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How I’d invest £5,000 using lessons from Cathie Wood

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Tesla
Image source: Tesla

Cathie Wood might not be a name on the lips of many UK investors. However, the US-based fund manager has performed brilliantly for investors in her flagship ARK Innovation ETF (NYSEMKT: ARKK). In five years, its value has soared almost 500%. To me, that makes her worth listening to. 

Contrarian thinker

Cathie Wood has shown herself to be unafraid of going against popular investing opinion. In fact, she’s gone on record as saying that the “most exciting times” are when she’s on the receiving end of criticism. Her controversial early investment in US electric vehicle pioneer Tesla is a great example of this. 

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As one might have guessed, the fund benefited hugely from this early call when Tesla multi-bagged in value last year. Since then, it’s come off the boil (fuelling further criticism of Wood’s strategy). However, it’s still the top holding in ARK Innovation.

Wood’s conviction is something I’ve tried to apply to my own investing. While I still don’t feel comfortable holding stock in Tesla directly, I do think it’s important to regularly evaluate the consensus view on any stock. In fact, this is essential if I’m to beat the market. I can’t generate better results than the herd if I’m doing exactly the same thing as the herd. Of course, stock-picking also raises the potential for me to underperform as well. 

Embrace disruption

The world is in a constant state of flux. Everything changes and nothing lasts. Rather than fight back against this, Cathie Wood embraces it. Linking in with her purchase of Tesla, she is a huge fan of disruptive companies — those that shake the foundations of an industry and change it for the better. As she puts it: “In a world driven by disruption, be on the right side of change.

Although I can’t say that all of the stocks I own are disruptive, I do recognise the importance of looking ahead rather than in the rearview mirror. After all, a company’s past performance is no guarantee of future returns. It’s not hard to come up with examples that are now shadows of their former selves. Think mobile phone makers Nokia and Blackberry being impacted by the arrival of Apple.

So, when I’m investing in a specific stock, I regularly ask: “Will this company still be around in 5-10 years and, if so, will it be worth more than it currently is?” If I’m not at least cautiously optimistic, I don’t buy. 

Expect market corrections

Despite being very bullish on technological progress, Wood is experienced enough to know that the fund’s value, and stock markets in general, will never go up in a straight line. In fact, the former is down 10% in the last six months. Regardless of the reason, she knows that downturns are inevitable and, again, embraces them, saying: “Corrections are good, they keep us all humble.” 

Cathie Wood walks the walk too. When Tesla slumped back in February, she bought more of the stock. I’ve tried to do the same with my own investments, particularly during the coronavirus crisis.

This isn’t easy. However, I try to remind myself that, despite being volatile, equities have delivered the best gains of any asset class over the long term. This is the risk/reward trade-off. It’s one I — and clearly Cathie Wood — think is worth signing up for.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and Tesla. The Motley Fool UK has recommended BlackBerry and has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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