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The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP754: Rule Breaker Investing w/ David Gardner
01:32:15
Clay brings back David Gardner to discuss his new book, Rule Breaker Investing.
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You're listening to tip.
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On today's episode, we invited David Garner to discuss his new book, Rule Breaker Investing. In the book, he shares his unique rule breaking framework that helped him find and own companies like Amazon in 2002, Netflix in 2004 and Nvidia in 2005. Throughout David's investing career, he seemed to have taken all of Buffett's rules to investing and thrown them out the window. As the co founder of the Motley fool, he launched his stock advisor Service in early 2002 and he has publicly achieved an average annualized return of 20.8% versus just 9% for the S&P 500 over that same time period. In this episode, we discuss why David decided to ignore Buffett's value investing principles and discover his own way to invest. Why he proudly breaks Buffett's number one rule of investing, not losing money. The story of David's early investment in AOL, which rose by over 150 times. The six traits of rule breaker stocks and the six habits of the rule breaker investor. Why David prefers to buy stocks that commentators say are overvalued. How the best companies are so good at what they do they almost seem to be cheating and don't play by the traditional rules. What conscious capitalism is and how it enables all parties to win in business. His Rule breaker stock picks for 2025 and so much more. With that, I really hope you enjoy my conversation with David Gardner.
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Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Play Fin.
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Foreign. Welcome to the Investors Podcast. I'm your host, Clay Fink and today I could not be more excited or happy as I'm joined by David Gardner. David, welcome back to the show.
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Thank you, Clay. It's a delight.
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So today we'll be chatting about your new book, Rule Breaker Investing. I was just on a trip up to the northeast around Boston and read it during my travels. It was just a fantastic read. Have you ever had one of those books where you read it and you're like, I wish I read this when I was 18 years old.
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I would say almost every good book I wish I had read earlier because everything compounds as you know, Clay returns for good and yeah, we would all be better off if we'd read formative books earlier.
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Well, that's how I felt after reading this one. There's just so much wisdom in it. Just A wonderful, wonderful book. And it's no surprise given that you're a New York Times bestselling author. So congratulations on this book. Super excited to dive into it here today. So let's dive right in here for the first question. Judy Blume, she has the quote, the best books come from someplace inside. You don't write because you want to, but because you have to. So talk to us about this quote and how it relates to your book. Rule breaker investing.
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Well, thank you, Clay. I do love that quote. That's why it's right up there as one of the epigraphs for the book. And yeah, I've written books in the past half books. My brother Tom Gardner, our CEO at the Motley fool, and I have collaborated on seven or eight books over the course of time, and yet not one for a long time. This is the first book I've written in 15 years and actually it's really the first book I've written because I wrote it from page one to page 230 myself. And I just had so much fun and I felt that Judy Blume energy because every other past book, Clay, I had to have a deadline and I had to have an editor and I probably pulled an all nighter and to turn in that last chapter. And yet this one, I didn't need any deadline at all. I'd been keeping notes for 15 years for the book. I just loved writing it. And I was saying to friends during COVID having not written the book, I thought I already would have years ago. I was like, you know, if I get struck by lightning, I am going to be so regretful as I burn to death that I didn't write this final book because I had been keeping notes and racking up investment returns and drawing lessons for the longest time. And so I'm really glad that two years ago my new year's resolution was to write this book. And there it is. Let me just call you out because I really appreciate the time that you've taken to read it. I do a lot of different interviews and understandably not everybody reads your book or is that familiar with what you're doing. And yet you've absolutely nailed it. You've sent me some of the questions ahead of time, so I know what a fun conversation this is going to be. Anyway, thank you, Judy Blum, because you expressed really well what I think any artist in the end feels when we finally chip away and finish that sculpture and put it out in front of the world.
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As you might be familiar, our podcast, it was started all the way back in 2014. And Preston and Stig, they really wanted to start by studying the greatest investor of all time, Warren Buffett, and how he invests, how he's beaten the market over such a long time, hence the name. We study billionaires. And what I find so funny about your book is that you seem to look at Buffett's approach to investing. You were getting started in the 90s, around that timeframe. I've talked to a number of guests where they also started in the 90s. Francois Verchon is an example, where he picked up Buffett's letters and just fell in love with that approach to investing. Well, you seem to look at this approach of Buffett's, and as I said, the greatest investor of all time, and just ran in the opposite direction, which is contrary to most guests I've chatted with here on the show. So what led you down this path to wanting to find your own approach and discover that for yourself? And, of course, making iterations along the way?
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I think, first of all, I've often been the person when everybody starts arguing one direction, it doesn't matter what they're saying, I'll start taking the other side. In some ways, I can't not do that as a person. So it starts that way a little bit. There's a great line on Robert Frost's gravestone, the fantastic Poet. It's from one of his poems, but it's, I had a lover's quarrel with the world, and I think I've had a lover's quarrel with the investing world for, well, really since I started investing at the age of 18, when my dad handed me a portfolio that he had invested for me from birth and said, here you go, David. This is yours now. This is all you're ever getting from me. Don't screw up. But dad had been teaching us through our teens, his kids, as he gave us each our portfolio. And I just started deciding that a lot of the things that I was hearing struck me as smart and impressive. But that's not the only way to play the game. And in fact, some of the Buffetisms, and I'm sure we'll talk about some of them, I mean, what a wonderful man, a person of character and entrepreneur and investor. So let's be clear that he is just an unbelievable gift to the world. His life in every way, has been. And there are other ways to play the same game. But if everybody starts agreeing with Buffett and going to Omaha, Nebraska, every year and beginning to lionize everything that he does, and build up and chisel out of stone his greatest lines. Then I start wondering, but wait, isn't there maybe what if you did the opposite though? And that's I think the way that breaking the rules began to be born. And it just started in my mind and with an early stock pick. I know we're going to talk about that too. I started to learn the Buffett crowd didn't seem to like any of my stocks because they traded at high price to earnings multiples or they were unpredictable businesses that you couldn't know like Geico or See's Candies would be the same 10 years later. And there's obviously again a wonderful benefit to approaching the world that way, as Buffett and his ilk does. But they didn't ever like Amazon, they didn't ever recommend Tesla or Nvidia or Netflix. And the list goes on. And these are all my best stock picks. So I've basically grown up over 30 years now looking like a rule breaker. If you have Goliath Warren Buffett already there, the best way to compete against Goliath is to play the game differently, as David did. If you try to play by Goliath's rules, then you will probably lose every time. I don't think that I would be a great so called value investor. So starting a new school with some new thinking and I think a lot of excitement now we can look backwards and see the returns came, I guess somewhat naturally to me.
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In true rule breaker fashion. You of course break Buffett's number one rule, which for those who are not familiar, it's to never, never lose money. And of course he even shares his second rule is to not forget rule number one. So let's talk about that. Why have you always neglected this idea of avoiding losing money?
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Well, I think that for me it's a realization that like a lot of things in life, taking risk is going to be useful. It's really the only way humanity gets ahead. Every innovation was a risk. I was reading the other day the Wikipedia entry for fork, right? Like the implement that we put in our mouths as we eat food. And when it first started showing up in Europe centuries ago, it was viewed as this bizarre thing somebody had brought to the table. What are you doing with that device that implement? So even a fork, something as simple as that is viewed by the status quo and the powers that be as this strange thing that you're doing. So I think that that's the way humanity has gotten ahead over the centuries by taking risks and trying things. And I Guess for me, the idea that you should never lose money, that you should. Let's go to Olympic figure skating. You should not fall. You can't fall in the gold medal quest. If you're in the Olympics yourself as a figure skater, falling is devastating, but you've done it thousands of times to get to that point. And it's so important for anybody, whether we're starting out as investors, some people watching us today, Clay, are just about to start investing. Or if you're 59 like me, and you're like, I made so many mistakes, and guess what? I'm gonna make some more going forward, you start to realize that if you just think of those as opportunities to learn and you just trial and error, try out lots of different stuff, you will make so many gains. And I certainly have. So any great stock that I've picked, Nvidia or Amazon, I had any number of losers that I sort of had to play into. One of my big themes is losing to win. I think you have to lose to win in this world. It's more of a venture capitalist mentality. And I've often liked to think that the Oracle of Omaha himself doesn't feel strongly about that line and might even feel some regret about rule number one, never lose money. Rule number two. See rule number one. I think that's the wrong message, and I think Warren wants to democratize investing, too. I don't think you're going to welcome everybody into the market by making it sound like it's a perfectionist's dream. And you have to make sure you never lose money. So to lean out with that as a bumper sticker or a T shirt that somebody might wear in Omaha. Not a big fan of that.
