The Pomp Podcast - #1170 Cathie Wood on Bitcoin, Tech, Venture Capital, and Innovation

Episode Date: March 9, 2023

Cathie Wood is the founder, CEO, and CIO of Ark Investment Management. This conversation was recorded at Lyceum Miami. Topics include investing in innovative companies & technologies, volatility in the market, dealing with critics, investment horizon in oil & energy, bitcoin & the crypto market, regulation, and importance of thinking indecently.  ======================= Pomp writes a daily letter to over 200,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

Kathy Wood is the founder, CEO, and CIO of ARK Investment Management. This conversation was recorded at a live event, Lyceum Miami, which occurred on March 4th at the Miami Beach Convention Center. I really enjoyed this conversation with Kathy, and I think you will too. Here's my conversation with Kathy Wood. If you pull a muscle, all of a sudden you realize how often you use that muscle. So the bladder is exactly like that. When it's working well, we don't think about it. But when it's not working properly, you're getting up at night, or in the cases of many men, you may have some leakage. If this is something that's affecting your quality of life, there are really good solutions these days. Depend makes the guard

and the shield. The shield would be if you have some leakage on occasion, if you have heavier leakage, you could use the guard. You're known for innovation and investing in innovation. I thought a great place to start would just be, how do you think about what is innovation and what makes a company innovative versus maybe just a company that is surviving and kind of going through the motions? Okay, so our innovation platforms are all technologically enabled, which means they follow learning curves. And learning curves are expressed or characterized by cost declines. So they're very deflationary, but it's a good deflation. So the first characteristic is learning curves, cost declines. If you've heard of Wright's law, Wright's law is

a relative of Moore's law. We've centered our research on that. And we can figure out how quickly costs will fall and how much demand is likely to take off as more and more sectors gain access to these technologies. So that's the first. The second is that these technologies or the platforms scale across sectors. So we've set up our research at ARC very differently from traditional asset management. Our analyst responsibilities are broken out by technology, and there are 14 different technologies involved

in the five innovation platforms. So they are tech specialists and sector generalists. It's the flip side of how research is organized traditionally. And then the third characteristic is they are launching pads for new innovation. So in the case of what we now call multi-omic screening, used to call it genomic screening, if we had not figured out DNA sequencing specifically so that we could analyze the six billion bits of code in our genomes, we would never have been able to isolate mutations. Mutations are the earliest manifestation of disease.

So that was sequencing. And because of that, an innovation called gene editing was possible. If you can isolate a mutation, you can reprogram it, edit it out. So we're seeing incredible results, cures for disease. And we think that's going to become a big theme in the years ahead. So one of the pieces of this thematic investing that you're doing that I don't think people quite understand is that historically where that money came from and how the actual funding occurred wasn't in a traditional model. So venture capital, as one example, is kind of this milestone-based funding where somebody would say, hey, I'll give you a little bit of money, make progress, come back. I'll give you some more money, make progress, come back, I'll give you more money.

How do you think about funding in both the capital source but also the capital mechanism of the investment for innovation versus, you know, a company that's been around for 100 years and kind of is just throwing off profit? Okay, so that's a big question. So there's private and there's public. The private is, of course, the venture capital. And because of our tax laws here in the United States and the preferential treatment for private equity and carried interest specifically, venture capital has really become isolated, I would say, to, you know, those with very high incomes or assets. And the little guy or the average investor or even some foundations and institutions cannot get into these deals. It's a very small circle here. And so we're trying to do there what we did in the ETF space.

In the ETF space, we turned what was a passive wrapper. Wrapper is just how you deliver a fund. called the ETF, into an active wrapper. And most people thought we were crazy, which I love. I love when people think we're crazy if we're onto something. And so at first we were, again, ignored by the industry. And now everyone, nine years later, understands this is the better model for the end customer. In the private world, what we're doing is we're taking something called an interval fund.

