Rule Breaker Investing May Mailbag: “Overvalued” Stocks and Common Conundrums
It's the last week of the month, which fans of Rule Breaker Investing know means they're due for a mailbag episode. And in this podcast, Motley Fool co-founder David Gardner tackles an entertaining array of queries and comments from his listeners on subjects including the difficulty with mixing the Rule Breaker philosophy and a deep-value investor's fear of overvalued stocks; how The Motley Fool's internet-focused picks did in the dot-com bust; picking stocks to buy; picking ones to sell; and how positions on the legal marijuana industry evolve.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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*Stock Advisor returns as of April 1, 2019The author(s) may have a position in any stocks mentioned.
This video was recorded on May 29, 2019.
David Gardner: It's nearing the end of a busy month for Rule Breaker Investing. Five Wednesdays in this month of May 2019, which meant five Rule Breaker Investing podcasts. We began the month telling stories, Stock Stories. Next we reviewed Five Winners in a Thinking World, our final review of that market-crushing quintet picked three years ago. I went from there to offer you some advice on how you might become a winner in our thinking world. And then it was The Business and Future of Sports with the charming and visionary executive Phil de Picciotto, Octagon Sports Agency co-founder. And last week, I tried to summarize through your own words some of the cardinal points made on this podcast, what you've learned from Rule Breaker Investing. And now, well, it's the end of the month, so mailbag! We're going to talk about nosebleed valuations, which stocks to sell, and betheborg.com, only on this week's Rule Breaker Investing.
Welcome back to Rule Breaker Investing! We have a lot in store for you this week, so I'm just going to get right to it. No idle chit-chat about how the weather is in Washington, D.C. -- gorgeous this time of year; how good the Minnesota Twins, best team in baseball this time of year. I will skip some of the informalities that I'll often start off with the show and just get right into it because we've had a very full month here in Rule Breaker Investing. I covered it at the top, very motley. It doesn't get much motlier, I think, for this podcast, than reviewing stocks on the one hand, interviewing a sports executive on another, telling stock stories or really, most importantly, I think, having your stories, your questions, featured in this mailbag as we end every month. We got a lot of action on Twitter. I want to lead off with some hot takes from Twitter this month before going into our traditional list of mailbag items.
All right, the first hot take is from Paul Hooper [...]. He said, "Love the episode," referring to our Business and Future of Sports episode a couple of weeks ago, "touching on many more aspects of sports than I expected, including the merging of e-sport and physical sport. Fascinating and happy prime birthday, David!" Well, thank you, Paul!
Brandon Van Z, @BrandonVanZ on Twitter, went on to say, "As a fellow entrepreneur, I appreciate you sidestepping the stock market briefly in your podcast this same week for a business discussion. I actually just became familiar with Octagon earlier this year when they signed Final Four Star @MoonSwag13. Sounds like a great organization." Now, if you're not all about Twitter handles and college basketball, you might not recognize that as Matt Mooney, star from the Texas Tech basketball team of last year. Apparently signed by Octagon. I didn't know that.
Anyway, Brandon and Paul, I'm really glad you enjoyed. I love talking about sports! I think many longtime listeners know I love talking about lots of things besides just investing. Board games are very frequently mentioned on this show in addition to sport and some of the other things that I personally find fascinating about our culture, and our world. I hope all of these topics eventually make you smarter, happier, and richer. That is the purpose of The Motley Fool. That's the purpose of the Rule Breaker Investing podcast. That's why we're not always all about stocks all the time. It's a delight to know that some of my frequent longtime listeners appreciate it when we wander off the stock market reservation from time to time and choose our own adventure. It was a delight, again to have Phil de Picciotto on this podcast earlier this month. And thanks for those positive props!