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Yeah. Well, one of the most impactful interviews I've done here on the show was with Hendrik Bessenbinder from last year. He put out the famous study that showed that a select number of stocks generate the lion's share of the market's gains. So, yeah, it's just a really difficult game of stock picking if you don't own some of those big winners. And you've owned several of these big winners. So you outline in the book that you've had 7, 100 baggers. You outlined them as well here, so I'll mention them. You had Amazon in 1997, which was a 1300 bagger, Netflix booking Holdings, Intuitive Surgical, Nvidia, Mercado Libre, and Tesla. And I think if you look at some of these, you know, it's pretty understandable that someone like Buffett would miss them, like Tesla and Nvidia. But, you know, even him and Munger have said time and time again that they regret not buying Google because they were Google customers themselves with the Geico ads. But there was actually, I was really surprised. There was another company you bought in 1994 that was also a hundred bagger, but it's not included in this list. It's aol. This one must have fallen out of status, of course, after sometime after their merger with Time Warner in 2000. I'd love for you to just talk a little bit about AOL and what that early investment taught you, given that you were so early in your investing journey at that point.
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It was an incredible lesson that I got to learn, and not just one, but so many, in part because we launched the Motley fool on aol. So I got to see for the first time inside a business, well, my own business, our own small business at the time, but also this upstart company, aol. It was early days for America Online, and it was the decade that America came. So they were beautifully positioned for what they were doing. And, yeah, I decided I wanted to recommend the stock. And for my own part, I wouldn't have said rule breaker at the time. I didn't know that phrase. I sort of have discovered it over the course of time and written about it now, of course. But at the time, I was just enamored of this new technology where I could actually type something in and then have somebody respond back in a forum. That idea just that email itself was like a new thing. It was amazing to me as a writer that I could actually put something up and get instant feedback from people as opposed to waiting for a publisher maybe to send me a rejection letter 37 days later by mail. So I just saw the excitement, the kinetic energy of what AOL was creating, and I was not fully comfortable buying the stock because, like a lot of my rule breakers that I now love this about them, it was an expensive stock. It was a hot stock. It had doubled in the year or so before I thought to recommend it. And so I decided I would take my own money and invest it in thirds. And that was the first time that I started to figure out that's a good way to invest. If you're not fully comfortable buying into something that feels like, I don't know, a raging stallion that could jump over the wall and disappear on a bad day, then maybe buy one third now, and then, let's say a month or so later, buy another third and then a Month or so after that, buy another third. That's exactly what I did as a young investor with aol. Anyway, Clay. We watched the company skyrocket. There were a couple of summers in a row, and you can go back and check this. There's a gathering of economists. It's not the World Economic Forum, but it's something kind of like that. And back, I think it was 1996 and 1997. For the fun of it, that gathering each summer would say, what is the most overvalued stock on the market? And two years running, it was America Online. And yet I watched the stock double, then double again, then double again. And I got an inside view, not an insider's view, but, of course, as a partner of theirs, an inside view of just the people running the company. I thought so much of them. I was so impressed. And I also saw sort of the old media fighting back against this new media company. It was not uncommon for the Washington Post, my hometown newspaper, to just take shots left and right at AOL as it went up 150 times in value from where I'd bought in thirds into a company that was the most overvalued company of the time and on everybody's front page for the various things they were doing, including merging with Time Warner in 2000, which effectively ended the AOL run. And within a few years, it would drop dramatically. Of course, the whole market would. You know, Amazon.com got crushed. Everything did. Our company got crushed as well. And so I don't count it today as one of my hundred baggers, because I don't still hold it. It doesn't still exist. The ones that you quoted earlier are all stocks that we've made more than 100 times in value on, and we're still holding. And that's such an important thing. So I can't say that about aol, so I don't include it on my iconic list of 100 baggers. But, boy, if I didn't learn so many lessons from their business, from being an investor, about my own business, et cetera. D all of the above from that first investment.
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I even have so many fond memories of AOL going to a friend's house and the parents yelling at us for getting off the computer because it doesn't let them get on the phone or however it worked back in the day. You know, it's always fun to talk about the winners, right? But I want to be sure we also touch on the losers as well, because you talk about in the book how you're shooting for a 60% batting average, which means you're going to have some losers. Although the losers, of course lose us money, they can also teach us valuable lessons, such as understanding that you can never 100% predict or know the future, or just how much luck can play into investing. So how about you share a company or two that you truly thought was, you know, going to be an Amazon, going to be a Netflix, but it just ended up being a total flop.
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I mean, I've got a lot of those. And one of the things I always love to say is that no one has picked more bad stocks in Motley fool history than yours truly. And that's really important to note because losing to win again, sort of like a venture capitalist. Most VCs that I know don't expect to be right on every investment they're making in early stage companies, but they do expect that their best ones will end up outweighing all of the losers and then, of course, and then some, leaving a lot of money on the table, which is why venture capital works. So that's really the approach that I take psychologically and really quite literally as I invest, I put down a lot of different investments. I won't say bets, because there's a big difference between sports betting, which is a loser's game, and investing, which is always going to be a winner's game if you're doing it right. So I think it's very important, of course, to talk about losers. I'll just throw out 3D systems, how about that? 3D systems, 10 years ago was a monster. 3D printing, a new technology at the time, was all the rage and it was the iconic company. What was the ticker symbol? DDD3D, 3D printing, 3D systems, I picked it. Within the first year and a half, I think it was up eight or nine times in value. Just a monster winner. And, you know, we started seeing how 3D printing can print houses, it can print board game components. For geeks like me, the possibilities of 3D printing were very evident. In the same way, Clay, that the possibilities of the Internet, well ahead of it, actually delivering on those possibilities were evident years and years before. In the same way today, the possibilities of artificial intelligence, we can see them, but a lot of them don't exist yet. So the market can always get ahead of itself. There's a hype cycle that develops around big technologies, and that was there for 3D printing. So my eight or nine bagger, I ended up selling at about a 90% loss six years later. So a lot of people would never ever want to experience that in their lives. That would possibly crush their desire to ever invest again. To watch something go up nine times in value and then you sell at about a 90% loss down the line. I've got others like that, maybe not as dramatic, but companies more recently like Zoom, we're using Riverside to do this wonderful podcast today. But Zoom preceded a lot of the video conferencing that we take for granted today. And obviously it's iconic and it saved a lot of lives during COVID It's amazing company and what a disappointing stock it's been for the last four years after making a big run up an impressive way Peloton, GoPro, the list, TiVo, the list goes on of companies that are innovators that fit a lot of the things I look for and that did not work out on the public markets, did not ultimately win the profit share or the pole position that they started with in the important technologies that they deployed. So I am very comfortable losing. I think something may be disconnected in me relative to most humans. I'm also very comfortable talking about it. You and I could fill up this entire podcast just talking about losers. But here's the key and I definitely unveil this at a certain point in the book that you'll probably remember. The key is that while psychologists tell us that the pain of loss is three times the joy of gain for human beings, and this has been lab tested Behavioral Economics 101, the pain of loss is three times the joy of gain. Investing reverses that. The stock market makes the joy of gain infinite times the pain of loss. Because the worst you can ever do is kind of what I did with 3D printing and 3D systems down 90 or even 100%. That's the worst. What's the best you can do? Well, as you mentioned earlier, my Nvidia investment or Amazon, my cost basis for both of those stocks is $0.16, which is a really fun mnemonic for me and is only possible thanks to stock splits and randomness. But I've ended up with the exact same cost basis for Nvidia and Amazon. At 16 cents you can make so much more than 100% on the upside that I don't fear downside in the way that I think most humans seem to.
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So you kind of alluded to there how you don't like to refer to your investments as bets. I wanted to double click a little bit into that. So many times we hear people say they're long term investors and then those same People turn around and go and make decisions that are based on the short term, whether it be the economy, a bad quarter, or whatever's happening or whatever's in the headlines. And you mentioned in the book that you'll never be caught saying the phrase long term investor. And that's because investing in itself is inherently long term. And since this is an investing podcast, I think it's really important that we get crystal clear on what investing really is at a fundamental level, because, believe it or not, it's just lost on, in my opinion, so many people. So I've really wanted to touch on this. You know Ben Graham, he's famous for talking about how many people see stocks as tickers that are on the screen or some chart or just something that bounces around and it can be traded and passed around and, you know, you can try and make a quick buck or, of course, it's not the right way to go about it. So when someone invests in a stock, how would you describe what investing in a stock really means at a really fundamental and basic level?