And an interval fund, that concept, evolved in the 90s, believe it or not, just like the ETFs. And here the SEC was trying to give individual investors access to private deals. Now, why didn't that happen? Well, it did not happen because of the preferential tax treatment for this accredited investor strategy. So we cannot charge carried interest, and we don't want to. And, you know, this is Greenfield. For $500, a person can gain access to our public-private ARC Venture Fund. public-private. We've done it that way, and it'll evolve to 75% private, 25% public, because we want

liquidity for quarterly withdrawals, just like REITs have quarterly withdrawals up to 5% of NAV. That's what we will have, and we need that public market liquidity in order to provide that. So it's a much better vehicle than venture capital. First of all, you're not locked up for seven to ten years. You can get in with $500. You can inflow daily or average in if you want. And really what we're trying to do here is democratize venture capital investing. And we want to increase the allocation of capital to private companies, which are where the innovation starts, of course.

So it's interesting to talk about this model, and this may be a little bit in the weeds, but I think it's an important point, is that a traditional venture capital fund is completely illiquid. I manage a number of different venture capital funds, and those investors who put the capital in don't get capital back until there is either a company that goes public or is acquired and there's profits that are generated. For you all, you have 75 percent that eventually will be in the illiquid venture capital investments. The other 25 percent, you're putting those into public companies that have an innovation focus, and that's where you're able to generate the quarterly withdrawals? Yes, that's right. And I'd also like to say in the public markets what's happened, and I'm on my soapbox here, so we've had this shift towards passive investing because of the tech and telecom bust and even more so after the 08-09 meltdown. asset managers have been thinking more about career risk and business risk after those two massive dislocations and so the pendulum shift towards passive has been extreme I think it

constitutes the most massive misallocation of capital in history and the reason I say that And the reason I started ARK is because we have never been in a period before where five innovation platforms, you mentioned them, the multi-omic sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. We've never seen five innovation platforms evolve at the same time. The closest we've come is to the early 1900s, telephone, electricity, and automobile. So the irony here is because of the tech and telecom bust. That's how this all started. There is a fear of technology. There's a new technology, early stage technology. There's a fear of volatility. People forget that volatility, yeah, it doesn't feel good on the downside, but boy, is it nice on the upside. And so we are trying to change that pendulum, at least be a part of it, shifting back to active management because there are so many opportunities. And we actually think the risks for those who are thinking about career and business risk, the risks today, we believe, are more in the traditional benchmarks, which represent the traditional world order and safety, tried is true. Well, if there are five major platforms evolving at the same time, the most provocative of which is artificial intelligence, the breakthroughs we're seeing are astounding us, and all we focus on is innovation.

We're seeing breakthroughs today that we did not expect for five to ten years. And finally, with chat GPT, we may be, well, we have captured the imagination of the general public. But as we're talking to prospective investors, there's still this fear like, oh, no, oh, no. You know, so it's a very interesting time. This is not like the tech and telecom bubble. In fact, it's the opposite. The tech and telecom bubble happened because of the Internet. There was this, again, capturing the imagination of the public.

What the Internet. Wow. Look at what this is going to allow. And then investors started throwing capital at eyeballs. That was the valuation metric. How many potential eyeballs can this website garner in the next five to ten years? So that was too much capital chasing too few opportunities too soon. The technologies were not ready.

And even if they were close to ready, the costs were prohibitive. So to give you a couple of examples there, DNA sequencing cost for one person's genome, and forgive me if you've heard this, but it is the most provocative example here. It cost in 2003 when the first genome was pretty much finished. We've completed it now. It cost $2.7 billion and took 13 years of computing power for one person's genome. Remember that six billion bits of code. Today it costs $200 and can take a few hours.

So we are all going to have our genomes sequenced regularly, and we are all going to have geneticists, because I'm going to go back to those mutations. As we age, more mutations occur, and we need to figure those out so that we can edit them, program them out of the system. So the costs are low enough now, that's an example, and the technologies are ready. So if you think about the cloud, it really didn't happen until it was a figment of the imagination, but it didn't happen.

We didn't have the technology until AWS in 2006. We didn't have the first really big breakthrough in AI deep learning until 2012. and really the transformer architecture in AI until 2017-18. And that's why we now have ChatGPT. One of the things that I want people who are going to watch this later or are here in attendance to take away is kind of very specific insights. And I think that you're the perfect person who you've thought very differently, obviously, about the way that you structure the funds.

