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Afford Anything | Make Smart Money Choices
The Case for Investing in Individual Stocks, with Co-Founder of the Motley Fool, David Gardner
01:29:14
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- [00:01]
A
Today we sit down with David Gardner, the co founder of the Motley fool and the author of Rule Breaker Investing, for a deep dive into individual stock picking. Now, I know that we are as afforders, we are dedicated index fund investors, which is the overwhelming bulk of my portfolio outside of real estate. Real estate index funds, that's what I invest in, that's what I teach. But it's fun to dabble just a little bit in individual stocks. And the insights that you develop when you evaluate individual stocks, those insights create transferable skills that apply to all investors. In this interview, we talk about David's contrarian approach. He actually looks for companies that are overvalued. He talks about why, if everybody else thinks that a company is too expensive, he's interested. He talks about his six traits of Rule Breaker stocks. And he emphasizes qualitative over quantitative analysis. He looks at leadership, innovation, corporate culture, things that don't show up in traditional financial metrics. So even if you never buy an individual stock, understanding these concepts can help you be a better entrepreneur, be a better employee in your own company. It can round out your understanding of business. Now, if you're not familiar with the Motley fool, they are a legend online. They started in the early 90s and since then they have provided millions of people with investing advice. They're a private company with over 300 employees, and because they've been around since the early 90s, their advice has stood the test of time. They've survived 9, 11 the dot com burst, the great Recession. They have withstood all of these tremendous financial calamities to bring investing education to the public. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double eye fire. And today we're going to focus on that second letter I investing in this conversation with the co founder of the Motley Fool, David Gardner. Here he is. Hi, David.
- [02:08]
B
A delight to be with you. Paula, thank you for welcoming Suffering a Fool. Gladly, if you will.
- [02:15]
A
I am happy to suffer fools. David. September is historically the worst month for stocks. Happy September. What should anyone who's listening to this know as we go into the worst month of what is historically the worst month of the year?
- [02:30]
B
Well, they should know that historically the stock market returns 9 or 10% annualized. That's a plus number. That includes every September. It also includes every October. And we've seen some crashes in October in the past and every good and bad month over years and years. And so I absolutely appreciate the hot stove start and saying September, because it's September right now. But, you know, anybody who's gotten to know me over the years or will get to know me in our conversation today should know that I'm always playing the long game. So even what the market does over the next 12 months is not of great concern or interest to me. I do care deeply. I'm a baseball fan. I watch my team every day. I'm one of those people who watches the games and follows the box course. But I'm not going to change my favorite team. So in the same way, I care deeply from day to day, but really we're measuring ourselves, I hope, over years, decades, lifetime. That's the game we're playing. That's not a game that Wall street plays very often, and much of financial media doesn't. Doesn't play that game. That's why it's so advantageous to play that game.
- [03:38]
A
With the sports team analogy, it is rational to root for a team, assuming that you're not betting on them and you're not on DraftKings, which we could also talk about in a moment.
- [03:48]
B
I think that's a mistake, but keep going. I love it. It's fun.
- [03:51]
A
Yeah. Because that's an interesting cultural phenomenon. Assuming that you're not betting on them, it's rational to pick a team and have the emotional connection to a team. Whereas if you're picking an individual stock, and I know Motley fool talks a lot about individual stocks, and we can talk later about stocks versus index funds, there's a lot to discuss. But if you're picking an individual stock, it isn't the same as picking a sports team. You do have to have that element of looking at its financials and deciding. It is my preferred holding, period forever. To paraphrase Philip Fisher. Or should I be reconsidering the evidence and letting this stock go?
- [04:28]
B
Yeah, I would say there's actually much more crossover in my mind between your favorite sports team and stocks in your portfolio that I think most people would think or expect to have. You know, one of my principles of the rule breaker portfolio, which is my style. My. My job is chief rule breaker at the Motley Fool, a company that I helped co found. So I love the phrase rule breaker. And breaking the rules is actually to love the companies that you're invested in to make your portfolio reflect your best vision for our future. And you're right, Paula. I do like to buy individual stocks directly, and I realize we're doing that in a world where most people are not coached to do that, but. Or they wouldn't feel comfortable to do that even if they were allowed. Perhaps that's part of being a fool. Capital F is going against the conventional wisdom. And so for me, I think we should all own at least one stock directly, and it should be in a company whose product and service you value, you probably appreciate and that you think will grow over the next, not month, but 10 years. And it's not possible to predict where AI will be in 10 years or where the world will be in 10 years, except that if you share the same rational optimism that I do, you can expect that it will be higher in 10 years. And if you're looking for excellence, if you're looking for the best companies of our time, I would say the rule breakers, then there's a darn good chance you'll be ahead of the market's returns. And I think it's so important, therefore, Paula, that we should be invested in companies we really know well, like our sports teams. And I realize some people think the opposite. They think you shouldn't fall in love with your stocks. Those kinds of. You hear those lines? I completely disagree. I think in many ways our stocks should be an extension of who we are. And you will do better if you're making your portfolio reflect your best vision for our future than if you're just taking somebody else's advice or just following along without really caring what the company does. So that's my quick thought back on sports teams and investing. And let me add one more thing, because the actual word investors comes from the Latin investeri, and investeri to the Romans meant to put on the clothes. So I really like that you've latched onto sports because we can all picture football is coming back to our society here this fall, how many people are going to go to the stadium with their sports team's home jersey on? And whether the team wins or loses that day, they're probably not going to change their favorite team. Whether that team has a good season or not bad season, they probably will stick with it. And, and if more of us, frankly, did the exact same thing with the stocks in our portfolio, we would have even more prosperity in our society that we enjoy today. So I would just say I'm a big fan of sports analogies and thank you for letting me go there. But I also love language and paying very careful attention to what words we're using which guide our thinking and actions. And it's very important to me that people think and understand what Invest truly means.
- [07:21]
A
When I hear you talking then about investing in companies that we truly believe in, a couple of things come to mind. One is an analogy to community bonds or an analogy to socially responsible investing. What I hear is a real values orientation, not to be confused with a value orientation, but an orientation that is rooted in principles. A, am I understanding that correctly? Is that what you're saying?
- [07:45]
B
You said it so well too.
- [07:47]
A
And then B, would that not have the effect of overemphasizing consumer facing brands, the ones that we're familiar with, as opposed to, let's say, some biotech companies that people who are outside of the biotech space have never heard of?
- [08:00]
B
Yeah, first of all, for us as investors, I think we should all be socially responsible, but not to somebody else's agenda. I believe that you know what you see as socially responsible, if you like, or environmentally responsible or just culturally relevant, to take away some of the edge of responsibility and just talk about the world that we're living. And that includes your investments too. I think that it is a one to one between what you own and what you believe. I think you should have that. And I don't think it's that hard to do. And you're right, it is going to bias people toward consumer brands because most of us, all of us are consumers, some of us work in biotech. And so again, I believe that your portfolio should be a natural extension of who you are. Therefore I should be able to look up and down your portfolio just like the books behind you on a shelf. If I walk into your den or your studio, I see your books. That tells me a lot about who you are because our books are our friends. Same thing should be true of where you're invested. I don't have a problem with being biased toward consumer brands. I actually look at all the great consumer brands, like the greatest consumer brand in the world, Apple, or maybe the second greatest, Amazon, and I ask myself, are there two better stocks we could have held over the last 25 years? The answer is there are a few better, but not many. And so I believe that consumer based brands and businesses favor beating the market more so than B2B or companies that are just not in the here and now are not part of relevant conversations we're all having. Starbucks has been a huge outperformer as one of the best known consumer brands on a industry that is really kind of pretty basic coffee. And so we see the power of not just the brand, but how that plays into the company's prosperity and how it grows over Time, my brother Tom and I, when the Motley fool was just in its first few years of starting, had been on the COVID of Fortune magazine and had some acclaim and awareness. I think it's part. We're like poster children for this new medium, the Internet. We were young guys, we were using it to give people investment advice. So there was a lot of interest in the Motley fool at the start. And so the View, which is still an ABC daytime programming show mainly aimed at women with female hosts, had a new host, Lisa Ling. At the time, she was in her 20s and we were kind of late 20s. And so they said, let's have the Motley Fools on. And we'll have them pick a stock for Lisa, and we'll call it Ling's Money Thing. And, you know, they'll pick a stock and, you know, it should be something that Lisa likes.
- [10:30]
A
Right?
