On this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined for a very special podcast crossover event by Motley Fool co-founder -- and host of Rule Breaker Investing -- David Gardner. The hook? The Brothers Gardner are releasing the third edition of their now-classic tome, The Motley Fool Investment Guide, updated and revised for the world we're investing in today, and David wants to share some of his favorite Foolish fundamentals with you.
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A full transcript follows the video.
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This video was recorded on Sept. 5, 2017.
Alison Southwick: More than 20 years ago, a couple of liberal arts majors decided to write a book about investing. What? And then to make matters worse, they wore jester caps on the cover and called themselves "Fools." Why would anyone take advice from these guys?
The crazy thing is people did take advice from them, including you, our listeners, and one of them is David Gardner. He joins us, today, to share some of his most timeless investing lessons. David, thank you again for joining us!
David Gardner: It is my pleasure.
Southwick: People pay good money to have you speak at their events, but we get it for free [working] at The Motley Fool. It's always nice for [us to have you in the] studio to talk to our listeners so that they can get a little bit of the awesome goodness that is you.
Gardner: Well, that's very thoughtful of you to say. Thank you, Alison. I noticed that Robert didn't say anything.
Southwick: I'm only saying that because you're my boss.
Gardner: OK, that's fine.
Southwick: Yeah, that's why.
Robert Brokamp: I wrote that for her!
Gardner: OK, let's get down to brass tacks.
Southwick: All right ...
Gardner: Enough of the Goody-Two-shoes talk.
Southwick: Well, I did it to make up for calling you crazy guys in hats who are offering financial advice.
Gardner: I was always fine with that. I mean, we were the ones who chose the name, and the hats, and everything that we've done.
Southwick: You owned it!
Gardner: We owned it, and we still do!
Southwick: Absolutely. So we pulled five topics around investing that you'll find in The Motley Fool Investment Guide. Again, that is our book that is coming out today. Third edition, newly revised, completely updated.
Gardner: Fresh for 2017 and 2018. Let's go!
Southwick: Yes! So David is here to talk about some investing principles you can learn about in the Investment Guide and the first one is buy and hold. And hold. And hold. And hold.
Gardner: Mm, yeah. So this is probably the hardest thing for most people to do, especially people who are new to the stock market who have heard phrases like "buy low, sell high" which has the word "sell" coming right after you've bought low. Or the news media driven that's always trying to get you to think something's changed and you should take some action. Or even just our human instinct to take action because in most spheres of life, doing something leads to results that we hope are pleasing, but you feel like you should be doing something.
I think that our record, now, shows the benefits of, as you said, Alison, buying and holding, and holding, and holding. There are any number of stories I could tell right now. I'm tempted to tell my Greatest Hits of All Time, like Amazon (NASDAQ: AMZN). [Amazon] has been an awesome hold, and hold, and hold from $3 [per share] to over $1,000 [per share]. That's been an amazing investment recommendation for our members.
But, I decided to go a little bit more recent [with NVIDIA]. This is still a buy and hold, and hold, and hold. NVIDIA (NASDAQ: NVDA) is a fascinating example of this. This is a company that I think many of us may have heard of, these days. Years ago, NVIDIA was making graphics cards for PCs. For video gamers like me, you would try to get a really nice NVIDIA card to drive the graphics part of your computer that would make the games awesome.
And over the course of time, the business has continued to diversify. They started turning these from graphics cards into being the processing units for the machines. And then they took their graphical processing units and started to do things like put them in cars, and things become more autonomous for cars they could be driving that. AI is showing up and they could help with that. Tesla's beautiful screen -- they [believed] they could participate there. So NVIDIA today is a monster. It is an awesome company.
But here's the story -- some of the numbers. I first recommended NVIDIA on April 15 -- tax day --, 2005. It was at $6.61 -- split-adjusted today --, so in today's terms it was at $6.61. Two years later it went to $40. From 2005 to 2007 was remarkable. Buy and hold.