More Twitter hot takes. This one from @unmerciful1. That's probably Unmerciful One, but maybe United Nations Merciful One. Probably Unmerciful One, though. Rick Engdahl, my producer, suggesting that's probably the more proper read. Anyway, @unmerciful1, here's the question. "What's the inverse of a spiffy pop? #STMP." @unmerciful1 is referring to a really big drop in stamps.com, one of my stock picks in Motley Fool Stock Advisor, a former big winner that has really gotten crushed ever since losing its contract with USPS, which is a very significant part of stamps.com's business. Anyway, a company I continue to hold out hope for.
But the real question here is, what do you call it when a stock does the opposite of a spiffy pop, a phrase that we've used very frequently on this podcast? I will not redefine the term right now. If you don't already know it, Google it. You'll find us. But what happens when a stock loses a lot of value? The answer, @unmerciful1, is that's a spiffy drop. Sorry about that!
A little bit more seriously, I never like it when my stocks drop. I much prefer, don't you, when your stocks pop? When they go up over time? But certainly, part of the story of most of our best investments recommended to our members here at The Motley Fool over the last 26 years, many of them go through big-time drops. Amazon, Netflix. Any big-time winner I've ever had that I've talked about on this podcast, over any meaningful period of time, has probably lost 50% or more of its value several times when held for a decade-plus. So, yes, I'm used to spiffy drops, too.
@AnandKatri wrote in saying, "Just finished listening my Wednesday routine listening Rule Breaker Investing podcast the latest episode. Amazing episode. Immediately after that, I did my homework, started watching the @DavidGFool interview with Consuelo Mack. Such a profound and beautifully explained set of Rule Breaker rules." Well, thank you, Anand! The reason that I'm reading this one in part was because, yes, when we reviewed Five Winners in a Thinking World a few weeks ago, that very week three years ago, I had just been on Consuelo Mack's show WealthTrack. I encouraged any listeners to go back and rewatch that approximately 30-minute episode. Anybody can Google it. Just Google Consuelo Mack Rule Breaker Investing or David Gardner. You'll see the April 29th, 2016, show. It was a very enjoyable conversation I had. Consuelo's a real professional, I really enjoy working with her. I've been on her show a few times. But I invited any of my listeners to go back, watch the show, and report back what I got most right and what I got most wrong three years later.
So far as I can tell, only one of you fully did that. Clearly, Anand, thank you! You watched it; I appreciate that! You didn't give me the feedback on best and worst, but I'm happy to say, coming all the way from Belgium, Christoph Hendricks @ChristophHendri1 on Twitter reported back. I want to share his tweet storm because I really enjoyed this. I was touched that you took the time, Christoph, thank you!
You started by saying, "@DavidGFool, I've listened to your interview with Consuelo Mack from 2016. The thing you're most right about is nearly everything, although I realize this answer diminishes the odds of being in the mailbag :) :)" Now, I want to take pains to say that I did get at least one thing wrong in that interview. While, I'm very flattered that Christoph feels like I nailed stuff, that's not the reason I'm sharing this. I really love his spirit because he goes on to say, "But if I have to pinpoint it, I think I would call out your optimism. Pessimism always sounds so smart. People say that pessimists are more right than optimists. That might be true for the present, although I don't think so myself, but definitely not for the future. Optimists shape the future, and as you prove, are also better investors. Could it be that the fact that you're an English major and love Shakespeare is a great bonus for your investing? What I mean is you might need the same vivid imagination to appreciate Shakespeare and to envision the world in, let's say, 2025, 2030, or even in 2044, 25 years ahead. Could it have to do with left brain vs. right brain dominance, where the one stands for mathematical thinking and the other for art, language, and feelings? I have the feeling that you are one of the few investors who speak out in the media for what you feel.
"In closing, after all, finding great leaders or foreseeing a long-term trend, finding a Rule Breaker, those are all not mathematical, but have to do with your feelings, gut, perception, or whatever you want to name it. A lot of investing gurus would call using your feelings foolish, but we know it is Foolish. You also asked for the thing you were least right about. As a fellow optimist, I'd like to look at all the good, not at the thing that you were less right about. I'm sure that that Tesla pick you made will be all right over the long term :) Thanks for injecting the world of investing with feelings, including the one that is least common in finance, humor. From Belgium, all the way to Alexandria, Fool on!"