So doing active management within the ETF wrapper, We just talked about the venture capital structure where you have 75% private, 25% public. But you also have a number of insights that I think it takes a long time, and it takes a lot of experience in investing to start to identify. And so one of them you mentioned earlier is this idea of volatility. And when most people hear volatility, they get scared, right? It has this negative connotation you don't want volatility. You're mentioning, though, that maybe actually volatility is a good thing, and if you can harness the volatility, that's actually where returns come. Can you elaborate a little bit on that?

Yes. Before I go there, can I just say one more thing about the Venture Fund? This is your show. You can say whatever you want. Thank you. Well, we're known for our social media and social marketing strategies. We give our research away happily. We are now giving more and more of our models away, starting with Tesla, because they are so misunderstood. And because our analysts, given their domain expertise have been disparaged by the traditional asset management world where most have MBAs. We do not want MBAs.

We do in terms of managing our business, but in terms of investing, we think domain expertise is going to be much more important given what we do. So added to social media and social marketing, we have now a social distribution strategy. So Titan, which is an Andreessen Horowitz funded company, is an app that now is featuring our interval fund. And what has been astounding to us is every day, no matter what the market was doing, we have had inflows every day. Now, slow, but sure. And so I think that the individual investor out there understands, in many ways, more than a lot of institutions, how much is changing, how the ground is shifting underneath our feet, and they're not finding the companies they want in the traditional financial world. So, volatility. Yes, volatility, many people think that that is a measure of risk. It is not a measure of risk per se. It is in one sense, in that it is more a function of uncertainty. And when we move into a risk-off period, as we've been in for the last 18 months plus, the time horizons, investor time horizons shrink.

And in fact, what I found most interesting about the last 18 months is our strategies were very much out of favor. They are coming back into favor, and we can talk about why in a moment, but very much out of favor because of fears of inflation and interest rates and the actuality of both of them going up. Long-duration assets, so very long-term oriented assets, are going to be punished when interest rates go up, especially at the rate they went up over the last two years. we are up i think somewhere between 18 and 20 fold in terms of the fed funds rate that has never happened in history what also never happened in history was that the bond market which was the refuge for those uh fearing uh volatility and risk uh had the worst performance i think this was true through the end of the year i know it was true through the end of uh the third quarter the worst quarter in history unless you go back to the 1700s so that was one

long duration asset and that actually has income associated with it our strategy which tends not to we tend not to pay dividends our companies don't they they're you know they're they're reinvesting in their companies in order to you know really gain exposure to exponential growth trajectories which is what we want them to do. So our strategies, no income, we're gonna be treated much worse than bonds. But, and so this idea of volatility,

just to give you a sense of this, the realities that we faced and that we want people, investors to understand. Pre-COVID, as we were beginning to understand what a disaster this was going to be, there was a one month period where the market, depending on the measure, went down 25 to 30%, just in one month.

We were down, our flagship was down 46%, more volatile as the uncertainty kicked up. Then, because our mantra, one of them is, innovation solves problems, why are they selling? And of course, the reason they were selling our stocks is because our company's cash flows, again, as I just said, are not going to the investor right away. They're being reinvested to make this new world happen.

And so investors don't like that when they have a short-term time horizon. They sold us. And I said, wait a minute, who do you think is going to solve this COVID problem? It's our companies. And our, we called them at the time, genomics companies, were the most punished of all

because many had negative cash flow and not very large cash positions. And so some of them were down 75% to 80% within one month, just to give you a sense of what we were dealing with. Then, April of 20, the market bottoms. And from April of 20 to February of 21, everybody began to understand, yes, our companies are going to develop the vaccine, the tests, they're sequencing the virus,

and so forth. Our flagship strategy, which has exposure to genomics, was up 360 percent. And that was less than a year. And then from February 21 until the bottom in December, we were down almost 80 percent. And that was the most extreme experience of my career. and I think it was because of what happened to interest rates. It was so sharp, so sudden. And I think we're going to see the ramification of this for years. But I also think that the market is beginning to look at interest rates and inflation cresting and coming down.