- [10:31]
B
That's sort of. We're trying to exemplify good behavior for our audience. Let's buy a stock and see how we do. So we picked a stock and we made our first appearance on July 2nd of 1998. These dates are seared in my mind, by the way, for reasons that will become evident soon. We came on and we gave the stock and, you know, we got a lot of good comments and fun exchange banter with Lisa. And the studio audience is always going to be pumped up. So we picked that stock. Over the next six weeks, that stock lost 33% of its value. It wasn't quite September, it was July through August. But we returned to the View for our second and to date final historical appearance on the View, where we came back and they're like, the Motley Fools are back. And the audience was like, yay. And then. And their stock for Lisa is down. And a friend of ours who watched this review says, I think you guys may be the only ones ever booed on the View. And, you know, it was good natured, but. And this is going to be a very telling story, but yeah, it had literally lost 33% of its value. The CEO of the company, they had reported earnings in those six weeks and they had good earnings. But the CEO said, you know, looking a year ahead, I can't say things are going to be as good as you analysts maybe think, just putting it out there. And you know, usually good people in life under promise and over deliver and many great CEOs and companies are, are floated by that mentality. And this is true of the company that we picked for Lisa that had lost 33% of its value. In six weeks that we've never got to return and talk about. But Starbucks has been a very good stock since July 2nd of 1998. It's up 34 times in value. That includes the 33% drop. So I think the key here is just realizing that the game that you're playing matters deeply. And we're not playing the six week game at the Motley Fool. We're not even in some time cases playing the six year game. And not every stock deserves Paula. To be held forever. Right? Some stocks are just going to be stocks I would never buy or I wouldn't want to hold for a certain length of time. But Starbucks is a great example of a rule breaker. A company that comes along and just looks overvalued, is doing something different. And whether it's been Nvidia for me, Tesla, another great example. These are all my best stock picks and that's what I'm writing about in my book. They're rule breakers and they do tend to be consumer brands. So Starbucks has just been a phenomenal investment. The people of the View, I'm sure. I don't think the producers are the same anymore. Like I don't think there's institutional memory there. But it's quite a remarkable story if we were to return at some point because we're really sharing what investing is and how it works and how you win and how you can win wildly, specifically by being longer term than most other people who are playing the same game.
- [13:24]
A
What was the criteria that you used to pick Starbucks in? You said 1998. Yeah, 1998, yeah.
- [13:30]
B
You know, the six traits that I'm looking for in stocks. I won't go through them all. Unless you want to.
- [13:35]
A
Yeah, yeah, please do. Please go through them all.
- [13:37]
B
Okay, fine. So, so here are the six traits of the rule breaker stock and we can. I'll go through them fast and then we can talk about Starbucks in the context of these. So here are the six traits that I look for in my rule breaker stocks. The first one is top dog and first mover in an important emerging industry. The second that it have a sustainable competitive advantage. The third is that the company's stock has recently experienced stellar past price appreciation. Okay, that's very contrary. So quickly. The first two are about the company, right? Top dog and first mover, sustainable advantage. The third though is about the stock and I'm specifically looking for stocks that are already doing really well, which gets very contrary for many people. All right, so now the second group of three, which also go company Company stock. The fourth one is we're looking for good management and smart backing. It's basically the people running the enterprise that matter greatly to us. Number five, strong consumer appeal. That speaks not always to consumer brands, but that speaks largely to the power of brands and reputation. And then the sixth and final one, my favorite of all, the secret sauce that brings them all together is that the company be regarded very generally as overvalued. People on CNBC are saying it's overvalued. Barron says Amazon bomb on the COVID People are saying it'll never make money. These things are completely overvalued. Palantir is so overvalued, it's that Tesla. So they'll never make money. And so when you actually put all six of those together, you have what I look for. Does every company check every one of those boxes? Usually not, but do the stocks that I pick check most or all? Yes. Did Starbucks in 1998. We don't need to do a retrospective, but did Starbucks check all of those boxes? If you want to, we could do a quick review. Sure, let's do it together. Do you think that. Do you think that Starbucks was the top dog and first mover in an important emergency industry?
- [15:39]
A
No. You had Dunkin Donuts. You had Pete's Coffee. Oh, actually, I don't know when these companies started, but you certainly had Dunkin Donuts pre Starbucks. And you may or may not have had Pete's Coffee. Trying to think of other major coffee labels. Seattle's best.
- [15:53]
B
Yeah, there's, like, Caribou. There were some others. So I agree. I don't think Starbucks grades out really highly on that scale. Although I would also say that the way that Howard Schultz, the founder, talked about the company was different from those others. And you may remember this, Paula, or you may be a Starbucks hater, or somewhere in between. I don't know. People love and hate Starbucks. But what Howard was saying is we're the third place. He's basically like, all of us have our homes, our first place and our jobs. Whether or not we still go to the office is a separate matter. Selling place.
- [16:25]
A
In 1998, we all did.
- [16:27]
B
Exactly. And then he said, but we all need a third place. And that's what we're trying to do at Starbucks. And certainly how many people have had meetings, touch bases, you know, or just regular habitual interactions at Starbucks? And while that can be true at Dunkin Donuts, maybe somewhat. And you know, at a place like Panera, you do kind of sit down and have a leisurely More than just coffee. I do think that how Howard was casting it and what they really built was more differentiated than just another Pete's knockoff. Anyway, I like your answer. I generally agree that I don't think we can say they were the clear top dog in an important industry. Although I do think that third place thinking was part of my thinking in 1998, I still agree with it today. Number two, sustainable competitive advantage. I personally feel like they did for a couple of reasons. Do you want to weigh in on this one? What do you think?
- [17:15]
A
I'm trying to think through what is Starbucks competitive advantage? Because for an institution like McDonald's, for example, it's easy to make a burger, but McDonald's, starting in its very, very early days, bought a lot of real estate. You could argue that McDonald's is a real estate holding company.
- [17:31]
B
You're right.
- [17:32]
A
That happens to sell burgers in order to float the real estate that it's holding. So for McDonald's, the real estate was their competitive advantage. For, let's say, yum brands. They have so many. They have Pizza Hut, kfc, Taco Bell, Habit Burger Grill. They have so much under their umbrella. There's economies of scale there. So you've got some competitive advantage. I don't know what Starbucks competitive advantage.
- [17:58]
B
Is from my standpoint. And again, there's a little bit of 1998. We're in a time machine here. But I also think these things are generally still true today. But I would say two competitive advantages that I saw that I would have said at the time were I think we have the smartest guy in the room in this industry. Howard Schultz is a true visionary and a brilliant businessman, and nobody else had him. In fact, I'm hard pressed to name who the CEO of Dunkin Donuts was back then or any of the other companies we're mentioning. But Howard Schultz was an iconic leader who had basically brought them public in 1992. And a second thing that Howard did as the leader that I think was played into their competitive advantages somehow. And I don't know how they did this, Paula, maybe you know better than I. They got us all to pay about $2 more for a cup of coffee than anybody else was. And so that laid down a powerful competitive advantage where they could use that extra margin to make their stores nicer in some cases and or expand faster than competitors. And I would say that played into a third form of advantage for them, which is their brand name. I think that a lot of people are like Starbucks. They know what that is. That's hard to do from a startup position to become a ubiquitously known company. And so you just become a third place go to for people like, I don't know, I'm new in town, let's meet at the Starbucks. You wouldn't necessarily say that at the Dunkin Donuts. You might, but you're conveying different things to people when you say let's meet at Blank McDonald's.
- [19:29]
A
Right.
- [19:30]
B
So for me, those represented competitive advantages that were sustainable. The founder is going to stay around, the premium pricing is going to keep playing through, and the brand. But I'm just sharing with you that this is the sort of thinking that I do as a rule breaker. I try to look at things that are more right brain and less numerical in a world where most people who are investing are all about the left brain. They've got their algorithms, their screens and all the rest. And I'm more thinking about it as an entrepreneur asking myself, you know, does that thing exist? One thing I can assure you is that Starbucks have been a powerful performer. Attribute number three, stellar past price appreciation. It happened to hit the skids right after we picked it on the View, but it was, it was a monster winner. And of course from that date to now has been a gigantic winner of 30 times in value. So that definitely existed. And I will also skip to number six and say the stock was broadly perceived to be overvalued. Why would you pay up, you know, 38 times for a coffee company? Like, that's too high a price to earnings ratio. I would never pay that for any company, let alone this coffee company. So those perceptions that are in place are often good indicators for me. There are reasons to buy the stock when everybody else is using them as reasons not to.
- [20:44]
A
Right, right. I'm glad you skipped directly to number six, because that was the primary one that I had questions about. And I actually have questions in two forms. Why is overvalued good? Why is that something that you look for? I'm wondering that both in the context of an individual stock like Starbucks as well as in the context of broadly the overall market. And maybe we can start there, because that is a worry that I've heard from a lot of members of this audience who say, is the market in general overvalued? We've had this run up that has gone on for a long time. Is the overall market overvalued? Should I be pulling money out of it? Should I be holding a bigger bond or cash allocation? I mean, talk to the index fund investors who are never going to buy an individual stock. What do you do when you think that the whole market is overvalued?
