What David Learned by Investing in America Online

By Markets Fool.com

In this segment of theRule Breaker Investingpodcast, Motley Fool co-founder David Gardner goes back to the very beginning of his investing days, when he was just an 18-year-old college student.One of the big purchases he made then was early internet powerhouse America Online (AOL), which he bought when he and his brother were just starting The Motley Fool on AOL's platform. And for many years, it disproved everything he thought he knew about investing.

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A transcript follows the video.

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This podcast was recorded on Sept. 21, 2016.

David Gardner:All right. That takes me through to my final investment story I want to share for you this week, and that was my first purchase of America Online. So America Online was my first great stock, and that's why I wanted to close with it. America Online, at the time, came public, I believe, in 1992. I watched it for a couple of years. I did not buy the shares.

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I watched the stock. I was an AOL user. I was an early adopter. I had been using my computer to dial up the phone to connect me to AOL's private online services since about 1990. I was very much a believer in the medium. That's kind of why The Motley Fool exists in addition to our dad getting us started as investors. And it was extremely frustrating, therefore, for me to watch the stock double from about 1992 to 1994 without my money riding on it. Again, I felt like I knew the company better than most. I believed in it. I was using it every day. I watched the stock double, and yet I decided, in the summer of 1994, that it's time to buy this stock.

Very influential for me was, as a Morehead-Cain scholar at the University of North Carolina, I was conscious that my full tuition had been paid from a man named John Motley Morehead, who was a Union Carbide executive back in the middle of the last century and left his money, after he died, to fund the Morehead scholarship at the University of North Carolina, and I had been a Morehead scholar.

And those of us who graduated were given a little book from Morehead himself with advice. And in that book -- a short book, I'm going to say it was 15 or 20 pages, it was more like a pamphlet -- he mentioned how if you go to work for a company, you should buy some shares of that company just to be loyal, to be invested, to be a team player. And we were getting ready to start, on America Online, The Motley Fool -- and I thought, "You know, I'm going to buy some shares of that company." And in fact, when we started The Motley Fool on America Online, we made it one of our early portfolio choices.

So it was actually, in some ways, John Motley Morehead's emboldening me to just buy the darn stock, even though it had already doubled, that made me willing to go ahead and purchase AOL. It was a significant holding of mine from the beginning, and what was amazing about this stock was how it disproved everything that I had thought about investing up until that time.

Because if you were hearing what I just said a few minutes ago, I had been so focused previously -- my previous 10 years as an investor -- on looking for companies that were off Wall Street's radar. That weren't that well known that I was hoping Wall Street would one day discover. And America Online was very much in the public eye, both as a stock, a winning stock at the time, and as a business, a consumer experience a lot of us were having.

And a lot of people thought that America Online stock was overvalued, and indeed, much of my own analysis, at the time, the way I was valuing stocks and thinking about things -- yes, AOL looked overvalued to me, too. And a year or two later, after the stock had doubled or tripled, there it was being called out at an annual meeting, somewhere in Europe, I remember, of the global economists, as the number one most overvalued stock on the American stock market.

And I believe a summer later, after that, somewhere in the late 1990s, that august group once again fingered America Online as a repeat offender. Again, a second year in a row, the most overvalued stock. By this time, America Online was up about 10 times in value not just for me, but for many Motley Fool members at the time, and I'm very happy to say that over the course of the next five years or so, America Online went from being a 10-bagger to being, at its height, a 150-bagger.

Now, it was obviously the dot-com days when those kinds of crazy things could happen, but for a lot of us, it was very real when Time Warner and AOL merged, right around the year 2000. It was as if AOL had truly come of age and was one of the biggest media companies in the world. And those of us who had bought that overvalued stock -- who in my case had watched it already double before I'd ever decided to buy it -- learned so much, I think, about what works in investing.

Now, we all know how the story played out years later. America Online, today, has been purchased by Verizon. It's a company that really lost, from the year 2002 on, it began to lose its market share as the world went from dial-up to broadband, and America Online began to shrink in size. And the merger didn't work out too well with Time Warner, and there were layoffs, and AOL, these days, is still a vital company, but nothing like the big dog that it was back then.

And yet the lessons that I learned, that I hope you can learn, from watching something be "overvalued" -- I've spoken to that many times past here in Rule Breaker Investing, how that's a good indicator. American Online was my first great stock. I'm happy to say it isn't my only 100-plus-bagger. Amazon.com is, and I've got four 50-baggers right now for Motley Fool Stock Advisor members that we've invested in since that service started in 2002.

But I had to close with AOL because I still owe such a debt of gratitude to Steve Case, who founded the company, and to those economists in Europe, and really, in the end, most of all, to the Motley Fool community, which started on AOL, as today on our website, in the discussion boards, and the sharing, and the learning that we all had together watching that company -- or other great companies like Amazon, and Netflix, and Apple, and the list goes on -- were, I think the lesson for a lifetime.

David Gardner owns shares of Amazon.com, Apple, and Netflix. The Motley Fool owns shares of and recommends Amazon.com, Apple, and Netflix. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.