What ARK's process tells us about the hidden value in sustainability
Ark are value investors. It might not be intuitive to think of them like that. The growth of their stock picks is dizzying. And consistently so (it appears at the time of writing).
The most dynamic investment house of its day, maybe ever, is now being discussed as being possibly TOO big - that they might risk distorting the market.
(We saw this recently with the entry in Hims & Hers which jumped ~28% on news that Ark was taking a position)
But they are open about that. You can hear it from the horses mouth in this essential interview for Bloomberg by Director of Research, Brett Winton (@wintonARK):
Now, although we can't have access to as many fantastic brains and convos with CEOs as they do, we CAN pay attention when tell us how they've achieved the remarkable returns they have.
But lets back up - you might not care all that much. Maybe you want to park your money in one of their ETFs and go check the straps on your hammock are nice and secure. Relax. And thats a solid position to take. But if like me you're interested in thinking a bit more deeply, or being a bit more hands-on, then you can apply that process and track the results.
To be clear, I'm not talking about trying to 'beat' ARK. No way. I just think they've open-sourced a way of thinking about the companies we're interested in - and especially the bigger ponds they're swimming in - that may not have been recognised completely as such in the market. Of course, if they have been there's a good chance they'll be winners anyway - and winners tend to keep winning.
So, lets take a closer look at their process:
ARK start with a question. Probably lots, but one critical question that stands over them all: what technologies will historians call a 'signpost technology'?
They activate the theory of General Purpose Technology, developed by economists Richard Lipsey & Kenneth Carlaw, which claims that there are only a very few technologies which can affect an entire economy. GPTs have the ability to 'drastically alter societies through their impact on pre-existing economic and social structures'
What are the characteristics of a GPT or 'signpost' tech? Lipsey and Carlaw say there are 4 qualities
It is a single, recognisable generic technology
Initially has much scope for improvement but comes to be widely used across the economy
Has many different uses
Creates many spillover effects
And they say there have been only a couple of dozen examples that count
Ark refine this a bit and look for 3 characteristics -
the tech is likely to undergo a steep decline in price
it is deployable across sectors
it enables other products and services to built upon it
And based on that they look for 'misunderstandings' in the market - what can we find that are being significantly mispriced by analysts. Valuations are arrived at through asking what would a pessimistic cash buyer be forced to pay in 5 years time...
Take Tesla, for example. Ark say that instead of thinking about car companies taking a one-off $5k profit from selling you an ICE, think about it as a market in which Tesla have a 25% share. The question is with the lead they have in autonomous, and the data they're accumulating, what business models are conceivable. What happens if Tesla owners can run their cars as 'robotaxis' for example?
If thats the case, then you have recurring revenue from the operating system, enabling platforms and insurance.
(Incidentally this is a reason i'm long MetroMile)
And not only that but Tesla may be able to consolidate their share of their market and grow it. Even if they don't, the higher margin for those that remain is derived from the operating system and the platforms that enable the additional activities. Maybe it could be like Apple who take a disproportionate slice of the global handset margin with only ~25% of sales.
Ark project that Tesla could have the largest deployed fleet of robots in the world, robots that improve over time. In the podcast, @wintonARK says ARK's analysis suggests a 30% chance the robotaxi model can happen. If it does, the owner gets cash flow but Tesla could get recurring revenue of (pick a number) but 20k per year is mentioned.
SO....
We have a compelling thesis about changes so powerful that the way we calculate everything else has to be recalibrated..now, let’s talk about why i think this is relevant to sustainability as a criterion for investment.
When we're talking about sustainability, what i DON'T think we're doing is looking to just add another tech into the mix - although this could totally change, given the abudance of innovation and pressing need we see in the world right now.
Instead i want to think about this slightly differently. We know we're at the head of a set of major, revolutionary changes in the way we organise economic and social life on this planet. We can roll with Ark's current take on what they are.
But there's another vector here - climate crisis. And specifically, the fact that we know that the cost of inaction (or insufficient action, more precisely) increases exponentially with every 0.1 centigrade (or - more normally - 0.5 degrees). This means that TIME is an atypical driver of transformation. The sand timer is running down, fast.
Here is New Yorker correspondence and author David Wallace Wells being interviewed for a Goldman Sachs event:
TLDR?
- speed: half of all emissions have come since the first Seinfeld episode
- scope: by 2050, up to 1Bn refugees from unlivably hot cities will need to be assimiliated by the global North, with the economic impact by end of century is permanent 30% reduction in global GDP. Warming oceans threaten the decimation of coastal productive economies, and the stability of the populations that live there
- severity: 2C is the 'threshold of catastrophe' - several of the major ice sheets irreversibly melting with ~20m of sea level rise built in.
But this is also now the best case scenario unless we are able to profoundly
Put simply, the difference between 1.5 (which we probably can't make) and 2C warming is INSANE. And we may be on course for ~3C:
Sir David King, the UK govt's former chief scientific advisor, has said that at around ~3.5C the amount of land lost to rising seas, and the displacement of people forced to move because of sea-level rise, loss of food sources, increase in unmanageable diseases, all will cause a breakdown of social order at such an acute level that government won't really exist any more.
Its not wild hypberbole. Its currently the most likely outcome.
Here's a map of Miami in 2050 based on current projections:
So, we have to act. And the zeitgeist for action is rising, its rising fast.
There are now THOUSANDS of business signed up to the BCorp designation, and there are other ways of measuring this to that businesses are clamouring to sign up for because it builds community
And BlackRock, the worlds biggest investing house, claim (more on this shortly) to have pivoted to ESG. There’s a structural shift happening in the way the the major money handlers think about the risk from insuffucient action
I'm an optimist - or at least deeply convinced that the commonwealth of human ingenuity is now fully swinging behind the effort to decarbonise everything, electrify almost everything, and outlaw and punish all transgressive behaviour. Moreover, the rise of blockchain means i'm absolutely certain that people will be paid cryptocurrency for every verified effort (however small) to remove carbon from the atmosphere. We will be spending carbon coins by 2030, i predict.
And i believe the effect of acute TIME compression is to make the sustainability agenda have an effect not identical, maybe, but very similar to the view of technology in GPTT.
It changes the regulatory environment to force down the cost of carbon reduction. Nothing less than the complete inversion of how we attribute value atm. It will come from restorative actions, not consumption (per se)
It crosses every sector
Many platforms will be built on this fact
At the moment, i believe that climate-positive economic activity is a value-play in a similar way that Ark think of things like AI and collaborative robots because its just not fully priced into the market yet.
I've also got a train of thought developing about how we can use what we saw in r/wsb with GME recently to accelerate this process of value realisation for the really good companies and sectors too. But i'll come back to that in another post.
For now, what i want to say, is that there's an added value play in companies which are profoundly part of the solution for the biggest issue facing us all.
Cathie Wood mentioned in an interview last year that an ARK ESG fund would be forthcoming in 2021. I’m going to focus on stocks that I think could be included. If i’m even close to right, the upside for both our financial resilience and our future on this biosphere - a thin 6 mile strip of life that as far as we know is the only one of its kind in the UNIVERSE - is incalculable.