- [21:32]
B
Let me just say index fund investors. I do think you should buy a stock. You don't have to make it, you know, 10% of your overall net worth. I think everybody in America should own at least one stock. I actually think you will be more intellectually curious. You'll notice more about the world. It'll help you in your own professional life because you're paying more attention. And I think you might even find it's fun and add a second, third or fourth, and you may even, like me, discover that you can beat the market averages by investing directly in stocks. Because my goal, Paula, is always to buy the great companies. I don't want to buy index funds with the mediocre ones and the outright bad ones. When you buy everything, you're buying it all. I think we can be a little bit choosy without being arrogant about it, and we can do a lot better. And that's been my lived experience. So with that said, though, that quick note aside, that mini rant for index fund investors. Yeah, I absolutely acknowledge, first of all, that the stock market drops one year in three. And whether that year is about to happen now, I didn't know that Starbucks was about to lose one third of its value in the six weeks after we promoted it on the View. Those things are not things that I try to have a developed viewpoint about. I'm much more fascinated by what wins in business. And therefore I want to be a part owner of those companies, like Apple, like Nvidia, like Amazon. And I want to generally buy those companies early and hold them way past everybody else. Therefore, one year in three, the market or those stocks are going to be going like that. And I'm not bothered by that because the good news is two years in three, they go up. And when we find great companies, they go way, way up. And if you actually just hold them over the course of years, not months, you will find yourself amazed by how much they go up. As I have been with our Amazon and Nvidia and Tesla and other companies that people haven't heard about as much, like Axon Enterprise or Intuitive Surgical. So these are all rule breakers. And therefore, Paula, I don't develop views of the market and where it is in its valuation cycle because I truly am 100% invested my whole life. So I started at the age of 18 when my dad said, here you go, I invested for you from birth. This is all you're ever getting from me. Don't screw up. So I started from the age of 18. I'm 59 now, so I've been investing for 41 years. That means shortly after I got that portfolio from my dad, the stock market crashed in 1987. We started the Motley fool business in the early 1990s. Then dot bomb destroyed everything. Lots of parts of the industry. Amazon went from 95 down to 7. Our company laid off a lot of people those few years. Tragically hard. 2008. 9. Great financial recession. There were some soft years in the teens. Everybody, even though everybody tends to say it was a great bull market all the way through. And then of course, the incredible Covid whiplash. So that's the first 41 years. I'm hoping to be around 41 more. That means I'd be 100. And I predict disasters ahead. It's inevitable there might be one in the next year, let alone the next month. And the world is far more resilient than each of these individual disasters. And one of my favorite lines from Buffett, who I quote even though I go opposite the Buffett crowd on many things. But one of my favorite lines from Buffett, actually, the punchline is who said it? And the answer is, you already know the spoiler alert. It's Warren Buffett. But when I introduce this line in my book without mentioning who it is, it opens some eyes. And here's the line it's forming macro opinions or listening to the macro or market predictions of others is a waste of time. Warren Buffett, and I think he has a good point there. Not to suggest we should bury our heads in the sand or not care. And a lot of us get emotional about our money, probably too emotional. So we're trying to avoid the fear of losing or the idea that September would be a bad month. But the truth is that over these 41 years, I've been invested in the next 41. Every cycle will hit multiple times. And the key is that the stock market rises, index fund investors 9 to 10% annualized, which is absolutely amazing. And the idea that you would jump off that train and destroy the compounding clock you've set up for yourself because you're worried about a bad month or quarter or even a bad couple of years, no way I'm going to be invested all the way through. And I've been so grandly rewarded for doing so. Therefore, I, I'm not going to spend a lot of time asking, is the market high or is the market low right now? So that's sort of without trying to be too blithe or too glib in my reply to you, Paula, because it's a great question. I'm kind of with the Buffett line. I really don't care about near term market conditions. Part of our business over 30 years now has been providing direct advice to hundreds of thousands of Americans who follow what we're doing. And so I take it very seriously because not everybody has this blithe, happy go lucky approach that I do to money. Many people take it much more emotionally in hard ways. And that's why we all have to get to know ourselves over time and figure out what you want to listen to. But if you're listening to me on this point, I don't spend much time when I'm invested for at least three years in any individual stock that I ever buy, which is another of my rules, I don't spend a lot of time thinking about whether the market's high right now. Now, you also asked an individual stocks question, which we can go to next if you want.
- [26:46]
A
Yeah. So why would you see overvaluation or the aggregate opinion that a given stock is overvalued? Why would you see that as a positive? Why would that be one of the six rules?
- [26:56]
B
This is really, really important. In fact, let me just set it up a little bit. If you can find a top dog and first mover in an important emerging industry with a sustainable competitive advantage, stellar past price appreciation, good management, smart backing, and strong consumer appeal. By the way, we kind of, I skipped this for Starbucks, but they definitely have strong consumer appeal and they definitely had good management and smart backing. If you could find all five of those, and then somebody on CNBC or in Wall Street Journal is telling you that's so overvalued. What I have learned is that that is the final indicator you need to buy that stock. And again, not any stock, because most stocks do not check the boxes we just went through. We're talking about excellence. And I'm basically looking to find excellence, buy excellence, and add to excellence over time. And I sell mediocrity. So I'm looking at a tiny percentage of the overall companies in the market. I don't feel pressure to screen the whole market or want to own the whole market. And yet I have a rich number of companies to buy from. I'm just focused on the stocked pond of the top dogs and first movers in important emerging industries. And if you're looking at that group of stocks and someone's saying it's so overvalued, my own Reflection on that is that we grew up with our site fool.com on AOL. In fact, before it was fool.com it was keyword fool on AOL. And that was my first great stock pick. And people were like, aol is so overvalued. And I was like, I hear you, but I'm recommending the stock. I think this is a great stock. And for multiple years it was the poster child of ridiculously overvalued. And it went up 150 times in value over the six years that we held it. And I learned at an informative young age with other people relying on our, on our advice, going on the View, being on the COVID of Fortune, being a poster child for an overvalued stock that everybody was wrong. That was actually the best stock that you could buy in 1993 or four. It went up 150 times the value proposed from the point at which it was so overvalued. Good news. It's not the only stock like that. Most of the companies that I've already thrown out in our conversation together were also so overvalued. And that's why I started to realize, Paula, that it's actually the opposite. And then you might wonder. Cause that's my setup now, my delivery answer to your question, which is more like 101, not basic finance here, but my 101 answer is the valuation metrics that the world has adopted as the conventional way to value companies are missing what I would say are probably the most important factors behind companies winning in the marketplace. They're literally invisible to valuation traditional metrics. And because they're the most important things, all the best companies are overvalued because what makes them great is literally not being scored. Because people are looking at price to earnings ratio, price to cash flow, price to book value. In some cases, they're looking at a multiple off of an output. And they're missing the inputs that we can all see hidden in plain sight. For example, who is the CEO of the company? That is unbelievably important. And there is no number. There are no numbers for the things that matter most. So when Jeff Bezos at a young age says, we're going to be Earth's biggest bookseller. But more than that, and he's being derided for not making money and just being an overpriced bookstore, the actual value of Jeff Bezos running your company, we can now see, was incalculably high. Unbelievable. And there was no number for that. There is no number for who the CEOs. By the way, some people are subtracting value from their organizations as CEOs. Question. There is no number to steer investors away from those companies. They end up looking undervalued because people are see the market is actually smarter than traditional valuation metrics. So the market is going to pay up for Bezos and not pay up for bad CEO. But most people using traditional valuation metrics and I've studied this, these and I've watched this for 30 plus years are completely missing. I'll give you one more example. Brand. There is no number for brand on the financial statements. It should be, it should be valued. There should be a proxy number and if you start adding it to earnings or cash flow, you'd start seeing that that company is a lot cheaper than it looks when you're only valuing it off of its cash flow. When you have a great CEO and a great brand, you have two of the key ingredients to win over the only term that counts, the long term. And traditional valuation is completely missing those. And those aren't the only ones. Besides there are others. But that's what I finally realized, Paula, and that's why it works.
- [31:55]
A
That was actually going to be my follow up question is what are some of the other key factors that are missing? Because when you talk about brand, I immediately thought of goodwill. And goodwill is included in financial statements for some.
