Thread by @ttp_cap

Thread: I just went back to @TheStalwart & @tracyalloway 's "Odd Lots" podcast w/ARK Head of Research Brett Winton from Feb. All of their pods are great, but this interview was especially interesting in light of the stir ARK caused w/their last $TSLA report/price target in March

2/During the course of the interview, they got into a discussion about how ARK hires new analysts and how they train them to make modeling assumptions. Winton's commentary here was particularly enlightening re: the heart of why ARK is often so controversial.

3/In particular, Winton talked about how ARK tends to not hire traditional Wall Street types, and he explained various reasons why. One of them stood out. I think the commentary speaks volumes, so I'll just post the most salient quotes here:

4/Read that quote. And then read it again. Then ask yourself some simple questions: do you understand what he means? Does the market? Do you agree with that set of statements? Why? Opinions on this will vary widely, since what Winton is saying there is purposefully controversial.

5/In the world of fundamental investing where gaining "edge" is increasingly hard, a simple/powerful technique is this: build a complete understanding of a company's strategy vs what the mkt perceives it to be, then form an educated opinion on why that strategy will/won't work.

6/ARK is not a business in the traditional sense obviously, but investing in their ETF products follows the same axiom. Do you really understand their strategy? Does the market get it? I don't think I fully understood this part of ARK until that Odd Lots podcast hammered it home.

7/Winton is telling you that ARK doesn't actually want to be accurate. They want to be "uniquely wrong." What if I substitute "wildly" for "uniquely?" Get the gist? If you're going to over-forecast something, don't do it by 10%...over-forecast by a country mile vs anyone else.

8/You have to analyze that particular statement in light of everything else to truly understand their strategy, but if u studied ARK intensely, other data points will pop up in relation to this one to help form a very clear picture, just like any other great fundamental thesis.

9/One such data point that helps explain this strategy was a conversation I instantly remembered from an interview that Cathie Wood gave on an "Invest Like the Best" podcast from 2018. Here's that particular dialogue:

10/How does that tie in? My own interpretation is this: Wood is telling you that when ARK publishes research, it's half baked ("evolving"). Now combine her statement w/what Winton said, apply the most recent ARK $TSLA report, and you get a clearer picture of their strategy...

11/It's just my opinion, but here's what I think their strategy is:
1. Find something you are conceptually bullish on
2. Construct what you know are overly aggressive, most likely wildly inaccurate assumptions about it
3. Publish said assumptions before refining them

12/ 4. Sit back and "watch the bulls and the bears insult one another" over what you know are most likely very inaccurate ("uniquely wrong") assumptions.
5. Rinse, and repeat

Some people might simply call this trolling. For ARK, this is a key part of their business strategy.

13/Let's say I'm right in my translation of this strategy. Now go back to the 5th post in this thread and ask a simple question: if this is my understanding of the strategy, is that aligned with how the market perceives their strategy as well?

14/In this instance, that answer is pretty simple: nfw. How do I know the market doesn't get it? Because social media just spent a solid couple weeks insulting each other..err..debating ARK's ridiculous $TSLA model assumptions!!!

15/If the entire mkt understood ARK's strategy as I've postulated it, they wldn't waste so much time ripping each other up over $TSLA. They wld recognize immediately that the assumptions were purposefully made to look wildly wrong, and were also very likely half-baked.

16/Bulls argued that ARK's analysis was genius. Bears argued that ARK's assumptions were insanely stupid. Much insulting ensued. Neither the bulls nor the bears, however, were correct. They were all just being successfully trolled...

17/Stay w/me on this line of thinking - if I'm right, why wld this be their strategy? I think that answer is pretty easy too:
1. It's great marketing/free PR
2. It normalizes what they know is a "uniquely wrong" bull case about the single largest position across all of their ETFs

18/Re: point #2 point above, I think this idea is crucial to understanding ARK, $TSLA, and a host of other story/meme stocks, especially in the context of the last few years market regime (eg a raging bull market for equities).

19/That is, in a world where fundamentals + valuation take a back seat to narrative + momentum, normalizing an absurd moon-shot bull case is extremely important for some stocks, especially if the past performance of those stocks has been largely grounded in narrative + momentum.

20/This is similar to the phenomenon of an influencer or politician telling an outrageous lie, repeating it fervently, and spreading it. Eventually, both the lie and the lying become normalized. Over time, a subset of people come to believe the lie to be true. Call them Group A.

21/Another subset of people (Group B) gives up and decides they can't prove it's a lie, but can't prove it isn't true either. There remains only a small subset (Group C) who feel increasingly isolated on an island trying to explain why the lie is actually a lie [think $TSLAQ]

22/This works exceptionally well for meme stocks b/c the momentum from Group A (the bulls) buying the stock sweeps up Group B - those people who can't disprove the thesis. Price action works to influence Group B; if the stock is going up, they assume that the bulls must be right.

23/Group B tends to have done the least amount of primary research, and consequently has the least amount of conviction. This is the majority of retail market participants. This is not to denigrate all retail investors, it's just the reality for most of them as a group.

24/But Group B also includes a decent portion of institutional active managers. ie it isn't just retail, but any "professional" who likewise hasn't done enough research and analysis to prove/disprove the bull case narrative. This is more investors than we'd all like to admit.

25/In a ZIRP/QE-fueled bull market regime, bulls always drive the bus. The combo of Price action + FOMO + TINA sucks a large chunk of Group B into chasing the stock higher on a thesis they can't evaluate. See @hmeisler 's pinned tweet for more details on this phenomenon.

26/So what happens to Group C? They get branded haters, skeptics, critics, bears and the worst of all, as SHORTS. They get attacked and harassed. And in this kind of market regime, they also get run over.

27/This is frankly pretty sad, since as likes of @rocket_jenross or @StockJabber or @TESLAcharts have proven, Group C tends include some of the most thoughtful, insightful well-informed investors in the market.

28/ These are the same people often doing the most primary fundamental research. It’s that kind of work that gives them conviction to be able to refute the obviously absurd bull case narrative.

29/ But in a narrative + momentum driven bull market regime, often times “the more you know” the worse off you can be…for as long as that market regime is intact…

30/And that brings me full circle on this stupidly long thread. If you think you understand a business strategy, and you think you have a differentiated view of that strategy than the rest of the market, now you have one form of investing “edge.”

31/Translating that edge into a trade requires the last step I described in post #5 in this thread: form an educated opinion on why that strategy will/won’t work. I obviously have an opinion on this particular strategy, but this thread has already been way too long…END THREAD