Apr. 22, 2022, there was $20.28 billion in insider selling (executives selling stocks in those companies), according to SEC Form 4 documents. There was just about $1.0 million spent on that entire list, and all of it came on a single Twilio purchase by board member and former GE CEO Jeffrey Immelt.
Yet Wood bought even more Roblox, Zoom Video, and Roku last week (despite no insider buying pattern). If ARK Innovation Fund’s picks are so innovative and shares are set to increase by hundreds of percent from here, why are corporate executives not buying shares as well?
Meeting Michael Lewis
During Wood’s talk, she said it’d been a “brutal year” for innovation stocks. No kidding. ARK Innovation Fund has fallen from more than $152 in February 2021 to roughly $50 this month. She remained defiant.
As the talk concluded, Michael Lewis headed out of the room. I approached him in the hallway. I shook his hand, introduced myself, and thanked him for his influence as a financial journalist and author. Then, I handed him my business card. On that card, I asked a question.
It’s a fair assumption that the CEO and board of directors know the company’s outlook, and the CFO knows the balance sheet better than anyone else. So, I wrote: “If CEOs and CFOs aren’t buying the stocks that are in ARK Innovation Fund, why is Cathie Wood doing it?”
He laughed, shook my hand, and said “That’s a great question.”
I said, “If you ever find out the answer to that question, please email me.”
“I will,” he said before taking off.
That is a simple question few have bothered to ask. I talk about this subject because it’s essential. The last thing I want is for an investor to pour money into an overhyped strategy that continues to bleed capital.