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And I'm so glad you're asking this question and getting crystal clear on it, because the language matters deeply to me. Maybe it's because I majored in English literature, my only degree in college, but, yeah, language has always meant so much. And I look very carefully at the language that people use in and around the markets. We won't go there right now. But for example, correction, I think is a completely misguided, ridiculous word that's become ensconced and has an official definition now, and it's so silly. But we won't talk about that right now. Let's talk about investing. Because the Latin root of the word investing is investiri. And investeri basically means to put on the clothes of, to wear the clothes. And so a phrase like priestly vestments, that's from the same root, from the Latin, and I completely embrace that etymology. And I encourage all of my fellow Americans and even people who are not American watching us, who might be sports fans, because we have a lot of sports fans in this country. Clay, you are a cornhusker ilk. I am of Tar Heel ilk. We recognize these things run deep. And the huge irony to me is that the way that we treat our sports teams, where we go to the stadium with our home jersey, and whether our team wins or loses that day, we're going to keep that jersey on. And whether our team has a good season or not, a good year or not, we're going to keep that jersey on and yet with our money. The word investing basically means to put on the jersey. If every American watching us right now treated their money in the same way they do their sports teams, we would have so much more prosperity and wealth in this country. And we're all still doing pretty well. But the word investing is a beautiful word. And the picture that I would love everybody to have is of those fans who love their team and aren't going to fair weather fan their way out of it after a bad season. I think if we treated our investing in the same way, we would be living true to the meaning of the word investing. And that's why you won't hear me say LT Investing or LT Investor. I can't do it here. I'm abbreviating. I don't believe that we should ever modify investing or investor with long term. That's a tautology. That's a restatement. Because investing by its very nature is long term. In the book I open up the Debt ARM initiative, which is basically, if you're physically present with me anywhere and you ever hear me say LT Investing or LT Investor, I invite you to come up and give me a dead arm. Because you'll be reminding me that it should never be put that way. Because the opposite of that, by the way, is a meaningless term. There's no such thing as short term investing. I would say that's trading. And trading is the antithesis of investing. Many people use those words interchangeably and they're really opposites for me. And I know which one I want to do, and I know which one racks up to thousand baggers over the course of time and which the other one has people spending too much time trying to make money maybe half the time, which is how I define trading. So I'm sorry if you came into our podcast today saying you love trading and you're a trader. I mean, I'm happy for you if you love it, and I know some people can do it well. But the vast majority of media coverage is about short term, whether it's CNBC or even Barron's and Wall Street Journal. And so much of our actions with our own money are short term, and it's so harmful. And you're paying such an opportunity cost by not investing.
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Yeah. I mean, it reminds me of your interaction with Jeff Bezos. Right? I mean, you mentioned that you were the. Or you believe that you were one of the earliest holders of Amazon. A lot of people can buy Amazon shares in 1997, and very, very few can hold it for 20, 30 years.
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You know, it's funny you say that because really it's so lazy and you're doing almost nothing to hold stocks. And I know you already get this clay, but the world at large, often they're really enamored or amazed that I would still be holding my Amazon from 1997 or my Netflix from 2004, my Tesla from 2011, our Nvidia position from 2005, 20 years later, still holding. These have been the best stocks you could have owned over the last 20 years. And we just didn't jump in and jump out. We didn't feel the fear around these great companies. There's a lot of fear in 2008, 9 with the great financial recession, a lot of fear about, in and around Covid for very understandable reasons. A human tragedy in a lot of ways. So it's not like fear doesn't exist. It's not like markets don't go down or it's not like companies don't self inflict gunshot wounds sometimes with Qwikster. If you remember what Netflix pulled somewhere around 2011, there are all kinds of mistakes and downtimes that occur over any meaningful period of time. And every one of these great companies is up 100 or more times in value with multiple drawdowns often of more than 50%, whether it was the company itself or the market at large. These are all part of the normal process of being an investor, I hope, your whole life long. And so, yeah, it was fun. Near the end of the book, I told my Jeff Bezos story. We won't do it here because, I mean, I don't want to spoil it in full, but I wanted to tell Jeff, in a room full of thousands of people, that I might be the second lowest cost basis represented in the room. Of course he has the lowest cost basis in Amazon stock. While it sounds amazing and so superhuman in some ways to hold a stock from 1997 to 2025, I didn't do anything like I'm the guy who worked the least. So I think it's really worth pointing that out. That's part of the pleasure for me of investing using the wind at your back. That the market provides us 9 to 10% annualized returns, which is amazing. And trying to beat that by finding not just all the companies with an index fund, but let's skip the bad ones and let's buy the best ones and let's buy them and hold them way longer than Wall street will and it works dramatically. And capital foolishly. Let's Take a quick break and hear from today's sponsors.
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A
All right, back to the show.
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B
In the book you outline very elegantly the six traits of rule breaker stocks and six habits of the rule breaker investor, which I'd like to touch on today. How about we go through the six traits of rule breaker stock and we'll dive in deeper on a couple of them here.
- [32:52]
A
Sure. Well, I'll just flash through the six right now then. Trait number one of the rule breaker stock is top dog and first mover in an important emerging industry. Almost every word there is loaded. We can talk more about that. That's the most important of the six traits. Top dog and first mover in an important emerging industry. Number two is sustainable competitive advantage. Because after all, if we're going to be buying and holding as long as we're talking about you better have a sustainable competitive advantage that that company owns or prizes. Maybe more than one of them. Number three, this is the first of the six traits that's not about the company but about the stock. And this is very contrary in a way that of course the rule breaker in me loves. We want to see trait number three, stellar past price appreciation. Stellar past price appreciation. Those are the first three. The second three also go company company stock in terms of what we're looking at. So the fourth trait of the rule breaker stock is that it have good management and smart backing. I'M going to say it's about the humans stupid. And I'm saying stupid to myself or to all of us. Too often people don't think about the human factor and don't even value or think about the value, let's say, of Jeff Bezos, what he represented to Amazon or what Elon Musk represents to Tesla stock. And the company, they just sort of write it off, it's not being factored. So good management, smart backing, the character of the people and the people who fund it as well. Really important number five, strong consumer appeal. Again, that's about the company. We're talking about the brand, we're talking about the choices that we make in a tension starved world where there are so many things competing for our time. We got our kids to take to soccer, we have to do groceries as well. Oh, by the way, we're trying to invest in stocks and we have our professional lives, which for some people are seven days a week in this work from home world, not just four or five, the way it used to be. So all of these things are competing for our attention. Therefore, companies that provide a service or product that we come to rely on and we come to love and admire their brand, that's such an asset. So that's the fifth trait and the sixth and final trait of the rule breaker stock, which Clay probably is the special sauce that brings them all together. And this goes back to the stock again, not the company. This is very contrary. I want the company to be broadly perceived to be overvalued. I want people telling me aol completely overvalued. Amazon will never make money, they're so overvalued. Netflix is going to get put out of business by Blockbuster. It's totally overvalued. The list goes on. I used to think everyone's probably right, so I shouldn't buy that because it's overvalued. Until somewhere in my early 30s I started to realize new insights. And one of them was powerfully, when people say a great thing that has those first five traits and the sixth is it's overvalued, that's actually the best buy signal you could possibly have for those kinds of companies. So those are the six traits of the rule breaker stock.
- [35:59]
B
Let's touch on some of these more contrarian ones first. So the sixth one is that it should be overvalued. You explain of course, that stellar past price appreciation and professional commentators are going to be saying it's overvalued. Overhyped. I'm nearly certain that 95% of our audience is going to listen to this and say, David, you've absolutely lost your mind. So you tell a story in the book of Tiger Woods. What can Tiger woods teach us about buying overvalued stocks?