And if we're right, inflation is going to shock people on the low side of expectations for two reasons. One, the inventory buildup out there because of overordering around supply chain is coming off. But more important longer term is the deflation inherent in innovation. And we believe now that, for example, electric vehicles are up to 10 percent of total auto sales. and electric and elon musk is going to make sure that electric vehicle prices to continue to come down at investor day today this week our analysts were able to understand now how elon and team are going to get the tesla average tesla price down from fifty thousand dollars to twenty five

thousand dollars in the next five years. And traditional gas-powered autos are really going to go by the wayside. So that's just one example. So innovation, cheaper, better, better solution, and will cause a lot of disruption to the traditional world order. So just to give you a sense of that. We believe that electric vehicle sales will increase from 7.7 million last year to 60 million in 2027. And they will account for 75% or more of auto sales because of the declining prices. And these are better cars from many different points of view. How do you deal with the critics when a fund draws down 80%? It's not a private fund where only the LPs know, right?

You are somewhat similar to many people in the Bitcoin or crypto world who talk about a lot online. On the way up, you kind of get all the praise, right? And everyone thinks that you're not only very smart, but you're making a lot of money. And investors are flocking to these funds or these assets. But then when it turns over, as every market does and has throughout history, it almost feels like then that reverses and now you're the bad person, right? Like, oh, Kathy, why did she go and invest in all these companies, even though maybe a year or two years before people were praising you and saying how smart of a strategy it was? How do you deal with not only the volatility of the assets, but the volatility of the public conversation where there's praise and then critique and then praise and then critique back and forth, back and forth? You're right.

I feel like we're very similar on that topic over the last 18 months. Right. So in February of 21, we could do no wrong. No wrong. And I prepared the team. I said, this is not the real world. There is going to be another side. Don't take yourselves too seriously or any of this too seriously.

Take our investing and our research seriously. but do not take the praise out there to heart and assume that we're brilliant and we can do no wrong. And so they were prepared for the first installment, but for this last year to be down as much, even more, it was a very interesting time for us. And much like in the crypto world, what gave us the courage of our conviction and, you know, basically shielded us from the critics in some way was our research and the breakthroughs that were happening faster, not slower, faster. You know, when times are tough, innovation actually gains more traction.

Faster, better, cheaper, more creative, more productive. And so that's the irony here. We saw the traction that innovation was getting as the prices were coming down. And so what was happening was, and of course, we have a five-year investment time horizon. Our valuations on our five-year forecasts crashed. And what I began to say in the media, I'd say as well, I consider what we're doing now, if you give us a five-year investment time horizon, we have a deep value strategy. And, of course, this drives the value guys crazy because who benefited during this last period was value.

And here we are saying, well, no, no, no, no, no. I look at energy prices, for example. The energy price after Russia invaded Ukraine peaked at $130, the oil price, below the $147 in 2008, which was the secular peak. And it has not been able to get back there again. It's at $75, $80. And we've been saying that we believe the demand for oil, and this is one of the big, if you did not own oil last year as a value investor, Oil, I think, was up 60 percent, the sector, reaching for all-time highs as the oil price was coming down. Very unusual circumstance.

And so what we're saying, and we put it in our Big Ideas 2023. Big Ideas 2023 is on our website, arc-invest.com. And you'll find in there, in our autonomous mobility section, an oil demand chart. And if we're right on both electric and autonomous, oil demand, which is about 100 million barrels per day now and has been, we actually think it's been peaking for the last few years. It got hit during COVID. Isn't quite back to where it was. We think we're in the peaking process. Secular peak in demand.

And we think that by 2020, no, this would be 2030, that oil demand will be down 30 million barrels. Now, oil demand, except for recessions, has gone down a little bit during recessions, but has been in a secular uptrend for, you know, 70, 80, 90 years. What are the ramifications of something like that, right? So when you talk about a secular peak in 2008 at $147, you all believe that there will still be volatility to the oil price, but basically the demand for barrels will continue to go down. There are financial ramifications. Obviously, some people who can stomach the volatility will just short it if they believe in that thesis and they potentially could make money. But the world runs on oil, right? And there's a lot of geopolitical posturing and kind of chess that gets played around oil.