And then, as you might remember, 2008 and 2009 weren't great years for not just the stock market, but also the world, especially the financial world. In the next year NVIDIA went from $40 to $5. So we went from $6 to $40, and from $40 down to below our cost and that didn't feel very good for our members, I'm sure. It certainly didn't look good for me with some egg on my face.
One year later, though, it had bounced back as we started coming out of 2009 and it went back to $20. So $6, to $40, to $5, to $20 ... all of this in just four or five years. And then, nine weeks later, it drops back to $8.50 again.
I don't want to create too crazy a stock graph in anyone's head. In fact, if you are an investor or you enjoy following individual stocks, just go online to our site or any other that has a stock graph and just look at NVDA over the last 15 years, or so, and you'll see this. It's a big, beautiful graph today, and you don't even notice at this point the movements that I just described for you. It looks like it did nothing for 10 years and in the last two years it looks like it went crazy.
So really quickly, just to catch back up, in 2011, six years after I made the recommendation it's at about $26. And for the next five years -- from February 2011 to February 2016 -- it basically does nothing. It drops down below $26 and does nothing for five years. That was a great five years for the stock market. So now here we are in 2016. It just gets back to $26 where it had been five years before and since then I'm really happy to report that NVIDIA has gone to $165 a share.
Gardner: In fact, it more than tripled last year. It became the No. 1 performing stock on the S&P 500, so we were really happy to have that in Motley Fool Stock Advisor for members. It tripled. And a lot of people said, "Well, that's an amazing move, but it's got to end." I'm only going to tell the story here because I can pat myself on the back a little bit. Why would I tell any other story?
So despite hearing that talk, in January of this year I decided to rerecommend it at its price then because I thought the conventional wisdom was the stock is played out. It's tripled. It was the No. 1 performer on the S&P 500. So I decided to rerecommend it, which I did at $103 in January of this year. Here we are just about to start September and it's gone from $103 to $165.
This is a company that we bought, and held, and held, and held, and it's become not just a better company but a more impactful company than we ever thought it would. But it's gone from $6 to $165, but you had to go through the $6, to $40, to $5, to $26, to $8, back to $26. You had to wait 10 years before this took up and became what is today the stock that is up about 25x in value. And it has been a wonderful 12-year investment, but it's all been in the last two years, my friends. That's remarkable, so you need to know these stories to be an investor.
Southwick: And you said Amazon the same thing. Netflix (NASDAQ: NFLX) the same thing. All of these stories -- even in the '90s -- they were saying that the stocks were played out and you've got to get out of them. But you've held onto these stocks for well over 10 years.
Gardner: Yes, whether it's Facebook, or Priceline, or Netflix, Amazon. These are all my very best investments. Most of them are up somewhere between 50x and 150x in value. You just had to be patient. You couldn't be the person who sold.
Even after a good year you might have thought that it's not that you sold when they were down. Each of those got cut in half more than once -- each of those companies I just mentioned -- so you had to be willing to sit through that. But you might have even been patient and then eventually when it bounced back said, "Well, I'm back to even, so I'll sell now."
But no, you had to keep holding. I think the key is -- and I know we have four others and this is my longest story, so I'm not going to go too much longer on this one -- that you need to ask yourself, "Is this company, and what it does, important, still relevant, and growing?" And for each of those companies you basically were saying that all the way through.
So if you're watching the stock price -- the zigs and zags --, and trying to make your decisions based on that, you probably may have sold or made a bad decision. If you instead asked yourself if Amazon is getting more important every year and is Netflix adding more subscribers every year, then you end up holding these companies and recognizing the great benefits of finding the best winners on our markets.
Southwick: Let's move on to the next one, because the next one is very much tied to the first one, and that is controlling your temperament.
Gardner: And really all five of these are, in some ways, tied to each other in the sense that a lot of it is about how you think and then how you act based on your thinking. So we just talked about buy, and hold, and hold, and hold and ultimately that's a lot about how you think and then what you do or don't do based on what you're thinking.
So, temperament is what you think, and I guess the much briefer story that I'll tell, here, is just the story of the word "invest," because the story of the word invest is that it comes from the Latin investire. I never did take Latin. By the way, Robert, I have to guess that you took Latin at some point.