- [36:27]
A
Yeah, it's a great story. And again, a lot of us grew up with Tiger. And I mean, he's still around today. Not what he once was, but in 1996, he was 20 years old and Nike signed him to a $40 million contract. And he had never played a single professional hole of golf. And you might imagine, given that Nike had 10 years before, had opened up a big contract with someone named Michael Jordan. And Nike, ten years before that, had paid two and a half million dollars to Michael Jordan. Here we are ten years later. Forty million dollars, the equivalent of 80 million today for a completely unproven golfer, seemed crazy at the time. And yet in that year of 1996, by the end of that year, Sports Illustrated had named Tiger Sportsman of the Year. And it brings chills to me a little bit to think about what he took on, as in his first press conference at the Greater Milwaukee Open when he had just finished his first round of professional golf. He started with the words, hello world. And that was not unpremeditated. That was actually, days later, Nike's campaign that had unleashed around Tiger. But I love that story because you have somebody appearing dramatically to overpay, and by any normal yardstick or any historically based wisdom, you would think, no way, that is a crazy mistake. And he went on to basically be one of, if not the greatest golfer of all time. And so for me, that's an instructive story. And I just started learning from that example and I started thinking, you know, why did that work? Because that ended up being a brilliant low cost basis investment basically by Nike in Tiger Woods. It's a model for what rule breaker investing is and does. And by the way, if Tiger were a stock I'd still be holding, that's my way of saying with almost every great investment, we just keep holding, there has to be a great reason to sell. There can be. We can talk about that, Clay. But it's a great story. And I think the reason it works, and not every golfer is Tiger and not every stock is Intuitive Surgical or Apple, but the reason it works is because Tiger was truly great. And a company like Intuitive Surgical, unleashing the da Vinci surgical robot on the world 20 plus years ago from a standing start position with a nothing brand, has proven itself to be truly great. These days, Intuitive Surgical has a higher research and development line on its income statement, then most of its competitors have revenue lines. We're talking about truly Apple, truly great companies. And that's what I'm focused on. I basically want to find excellence, buy excellence, and add to excellence over time. I sell mediocrity. That's how I invest. And I learned that through not Tiger. I really learned that through the stocks that I picked over time. But Tiger is a great metaphor, analog example for anybody who's skeptical that buying stocks would make sense or that you could beat the market. And if you made me beat the market with 60% of the stocks on the market, I'd have a hard time because they're not great. I'm focused on true greatness, the people that are running the companies, what the companies do in this world. I want to feel great about what they're doing, et cetera. So I hope I didn't go on too long, but that's my. We can all learn from Tiger, but not Tiger. We actually can learn from Nike because they're the investor. They're the ones who actually put the money out, took the risk, just like you and I do when we buy stocks.
- [40:09]
B
And as value investors, we're oftentimes hardwired to want to bargain. So when we see a stock that's up substantially, we just tend to avoid it because our gut instinct is telling us we miss a boat. We're supposed to be very valuation focused and focused on price. I'm reminded in the book you outlined when you purchased Intuitive surgical in the 2000s, the PE was something like 70. So someone will look at that and say, there's no way that intuitive is worth two or three times as much as their competitor that's trading at 20 or 30 times earnings or whatnot. I think what people could maybe be missing there is that these exceptional companies aren't just two times more valuable. They're not just three times more valuable. They can be a thousand times more valuable. So the market might be looking ahead, say one to two years and see a lot of potential growth there. But if you're an investor, there's still a lot of potential of what a company could achieve.
- [41:07]
A
It's so true. And obviously part of what I love is that all of my greatest stock picks were so overvalued when I picked them. And these are the companies that went on to go up 100 or more times in value from that position of being so overvalued that you have to discard them, put them in the won't, invest There, now pile. And you know, you're making me think, you know, one of the things I love doing in the book, Clay, is telling stories. And just based on my own experience sitting here in my den trying to beat the market. And there's a story I didn't tell in this book that I want to tell briefly now because you just triggered it for me. The one time I met Steve Jobs, we were at a conference. It was the Business Week, that magazine, the BusinessWeek conference, I think was 1996. And we were keynoting that morning and Jobs was keynoting the lunchtime talk. And at the time he was the CEO of Apple and Pixar. And people were like, Steve, how can you do this? You're trying to be the CEO of two different big public companies. And that seems like a total misallocation of your time. That's what he was hearing from Wall street, institutional investors, etc. And he told a brief anecdote that he basically said, you think I misspending my time? Well, then you're really not going to like that. I spend one day out of every five in the work week simply interviewing new hires at my companies. You might think that's a real miss expenditure of my time as well. And Jobs went on, but here's the deal. Most people think that somebody who's great is maybe two to three times as good as, as somebody who's good. But Jobs said that morning, in my experience, somebody who's great is 40 times better than somebody who's good. And that's why I spend said Steve Jobs one day every week just interviewing new hires. Obviously, not only did Pixar and Apple go on to crush it, but ironically, near the end of his life, Steve Jobs ended up being the single largest shareholder of Walt Disney Corporation, something he didn't even start out with because Disney bought Pixar, he got a low cost basis on his Disney stock and held it. So we're talking about obviously an iconically great entrepreneur, the kind of Tiger woods like figure that I look for in the business world. By the way, I find a lot more of those figures in the business world than the world of politics. I live in Washington D.C. i would even say, in some ways the world of sports. I have been so incredibly enriched by focusing my time on the private sector and thinking what is really great and who are the great leaders that I know. And we've talked about a lot of them and we'll probably still talk about a few more before we're done, but that's My Steve Jobs story, it's not in the book, Clay. It spoke to what you just talked about, which is intuitive, surgical at 71 times earnings is not just good, it's great. And great is worth a lot more than people are willing it seems to pay for at early stages. And so I and my fellow rule breakers try to take advantage of that by being early. And yet it's not just about one side of the trade. It's that you keep holding past everybody else as well. That's how you actually maximize what the stock market can give us as investors. If you want to maximize your gains, you find early and you hold past everyone else, even sometimes to points that it hurts.
- [44:32]
B
Yeah. One of the key insights here, I think, is that the qualitative factors can be just as, if not more important than the quantitative. The numbers, the pe, the balance sheets. So it's really important to look at things like the CEO, the brand, the culture, all these are incredibly important and are incredibly valuable in these amazing companies. But you can't find that line item on a balance sheet. Talk more about better understanding the qualitative factors and some of the things you're looking for in these top dogs, these first movers in emerging industries.
- [45:07]
A
Probably my favorite chapter in the book, and thanks for asking about that and calling that out, Clay. I hope everybody will go out and read Rule Breaker Investing. But even if you don't, just find a buddy's copy and read chapter 12. Because I think that probably is my greatest contribution that I make to investing thinking in the book. And it specifically arises from watching these six traits and seeing the first five. When they work in concert together, you just find amazing companies and they're always going to be premium priced, they're always going to look overvalued. Starbucks will always look like I'm overpaying for a coffee company. By the way, the coffee itself, people would say is overpriced. How could that possibly work? And I think the key insight, I didn't have it as a young person and I didn't even have it until writing this book. But as I finally thought about why do these companies, the ones everybody says are overvalued, these end up being the best stocks of the generation. And the reason I think there are probably more than one, but the biggest reason I found is that what matters most in business, there are no numbers for the things that matter most. You just called a few of them out right there. Who the CEO is, does anything matter more? Lots of things matter. And let's go back to A football analogy, since we're about to hit football season here. The quarterback obviously matters. These are the highest paid players on the field. The media typically glorifies them, probably over glorifies them. They're forgetting about the offensive line and the contributions that enable the quarterback to do his thing. But in a lot of ways, the CEOs are of course the quarterbacks of American companies. And while we spend a lot of time thinking about, you know, Tom Brady, we actually don't have any line on the financial statements to express the value of the CEO. We've talked about some incalculably valuable CEOs in our time together. There are also CEOs who are destroying value out there. There is no line on the financial statements to adjust for the CEO. That's not the only thing. You called out a few others. I'll just hammer down on one more. The brand. It's obviously the fifth trade of rule breaker stocks. Strong consumer appeal, Starbucks, Apple, the biggest companies. And the best companies in most industries are the ones with the best brands. And there's no line item for brand on the balance sheet. There's no number. We're adjusting our price to earnings ratios or price to cash flow or price to book ratios. So I've just covered two of the things that really matter maybe the most in business. And especially as an entrepreneur myself, I know how important it is to say who's running this thing? And by the way, what's their reputation? And is that a brand that people love? I know how important those things are and there is no adjustment for it in most people's valuation models. And let's throw in two more. I'm not going to speak to them, but innovation. Can you innovate? There's the R and D line that tells us a little bit, but not that much. And then the culture of a company. I am a big fan of company culture and thinking how important that is. Sometimes I describe myself, it's not on my business card, but I could be a cultural anthropologist, a corporate culture anthropologist. I hope you will try to be too. I hope all of us will, because that actually matters. Maybe more than anything else. CEOs come and go, leadership teams can change. But the culture at companies is very hard to change. And when it's powerful, it is beautiful and so strong. And when it's the opposite, it is a death knell. You can buy a company that looks like it's so undervalued. Why? Because it has the worst culture in American corporate culture today. So those are the things that cause these companies to win or lose in the marketplace. Their inputs, earnings and cash flow are outputs. Working all of our valuation models off multiples of outputs without scrutinizing or putting numbers on or paying attention to the inputs, I think is crazy talk. And I think in a lot of ways that's the standard that people have been taught in terms of how to value things. And so as a rule breaker, while I don't right away have my own answer, I think that's for others, maybe younger people than me, like maybe you clay people, to discover in the future what are good proxies for things that matter more than what we're valuing stocks off of today. So that, I think is a powerful insight in the book. I obviously speak more to it. There's a lot more in the book than that. But that's maybe my favorite point that I hope people will think hard about.