We've even seen the United States have to go and visit other countries and say, hey, you want to release some of that oil to us? What is some of the ramifications? Or do you guys not care what the ramifications are? Because you say, hey, look, we're financial investors. We have a thesis on the peak in oil demand. And if we get that right, our investments will do well. Everything else is kind of outside of our purview or our focus. this? Well, first of all, I'll set this up by saying that we think the oil price is going to

be extremely volatile. And the reason is, we've seen some of this already, combination of ESG and environmental concerns generally. Oil companies pulled back on investing, which is one reason the oil price did get back to 130. Now, this will also drive the value investors, I apologize if some of you are here crazy, but if you look back at whale oil, remember that was our primary source of energy, you know, light in the day. What you saw when it was clear with the oil discovery breakthroughs that oil was going to displace whale oil, what you saw was a massive increase in volatility because companies basically said, all right, game over. I'm not investing in this anymore. And until the transition was complete, there was still a dependence, of course,

on whale oil. We think the same thing is going to be true here. Now, all commodities are priced at the margin. And so the expectation out there right now in terms of what actually is being produced is that oil, the price is going to continue to move up over time. And demand, demand is going to move up. Oil price will come back. If we're right, I just mentioned the oil price will be very volatile. The valuations of these stocks will continue to come down. That's how you will see it reflected in the market. And in terms of the ramifications generally, this is going to be a massive tax cut for the consumer and businesses accepting energy business which is hugely positive for the world it is also going to from a geopolitical point of view

it's going you know the middle east had has had still has a lot of economic and political power because of its oil position, that is going to change. And so what we have to worry about is as energy prices, oil prices come down, you know, how will they try and change the subject? You know, we're watching what Saudi Arabia and UAE are doing. They're both shifting. They understand. I mean, they may not agree completely with our thesis,

But they know they have to diversify. So they're both diversifying into innovation, actually. UAE, probably more methodically, I would say, than Saudi Arabia. It's interesting, this week, yesterday, there was an article in the Wall Street Journal about the UAE not leaving OPEC. And I'm saying, oh, man, this is really interesting. Whenever Saudi Arabia and the UAE disagree, the oil price is on the threshold of collapsing. Why is that? Because Saudi Arabia has the highest reserves of oil, and it is in Saudi Arabia's interest to control the price.

Don't let it go too high because you want the demand to be sustained. Don't let it go too low because you can't fund your finances. UAE, some parts of the UAE are hardly dependent on Dubai, for example, is only 5% dependent on oil. So they don't have exactly the same incentives. In fact, their incentives probably are to increase production now to maximize. If we're right on what's happening here, and I think they believe we're right, than it is in their interest, if they can, to maximize their oil production now,

you know, if Saudi Arabia is going to be the offset. So the last... I've seen that happen a few times, and each time there's been a rift, the oil prices come down dramatically. So UAE came out and denied it, but, hey, where there's smoke sometimes, or thou dost protest too much, you know, we've been here. So we'll see what happens. We'll see what happens.

I want to talk about Bitcoin and the cryptocurrency market. You all were one of the first or the first, you know, kind of traditional Wall Street asset management firm, not only to openly talk about it and highlight your cautious optimism towards the asset, but also to actually buy Bitcoin specifically. When you look back, maybe we can start with like, we're now maybe eight, nine years into this journey for you. Other than being able to say you were right, what else would you kind of look back and say were lessons along the way that you've taken in kind of embracing Bitcoin and the rest of cryptocurrency so early? You know, I think one of the things that I love about Bitcoin in particular is my economics background matters. And so here are all of these developers and young people very interested in the space. And, like, I want to learn from them and they want to learn from me.