Brokamp: I didn't, actually.
Gardner: Alison did you? OK, so none of us did, because ...
Southwick: Rick says that he did.
Gardner: Rick did. OK, good. And I know some of our listeners took up to maybe Latin V and others were glad that they never had to take Latin. I never did take Latin, but I do love language, so in some ways I regret that I didn't.
But the way that I make up for it is that I look at the etymologies of words. That would be down on my tertiary list of it's definitely not a superhero power. It's more like a lame following. Like I'm about as good at this as I am at fishing, which means I'm not good at either, but I care about it. Actually, I care about it more than fishing.
So the etymology of this word investire, the Latin, meant basically "to put on the clothes of." That's where our word invest comes from [today]. And so to me, that's my temperament. That's my mentality. When I buy shares in a company, when I invest, I think of myself as kind of a sports fan putting on the home team jersey. And I'm going to keep that jersey on. It's my team. I'm a part owner. It's actually even better than your sports team. You might be a Green Bay Packers fan. You might be a New York Yankees fan.
When you buy shares of a company, you're actually a part owner of that thing. You're just renting the awesomeness of being, let's say, a Packers or Yankees fan when you wear that shirt. But when we buy shares of public companies, we become part owners, and that's really important to me.
That's the way I think everybody should think about the markets, but it turns out we're in the minority, which is why we call ourselves Fools and why we write a book like The Motley Fool Investment Guide, because you're going against the conventional wisdom. You're being a Fool if you think that it's like putting on the home team jersey and staying by your team.
But I think we just talked about the value in the previous point of staying by your team. I want people to have that mental image of putting on the clothes of Under Armour. Well sometimes literally if you own Under Armour, which by the way has been a painfully bad stock for 18 months now.
But whether it's an actual apparel maker like Under Armour or -- we just talked about it --, NVIDIA, which you can get a t-shirt probably somewhere on the internet for, think of yourself as "donning the clothes of" and stay by that team. Watch them each day if you're really a fan like I am, and I don't mean day trade. I mean I enjoy following the stock market. Just check in once a year. But don't change your home team unless you have a real good reason to.
Southwick: The next lesson is being a contrarian.
Gardner: Well, we said these are all related and maybe each of them grows out of the next. I think being an investor is contrarian. I think most people aren't investors for two reasons.
The first is that a lot of people don't have capital yet, and I think one great thing about Motley Fool Answers -- and there are other great things, too -- are that you're often speaking to people who are preparing to become investors or have just started becoming investors. For my own podcast, which is Rule Breaker Investing, I'm generally speaking to people who are probably already investors. So, the reality is most of the world is not investing because it doesn't have the capital. That's reason No. 1.
Reason No. 2 is that even for those who do have the capital, a lot of them are, in my mind, [more than] happy to give it over to somebody else. Even things we like, like index funds. To just mail it in, not connect with it, and not really choose into a company like NVIDIA or Netflix.
So, I think you're a contrarian if you're listening to this podcast. I think you're a contrarian when you purchase, which I know you will, for friends and family as well, The Motley Fool Investment Guide. You're definitely a contrarian if you're putting on a Fool cap and talking about money. So I think being contrarian is very natural to Alison Southwick, Robert Brokamp, Rick Engdahl, and so many Fools here at Fool HQ, and so many of our members which far outnumber us here in Alexandria, Virginia.
So I think you all get it, but just to close on this one, maybe one of my most contrarian principles is the Rule Breaker approach that I take to investing. Trait No. 3 of the six traits that I'm looking for in stocks that I pick are companies that have already done very well. Strong past price appreciation.
And I think that, again, flies in the face of what most people think, because most people think it's about buy low, sell high as the old saw goes. They're looking for the discarded cigar butts in the gutter or a stock that's down. Something near the 52-week low than the 52-week high if they're even thinking about stocks. I think you should be looking at the 52-week highs, especially for the kinds of companies that we're focused on, which are the world-beaters. The Rule Breakers. So I think that's very contrarian on its own.