- [49:45]
B
One of the other concepts I really resonated with was this concept you shared that you've referred to as cheating. So it almost feels like investing in itself is cheating, right? Getting to own, get exposure and build your wealth and compound over time. So this is covered in the chapter on competitive advantages. And you got this concept from Seth Godin's piece titled Cheating, and I'll briefly quote it here to give the listeners an idea of what you're getting at here. So he writes, starbucks is cheating. The coffee bar phenomenon was invented by them. And now whenever we think coffee, we think Starbucks, Amazon.com is cheating. Their free shipping and huge selection give them an unfair advantage over the neighborhood story. And then he closes out that piece by saying, why aren't you cheating? The point is that, you know, some businesses just have an unfair advantage over their competition because there's all these sort of factors that almost have a lollapalooza effect that just make it impossible to stop them to some extent. But it almost appears that they're cheating. You walk into a Costco store and it's just amazing. That, of course, leads to strong returns for long term investors, which is the term you hate. It's what delivers returns for investors over time. So that's of course, what we're looking for. So talk more about this concept of cheating.
- [51:01]
A
I really love that you found that and pulled that out. I think it's just such a brilliant short piece by Seth Godin, one of my favorite business authors. And what Seth is really talking about, as you just spoke to, he's using a naughty word. And obviously cheating in most contexts is a word with a very negative connotation, and rightly so. And I know you and I and Seth would all be the first to say that. And yet it seems like people who are endowed with incredible natural abilities. We're talking about sports. Somebody who can dunk a basketball, I would say is cheating relative to the rest of us who can't dunk a basketball. People who can read really fast. I have some of these people that I know. Maybe you're one of those people. Clay, you read my book. I bet you read it faster than I can read. There are some remarkable fast readers and learners that appears to be cheating. They spend half their time on homework than I do. They retain more of their reading than I do. It seems like in Seth's words, they're cheating. And he does end that little piece by saying, why aren't you cheating? In other words, why aren't you taking advantage of the natural or situational advantages that you find yourself owning? And yeah, to me, that's a great explanation of why some companies win dramatically and others don't in the marketplace. And as investors, we're trying to find the former and avoid the latter. And so looking for. I would describe this as business focused investing. I think more of the world is doing trading than investing. And I think maybe more of the world is doing zigs and zags, chart analytics, the movement of sea slugs and oceans kinds of trading than what I think is much more important, which is looking at the businesses themselves. So I don't really want to look at stock charts. And I think you really should know and deeply care about the company you're buying stock in, what they do, and if they succeed, I hope it's a better world in your mind than if they hadn't succeeded. I was raised to think I'm a part owner of the companies that I'm buying. When we went to the Safeway in Washington, D.C. saturday mornings with our dad to get groceries, dad would say, hey, kids, look, chocolate pudding. We own some of the company that makes that chocolate pudding. Let's go get more chocolate pudding. That's an awesome dad. But what he was teaching us from an early age is we're part owners. We can be through the miracle of the stock market and the ownership culture that I hope we're never taking for granted in our country. Clay, we can be part owners of the things that we love. And I think, therefore, you should take that very seriously. And if you do, you will do better numerically with your returns than if you don't do that. That's been My lived experience. And so, yeah, I think that this form of approaching the markets is business focused. And therefore we should be looking as anthropologists of the business world, we should be asking with intellectual curiosity, why is Costco so darn good? And how can Starbucks get away with charging $2 more than anybody else for that same cup of coffee? And the list goes on Apple. I mean, Apple has gone through so many different evolutions at this point. It's really fascinating as a business focused person to ask why were they mediocre for a long time and then those PC and Mac ads start showing up and Apple starts breaking out with the iPhone, et cetera. So I am fascinated by business. I don't need an MBA degree because you and I can get it every day just by studying Jensen Huang and Nvidia, or Elon Musk and Tesla, their strengths and their weaknesses as people, but of course, even more the companies. And so, yeah, I think it's really helpful to be a business focused investor. And that's the tradition from which I'm writing and that we're speaking to.
- [54:52]
B
I want to be sure to get to the rule breaker habits as well. So how about you walk through these and we'll touch on a couple of them as well.
- [55:00]
A
Sure. Run through them quickly again. So rule breaker habit number one is rule number one, let your winners run high. That like my traits for the stocks, the first one is the most important. So rule number one, let your winners run high. The second is to add up, don't double down. Rule breaker investor habit number three, invest. We've talked about what that word really means, invest for at least three years. Number four, follow the four tenets of conscious capitalism. Number five, max 5% allocation. That is to say, any new position you take in your portfolio, I don't think you should be risking more than 5% of your overall net worth in that position. Max 5% allocation. And finally, rule breaker investor habit number six, aim for 60% accuracy. You alluded to this earlier when you said, we're trying to beat the market, our batting average, we want that to be ideally 660% or so of the time you should be trying to beat the market when you buy stocks directly.
- [56:15]
B
All right, Starting with the most important one, let your winners run high. So let's talk none other than Nvidia. So it was April 15, 2005, you recommended Nvidia. So it's been over 20 years of holding that stock and it's been one of the greatest investing success stories out there. But it wasn't all sunshine and roses. The journey was not a straight line up. Stock lost more than 80% in 2008, over 60% in 2022. Even, you know, after it's become an enormous company, it still has these big drawdowns, you know, and that would have tested even the most patient investors. So walk us through your mindset going through these gut wrenching drawdowns because you even mentioned earlier that you sold the 3D company on a 90% drop. So maybe it potentially crossed your mind to part ways with Jensen Huang. So talk more about holding through stocks like Nvidia through these drawdowns.
- [57:08]
A
Well, Clay, a minute ago or so you said it's not all sunshine and roses. And that's not just true of holding Nvidia over a long period of time. That's true of life. It's not all sunshine and roses. And that's always going to be true of your stock market portfolio over the course of your life and of any individual stock because we're talking about the rule breakers, which in my experience are the greatest stocks of any generation for very logical reasons that we've been trying to elucidate in our conversation. These are companies that are just phenomenally great companies. And so, yeah, you want to buy them as early as you can and you want to hold them as long as you can, which is what we've done with Nvidia. And it won't ever be all sunshine and roses. And you already referenced 80% drop. So, yeah, I recommended it in April of 2005. It was like a four bagger a year later. So we made four times our money in that first year. And yet 2008, nine, all of a sudden, that four bagger, we're now underwater from our original position. So as Nvidia goes from a big winner for us early to underwater, that doesn't feel good at all. Never will. And you know, fast forward the stock fully recovered and then kept going and then went more than that and then went sideways for five years. As the market is going up, it goes sideways and then it drops just 20, 22. As you mentioned, it's a mega company. It's Nvidia. Two thirds of its value in a single year. And all of these are waypoints on the way to the greatest stock of the last 20 years. And so part of what I love about chapter one of the book is telling the story and we're abridging it here, but just making sure people understand what a roller coaster ride it's going to be if you're Going to be playing to win, as I do over the only term that counts, the long term. This is the best stock of the last 20 years. And the 20 years of holding it were dramatic up and down. And since it's never gonna be all sunshine and roses, I think you have to ask yourself, what are you in this for? And for me, I want to keep owning the best companies of our time. The only reason I ever sell, generally, actually the number one reason I sell Clay, is when a position like Nvidia or Amazon gets too big within my portfolio, it's eating my whole portfolio. Almost anybody who's ever held a stock of 100 times in value, if they're not selling some of it off to redeploy some of that, they're going to be dramatically overweighted in that stock, right? So the number one reason that rule breakers sell is the best reason of all. It just keeps going up. But the second reason I would sell is if I've just the company counts for nothing, it doesn't really matter much anymore. And so I'll eventually just. I'm usually the last guy out of any bad stock like 3D systems. Others had sold it well before I did. Some made a profit eight or nine bagger I didn't. And the benefit of holding winners and losers to the very end is dramatically in your favor because of the winners. So of course Nvidia, when it goes up 1300 times in value, it wipes out every single bad stock I ever picked in my 30 years of stock picking for the Motley fool and then some just that one position because of the dramatic gains that you get. And by the way, we've had many other great stocks besides. So I'm glad that Nvidia is as popular and big as it is today because it basically provides a front and center page one view of what we've done at the Motley fool and Motley Fool Stock Advisor where we've bought and held it for 20 years. Let's take a quick break and hear from today's sponsors.