Well, I have a postscript to that. But Christoph had his own postscript. He wrote, "P.S., only after my tweets, I saw that the word optimist is actually in my Twitter description of myself." And he laughs at that and he says, "It's in Dutch, but it's the same word." And indeed, Christoph, looking at your Twitter profile, getting by with a little help from my friends, because I don't read Dutch, but one of our new employees, Parker, on our Fool People team, does. Enough so that we could translate how Christoph lists himself. It reads something like [reading Dutch]. With my friend Parker's help, I now know that Christoph lists himself as teacher, investor, reader, thinker, enthusiast, optimist, family man. And I like all those things. But I particularly like, Christoph, that optimist in your language and ours is spelled exactly the same way. So thank you for that!
My own postscript is yes, apparently I did pick Tesla on Consuelo's show a few years ago. It hasn't been a great three years for Tesla. In fact, it hasn't been a great six years for Tesla's stock. This is a stock we recommended in Rule Breakers in 2011. It's still about an eight-bagger. So it's been a spectacular investment. But history will show most of that gain occurred in the first two years of the investment. Tesla's about flat with where it was six years ago. Viewers of the WealthTrack show April 2016 to today would find out Tesla has, sounds like it's been a pretty significant underperformer, which I'm sorry about. But they can't all be outperformers, can they?
All right, two more quick hot takes. One is simply betheborg.com. This was referenced. There were some interesting images on Twitter. If you don't know what the Borg look like, yes, they look scary. A few of you have started to realize why betheborg.com is one of my favorite websites. Those who have not visited there before, please take a look. It's an amazing website! Again, one of my favorites. I did tell the story behind betheborg.com in our Five Winners in a Thinking World podcast a few weeks ago. So if you're somewhat confused by what I'm saying right now, I think it's a good instructive story. Go back and listen to me talking about Star Trek and the Borg and The Motley Fool a few weeks ago.
The last hot take I'll share with you is from @MikelLewis, who wrote, "Why didn't you include the Disney dividend in calculating return vs. the market? I understand The Fool's mission is in part infotainment, but it's a major miss not factoring that in." The reason I wanted to include this as a hot take, and thank you, Mr. Lewis, is because, well, first of all, picking stocks is what we do here at The Motley Fool. So yeah, picking stocks is what I do on this podcast. In fact, every 10 weeks, I feature a five-stock sampler -- spoiler alert, next week is that week, so we'll have a new five-stock sampler next week. But if you're going to pick them, as we've always said at The Motley Fool, well darn it, you'd better score them. And so with every five-stock sampler that I've picked on Rule Breaker Investing, this podcast, over the last four years now, yes, we always go back and update. We score them, we see how we've done and what we can learn.
But I want you to know that this is a side-of-desk thing for me. Who does the scoring? The answer is, I do. I keep a spreadsheet. My assistant Mellana is very helpful. My friend Rick Engdahl helps me some in this regard. But we're pretty much homebrew on this podcast. I would want any listener to know that if you're a subscriber or a member of Motley Fool Stock Advisor or Rule Breakers or a Fool ONE member, if you're coming to Alexandria next week, because we have FoolFest once a year, we're going to have over 800 members coming to join with us next week -- all of the services that you pay us for have very professional scorekeeping. We take all of our numerical performance and the reporting dead seriously here at The Motley Fool for our membership. But this is my podcast, where basically, after I pick the stocks, I type the prices in that day, and I follow them a year and two and three later and report back to you here, but I do not factor in dividends. Neither the S&P 500 with dividends, nor the individual dividends paid by each of the stocks I pick in five-stock samplers. None of that is being counted. I'll basically say, "Hey, I picked this stock at $37.16 two years ago. Today, it's at this price. It's up x%." I think most of you are familiar with this. I do it frequently on this podcast. But it doesn't include dividends.