And I guess I would be remiss if I didn't mention the final principle of Rule Breaking which is that we're looking for stocks that are "grossly overvalued" according to the media. That is about as contrarian as you can be -- for us to make that a buy signal. When "Amazon.bomb" is the cover of Barron's and we're like, "That is great news, not bad news," that so goes against the convention that I think that's contrarian, too.
Southwick: We already touched on this one a little bit, but have an ownership mindset. You talked about this with the home [team] jersey. Wearing your team literally on your sleeve.
Gardner: Yes, there's a lot of overlap, there, and that's why I love your [podcast] topics, all of which we talk about in the book and further illustrate and I hope just double underline for a lot of people.
Again, I think a lot of Motley Fool Answers listeners already know we're contrarian. They already know about the ownership mentality, so I might be preaching to the choir, but I guess for this one I'll just point out the benefits of the ownership mentality.
I want to briefly define the word "spiffy-pop," because it's a word that not every Answers listener will recognize, and yet it is my screen name online at Fool.com, TMFSpiffyPop. That's my screen name at The Fool, so I have to explain briefly for those who don't know what that term is. It's a direct benefit of being an owner and having an ownership mentality. So a spiffy-pop is when you make more money in a single day with a stock than you paid initially for that stock back in the day whenever you did.
For example, if a stock is at $100 a share today and you bought it at $33, and for whatever reason tomorrow the stock goes from $100 to $135 in a single day, that's $35 more. You bought it for $33, so in my parlance, you just spiffy-popped.
Gardner: And it's an awesome feeling! A lot of people have never had the feeling ...
Southwick: I've never had that feeling.
Gardner: ... but, depending on when you start investing and how interested you are in individual stocks -- and everybody's different --, if you are a longtime Motley Fool member, you might be interested to know -- if you didn't already -- that Motley Fool premium services just celebrated our 28th spiffy-pop this year, when you look across the stocks that we cover in all our premium services.
In fact yesterday or the day before, Universal Display, which is a Rule Breakers stock spiffy-popped for the third time. And Activision Blizzard, which is a longtime holding in Motley Fool Stock Advisor -- a lot of people own this company, the great video game maker, Activision Blizzard -- spiffy-popped for its 12th time this week. So 28 times this year it's happened for Motley Fool premium members, and that's about the best thing that we can do for our members, is to make them that much money and to do it the way we've done it, which is being patient and having an ownership mentality.
Southwick: Earlier this week you were preparing for an interview with "Planet Money" and it was about Marvel, so I [thought], "I'm going to go hop on the boards and see what the chatter was about Marvel right around the early 2000s." And the chatter was not nice. People were really upset. They were thinking this stock was a bad recommendation. And they were so upset at you.
And then toward the end of the piling on of anger, you popped into the conversation and said, "I still believe in this stock." You mentioned the community of The Motley Fool, and it's fascinating for me to see that probably over and over again you get beaten up on the boards; and you have to keep saying over and over again, "Listen, I still believe in this company. Hold, hold, hold."
Gardner: Well, we celebrate the spirit of debate, and we love bulls and bears, and we welcome all to Fool.com. Certainly in the 24 years or so that we've been running our company, I've had any number of debates and often ones that I was wrong on. And that's why we celebrate that spirit and it's one of our core values at The Motley Fool.
So, I don't mind that. When I don't like it is if it's nasty or personal. I don't think anybody likes that on the internet. Don't be the trolls, Answers listeners. Don't be the trolls. That's always good advice. But it's fine because I'm wrong a lot. We've selected five topics that are wholesome, good topics and I'm bringing you some of my best stories.
But, I want you to know that I probably picked more bad stocks than anybody at The Motley Fool. I think that's factually true. I'm not looking at the numbers as I've brought some other numbers here, today, [but] you have to understand that we're willing to be wrong and to lose, and that's a critical part of winning. And winning big, in fact, is to just be willing to look silly. In basketball terms, to stand at the free throw line -- and everyone thought you were a professional -- and air ball it eight times in a row. People are like, "I'm paying for this?"