- [60:43]
B
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- [64:08]
A
All right, back to the show.
- [64:10]
B
What's also just so fascinating for me is that all these companies aren't just benefiting shareholders, they're benefiting, in a lot of cases, all of society. So you get into the topic of conscious capitalism, which you mentioned, and it's really all about creating a win win for all parties. So it could be a win for customers, a win for employees, a win for shareholders, a win for society. And as you put in the book, there's a bit of a conundrum here because all customers want to pay less, every employee wants to be paid more, every partner or supplier wants to be facing out the shop window. And every shareholder wants you to double the stock price tomorrow. So what is it, do you think, conscious capitalism that allows all parties to win?
- [64:58]
A
Well, I have had the great fortune of being on the board of Conscious Capitalism for several years, and I've been in and around the movement. That's how I think of it for 20 years, just about now. So I know what this looks like. And not every company does this. But let's just go with Chick Fil A, which by the way, I mean, if I wish that company were public, because I would have bought and held that for decades now. We would have done incredibly well together. You know, Chick Fil A, while, on the face of it, is a chicken fast food restaurant. It is an amazing company. The esprit de corps among their employees, the feelings that customers have about Chick Fil? A, their decision not even to open on Sundays, which would go against most other companies out there. I mean, everybody else in the industry are all so distinctive and such strong signs of corporate culture. And so that's conscious capitalism. They're winning for everybody. They're winning for their farmers who send them the chickens. They're winning for their customers who keep going back in some of the longest drive through lines I see. And yet they move faster than anybody else's drive through line. You see the employees and how much they enjoy working for the company. I mean, it's not the easiest industry to work for. This is an employer you'd want to work for if you're going into that industry. And that's true of so many other conscious capitalism companies. They're generally the best place to work kinds of companies in the industries at large. And of course they're winning for their investors. It's just that not all of us get to unfortunately invest in Chick Fil A. But it's just a fun example a lot of us can relate to. But you know, Clay, solving problems by asking questions differently is what rule breakers do. And that's what I'm trying to do in my book, Rule Breaker Investing. And that's what Steve Jobs said. He said, think different. And so if you want to think different and be really successful in business, you start saying, you know what? The purpose of the corporation is not to reward shareholders, which was 20th century chapter and verse teaching. And most of the Fortune 500 CEOs in the 60s and 70s, if you got their paper annual report, they would say, we're here to benefit shareholders. That's the purpose of capitalism. Well, John Mackey, founder of Whole Foods Market and a bunch of other visionaries some years ago started saying, is that really the purpose of business to reward shareholders, or is it to create a win for your customers first for all of your employees by being a great place to work for your partners and suppliers, for the environment, Planet Earth, if that's relevant to your business model or your local community for some businesses. And also, by the way, by the way, if you're creating all those wins for those people, guess who else is almost certainly going to be winning? Your shareholders. But if we take, John Mackey would say, if we take just one of those stakeholders, the shareholder, and we say the purpose of the corporation is to max it out for shareholders, can you see how that torques bad decision making and creates all kinds of bad incentives, et cetera? And when people say they don't like capitalism, by the way, I love capitalism, but I love conscious capitalism. The people who say they don't like capitalism, they're reacting to the bad incentives and some of the bad dogs out there who often get the headlines. Chick Fil A doesn't get the headlines. It just keeps grinding away. And most of the companies we've talked about in our conversation today, and all the ones I try to fill my portfolio with, I truly believe they bring a better vision to the world. They make the world a better version of itself in the future for their efforts. And Clay, I truly, and I'm not speaking here to investors, I'm speaking to entrepreneurs. There are a lot of entrepreneurs listening to us right now. If you're trying to win for all of your stakeholders, not just one group, you're so much more likely to win sustainably and in a way everybody can embrace. And I've seen it firsthand, and so I know that's how I want to Invest as well. And that's why it's investor habit number four. For the rule breaker. Investors follow the four tenets of conscious capitalism. There are three others we're not even speaking to. But thank you for calling that out. It's always worth talking about.
- [69:00]
B
It's just such a fascinating concept to see. Costco, for example, keeping prices extremely low and somehow that ends up being good for shareholders in the long run. But I can't help but also call out by just so many public companies or companies can have this vision and this culture. Initially they go public and then just over time, shareholders chip away at what the company used to be and it just becomes something different gradually over time. I'm curious if you ever find yourself between a rock and a hard place where you buy a stock, you develop some sort of emotional connection to it and it delivers these great returns, but you see it take a turn and just the things have changed over time. How do you deal with that in terms of so many public companies can just get a lot of pressure from Wall Street, a lot of pressure on these. Hitting the next quarterly EPS estimate. Yeah, how about you talk about that?
- [69:53]
A
Well, I think that it's always going to be true that public companies feel pressure more so than private companies to perform on a quarterly basis. And even as big and successful as Nvidia is, it seems like often we're casting our market dynamics. What are their earnings going to be? That seems to matter so much as a bellwether for the market, just that one company. And I don't view things that way myself, by the way, but that tends to be how media coverage works. So I would say that it's natural that as any organism grows, its parts specialize and it becomes more and more unwieldy. And so in a lot of ways, that's why rule breaker investing works, by the way, because we're buying the Davids, not the Goliaths. And one of the great things that I learned from Clayton Christensen, the brilliant Harvard academic who invented disruptive innovation, at least that phrase as he talked about disruption. The key is that it often happens because big companies, you think that they're amazing and untouchable and we need to break them up because they're too big and too successful. But actually anybody who's ever, and I've not been a battleship captain or let's go with an aircraft carrier captain, knows how long it takes to turn that thing around. And so as these companies get bigger and bigger, they actually become more vulnerable, not less. Even though media coverage makes it sound like Facebook is unstoppable in the same way that AOL was once viewed as it merged with Time Warner as this huge juggernaut that couldn't be stopped. So I think that it can be true that the companies that we buy as little acorns as they sprout into gigantic oaks and then throw off more acorns that create more oaks and whole forests around them and they become this juggernaut like meta platforms is today. Some people are going to start jumping off the ship saying I don't actually support what they do anymore or social media and my kids, et cetera. And it's understandable when you start hitting high, high scale that some of these effects can be negative. Walmart is on the one hand amazing in the sense that it's given lower prices to so many Americans, really at a incredible scale. And it also squeezes all of their partners and suppliers and a lot of them don't like Walmart as much as somebody that might premium sell their goods. So these huge effects can be positive and negative. I try to look at things holistically and I ask if that company disappeared overnight, would anyone notice? Would anyone care? And while there are certainly haters for any of the great companies that we've talked about in this conversation, some people do in fact hate meta platforms. Some people hate Jeff Bezos, some people for other reasons, hate Elon Musk or not even the people, let's just go with their companies. Some people hate Amazon, some people hate Starbucks. Some people hate Blank Net Net. These are companies that are providing, in many cases life saving or incredibly important services every day run by people that are trying to make good decisions. I've met a lot of them and talked to them. They're not hoping to be evil dictators. They're basically trying to create value for everybody that are part of their ecosystem. And so to close my shaggy dog answer, if I felt like my company was now no longer on the side of good, but on the side of evil, then I would sell that stock. But a lot of this is subjective. One person who hates Amazon, somebody else really, really loves Amazon. I think more people love Amazon that will admit it. And I think that would be a good example. Sort of a lightning rod company. Is Amazon good for the world at large or not? I think it's wildly obviously true that it is, but if you disagree, I'd be the first to say don't buy the stock because I think you should be making your portfolio reflect your best vision for our future, not mine.
- [73:39]
B
Yeah, so well put. My next question is for those that are interested in adding new rule breaker stocks to their portfolio. On the one hand, all these massive mega companies are some of the biggest innovators in the market, right? Amazon and Google and whatnot. So they're the Goliaths of today in many cases. For those looking to add new stocks that are potentially rule breakers, how do you think they should think about market cap? Should they focus more on smaller companies that have more room to grow or focus on companies that still have these rule breaker traits but might be a much bigger size than they once were in the past?