So it's a really it's been fun so much. I mean, it's brought in probably all of all of my expertise from an investing point of view and from an economic point of view. And it's wonderful, you know, that this can bridge that gap, you know, the economics and the technology. Yeah. In the early days. So we gained we did we started our research when we were at Alliance Bernstein first. That was 2011. Founded ARK 2014, did the research. And in fact, when we first broke out the five major innovation platforms, we did not have AI and blockchain there. We had instead what we called, we had that in mind, those in mind, but we had next generation internet. And as we started doing our bitcoin research i brought in art laffer who's a very well-known economist known for fiscal policy theory as well as monetary policy theory and he agreed to collaborate and

when he said this is what i've been looking for ever since we went off the gold exchange standard in 1971 a rules-based global monetary system and i said oh wow how big could this be and it was only a six billion dollar and we called it network value at the time market cap um uh he said well how big is the u.s monetary base and i i said well it's four and a half trillion and now of course it's eight trillion seven and a half eight trillion uh he said well there you go and so i bought personally you know and that's a big number art and in fact in fact chris berniski was our analyst at the time and um we we there was no vehicle to put it in our funds gbtc was just coming of age and we were doing our due diligence and so i bought um a hundred thousand

dollars worth just personally and chris became like here i am the portfolio manager and and it was his research that moved me to do this and like it was so early and and so he doubled down on his research it was bad if your boss loses money because your research right um but and and then of course uh you know the rest is history i i guess we're at is it 300 billion ish now And many people know that we think that's $300 billion in market cap or network value at $24,000. And we have in Big Ideas, again, our forecast for 2027, I think, is around $650,000 and beyond that $1.5 million. Say that again? in the big ideas research that you guys published what are the uh two numbers the two numbers uh

are we have our base case is roughly 650 000 for 2027 now that has come down we were using a million plus four or five years out but because we've had the the debacles associated with decentralized, opaque institutions, as opposed to decentralized and transparent, institutions are going to hold back a little bit. But we still think that the million plus is right in our bull case. And you can see how we build our case and look at the assumptions, how much institutional involvement and so forth. Very conservative assumptions. And our conviction actually has grown through this year, grown through this past year, because FTX, Celsius, 3AC, Voyager, all of these were centralized, opaque institutions. They went bust.

And even the centralized, regulated institutions, now we're looking at Genesis, bankruptcy, yes, Silvergate, these are regulated. But, again, they're much more centralized and opaque. This is interesting. As many people know, I've gone around the world. I've talked to all kinds of different people. And I would say the number one topic, other than, like, what is it, that people want to speak about when they come from the traditional world is it's unregulated, right? And there's something about regulation. And these individuals usually come from a perspective of, like, oh, the government will regulate it out of existence.

The government will ban or outlaw ownership. The government won't allow this to occur. But your point, I think, is Bitcoin as an asset, it's an inanimate object, right? No different than, like, let's say the U.S. dollar, and we don't regulate the dollar. We regulate the companies and individuals who traffic in dollars, right, or use dollars. But there's all these companies in and around Bitcoin or cryptocurrencies that have been regulated. And we see maybe in a really optimistic lens stress on them all the way to failure of these businesses. Can regulation actually stop some of this?

Or is regulation, in many cases, it can solve some of the things on the periphery, but we should expect regulated businesses to be just as much at risk as, you know, some of the unregulated businesses. And we can't really rely on that regulation as like this crutch, because it seems like most people would say, if it's a regulated business, then we shouldn't be seeing some of the things that we're seeing. Right. Well, Bitcoin came out of 08, 09, right? and look at all the regulated companies that went under then and all of the counterparty risk that nobody understood, you know, and all of the paperwork that had not been done. So, you know, I do think about what you're saying. I think... I don't think...

We worry about the innovation that is leaving the US and moving to other countries who are much more friendly. the UK I think is and Europe generally from a regulatory point of view has has much more of a solution more clarity

than the US and so but I think the American DNA is such and we see it in how regulators are going this far but you know and the most interesting one to me now consider the source we own it

I want to be very clear. Everything that we've spoken about today, you should assume one of the two of us own it. Right, right, right. So Coinbase. Now, I'm listening to the regulators, and they're saying, well, if it looks like a security, and it walks like a security, and it quacks like a security, then it's a security. And we will enforce the insecurities laws. That's what the SEC does. And I'm thinking, well, Coinbase had to go through the SEC.