And sometimes the stock market does that to you or your own style goes out of style. So I'm willing to look like a fool. I hope that all comes together at "Planet Money" -- their interest in Marvel -- because the good news is Marvel has turned out to be such a wonderful investment.
It's a 54-bagger since I first picked it in 2002. That was helped somewhat by Disney buying it out a few years ago, but really it was a remarkable story. The company converted from just comic books to movies and then all the other things that are implied by that as Iron Man, and The Avengers, and the X-Men came along. It was just an awesome, fun investment to win and make a lot of money on.
Brokamp: You bring up an interesting point in the story of Marvel, as well as NVIDIA, in that you probably couldn't anticipate what was going to happen. It's not like you looked at those companies and thought, "I know what's going to happen here. Marvel is going to get into movies and it's going to be huge." I wouldn't say it was luck, either. Was it your faith in management that they would be able to make good, strategic decisions in the future?
Gardner: That's a great question, Robert. And yes, I'm the first to say I don't know how the future is going to play out. I think we're all playing probabilities or hunches sometimes. But a lot of the time, if you like the person or believe in the visionary who's running a company, like Reed Hastings at Netflix or Jeff Bezos at Amazon. If you're betting on the jockey, I think that even if you're not quite sure when the race is going to end or where it's headed, or it's not an oval track measuring 1.5 furlongs and there's this home stretch, or you're not even sure where the horses are headed, you feel a lot more confident if you've got a great jockey. I think that's part of it.
But specifically in those cases, I had no idea NVIDIA would become what it's become today. Marvel I did have a little bit more sense in that I didn't recommend the stock before it all took hold. In fact, I recommended it the summer after that first Spider-Man with Tobey Maguire film came out. And it was amazing. The box office of that film was larger than the market capitalization -- the total value of the company --.
Gardner: So I didn't know that The Avengers would show up one day, or Thor would end up being a good movie franchise. But what I did know was that it seemed probable that there would be a Spider-Man 2 and that there might be [more] with 4,700 other characters like The Incredible Hulk and the list goes on. And so it worked out really well in that regard.
But I think the key, here, and we've been underlining these points and we'll just do it again, is that ownership mentality, where you're just wearing the jersey and staying with it unless you see the company not doing good things in the world.
And maybe that's the last point about ownership mentality. I have one more story, so I'll be quick here. If you own something, don't you want to feel good about that thing and what it's doing in the world? So if you have an ownership mentality, I think you also are buying companies whose purpose is their products and services you approve of.
As I've sometimes said in the past, make your portfolio your best reflection of your hopes for our future. I think that's really important that we make sure that the dollars that we're investing are aligned with the world that we're trying to create because, darn it, your dollars are, in a small way, helping to create whatever the future is.
And so the ownership mentality has you saying that you're not only going to invest in things that you believe in, and when they win you're going to feel not only much richer -- and with these companies we're talking about today you have [become much richer] --, but you're going to feel great about the world now with Netflix having undermined a lot of the cable TV companies, or Amazon having added a lot of value and efficiency to your life -- anyway my life as a lazy shopper --. And the list goes on of how good these companies are, and what they do, and the people who work for them, too.
Brokamp: How has running your own company, along with Tom and other people, influenced your investing? You're not just sitting there at your computer going through filings. You know what it's like to manage people. To have an HR department. To have to be doing projections and things like that. And receive media scrutiny.
Gardner: Robert, the great Buffett line that is my favorite Buffett line is, "I'm a better investor because I'm a businessman, and I'm a better businessman because I'm an investor." I think that he -- and not just he or me, but a lot of people listening who might be entrepreneurs and have started something -- has a certain lens that we have perched on the ends of our noses and we see the world, now, somewhat through that.
And yes, being an entrepreneur or being in business doesn't mean that you're magic if you started something. I think all of us here at The Fool have this kind of lens. And I think knowing and caring about organizations and what they do, and specifically this one for us, makes us make better selections of stocks when we're looking at other people's stuff. We're looking at their company, their culture, their balance sheet. It's helped enormously, I think, for us, to have that lens.
