Diversification: 1, Jim Cramer said. Concentrated Risk: 0.
Cathie Wood, who runs the controversial investment company Ark Invest, has come under fire in the past. The company is focused on identifying "disruptive innovation," and Arks' handful of ETFs are spread across around 30 companies in the historically volatile tech sector.
Cramer, the equally controversial host of CNBC's "Mad Money," thinks Wood's entire strategy of jumping heavily into those companies she thinks have the greatest potential for growth is, quite simply, wrong.
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"Wood's strategy generated incredible returns when Wall Street loved growth, but when growth went out of style, so did her performance," Cramer said. "Turns out, it wasn't a strategy at all. It was a tactic and a very risky tactic at that."
Ark, which was up more than 150% in 2020, fell 23% in 2021. And then 67% in 2022. The reason, according to Cramer, behind Ark's tremendous upsides and downsides is simple.
"Wood was undiversified. That gave her tremendous outperformance in 2020, but tremendous underperformance in 2021 and 2022," Cramer said. "That's the danger of running an undiversified portfolio. You have to be right every time, or else your investors get obliterated. In reality, nobody's that good to maintain this method over the long term."
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Though Cramer acknowledged that Wood was the "best stock-picker of 2020," he said that he doesn't think she has lost her magic over the past couple of years. Rather, he thinks, other than a few good picks, she never really had it.
"Her whole concentrated investing style is self-defeating. You can't win like that year in and year out," Cramer said. "Sooner or later it will blow up in your face."
Cramer's solution is a company like BlackRock, which is centered around diversified investments rather than a few potentially huge home runs.
Investors should follow a strategy, Cramer said, not a tactic.
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