- [32:06]
B
Yeah, if you buy somebody else's company and you can't recognize full tangible value off of their assets, you book a goodwill asset and that ends up being in some cases people's proxy for brand. But there is not a goodwill straight up for a company with a great brand. And even if there were, I still question the accounting and thinking behind it and nobody's doing valuations off goodwill. And so that's why to me, ironically, and it truly it's taken me 40 years to realize this and ask why without bragging too much, why have I done so well and beaten the market by finding Amazon at 16 cents a share and then 10 years later finding Nvidia at 16 cents a share and I'm still holding both of them and they were so overvalued and I started to realize it's these things. And you just asked a great question. Are there more things what I would say hidden in plain sight? And the answer good news is yes. And if you and I care and I'm going to give two more, then we can use these and pay attention to them. And here's even better news. If you're trying to beat the market most of the volume on the New York Stock Exchange every day does not know these things or care about them at all. Most of it is incredibly short term. It's looking at zigs and zags on price charts and looking about six months ahead. The vast majority of the so called money sloshing around the market, institutional smart money is actually really short term that doesn't even notice what the company does, let alone that it has a brand or a certain person running it. Institutional money that's just mechanically getting invested is not looking at these things and, and therefore I find it an easier game to win which when I've done and here are two more things Paula, and afford anything fans that I think are also not counted that count for so much. Number three is innovation, the innovativeness of a company, the capability to innovate. I think that may be the single most important trait of companies in some ways it's they are in the leaders or not of those companies. Right? So it's a human factor, but it's also systemic. Do they have processes in place? Do they have frameworks that they operate off of that allow them to innovate? Why can some companies consistently out innovate others? Why is Alphabet such a remarkable, amazing rule breaker company in stock and the second or third place company in that industry isn't as much? So I would say the capability to innovate, which you can see fairly evidently based on what companies are doing and bringing out as R and D, are they spending the money well? Are they consistently bringing out new fashions, new brands or not is clearly important. And also there's no proxy or number for it. So we're not noticing with our traditional valuations who's innovating. And in fact we usually demean the ones who are because we say things like I can't really predict what they'll do next. There's a whole world that follows Warren Buffett and I love lots of aspects of Buffett, but I also don't agree with this. And he's trained people to think what won't change in the next 10 years, invest in that. So he's like Geico See's candies et cetera. I'm like what could morph into something amazing in the next 10 years? Let's invest in that. Most people are not comfortable with that. That's all about innovation and being driven by that. So that's number three and then a fourth factor and please add another of your own if you like, because I don't think these are the Only ones. But these are big blocks to build on. And the fourth one I have in mind is corporate culture. I have grown up within a company that I helped start. We have hundreds of more employees than I thought we'd have at the start. I have seen firsthand the importance of corporate culture. It is a rich, deep soil. If well tilled, it outlasts leaders because cultures and cities run deeper than those who run them. They last longer, usually. They're harder to change than leadership. And culture really sets up everything else. You may have heard the. The. The classic line, culture eats strategy for breakfast. I'm part of that school that believes. And yet, if you actually try to talk about this, usually in Wall street circles, it sounds frou frou to people. You're like, really? Culture? Really? But what about the valuation metric that we're talking about? Right? And yet I, as an entrepreneur and somebody who's been picking stocks for people for 30 years, believe that's very, very important. So to reiterate this line, Paula, there are no numbers for the things that matter most. That for me, explains a lot of why overvalued. In my 20s, I was like, I think this works. I'm gonna go with this. I've now seen what happened with aol. I'm gonna keep going with it. Amazon, the list goes on. Now, I think I understand. Not trying to say I see all of it, but I think I understand, in part, why it has worked so, so well. And I don't think it's about to stop working anytime soon.
- [36:52]
A
What I hear from you is a priority on the qualitative assessment of a company rather than the quantitative assessment of one.
- [37:00]
B
You got it. And by the way, quantitative matters, too. Like, I got into all of this as a huge fan of baseball statistics, growing up in a baseball family and being a big fan of Bill James, whose work was later taken into the major leagues by the Oakland A's and Moneyball. And anybody who's read that book or seen the movie knows a little bit about that. That was like, where I was back in the day. And then I started realizing, you know, I could also hold these quantitative new thinking thoughts, but I'm never going to influence baseball. That. That's its own world. It's very closed. But here's what I could do. I could go to a different field that we can all play on the stock market, where you and I can just create our own portfolio, compare ourselves to Warren Buffett numerically. How did you do this year? How did I do last year? We can all play on that field. I was like, I am going to take new thinking, quantitative, but especially qualitative into this realm and play there. And I think it's a bigger game than baseball ultimately, which is why I'm glad that baseball felt close to me. But I want to make it clear, like I love math. I think math is great. And the key, like a better world than we're living in today would be somebody who's figured out proxies for math for the four intangibles. I just said matter more than anything that's tangible and they're the inputs. If we actually, and I think some future generation smart thinker will do this and maybe it'll be AI, but somebody should be creating numerical proxies for these things. And then it would be more quantitative. But then I'd still start saying, okay, you've quantified that up. What else qualitatively aren't we seeing? Because I think that's the value adding value contributing. Beautiful question to be asking in a numbers driven world.
- [38:45]
A
Okay, you know you're on the couch, it's late, you're scrolling and you see something that you want and you put it in the cart. But you don't want to get off the couch to like find your credit card and you don't have to because there's that big iconic shop pay button. You know the one that's the button that has all your payment and shipping information saved so that the checkout process is easy. Well, that's Shopify. And there's a reason that so many businesses sell with it. Because Shopify makes everything easier. From checkout to creating your own storefront. Shopify is the commerce platform behind 10% of all e commerce in the US from household names like Mattel and Gymshark to brands that just got started today. Shopify gives you that leg up with hundreds of beautiful ready to go templates to express your brand style. And you don't need to know how to code, right? You can tackle all of these important tasks in one place. From inventory to, to payments to analytics. You can spread word about your brand with built in marketing and email tools. And of course there's that iconic purple shop pay button that's used by millions of businesses around the world. And that's why Shopify has the best converting checkout on the planet. If you wanna see less carts being abandoned, it's time for you to head over to Shopify. Sign up for your one month, $1 per month trial period and start selling today@shopify.com Paula go to shopify.com Paula shopify.com Paula if you run a business, every time you miss a call, you're leaving money on the table. Think about the last time that you had a plumbing emergency if the first plumber didn't answer. Did you wait? No, of course not. You called the next plumber on the list. With OpenPhone, you'll never miss an opportunity to connect with your customers. OpenPhone is one of the top business phone systems that streamlines and scales your customer communications. It works through an app on your phone or computer so you don't need to carry two phones around. And your team can share one number and can collaborate on customer calls and texts just like a shared inbox. That way any teammate can pick up right where the last person left off. Plus say goodbye to voicemail. Their AI agent can be set up in minutes to handle calls, after hours to answer questions, to capture leads. So you will never miss a customer. And whether you're a one person operation that's drowning in calls and texts or whether you have a large team that needs better collaboration tools, Openphone is a no brainer. See why over 60,000 businesses trust Openphone. Openphone is offering my listeners 20% off of your first six months at openphone.com Paula that's O P E N P-H-O-N-E.com Paula and if you have existing numbers with another service, Openphone will port them over at no extra charge. Openphone no missed calls, no missed customers Huge Savings on Dell AI PCs with Intel Core Ultra processors are here and they are newly designed to help you do more faster. They can generate code, edit images, multitask without lag, draft emails, summarize documents, create live translations, and even extend your battery life. That's the power of Dell AI with Intel inside upgrade today by visiting Dell.com deals how do you decide when to let go of a stock? Is it the same assessment, just in reverse? Is it when new management comes in and they're weaker when scuttlebutt? Word on the street says that the culture is kind of fallen apart. How do you know?
- [42:25]
B
Love it. And I know I'm talking to a Phil Fisher fan when you throw scuttlebutt out. And I really appreciate like I try not to be a great seller. I don't think I ever will be a great seller and therefore I try not to sell at all. And that's not to say I never sell, but it's much closer to that than anything else. And I have been wildly rewarded for making that error. In this sense, some of my biggest holdings are companies that I didn't exactly figure out with my opening thesis. And had I decided, you know, it's not really, like, playing out how I thought, so I'll just sell or it's not hitting my target price. A lot of people like to do it numerically. They have a target price instead. I was utterly amazed as they went from Caterpillar that I was investing in into a butterfly I never could have expected. And I just let it happen because I don't sell. And then it ends up being. In this case, I'm thinking of booking today, which started as Priceline with William Shatner singing ridiculous tunes on TV around Priceline, I completely misunderstood the thesis of the stock that I'd bought. But as things started to turn out better than I was thinking, I started realizing, I'm going to keep holding this and I have all the way through. The most you can ever lose. This is back to math. The most you can ever lose is 100%. And I've still never, never quite done that. But I've gotten close and we haven't done this. And we don't have to rock this a lot in our conversation today, but I love talking about losing and losers. And I want to make sure people know right alongside mega winners that I have created for Motley fool members are any number of losers. I have more bad stock picks than anybody at my company, so this is very important. But with that said, the most you can ever lose is 100%. The most you can make is infinite. Therefore, if you disciplined yourself just to say, and I'm not saying you should do this, just it's a thought experiment. If you simply said, I will never sell any of the investments that I make, if everybody societally had done that, we would be so much more prosperous today than we are. And I still think we're doing pretty well. How many people have come to me saying, I had Apple, I had it for a couple of years, and you know, it's Apple and. Or, you know, Netflix, like Quickster, like, I don't know what they were doing there. So I, I greatly. To my. And it's because on average, the market goes up and I'm really only focusing on great companies. And sometimes I'm wrong. That company wasn't great. For example, Peloton has not ended up being the great thing I had hoped that it would be. So we're not always right, but when we are right, we should give ourselves the huge benefit of our younger selves having some vision and recognizing what were about to do to our portfolios if we would only let them. And again, most people tend to sell way too early. They don't stick with their knitting, they get scared out of market, emotional short term stuff. Or they just don't think any stock could go that high. And I've seen the opposite. There's a psychological reason I want to throw out really quickly, which is that behavioral economics has repeated again and again that the pain of loss is three times the joy of gain. And I see you're nodding your head, so you may well have thrown this down on a regular basis on afford anything. But this is, this is basically lab test at this point. And here's the amazing thing about the stock market. It's the exact opposite. In a crazy way. The joy of gain is infinite times the pain of loss. So in a world where most people are trying not to lose and if they join a Motley fool service and my first stock pick goes down for them, they call our member services line. They're like, what should I do? Should I sell the stock? I wasn't expecting to lose money. I'm paying you guys and I've just lost money. I think I'm going to cancel the service. People really don't want to lose. It hurts us as humans and their biological evolutionary reasons why that is. And investing is the exact opposite. The joy of 100 bagger wipes out literally every loss that I've ever made and leaves money on the table. And I picked seven 100 baggers. And they're not just a hundred baggers, they're up more than that. 100 is a round number. So truly any one of those stocks on its own, the joy of gain wipes out every loss I've ever picked for Motley fool investors or myself. And we still have profits to show. Mercado Libre has been a phenomenal investment. It's basically the Amazon of the Amazon. As one of my friends at the Motley fool says, this is an amazing company and that is up 180 times in value for our members. And so when I pick a stock that goes down 50% and I've done that a bunch of times, that hurts a lot. And some people, they'd be like quitting investing if they, they watch the stock get cut in half. And I think I have something disconnected in me, but I'm like, who cares? It doesn't actually matter. It's a minus 50% we're about to make a hundred times or more in value on this other company if we just let it over time. We've thrown out a bunch of companies. Tesla, it's been phenomenal over the last 14 years. And I know people are mixed on Elon these days and I'm not an Elon fanboy, but I'm definitely not an Elon hater because what he has done at scale. Talk about innovative capability. We talked about that earlier is remarkable. And yeah, I'm going to keep buying Tesla stock and keep staying invested in that overvalued company that you know is just a car company. There are those kinds of lines out there. Anyway, I'm starting to stray from the main point, but the main point is the upside for Tesla, which is up 200 times in value for us, has just dwarfed any bad 10% drop or bad fall for the market. And that's the key that you need to know. And that's pure math. But you only know it if your eyes have been open to it because you've actually seen it, read about it or experienced it. Otherwise there's no one there to coach people to realize how investing really should work over the course of our lives.
