Ark Invest’s CEO and CIO, Cathie Wood, believes that we’re faced with one of the biggest stock market crashes in history. And, if you were looking at the signs all around, you shouldn’t be surprised. Technology is advancing rapidly, and, “thanks” to the lockdowns the economy is anything but stable. Cathie believes that moving forward, the new technological implementations will heavily disrupt the traditional value investing strategies.
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Cathie Wood’s Warning in the Stock Market
Cathie Wood’s belief is based on something, called “The S-Curve of innovation”. This is a model that demonstrates the progress (or lifespan) of technological innovations. Every time a new discovery is made and a product is created and adopted, it experiences rapid growth (during which sales are great). Eventually, however, the trend slows down, the revenue plateaus and starts declining. Then comes the time for new implementations (or the “innovation window”), which results in a new growth spurt. Then, the process repeats.
Now, you can apply this on a product-to-product basis, especially if you take a look at, let’s say the mobile device or computer market, but you can also use it to look at the industry or even technology as a whole.
And this is precisely what Cathie Wood is doing. She believes that the previous period of innovation happened during the 1980s, and we’re about to see a new one happen right in front of our eyes. We are currently around the so-called “launch point”, where the next rapid growth cycle will begin.
According to her idea, the fields that will experience this are robotics, AI, energy storage, genome sequencing, and block-chain technology.
But, here’s the thing. All of these wonderful innovations will need space on the market. Space that they’re going to have to take away from other companies already on the market. Cathie predicts that this will create “black holes” in the market.
She expects that somewhere between 35% and 40% of the S&P companies will be replaced by these newer, innovative businesses. This includes linear TV, fiscal branches of retail banks, brick & mortar retail, freight rail, and traditional transportation.
And no, you aren’t alone. It sounds a bit over the top to me as well. It’s hard to imagine all of these things that we’re so used to just going “poof”, even if they’re replaced by better, safer, and more efficient alternatives. But I can definitely see her point.
Besides, she isn’t just making wild claims here. She has data and statistics to back her ideas up.
Freight Rail and Transportation
We often talk about the EV market here on this channel, and you know that I’m a big believer in the industry’s future. Currently, EVs are not as widespread as standard vehicles, mostly due to the price tags. But as soon as things on the battery front improve, I expect that the prices will start dropping (battery-related costs are one of the most significant factors that hold back EVs from taking over). As the products become more accessible for the average user, traditional transportation methods will start falling behind. Think about – if both vehicles cost about the same, but one is safer, cleaner, and more efficient, why would anyone not make the change?
Cathie Wood believes that this will also change the face of the freight industry, in combination with autonomous driving technology. Now, if you ask me, this might be a bit costlier to implement, and it might take a bit longer than commercially viable and widely available EVs, but I can definitely see the possibility.
Now, let’s talk about physical bank branches
Physical banking is already falling behind in popularity, and Cathie expects that it will be replaced by digital wallets very soon. She uses Chinese systems like WeChat and Alipay as an example here. People find it not only faster and more convenient, but also safer. The Tencent reports for Q4 2019 show over 1 billion WeChat daily transactions, and there is no reason to believe that the rest of the world won’t follow suit. Digital payments are preferred by many businesses since research shows that people are much more likely to make a purchase if they don’t have to go through the feeling of physically parting with their money (I’ve mentioned this in some of my previous budgeting videos).
The reality of the situation is that banks have a much harder time acquiring loyal customers than digital solutions. According to ArcInvest, platforms like CashApp, Venmo, and PayPal have a bright future ahead of them. They expect that, by 2023, over 74% of the adult US population will be using digital wallets.
Linear TV refers to the way people watch things on television, where they have to tune in a specific channel at a specific moment, to “catch” the show they want to see. As most people agree, this can be rather annoying, since it requires you to free up your schedule, get home early enough, and just sit there and watch with no interruptions. But it’s all designed like that for a reason – because that used to be the most efficient and effective way to serve advertisements to the audience!
But, looking at the stats, linear TV isn’t doing so well. Cathie points out that advertising spending on TV in the United States has been flat over the last few years. Simultaneously, fewer and fewer people are even bothering to watch TV – today, fewer than 50 million people watch TV in the United States, while not too long ago, this number was well over 100 million. A fifty percent decrease!
The new and innovative service here is on-demand streaming, and the younger audiences are already opting for streaming over linear TV. Furthermore, streaming services enjoyed a large influx of new viewers during the lockdowns, and advertisers quickly noticed.
A Word of Caution: Index funds and the passive investing mindset
Cathie also shares a warning for the businesses that mostly rely on passive investment strategies and index funds. All of the recent bubble talks made index funds very popular. And that’s perfectly reasonable – investing in the S&P 500 is a solid and pretty much risk-free strategy at the moment. But Cathie believes that when the industries begin to chance, the stock market won’t be as stable anymore. She is mostly talking about businesses and organizations that rely on successful investments for their revenue here, but it’s still worth considering.
Index funds are also not “as efficient” as purchasing specific stocks, since you are spreading your resources over the various businesses in the index, instead of focusing them on a couple of really successful companies. And, as a quick side-note, a large portion of the top S&P 500 companies are indeed in the tech industry (the top 10 accounting for over 27% of the entire index).
Please remember, I’m not saying all of this to scare you. I’m not rushing to sell off my positions or doing anything drastic, really. It’s just something to keep in mind for the future. And what about you? Do you think that Cathie has the right idea? How do you think the landscape would change if these technologies got introduced?
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Recommended books for further reading:
- Rich Dad’s Increase Your Financial IQ: Get Smarter with Your Money
- Unshakeable: Your Guide to Financial Freedom
- The Richest Man In Babylon
- Keys to Success – Napoleon Hill
- Think and Grow Rich! – Napoleon Hill
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