- [74:17]
A
Well, first of all, thanks for calling out market cap because I love market cap. And on my own little podcast, the Rule Breaker Investing Podcast, we play a game show four times a year at the end of each quarter, the market cap game show, since I love games, therefore had to make a game show out of guessing company market cap. So I love market cap. And I don't think it's something to target specifically as an investor. I think it's something to know whatever you're invested in, like to care about the market cap. In a world of people who don't really know what market cap is, you're going to be well served by caring. And I would say often I would shoot for companies in the 5 to $25 billion market cap range. If you're looking for earlier stage and hoping that that might be the next Amazon or the next Nvidia, they're gonna start there, right? Not at $4 trillion. So I think it's worth paying attention to. But more than anything, I think it's about the company's opportunity in this world. So I don't shy away from buying a new stock of a company that has a $2 trillion market cap because a lot of people think that's almost like a ceiling, like nothing could get bigger than that, right? And they were saying that before there was ever a trillion dollar market cap, will there ever be one? And the answer is, heck yeah. And a lot more are coming. And a company like Nvidia could easily go multiple times in value from where it is now over the next 10 to 20 years. So I wouldn't get too hung up on the idea that you need to find small cap market caps. I think you should be asking yourself, is this company more than anything, I might be asking myself this. And this is another test that you read in the book, Clay, but my cola test, and the cola test is basically, let's think about Pepsi and Coca Cola and let's Ask ourselves if we've just bought a stock, whatever its market cap and if we kind of think of that as the Coca Cola of its industry. Like I would say Intuitive Surgical is the Coca Cola of the robot assisted surgery industry. The Cola test is can you find a Pepsi to that? Coke does a near analog or a clear competitor exists. And the companies that I love most of all are when you cannot find a Pepsi to that Coke, when that company is doing something that nobody else is doing at a scale that no one else can challenge. Blue Ocean is ahead. And so it doesn't really matter to me what the market cap range of that situation is. In fact, a lot of companies that get over $100 billion and are staring at the possibility of a trillion dollars, which by the way is 10 times a 10 bagger off of $100 billion company, those companies at $100 billion market cap have resources and possibilities that don't exist for a company that only has a $5 billion market cap. So in a lot of ways you're de stressing and de risking your investment by finding companies that pass the Cola test, even if they're quite big. Those are some of the best companies out there. So that's how I think about what companies I want to be invested in. Market cap is a factor, but it's more of a descriptor, not something I'm screening for.
- [77:29]
B
So David, you Advocate for a 20 to 25 stock portfolio of individual stocks that is diversified across a wide range of industries. So this can be a bit difficult, I think for a lot of people that work full time jobs, they have a life, they don't just read stock reports like some of us all day. So there's this fine line between understanding what you own and still being broadly diversified.
- [77:53]
A
Right.
- [77:53]
B
If you have 20 to 25 stocks, I think for a lot of people, they own some companies that they might not understand that well. So how do you go about staying within what Buffett would call a circle of competence but also being broadly diversified in the market?
- [78:08]
A
Well, first of all, I'm a humanities person I mentioned earlier, I'm an English literature major. And while we don't tend to get the big salaries coming out of schools, it seems like it's all the engineer types. I do think that we have some advantages as well as people from history, literature, the list goes on the arts, drawing connections between things that other people might not notice because they're kind of siloed and they're specializing in something. And so that list of my 7, 100 baggers that you shared at the beginning of our interview. For anybody who wants to go back and rewind the tape here, they're gonna hear seven company names that are completely different companies, different industries, not the same technology. As an investor, I'm not trying to own a certain sector or flood my money into a given technology. I actually love being a mile wide and an inch deep, because even though I'm only an inch deep, I'm actually seeing across a full mile in ways that other people aren't noticing or seeing. So I think what rule breaker investing is doing specifically, Clay, is it is enabling people to see with new eyes that they wouldn't have had otherwise. And specifically, what I'm talking about is seeing the traits that make up the great stocks of this generation and the next generation. So while somebody's probably gonna know more about that, might even work at the company or work in that industry, whereas I'm just a stock picker. And yet, I think what the six traits for rule breaker stocks do is they give us pattern recognition that I built up over time as a humanities person that has helped me not feel like I have to know everything about genomics or everything about AI or everything about anything, but just know enough to be dangerous, willing to risk money to put it in something. Because I see the pattern of things that have worked. And I won't just say, as a stock picker, I'm also an entrepreneur. So I have, you know, one of my favorite lines from Buffett, and I love so many Buffett lines. I'm a better investor because I'm a businessman and a better businessman because I'm an investor. That is such a true statement. And you're head nodding. And I hope a lot of other people are too, because too many people in this world, I think, cut off one of those things. They're like, they're in business, but they got their own company, and they're so busy that they're like, I would never invest in stocks. Just so, you know, like, I just give my money away to my money guy. I need to be an entrepreneur. And then there are other people, the opposite. They've got, like, their trading station 3000 and they've got their charts, and they're like, I don't really work in business, and I. I would never spend time. Like, I'm just all about making money on the market. Both of those two people are cutting off half of their learning. And the key to the Buffett line is you're better because you're the other. And so it's not like a 2D plane. It's actually a gyre. It goes up three dimensions over time. The better you get at one, the better you'll get at another and at the other. And it just keeps going like that's been my lived experience. And so I think it's incredibly valuable to recognize the traits of rule breaker companies. And I see them as an entrepreneur myself, I see the importance in some ways. I have a friend who read this book. He was the first person to read it, Dan Simons, who started founding Farmers restaurants here in Washington. And he read it all in one afternoon. He actually called me because he canceled his meetings because he wanted to finish the book. And he said, what you've actually written here is not an investing book. This is a book about business and life. I'm an entrepreneur. These are the lessons I want my employees to have. And while that is an incredibly high compliment coming from somebody I deeply respect, it actually should be true in a sense of any investing book, because what you're really doing is as an investor, you're asking, what do I want to be a part owner of and therefore, what is going to win in the marketplace and what are the factors and traits that we can find from robotic surgery to electric cars to coffee. The list goes on. There are rule breakers in every industry. So by calling this rule breaker investing and talking about rule breakers, I think I'm taking a new angle that people haven't had before across every industry if they want to use it.
- [82:18]
B
Well, I'm happy you mentioned what your friend mentioned to you just about the book and living a good life, because I think it ties in well to my next question. One of my favorite things about just tuning into all your public appearances, reading the book and whatnot, is just how positive and optimistic you are. It just shines through. And everything you do, your personality, your messaging, your investing approach, the way you run your business and whatnot, it reminds me that if you have the mindset that you have this very pessimistic view of the world, you're never going to own a ten bagger, a five bagger, a hundred bagger, because you just don't believe that the future is going to be better than it is today. So I think that optimism is such an important trait to be a good investor. So I'd love for you to talk more about the importance of optimism, not only as an investor, but living a good life.
- [83:10]
A
Well, thank you very much, Clay. And I know I'm speaking to a fellow optimist. I really appreciate Your bright demeanor and all that you bring to this podcast and the people that you interview. And that shines through for me as well. You know, Henry Ford once reputedly said, whether you think you can or whether you think you cannot, you're right. And I've always taken those words to heart. What I've realized about optimism is it's not a state of mind. It's not just that. It's actually a creative force. So whether you think we can or whether you think we cannot, you're going to be right. Therefore, as an entrepreneur surrounding myself with private sector people my whole life long that I've learned so much from, I see them go out and build things that never existed before. One of my favorite conscious capitalists, Roy Spence, who started his own branding and marketing firm, GSD&M in Austin, Texas, one of my favorite conscious capitalists, he said, you know, it's the greatest joy in life, David, putting something there that wasn't there before. You could say that about a child, you could say that about a business. The world is always going to be to the doers. And doing doesn't mean not thinking too, but it does in the end mean doing. And the only people who can scale great companies, the only people frankly who can scale a small business from zero employees to one are, are going to be people who think they can. And while we're going to be wrong and any number of bad stock picks or bad mistakes we've made at my own business, the Motley fool over the years, that's going to happen. But it all happens in service, I hope, of purpose, of why you're doing what you're doing, especially for entrepreneurs. You talked about conscious capitalism earlier. The first tenet of conscious capitalism is purpose over profit, higher purpose. And the crazy little secret here is that the companies that truly pursue purpose often have the highest profit in their industries. Chick Fil A being one example we talked about. But most of the industries are led by companies. The best companies I would say Old Dominion Freightline in the trucking industry, a completely different industry. We haven't talked about this at all. That is a brilliant purpose over profit, multi generational family run public company that I love and I love lots of others. I think it's so important to surround ourselves with positive voices. It's not always easy today in our society and some who've read what probably is my favorite chapter in my book, which is my chapter X at the end, it doesn't have a number, it's just entitled Excelsior. I loved writing that Chapter probably more than anything in the book. But I think that what I recognized is that purposeful work done by purposeful people that convince others to go to work for them, who can buy into the vision, people who can make visions into reality. It's such a beautiful thing. And it's led to all the technologies we're using today to broadcast or reach people, what we're wearing, what we ate for breakfast, all of the things, and they're such better quality than existed 500 years ago or 5,000 years ago. And so the story of humanity is one that was built by people who say, yes, we can. And I'm not here to say that if you can't get there that there's anything wrong with you. There are lots of pessimists in the world. There are a lot of people right down the middle, realists. But my favorite position is rational optimism. And there's a great book by Matt Ridley called the Rational Optimist. After my amazing new book, Rule Breaker Investing, I completely recommend everybody go read the Rational Optimist by Matt Ridley, because you'll see that the story of humanity was. It's to the doers. And in every generation, as Ridley documents, most people thought it's all going down. Probably the apocalypse is coming. And during my lifetime of all lifetimes, and things are not going to be as good for my kids as they've been for me. And that is a consistent recurring belief that people have and it's been rationally disproven and wrong. And if you figure that out early in life, that's going to stead you better than if you never figured out at all. So there's some words about optimism. One of my favorite words, yeah, that's just wonderful.
