Why Cathie Wood's Stock Analyses are WRONG
Cathie Wood's ARK ETF $ARKK is down 80% from all time high and is now underperforming Warren Buffett's Berkshire Hathaway $BRK.B since inception. The reason for this failure has to do with the way those stock analyses are done. And Cathie Wood is not alone in making these mistakes.
Cathie Wood is a growth investor, and in growth investing, it is okay to invest in a company even with high multiples, as it is expected that investors in the future will pay more for the stock in the future as it keeps growing.
The mistake that Cathie Wood makes is being over-optimistic on her investments. For example, the price target for Tesla $TSLA for 2026 is $4600 (X33) and for Zoom $ZM it's $1500 (X21). What's worst is that for her bear case of Zoom, she expects the stock to be a ten-bagger.
When doing an analysis, the worst-case scenario should, most of the time, be one where you lose money. If you make an analysis where you cannot lose money, it is probably wrong.
Over-optimistic investors are not new. In the 1990s, we had Nobel Laureates setting up a hedge-fund, Long-term Capital Management, that could not lose money in theory until it crashed.