- [48:17]
A
Right. For, for that to be true, there needs to be some reasonable level of, of allocation across a basket of stocks. And so how much do you recommend a person put their portfolio in any one particular individual stock? And when you have an individual stock that becomes a runaway outperformer, you necessarily are then way overallocated in that stock. Should you rebalance or should you allow your portfolio to be wildly out of balance as you let that ride?
- [48:51]
B
Two more wonderful questions. And without sounding like I have answers to everything I do want to say, those thoughts have occurred to me and providing advices I have over the years, I have baked them into my rule breaker framework. So I'm about to trot out two answers. One is habit number five of the rule breaker investor max 5% allocation. And then we hit portfolio principle number four in part three of the book, which is know your sleep number. And we're going to go there as well. So let's go to both of those places. The first one is, yeah, this is a habit that I have. I don't start any position in my portfolio that's more than 5% of the overall portfolio. So that implies that I'm starting with at least 20 stocks. And you know, obviously Paul, I know a lot of us are not investing in stocks directly. So it's okay to have, let's say 75% of your portfolio in a big broad Index fund like the Vanguard Total Market index Fund. You can be way over allocated in a crazy sense. There you go. We love it too, right? And we have provided that advice to Motley fool investors for decades. Like we, we're big Jack Bogle fans. Even though we totally disagree with Jack that it would just be luck to beat the stock market, I will always disagree with that. I believe my life's purpose is to show people that's not true. And I think I've demonstrated that on the field of performance. And I love the advice still because for most of us, we're busy. We don't really want to care about this subject. We're not even watching afford anything right now. That would not even occur to a lot of people. Like a podcast about finance or money or a show. Why would I read that or do anything with it? Most people tragically will not read my book. I do hope a lot of people read it, but I'm aware that not everybody cares that much. So they're kind of 401k mailing it into the big fund or the safe one or whatever. And if that's the case, I'm fine with that being a huge percentage of your portfolio because it's widely diversified, as you and I both know. And if I were investing directly in stocks, which is pretty much all I do personally, I would never start a position at more than 5% of the portfolio. You're not, you shouldn't overweight because you think this one thing is going to be the big one. And most people who've done poorly with the stock market, which is hard to do if you're investing over time, it's really hard to do poorly with the stock market. When you think about something that's rising 10% a year, year after year, decade after decade, how can you screw that up? Well, we've talked about a few of them. You could hop off the ride and say I'm leaving that. Or you could overallocate into the things that aren't that and make a big mistake.
- [51:23]
A
Right, but I mean the stock market in aggregate goes up year after year after year. But any individual stock, Blockbuster, JCPenney, Sears, you know, these tend to fall.
- [51:34]
B
These are all the companies that my rule breakers crushed. But yes, keep going, keep going.
- [51:39]
A
Right. And so these tend to fall. And I mean the index fund argument is that's why you would prioritize an index fund, because it is self cleaning. And as certain companies fail out of the stock market, new ones get embraced in. And you as an individual don't have to worry about it. But if you were to hold a basket of, let's say 20 individual stocks, of those 20, it's entirely possible that 10 might be failures. And if that were to be the case, you could kind of choke on a portfolio that was comprised entirely of individual stocks.
- [52:13]
B
First of all, I think it's a great approach to take to investing personally. Obviously, that's what I do. And I don't just have 20 stocks, I have about 55 stocks. We have a ratio between your age and the number of stocks you should have, which I mentioned briefly in the book. But it's just a simple way of thinking for most people. If you're 18, maybe have 18 stocks. And if you're 59, maybe have 59 stocks. And so to me there are natural guards against making that kind of mistake you're describing. But I realize it sounds scary. It sounds like, yeah, some of them aren't going to work and then you're just only have a few and. But my experience is the opposite if you're actually buying really good companies. Not meme stocks, not stocks, not. I don't even stick with cyclical stocks because I want to have stocks that are going to go up over the course of time, not just kind of parabola their way through life. So I would just say that it is entirely possible to have an excellent diversified stock portfolio. And let's now go to the now that, you know, we start with nothing 5% or more. Let's go to what happens when you actually bought Nvidia and or Amazon, Tesla, et cetera. And all of a sudden, in a good way, one or more stocks is blowing up in your portfolio, creating the best problem of all to have as an investor the best stress you could ever have, which is, oh my gosh, I bought and held Starbucks from when David and Tom were on the View. I'm still guys, this has been incredible. Even though they're didn't have you back after six weeks. What should I do? And for that I developed portfolio principle number four, which is know your sleep number. Now a lot of people will know that phrase from the mattress industry, which is where indeed I've swiped it. But I believe I've repurposed it for an even more powerful meaning last mattress.
- [53:56]
A
Blatant trademark violation right here.
- [53:58]
B
Like I put it right out there in the book, Come after me, fight me sleep number. So no, I love the phrase and I do think it's very apt for the context I'm about to throw down. So here it is. Your Sleep number as an investor is the percentage at which you would allow your single largest holding to occupy of your overall portfolio and still sleep well at night. That is your sleep number. So let's give a quick couple quick examples. For many people, what is their sleep number? One, they want to have a broadly diversified fund where nothing accounts for more than 1% of their overall holdings. Or. Or maybe they have a fund and then 23 other funds because they have an unbelievably low sleep number, and that's what makes them sleep comfortably at night. If it started ticking up to five or seven, they'd start going, I need to sell that down. Because. No, Right. And so that for many people is their sleep number. For a lot of others, I'll go talk to investment clubs and they'll be like, yeah, we anything, 10%. If a stock becomes 10% of the portfolio, we start selling it down at that point. And I'm like, I understand your sleep number's 10. That's fine. We all need to get in touch with who we are and contextually, what we're trying to do. Your sleep number should be larger when you're younger. It should be smaller. As you age, there are obviously contextual things. So choose your own adventure. I'm just giving you the tool and the phrase stolen from the aisles of the mattress industry. What is your sleep number? And, you know, I could give a personal answer. I'm happy to do so. But mainly I wanted people to understand, Paula, that as we have that horrible problem of having bought Tesla and all of a sudden it's up 50 times for us, it's occupying a lot of our portfolio. I have a number that you should have in mind that you sell against. And that's the number one reason that I sell, by the way. Everyone's always like, what's your sell? Discipline. As a contrarian, I always hear that it's like you need to be really disciplined as a seller. That shows that you know how to invest because you have a. And they stare down their pince nez at you. You have a sell discipline. But my phrase has always been, what's your buy? Discipline. Because for me, buying is where the real money is made. Not selling, it's what you're buying and holding. And you should have a buy discipline. And that's exactly why I trot out my six traits that we've already talked about. Because for me, that's my buy discipline. And by discipline, mega greater than sign tiny, tiny font cell discipline. In a world where that sounds irresponsible because of how people talk about the markets. And I obviously completely disagree. But when it does come time to sell, the greatest reason is because you have winners that are starting to make you a little uncomfortable because of how well they're doing. And that's not presto magic. That's not impossible. That's actually going to happen very naturally. For anybody who's taken the approach that I describe in my book, Rule Breaker Investing, is you are going to have that happen to you. It's a great problem to have. And also you're going to sit through downtimes where your portfolio like mine gets crushed in a given year. In 2022, post the COVID huge bump, my portfolio, all stocks went down 50% in value. And while that really hurts to say, I'm happy to say we're way back up above that once again. And that's been my lived experience for 40 plus years. Now. If you're willing to just sit there on your hands and realize I'm not predicting the next big market, I agree with Buffet. We don't have to have a macro view. And I know my markets, my stocks are going to go down from time to time. I'm willing to let that happen because I'm so confident in the excellence of the companies that are in my portfolio, even though I know I have some of them wrong. And therefore I'm not gonna worry about it. It's more about managing your sleep number to sell than anything else anyway. So those are two constructs that I have. I'm giving them short shrift in a short form interview with you. Although it's delightful how long you're letting me answer some of these questions. Thank you, Paula.