They had to issue an S1, highly regulated. They had a lot of tokens that now the SEC is questioning as securities. Well, has the definition of a security changed since Coinbase went public in 2001? And it went public around the time that Gary Gensler came in, so maybe that's where the disconnect is. Gary Gensler is much more of an enforcer, I don't know, but the definition of a security should not have changed. And if they didn't think these should have been on Coinbase's platform then, they shouldn't have let them go through. So this is fascinating because in politics, as some of the guests later today will talk about, this idea of changing your mind is almost demonized or condemned, and you hear terms like flip-flopper and all of that. In investing, it's actually embraced by the best investors.

And so if you can change your mind when you receive new information, it's seen as a sign of intelligence. Regulators kind of sit in between those two groups. It's a little bit of politics and government. it's a little bit of investment in markets. How should we look at them and their ability to change their mind? Like, is that something that we should look at as like that's a good thing that they're doing?

Or does it make it so hard to invest in a market if a regulator later can change their mind, right? And I'm almost using this as the example of, they just came out and said, hey, we got it wrong before, now we believe this. Is that a good or a bad thing? I think what it is is a process of iterating to the right answer

and is very messy. So if you look at how derivatives evolved in the markets, it was very messy. They had to put in place not a completely new regulatory structure, but they had to bring the CFTC into the discussion, and we got a whole bunch of new guidelines and rules right so i think that's where we're going with this new asset class which we really do we believe

it's a new asset class i know that but i know there are securities associated with the new asset class so let's just be clear um you know bitcoin you've told us is not a security great uh coinbase clearly is a security and it has on top of it assets that could be a new asset class So I think we're iterating. It's been very messy. Even this concept of staking, I don't know if you saw Gary Gensler's video where he said, no, I'm not talking about stake,

S-T-E-A-K. He's trying to make this very... He's trying to be approachable, and I'm talking about S-T-A-K-E. And then you look at... You look at, okay, the one that Paxos basically said it would stop staking. There's a couple of them.

I think Kraken said it and Paxos as well. Kraken. Well, Coinbase has a staking service, but it is a utility, not a security. So again, we're iterating, and it is interesting to watch the SEC try to figure this out. You're right, that is a service. It's a technology here.

It's a security here. And it's like, it's complicated, right? I just wanted to be noted that Kathy and the SEC both use videos to share information, so you guys may be more similar than you think. One of the last things I want to talk about is finding ideas. And you and I have talked in the past about there are some ideas that somebody sitting on Wall Street

may pontificate on, do some Googling, start some research, and eventually come to a conclusion that ends up being a great investment idea. There's also a long list of ideas, both inside of investment firms, consulting firms. I'm sure there's a lawyer somewhere in a law firm who's got a horrible idea, right? And there's really, really long ideas, a list of ideas that end up not being good investments because you just know the world and the reality that you're in. There are areas, though, that I think you all look at, things like whether it's gambling and betting, whether it's the porn industry or others that seem to be at the forefront of using some of the

technology so they're not necessarily creating it but can you talk a little bit as to how you think about where to look for these ideas and then how do you evaluate when you see some of these kind of fringe industries doing something is that actually an innovative idea and technology or is that something that may be a fad today and is going to eventually go away so it's interesting And this, really, I learned through the Internet. The earliest users were the porn industry and gaming. And they became avid users very quickly, right? And that is what makes innovation difficult in terms of investing.

because here I was a portfolio manager at the time and I was attracted to this technology called, this was the early 90s, the internet. And there were all these articles out there about what a bed of criminal activity it was. So here's a fairly young portfolio manager. I'm trying to make my way in, contribute to the team. And I'm coming in with this idea

that has porn and betting. And thank God, Sig Sigalis, and God bless him. I just went to his memorial service this past week. He gave me the biggest breaks of my career. He believed in me. He kind of knew that what I was saying was right, that, you know, often the earliest adopters are in these two areas,

and actually you should look at what they are using in terms of technology and how they're using it to actually learn some lessons about where the world's going to go. The other thing they do is they grease the skids in terms of, you know, making or helping technology, helping those evolving the technology perfect it, right? So we, you know, Wright's law is all centered on unit growth.