Here at The Motley Fool so many of us who love business think it's a great thing, not an evil thing, and in fact do think that we're better businessmen because we're investors, as well, which is the other side of that coin. The act of being a stock market picker has you looking at other companies saying, "Hey, we should try that at our company. I just researched this stock. They're doing something cool. Let's try that here." So it works both ways. It's a powerful dynamic and I'm glad you asked.
Southwick: Our fifth and final lesson is about diversifying.
Gardner: And I would say just as we're diversifying our four points with this fifth point, you should be doing the same thing with your investments, and I'm pretty sure I don't need to say much at all about this one, because I think Motley Fool Answers listeners are aware of this, and you all help people think about that from month to month as the years while by and we do our podcasts.
For me, I think everybody should have 15 stocks at a minimum if you're going to choose stocks, which I highly endorse. I think it's a wonderful thing to do. Even if you don't want to choose stocks and if you just want to invest in index funds, I still think you should buy one stock, even if it's a tiny percentage of what you have, just to participate in being an owner and see how the markets work. And darn it, you might even do well with that company, especially if it's one that you feel good about for the next 10 years.
But for investors who are stock market investors, 15 stocks at a minimum. When somebody joins Motley Fool Stock Advisor or Rule Breakers, if they have no stocks, I say get from zero to 15 as quick as you can. Maybe not as fast as a Tesla Model S can get you, but as fast as you can get from zero to 15 stocks, please do. Please don't bank it all on one big stock that you think is going to work out. Be diversified.
Brokamp: Do you have a level of comfortability with how much you have in a single company?
Gardner: My level of comfort, there, is well beyond, I would say, the average human, so I don't know that I'm a good source of information on this one, Robert, because I'm willing to let a stock become even more than half of everything that I have, and that would only ever happen if that company was one of 100 or more times in value.
I tend not to sell stocks. I tend not to rebalance. I tend to allow stocks to run, which means the good news is when the winners win, they really win. There are two forms of bad news. One is that you're going to end up with way too much of that stock, which is kind of bad news because it can be stressful for a lot of people, but not as much for me.
And I guess the other bad news, there, is if you start becoming unwilling to sell it or shave it down because you don't want to pay those big capital gains taxes. You have a big capital gain when you have a stock like that.
But again, back to the good news. When you hold your companies and let them prove out their allocations for your portfolio over time, if you invest in bad stocks, which I do ... I recommend them all the time. I have a lot of stocks that have lost more than 50% of their value that I've recommended in Rule Breakers and Stock Advisor. I'm ashamed to say it, but it's true.
The good news is if you didn't add to them, which I don't, then they start to become almost irrelevant in your portfolio. So the stock that a lot of people live in fear of, something that would lose everything ... Imagine if you bought a stock -- I still never have done this -- that went down 100%, the good news is it's gone. It's starting to occupy almost none of the allocation of your portfolio.
So, I like to let my stocks win and run over time, but a lot of people wouldn't be comfortable to the extent that I'm comfortable with that.
Southwick: Well, there you have it. David, thank you for joining us. If you, our dear listeners, want more Foolishness in your life, you want to check out The Motley Fool Investment Guide. It's out today on Amazon, so you can get it for your Kindle. You can also go to a good, old-fashioned bookstore and pick it up today.
Pick up a copy, as David said, for you, for your friends, for your family, for your loved ones, and for anyone who could use more Foolishness in their finances. Or you can also go to Book.Fool.com to learn more. Yah? All right, David, you're sticking around. You're not going anywhere.
Gardner: I'm totally psyched about this. Let's go.
Southwick: We're going to go on a trip in the wayback machine to when this book first came out, so this is very exciting times.
Alison Southwick owns shares of Walt Disney. David Gardner owns shares of Activision Blizzard, Amazon, Facebook, Netflix, Priceline Group, Tesla, Under Armour (A Shares), Under Armour (C Shares), and Walt Disney. Robert Brokamp, CFP owns shares of Facebook and Tesla. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, Facebook, Netflix, Nvidia, Priceline Group, Tesla, Under Armour (A Shares), Under Armour (C Shares), Universal Display, and Walt Disney. The Motley Fool has a disclosure policy.