- [57:55]
A
Of course. So what is your sleep number and how has that moved or has it moved over time?
- [58:01]
B
So I'm gonna give my answer and then I'm gonna immediately explain why it sounds crazy.
- [58:06]
A
I love it. What is David's crazy answer? We're going to take a final break to hear from our sponsors. It's the last one and when we come back, we're going to find out what answer David gives that everyone says is crazy.
- [58:26]
B
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A
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B
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- [60:09]
A
So what is your sleep number?
- [60:11]
B
Typically, what my sleep number has been over most of my life is 80. Wow, right? And obviously I'm not advocating 80 for anybody, but because I'm transparent, I'm the real me on Twitter. I'm me. I don't have, you know, social media company doing me like this is me here today. I would want people to understand who I am and why I've done what I've done. Just like I've done that for my adult kids now. So when you're an entrepreneur and there are a lot of small business people watching, I bet, who can relate to your single greatest asset is your company, the business that you're building. And when you have extra dollars, you're probably going to invest them first in your business. Unless it's a more mature state and you're like, no, I'll allocate that to a portfolio. So therefore, the majority of my wealth has always been concentrated since my 20s, in the company that I've helped found, the Motley Fool. And for my own stock portfolio, I therefore can be a crazy man. I can allow, because it's a minority of my overall net worth, I can allow a stock to blow up as I did aol, my first big stock back in the day, becoming more than 50% of my portfolio and still sleep at night. Does that make sense?
- [61:24]
A
That absolutely makes sense because you're looking at the overall risk of your entire portfolio holistically.
- [61:29]
B
But the funny thing there is that it's still true for most of us small business people that you have a large percentage of your net worth concentrated in your company. So you, if you're really being hardcore defining what we mean by sleep number, we all have much higher sleep numbers, a lot of us, than you'd think. So my portfolio is in a sense, a beautiful thing that I've built over time and I love and I allow it to be a little crazier than you might think, for the reasons that I hope are now self evident. And I have been wildly benefited from allowing great stocks to blow up in that portfolio. Netflix is my biggest holding. It's up more than 600 times in value. I've largely let it. I did actually make the mistake of selling off some Netflix to buy the house that I own today. I wish I hadn't in a sense, because I would from a financial standpoint, I would be way, way wealthier if I had not sold off Netflix to buy a house. I'm not a particularly good real estate investor, but I love my house. It's where we live. In the end, it's not about money, it's about our lives and numerically. Selling off Netflix stock when I did to buy a house was a huge mistake. That said, I retained a lot and it's way, way up. So because of my own circumstance, I've been allowed to let a stock go way up in a way most people wouldn't. And obviously the whole industry of funds, mutual funds, especially actively managed ones, that are regulated, they have to rebalance, they have to sell down. And this is a major criticism levied against the industry by one of its prized native sons, Peter lynch, when he wrote one up on Wall street and he said the whole industry is constantly watering the weeds and cutting the flowers, Lynch's phrase. Because every time Amazon goes up another hundred percent, all of the funds are having to sell that to put it back into the things that aren't doing as well as Netflix. And therefore you have an endemic systemic problem around rebalancing, which is constantly causing fund investors who don't own great stocks directly to be watering their weeds as they cut their flowers. It's for very understandable reasons that provide more safety consistency, which a lot of the world wants. But if you're a wild man like me and you're a contrarian, a fool, that's the last thing. Don't, don't force me to sell off my Amazon as it goes up and add to peloton instead, because it's down. That's a huge mistake. The numbers have proven it out. I'VE now seen it over 30 years. I recognize that not only do we not want to do that, we want to add to our winners as they go up. But I add up, don't double down. I never throw good money after bad. If a stock is down for me, I firm rule, do not add to it. And I realize there are a lot of people are like, I'm a value investor when it goes down. I loved it at 12. Now I really like it because it's 8. And I am completely the opposite. Not saying that doesn't work. It doesn't work for them, but for my style, that would be caused me to to be buying all the way down into my worst stocks. And usually innovative rule breakers that don't work out implode like they're not great. You don't want to be buying all the way down saying this thing is still worth something. And you want to be doing the opposite. You want to be adding every time Amazon adds a new product category when it started with books. And so that's a really important part of my style. But I want to make sure I'm kind of showing all my cards here, thanks to your great questions and our deeper conversations so people gain the full amount of my thinking that I can give in our time together.
- [64:49]
A
You know, what I'm hearing from you is that contrarian investing in individual stocks is almost the opposite of contrarian investing when you're investing across asset classes. Right? Because if you're investing broadly across asset classes, then sure, if international equities is up and US small caps are down, you sell off some international equities, you buy US small caps. That's the contrarian move. But for individual stocks, what I'm hearing from you is that it's the opposite. You, you don't sell out of the winners to buy the losers. In fact, you buy more of the winners.
- [65:22]
B
And think about that like, yeah, and it, it sounds contrarian. And I realize it really is based on beast practices. But then when you really step away, isn't this patently obvious? Like, am I not saying things that are not helpful because they're so visibly visually evident? Take I mentioned earlier, Intuitive Surgical. This is a company that, if I ask viewers to raise their hand right now, do they know what that company is? I think most people don't have their hand up right now. And yet.
- [65:48]
A
Right.
- [65:48]
B
It is a out and out rule breaker. Huge winner. I think it's up 96 times in value from our initial recommendation in 2004. This is a company as Surgery becomes increasingly minimally invasive and robotic driven. This is the company that's been doing that for 20 plus years. There is no visible competitor and they are now a juggernaut with blue ocean ahead of them. As I believe virtually all surgery in the future will probably become robotic assisted or even robotic driven. We're moving away from the human hands and the knives and the three days of hospital recovery because they cut you apart and we're walking off the surgery table a day later. This is the company behind it, Intuitive Surgical. It's been a fantastic. It hits all six of the traits that I've already shared with you today. And so this is just an example. When I first recommended, it was at 71 times earnings. It was completely overvalued and doctors were shouting it down. They were basically saying, this company is, you know, the outcomes are no better than getting your prostate gland out if you're a male with prostate cancer than what I've done for decades, which is, I'm skilled as a surgeon. I do that for you. And the claim was the outcomes are no better because in either way your prostate has been removed or you've had a hysterectomy, either way. But what was missing from that headline was that, yeah, that might be true in terms of just the pure outcome. But what about the whole. You hurt my body. And it's expensive for hospitals to keep people in intensive care or recovery for an extra X days multiplied across a population or a world. It is not the same outcome, not nearly. And so that's in part what explains the success of this company. I want to make it very clear if anything that I just said sounded smart to anybody. I'm an English literature major. I am not a doctor. I don't play one on tv. I want you to know that we've talked about a wide variety of different types of companies today. But the key is they're all rule breakers. The pattern recognition that basically I've built up over time has you check marking companies in widely disparate industries because you're recognizing who's the rule breaker in all of them. Now, you were asking a question about normal asset allocation across all kinds of different asset classes. And you're right. I guess if people are trying to invest in foreign big cap stocks, and that was down last year, then regression to the mean suggests that we should add some more of that. It's just so different from what I'm doing. And I was raised in a family that would never buy funds. I was raised by a dad who loved the Stock market, who himself had a dad who loved the stock market. And the idea that I would just, as an English major, learn how to invest was very natural for me. From the day one, age 18, when I was handed a portfolio, I actually don't think I'm any kind of rare bird or genius. I think that I'm a lot like people that I've grown up with who all think the stock market is a miracle. It is your and my opportunity in an ownership culture to be part owner of the companies whose products and services we love to be able to wear the home jersey of our sports team. Except unlike your sports team, this one causes you literally to retire early, to put a kid through school, to take a trip around the world with your best friends. My sports teams, I mean, I love them, and we love sports as Americans. And I know you said maybe we talk about sports betting at some point, but the truth is that so much of our attention is riveted on sports when if we just took 10% of that, put that toward our actual net worth and our money, we might not just go, I can't figure things out. And I'm mailing it in with the index fund, Maybe a few more of us would switch on and go, why did Starbucks sort of outperform caribou coffee? And, you know, turns out I love Starbucks and I should own the stock. By the way, the Apple computer that I'm speaking to you on, I own some of that stock, too. And the list goes on, Right? So I'm trying to switch people on to realizing their possibilities. And we all have. We all have powerful possibilities. That's why I want to make it clear I'm a fool who's an English major who sees what wins out there? Because I've been watching it my whole life. And Intuitive Surgical is one heck of a great example of what I'm trying to talk about.