So Moore's Law is centered on time, so every 18 months to two years. Wright's Law is centered on units. So the more something is used, the faster the cost will come down, right? And so those early users are critical to jump-starting technology. So I actually look at what technologies they're using just to see if I'm, you know, what else is coming down the pipe. The last thing I want to talk to you about, you're an independent thinker. There's many conversations we've had, there's many things I've seen you say publicly where I judge the independence of your thought on the reaction that people have. And as many people can just Google ARC or Cathie Wood.

right now there's a lot of people who are saying what are they talking about right this is crazy town um but if you go a little bit further back and maybe search in 2014 2015 2016 there was a lot of the same people saying that about you guys then and uh it appears that over a long period of time you guys have been right about a lot of things when people questioned what you were doing how do you remain so steadfast in the ability to continue to think independently and especially do it when there's a lot of folks trying to convince you that you're either wrong maybe you shouldn't do that or that there's an easier path to just simply become a value investor or you know buy indexes and why do you have to do all this work how do you think about just

we're independent thinkers and this is the way to kind of continue to think independently and not succumb to the consensus thought you know the the criticism out there um you know we we don't have a not invented here there is sometimes people pick up on something that we have missed that's That's why we're publishing our models more and more. I find that to be a very effective battle test of our assumptions and so forth. But in terms of keeping our focus on innovation, which is, again, because of the innovation platforms evolving, we have, just to give you, here's what keeps me focused. If you look today at how the market values truly disruptive innovation in the marketplace, both private and public, it's about $13 trillion, so a little more than 10% of the total equity market cap. We think that's going to $200 trillion, more than $200 trillion, by 2030.

This is in big ideas. You can see the building blocks. That's a 40% compound annual rate of return. Now, if our technologies are doing that, hopefully we're doing something better, picking the right companies and so forth, and we will do better. I cannot say that we will deliver that. Compliance will not let us or north of that. But as our research, as we see the research breakthroughs happening at a faster and faster rate, and we don't see the traditional world focusing on these, we just know the opportunity is that much bigger. so I learned very early on in my career it was economics it was the early 80s and inflation and

interest rates were in the mid-teens and I came in again young and art laugher trained I felt like I knew how the world worked and said inflation and interest rates are coming down for this that and the other reason that was such a controversial call you had the great powers on Wall Street at the time, and Milton Friedman. You had Henry Kaufman and Al Wozniak, who were the doctors of death and doom. That's just how bad things were in terms of inflation and interest rates. And you had Milton Friedman basically saying, get used to it. Inflation is embedded in the system at a double-digit rate. And so the whole world was moving in that direction. And here we were, this little voice, and I mean really little, who was going to pay attention to me?

and we were writing again there were no computers at the time there was you know there was so I wrote a 20 page quarterly letter to our clients mostly pension funds and it became as inflation and interest rates were coming down people wanted to know why this was happening so there's no no no no no then there's evidence that it is and then people look and say why is this happening and so it's the same with innovation no no no no no the old way of the world is the right way no no no no no and yet that yet the evidence is moving incontrovertibly in the other direction it's the evidence that keeps us sane and actually is a great shield against all of the criticism and we're just we're and one of the reasons we put our research out there and our models out

there is we're saying, hey, there is so much happening right now that is going to be highly disruptive to not only investors, but your personal lives. And it is really important that you get on the right side of change. And it's one reason we moved to St. Pete. We'd like to use St. Pete as a place to showcase over time, sort of like Disney's old carousel of progress, which hasn't changed since the 60s. We'd like to show people how their lives are going to change, and our research is the first way of doing it, but we have other ideas as well. I love it. Ladies and gentlemen, Kathy Wood. Thank you. Thank you. Thank you so much. Of course.