- [87:18]
B
I mean, in line with that Henry Ford quote, whether you think you can or you can't, you're probably right. I mean, when it comes to markets, whether you're an optimist or a pessimist, you can find great reasons for either one. You can kind of choose your reality and choose to live in that reality. And we all to a large extent, control our own destiny through that mindset that you share there. It's no wonder the wonderful things you've built with the Motley fool and the wonderful portfolio you've built. So I applaud you just for sharing that message in the book and on our show here. But I have one final question before we move to the handoff. So it was in the introduction of your book that you told the story of being featured on the Live TV show the View, which has millions of viewers. And the stock you shared on the show was Starbucks. So at that time is in the late 90s, Starbucks had around 1900 stores worldwide, and today it operates 40,000 stores. I feel like I'd be doing the listeners a bit of a disservice by not asking you the same proposition today, given how well you've done over the years. So how about you talk about a rule breaker stock or two that you'd like to share with the audience here in 2025?
- [88:25]
A
Well, thank you. First of all, let me say that we've talked about a lot of different companies. If anybody does a transcript of this podcast and simply grabbed every public company that we've talked about and build a portfolio, I would feel really good about that. So I never think it's about one stock. What is the next Nvidia? And often it's like the joke is the next Nvidia is Nvidia. And that's been true, by the way, for years now. When the company had $100 billion market cap, which sounded like a lot, what was the next Nvidia? Yeah, Nvidia. And that's sort of a joke. But without joking, I'll just say that there are many companies that I think fit one or more traits of rule breaker stocks, and we've talked about those here, and obviously I go on with more depth in the book. And when you can find a company with four or five or six of them, then I feel really great about it. A lot of the companies that we've already talked about do. So a quick example, Intuitive Surgical Company is amazing. We're living in an age where we're moving from the human hand operating on people to with much more precision, minimal invasion. We're actually getting solutions you can have. If you have prostate cancer, you can have your prostate gland taken out in a way that has you walking off of the hospital bed the next day. In years past, it would take two or three years to recover from the wounds that you underwent as part of that surgery. So that's a simple example of a company that I do not see any cola to Intuitive Surgical's Coke. It is a company that now counts itself at a much higher market cap than when we first bought it about 100 baggers ago. And I love that company over the next 20 years because I think most, if not all surgery is about to become robotically assisted. And there are no other players out there at any scale compared to Intuitive. So that would be an example of a rule Breaker that I love today, that I've loved for 20 plus years now, and I love over the next 20. But here's a company name that we haven't mentioned once during our conversation. Axon Enterprise. Axon Enterprise. You're nodding your head, Clay, because you know the company and you follow the markets. But most people, if you tap them on the shoulder on the street and say, hey, what do you think about Axon Enterprise? They look at you funny. And that's because this company operates a little bit under the hood in an industry that we all know, law enforcement. So Axon Enterprise was first of all Taser and has changed its name since when it merged with Axon because in addition to the non lethal weaponry that Tasers represent, which is an incredibly great technology that saves lives every month across the world. So that was Taser. Then they added police body cameras. In an age where people want more transparency from the police, most police walking around the United States of America today are being filmed with what they're doing. They're also wearing body armor, which is good on them. And Axon provides both of those. And all of those films, they have to be saved somewhere. They're up in the cloud somewhere. Specifically, they're@evidence.com, which is also owned by Axon Enterprise. So they are basically offering subscription services back to all the police departments to house their videos over the days, weeks, months and years. That is a remarkably beautiful competitive position. I do not see any Pepsi to Axon Enterprises, Coke. This is not a development stage company. I don't think we need to look at tiny. I avoid all penny stocks. I have no interest in tiny micro cap companies because they're not likely going to change my world anytime soon. And I'm looking for the world shapers. I want the companies that are the best stocks, the best companies of this generation. So those are a couple. I could just throw out a few more names because names are fun, right? Palantir is very obviously a rule breaker. And when it's described as the most overvalued stock of all time or on the markets today, I'm glad that I bought it more than a year ago. I didn't get into the ground level. I often don't, but I tend to get in early and I tend to hold way past everybody else. Rocket Lab I really like a lot. That's another recent rule breaker that I bought into. It's a company that at the dawn of the commercialization of space, they look pretty well positioned. So, you know, we talked about the first trait of the rule breaker, stock. It's the most important one. Top dog and first mover in an important emerging industry. We didn't talk that much about that last phrase, but I just threw it down a bunch of times there. Because important emerging industries are where the rule breakers are born. That's where we want to be focusing our investment attention, trying to find great companies with visionary leaders that are there. So these are all stocks that I own personally and I own many others besides. And I hope people will have a heart for buying stocks directly because in a world that is being constantly told that it would just be luck to beat the market averages and just index. Because who can pick stocks? I have completely disagreed my entire life. I have a friend who said the other day, this is a great line, Clay. You can use this anytime with anybody. Here's the question you ask. You say, what's something you believe that most people don't believe? And that's just a great question to ask anybody. It's just a fun conversation, open air, water cooler stuff. But when you can turn your answer into a business, potentially, if you're an entrepreneur who believes something that most people don't believe, and then you build it and they come. Field of dreams, that's one of the most powerful things you can do. And I would say the Motley fool was started by a couple of brothers who believe something most people don't believe, and that is that you can beat the market averages. I think this book contains basically every last thought because it is my last stock market book. It has every last thought for me as to how to pick the great companies. And I don't want to index because I have to buy all the bad and mediocre companies. I'd far more rather focus my time and effort. My returns are so much higher because I pursued excellence and continue to do so every day in business, investing and life. And Clay, this conversation was one of my favorites. I really appreciate you putting in the time especially to read the book. I tried to throw in as many jokes and make it as fun and readable and as much of a page turner as I possibly could. So I hope people who do buy the book love reading it and will share it with other people in their life, especially younger people, to get them switching on to investing what it really means, pursuing excellence not just with your stock picking, but with who you associate with in life. I hope there are a lot of good lessons that people will learn.
- [94:57]
B
Excellent. David, we always enjoy bringing you on the show, so I really appreciate you and just all the wisdom you share, not only on our show, but through all the work that you do. One of the things that I just love about the book is that it just makes investing so approachable. Right. You're not diving into valuation methods and balance sheets and whatnot. So I just applaud you for what you've done in creating this wonderful book. Thank you. Sincerely. Before I let you go here, where can the listeners go to get a hold of the book?
- [95:29]
A
I would say wherever fine books are sold, wherever you enjoy buying books, whether it's online or off, whether it's Barnes and Noble, Amazon or I will say, having spent in front of a microphone last month three straight days reading from page one to page 230, I really loved doing the audiobook. It is my voice. I'm getting to read my stuff. And so if you're not already tired of hearing me after the wonderful interview that Clay just threw down for all of you, the book is an audiobook as well. And I had so much fun doing that, too. Yeah, it should be out. It comes out September 16th. You can pre order anywhere. And I really hope it's the kind of book that people will be buying five years from now, not just five weeks from now. So this is my final stock market book, Sports Terms. I know we're sports fans, Clay, so I'll just say I was swinging for the fences. I hope I left it all out there on the field. That's what I was trying to do.
- [96:21]
B
You certainly did, David. Thanks again.
- [96:24]
A
Thank you for listening to tip. Make sure to follow. We study billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.