- [70:02]
A
As an English major who has an emphasis on the qualitative aspect of evaluating companies, given the fact that we don't know what we don't know, how do you evaluate companies that are in operating in domains that are outside of your expertise, such as Intuitive Surgical?
- [70:20]
B
Yeah. So my answer is in two parts. The first part is simply, I care. I pay attention. I try to be somebody who knows more than the average person about Blank. Now, knowing more than the average person about robotic surgery is not very hard. If you even know the company that is the leader in that space, I think you now know more than the average person. And to simply have known that name bought it and or added to it over time is extremely valuable. So I personally don't think you have to be a subject matter expert or go deep. I'm a mile wide, inch thick person and I take pride in that. I'm actually two miles wide. Like I am trying to draw associations or connections. I find myself fascinated by everything and I am master of nothing. And so I hope everybody knows that that's a perfectly legit way to go. So in general, Paula, I'm trying to know more than the average person about any company I'm looking at. And I'm never going to know more than some of our customers that the mod pool some people on our forums, discussion boards. I meet them at book signings or meetings and they work at that company or they are in that industry for their lifetime. And I never would from a position of humility, I would always come and say, could you tell me more about your company or that industry I'm interested in? We can't be subject matter experts about almost anything anymore because the world is wide and keeps getting. We're inventing new media types all the time, but that doesn't mean final albums are going away. Like we're proliferating. And so I think an abundance mentality, a growth mindset, as Carol Dweck would say, is the right approach to take. And it doesn't daunt me. It doesn't cause me to think I shouldn't be in the game or even investing in that stadium or playing on that field because I'm not, I'm not worthy. I actually think saying yes, we can, just like optimism works in life because it's not a state of mind, it's a creative force. The people who say yes, we can tend to be the entrepreneurs who actually do build the companies. So what you think about yourself so often leads to what you become. I think I may have lost the initial thread of your excellent question and I may be off in my own little corner here, but the quality. You know, it's funny, you said qualitative versus quantitative earlier and I realized they're almost like a yin and yang. And so many people are quantitative. So it sounds like an interesting thing to be qualitative, which I think I'm interesting about because I think I am. But the truth is I actually think they're not even even. I think qualitative is way more important than quantitative and qualitative. We are all invited to converse. We are all invited to ask, does Starbucks have a sustainable competitive advantage? That's just a fun conversation to have at Starbucks anytime. And we all see different parts of the elephant. It's not like anybody's seeing everything. So I deeply care about what you would think about that answer. And I listen to others and I weigh it against my own. And if you have a better idea in that conversation, I may not let you know you changed my mind. But maybe about a year later I was like, you know, Paula actually changed my mind when she said this or that about that thing. So I think qualitative is really where the game is and I think it's much more important. And yet it's sometimes like a side door, strange way to view the markets when really the markets are just like a farmer's market showing off the produce that we could be buying and do every day, the products and services that are served up just by companies. It's very much more democratized and a broad part of our culture than I think we're recognizing. When we hive it off and say, who's an investor? And people don't raise their hand because they're like, I'm not an investor. And I think you are. We're all investors. Everyone is an investor. I truly believe that whether you've switched on to that or not.
- [73:57]
A
You went through the, the dot com bubble, as you called it. Dot bomb.
- [74:01]
B
Yeah.
- [74:02]
A
There's two parts to this question. So that was a time in history when this new life changing technology was just emerging, which the information superhighway. Everyone had a sense that it was going to be in a. Of course you can describe this era much better than I can. That was a time in which everyone had a sense that the Internet was going to be big and it was going to be revolutionary and it was going to change everything, but no one really knew how. And so there was a lot of speculation both financially and culturally in the zeitgeist that led to speculative investments, that led to the dot com bust, that led to the various lessons that we have learned in hindsight from that. Can you walk us through that experience and then talk about any parallels that may or may not exist with the advent of AI that we're experiencing now?
- [74:55]
B
Yeah, we were there kind of pre World Wide Web. Literally those dial tone sounds that some of us hear in our brains of connecting our computer to somebody else's via the phone lines. And by the way, if somebody picked up the wall phone in another room in your house, you got knocked offline and they couldn't reach anybody.
- [75:12]
A
I need to get off the Internet. My dad has to make a phone call.
- [75:14]
B
Precisely I am older than you, Paula, but you still can say that and know that and remember that. So I basically saw that all the way through. So without overusing the phrase lived experience, which feels like an invented, important phrase in the last 10 years or so, that's my peeps. That's where I came from. That is what I saw with young eyes. And in a way that I'm on tv, we're writing books and we're out there saying, yeah, we love the Internet, we believe in the Internet. This is already pretty big. It's going to get bigger. And I think the good news is we were right in the long term.
- [75:49]
A
Internet's not just a fad.
- [75:50]
B
We were right in the long term. And in the short term, we were right in the midterm. For a while we looked quite wrong, which I can speak to. But I do want to just remember that some of my early TV appearances on cnn, it was coming back, we're going to have somebody who thinks you will use your credit cards over the Internet back after this. That was literally, that was where the conversation was. So please understand that I was shaped by that. I, I was the other person on the end of that conversation going, I mean, we're giving them to waiters in the restaurant. I mean, don't you think you'd also give it online? I mean, and, and fortunately we were right. Not that the Motley fool was like the only ones who believed in E commerce, but within the market's view of things. At the time, that was literally where people were like, the Internet is not going to be adopted in the way that these clowns with gesture caps think. And Gartner, the market research company, public company, been a good stock, although it's been hurt over the last year. And it might be AI hurting it, but Gartner has a great framework called the Hype cycle. And you hit a stage where you hit the peak of inflated expectations. That's their phrase. And it's just we start imagining too many things, good things can happen. We humans with our imaginations and then sometimes our financing and momentum and all the rest peer pressure ourselves into wanting more in the short term than we can actually get from new technologies. Whether it was the Internet back then, AI today, 3D printing 10 years ago, the list goes on of like the peak of inflated expectations gets reached and you're about to go through the trough of disillusionment, which, those are phases two and three of a five step mental model that you can have. And I experienced that firsthand. I watched obviously There were companies that were dot bomb like almost jokes that were coming public at the time and we would never recommend. And didn't any of Those companies like Dr. Koop who was the surgeon general at the time, very distinguished man. There was DrCoop.com, which was going to be a medical site which gave you all your medical information and it just not a good company. Small company, small finances, never had a shot. Way overvalued. When it comes public implodes doesn't exist anymore. We watched the dot bomb happen right in front of us and we watched everybody go down with it. As I think I may have mentioned earlier, where it was trading at the time, Amazon.com was at $95 a share. Just before that at the peak of inflated expectations. And we went Amazon shareholders, I owned it all the way down to seven. Amazon 95 to seven in an 18 month period. So yeah, it was out there that that trough is real and it keeps recurring with almost any important technology without being cynical and without being predictive. It gives you a mental image of what's going to happen. And here's my secret. I buy in phase one ahead of most other people who are calling it overvalued, who think young founders don't really know what they're doing, when actually Bill Gates and Steve Jobs and everybody else who dropped out and started things at 19 were the smartest people in their society. And we've seen that that became true. And that seems consistently true. That's a double whammy. You're a young entrepreneur and because you're young, you look like you're naive and you don't really get it. And clearly that discriminating writer at the Wall Street Journal is going to put you down because of your naivete. That's a beautiful construct for investors like me because you want to find those youthful people who get it anyway. All of that happened and it's going to keep happening again and again. So is it happening right now with AI? Yes. Where are we in the actual cycle? I don't know. Your guess is as good as mine. What is my approach? It is to buy in phase one and keep holding into the final phase, Phase five, all the way through. Because by phase five I don't remember the exact phrase Gartner uses. But it's basically it now exists invisibly. We all take it for granted. It's how society works and how things have all the Internet, how things have always been. Even though it wasn't that way. It was dial up and we already Made that joke. So the key is that I get in before most others and I hold all the way through. And when I'm wrong, that hurts. I've watched companies like 3D Systems, which is at the forefront of 3D printing. When it became popular for the first time 10 years ago, I watched that go up nine times for our members. My recommendation. And then we sold at a loss four years after that. And I know part of your question, Paula, was about selling. And when we do sell these things, et cetera, as you might imagine, my. My general answer is I just don't sell. And when a stock is just flat out bad, the good news is you don't really need to sell, because if something drops 80% and you're not adding to it, which I never do, when it's down, it becomes irrelevant to your overall returns. Whereas when something goes up 8 or 80 times in value, it becomes increasingly important as it succeeds to your financial destiny. And that's a good problem to have. So I hope I spoke to some of that with a rather roundabout answer. This has been such a fun conversation.
- [81:00]
A
Thank you. I've got two further questions as we move into this AI future. And as a lot of people who are listening to this have so many questions that run the gamut from as an individual, am I still going to have a job in five years? A lot of people who are listening to this are worried about that, to how should I be investing, given that AI is so fundamentally going to change and the nature of how business is done in ways that I cannot predict. And so I'm being asked to make qualitative assessments in a future that I may not recognize.
- [81:37]
B
Here's my solace. First of all, this comes from a lifelong optimist, somebody who always sees things half full. And I think I've been wildly rewarded for having that attitude. I realize not everybody, congenitally or constitutionally, has that. So just know that's how I roll. So, as you might imagine, I think AI is amazing. I think being invested in it in every way makes sense. It's not always clear what's the next AI stock I should buy. And it doesn't have to be. If you are simply using artificial intelligence, as I do every day, and have for a couple of years now, you're going to figure it out. And the good news is there's not one answer. It wasn't just that Amazon was the Internet stock. What's the Internet stock I should buy? There were dozens and dozens of answers, and some of them didn't emerge for another 10 years after it was first being asked. Uber was not around in the 1990s. So amazing new opportunities will emerge that you and I cannot even dream of six years from today. And so if you are simply paying attention, if you know what intuitive surgical is, even if mercifully you haven't had any surgery yet, needing da Vinci surgical robot, you're going to be ahead of the game. So I think the world is always going to be won by those whose minds are alive and who are paying attention. And there's no question that artificial intelligence is already fundamentally reshaping our society in the same plate tectonic way that the oncoming Internet did in the 1990s and is still doing so 20 plus years later. So I guess my main point is we don't have to know all at once or ahead of everybody else. We truly can be there and go, you know what? I think I'll buy this duck. I let's go to Apple for a quick sec. I missed Apple for 20 plus years. When I finally recommended it in 2008 to Motley fool members, I was like, I am so, like almost embarrassingly late because I, I pride myself on bringing great companies to people early. And Apple's been public for 20 years and everybody knows Apple and they've already done their 1984 ads and all the rest and iPhone came out last year and here I am finally recommending it and Apple's up 30 times in value from that point and we've just passively held. And so the key is you don't have to know these things. You just have to care and pay attention. And then I think using my rule breaker traits, if you like, or your own horse sense or some combination thereof, you will start to see that maybe you should add that company, maybe those three to your portfolio, especially if you care enough to invest directly in stocks. So I'm a bull. And yet this is a funny thing to say. I don't even know yet what I'm fully bullish about. And I won't in some cases, no, for a decade from this conversation and lets you and I be trying to buy those companies then, because that's what wins.
- [84:26]
A
That was the same year that I bought Apple as well, 2008.
- [84:28]
B
That's fantastic. You have more years than I do to compound. So good on you.
- [84:33]
A
Thank you, thank you. Well, and then final question. Since we did promise at the top of this interview that we would talk sports betting. All right, so you're a sports fan. What do you think of the proliferation of sports betting and sports betting opportunities. Any advice that you would give to the people listening, what's the sports bet take?
- [84:53]
B
Take number one, it always should have been legal. I don't think betting should be illegal. I think actually it's a more interesting world if we have speculation markets and things asking about what's going to happen, what's going to win. In some ways the stock market is doing that. It's just on a longer term time frame. So thought number one is it always should have been legal. It now is in the us I'm good with that. Other countries figured that out ahead of time. I'm generally a free person. Live and let live and let's see what works. Take number two, it's a huge waste of money. It is regrettable and tragic that while it is legal, which I completely agree with, that so many people would think that that is a good way to spend their money, it is obviously not your expected return. And you, you may know sports better than I and if you do, you know sports pretty well because I fought it lifelong. I'm from a baseball family. I watch every game of my North Carolina Tar Heels football, which is regrettable right now, and basketball team. I have spent a lifetime loving sports. And the expected value of the sports bet is minus percent because as you well know, the odds makers are pretty darn good at what they do. So when they say it's a six and a half point favorite, about 50% of the time it'll be above that and about 50% of the time it'll be below that. And so you and I are taking either side of that bet. One of us is going to be right, the other is going to be wrong and the house will get its 5 to 10%. So anybody who's even lightly numerical should recognize that the expected return is literally negative. I've made sports bets. Take number three. It's fun, sure, a little bit of fluff here and there, trash talk with a friend. I totally support that. If you actually think that you're going to make money that you're going to like, this would be a great way for you to spend your dear capital that you've saved up to this point in life. Wherever you got that money, you now have it as savings and you want to put it there at any scale or volume. Huge mistake. Because the stock market returns 9 plus percent annualized. That's a tailwind at your back that causes you to go up in the sailboat forward. Instead you're rowing like crazy against the wind, wasting so much time and money. So I'm gonna. I don't view watching sports as a waste of my time. I hope not. It'll be a huge deathbed regret of mine if it is true, because I watch thousands, hundreds of thousands of hours of sports. Take number four to close. There's an entire industry dedicated now to getting people to put down sports bets, usually coverage, even on, I would say, admirable brands like espn. Regularly, somewhere on the screen is showing you what the odds are if you put your money down. I may be making these numbers up, but I think Americans put like $64 billion down last year, not just on sports, but gambling overall. It is an unbelievably sad waste of money because, yeah, it could have gone up. If it's anything more than a very light, friendly hobby, it is a huge mistake of allocation. So I'm glad that you gave an opportunity for me to at least air that here. I do spend one page in my Rule Breaker Investing book, trash talking and flaming sports betting. I would also do the same, by the way, for the gambling industry overall. I often think of gaming in this way. We're creating lovely environments to entice people to come in and literally give their money over to their hosts. That is how I frame and think about gambling. And I've gone in casinos myself and I actually enjoy the game of craps, even though I know it's a negative return. I see a little bit of the entertainment aspect, but when you really reframe that whole industry, which I would never recommend a stock in, and I don't own any investments there because that's not my best vision of our future and nor is sports betting. I see hospitality toward welcoming in people who are not often that knowledgeable and literally taking their money day after day, year after year. So you can imagine I'm not a big fan of betting.
- [88:45]
A
Wonderful. Well, thank you so much for spending this time with us, David. Where can people find you if they'd like to learn more?
- [88:50]
B
Well, I'm avidgful on Twitter x, I'm on LinkedIn, and of course, most of all, I'm excited about my book, Rule Breaker Investing, which is my final stock market book. It's a rippingly fun read. It's short. My editor Craig at Harriman House said, you know what, people like David, he's British. They like short books. And I was like, I agree with you. I also like short books, Craig, and so I hope that it will be a generational classic. I'm swinging for the fences with this book. And many of the things that we've talked about today, at least some of which probably struck people as surprising, are all there in context in a way that I hope will be something you could share with friends, family, kids, grandkids. That's what I'm shooting for. And really, if anybody reads it and loves it, that made me happy enough. I loved writing.
- [89:40]
A
That's our show for today. I am recording this sign off. I'm in Portland, Oregon right now at a conference called fincon. It's for creators who create online information about personal finance. Thank you for listening to the show. I'm sorry I don't have key takeaways for you, but it's been quite a conference. Jo Salsihai and I co emceed the opening of the conference. We were the opening MCs. It was a lot of fun. We played this round of you might be a Money Nerd if and the audience was totally into it with us. So it was a lot of fun. It was a great open. Yesterday I gave a presentation that was great. I've also been recording interviews while I've been here, so I just wrapped an interview with Karsten Jeska, also known as Big Earn the Economist. We will be airing that next Tuesday. I also interviewed Rob Berger, formerly from Dough Roller. Now he has a YouTube channel, an eponymous YouTube channel, robberger.com. you're going to be hearing that as a bonus track. So lots of great things coming up on this podcast. Thank you so much for being part of this community. Thank you for being an afforder. If you enjoy this, if you get value from this, please do three things. First and foremost, make sure you're following this podcast in your favorite podcast playing app. Hit that follow button so you don't miss any of our amazing upcoming shows. We're going to release the interview with Rob Berger and the interview with Karsten Jeska next week. So that's number one. Number two, make sure that you are subscribed to our newsletter affordanything.com Newsletter and number three share this with your friends, family, colleagues, neighbors, co workers. Share this with your dog sitter and your second grade teachers, best friends, cousins, grandma. Share this with everybody because that is how you spread the message of fi r e. Was that three things? I think that was three things. All right, I have got to run to my next meeting.
- [91:24]
B
Please.
- [91:24]
A
Thank you so much for being part of the Afford anything community. I am so happy that you're here. I've met so many of you face to face in the last 48 hours and it's been such a joy to be able to shake your hands, to hug you, to look you in the eye. So to everybody who I've just met, thank you so much. And to everybody who I haven't met, thank you so much. Like, I'm just filled with joy right now and enthusiasm having met so many of you and being here with other people who are dedicated to devoting their lives to creating content around, to sharing information and education around personal finance because it's such an essential topic. So thank you again for being part of the Afford Anything community. I'm Paula Pant, and I'll meet you in the next episode.