Now, if there's a big, special dividend, I'll account for that. Or, certainly if there's a corporate buyout, we'll mention that. But for the most part, we're just picking stocks, giving you the numbers, and sharing back with you how they're doing. That's how our five-stock samplers work. No dividends, for better or for worse, included.
All right, well, we're about to warm up Rule Breaker mailbag item No. 1. But occasionally I like to talk about how to get on this podcast when we have our mailbag. Rick Engdahl, my producer, sent me over 28 pages of questions for this week's mailbag. I think I have about seven of them lined up. You might be wondering, well, how do you pick this one over that one? Well, let me reveal -- I never give all the secrets. I like to dole them out one at a time here and there. So let me give you my latest thought in terms of how not to be on this podcast. A way not to be on the mailbag is if you mail me a question that is a very simple Google-able answer. I got one from an otherwise beloved Fool, somebody who said some really nice things, but asked basically, "What's the difference between an ETF and a mutual fund?" Now, in a lot of ways, that's an important question. I would want anybody listening to this show who's begun investing to understand what mutual funds are, and also what exchange-traded funds are. And certainly, on a podcast like Motley Fool Answers with Robert Brokamp -- who by the way will be joining me later this episode -- and Alison Southwick, they regularly take on questions and answers, Motley Fool Answers, like that one.
I'm the first to say I want everybody to understand what I'm talking about. The Motley Fool is trying to democratize the world of finance, and make it understandable. At the same time, though, there is this thing called Google. One of my top favorite 100 websites -- I know some of you know it -- lmgtfy.com. If you've never visited betheborg.com, you should. But if you have already and wanted to find another great site, go to lmgtfy.com. Anytime anybody ever asks you a question that they themselves could have Googled; this is a really fun, snarky way to send them a link to help them answer their own question. Check that site out. I think you'll understand how it works. You'll see the humor. I even tweeted out an example of how to use that site earlier today with the question about ETFs and mutual funds.
Anyway, in general, we're looking to provide suggestions, advice, and thinking that couldn't merely be Googled on this podcast. It's probably true of many other Motley Fool podcasts. But there's a tip.
All right, Rule Breaker mailbag No. 1. "Hi David," writes Darren Pryor. "I absolutely adore your podcast, which is my unmissable listening priority each week and has been for many years." Well, thank you very much for that, Darren! "Something that's been troubling me about your stock picks that I hope you can help me with, and potentially other listeners with the same question, as a deep value investor, each time I see your weekly stock picks from the various Motley Fool Rule Breakers and Stock Advisor subscriptions, I literally choke and freeze on some of the nosebleed valuation levels, only to find that I either dismiss them, or jump in way too late after summing up the courage to jump in, mostly on the faith that they've been carefully chosen by yourself and your team. Both of these reactions have caused me to miss far too many opportunities out of irrational fear disguised as sensible decision-making. Indeed, my personal value picks have turned out to be just plain awful compared to many of your 'nosebleed' stocks.
"To help with my confidence, I'm wondering if you might devote a podcast session to exploring past successful picks and highlighting how pricey they too were at the time of your recommendation, either by price to sales, price to earnings, market cap, whatever you feel is the best way to highlight that despite their valuation back then, today, they've proven to be brilliant picks. That way, people like me can close our eyes and take faster leaps each month with your recommendations and not be burdened with FUUD," which means, of course, fear, uncertainty and doubt. "Again, thank you for all you do to help the investing community to be happier, smarter, and Richard. Cheers, kind regards, Darren Pryor."
Darren, thank you very much! That's a great idea! I think we're going to do that. Sometime this summer, I'm going to have an episode -- let's call it Where Were They Then? And we're going to look at some of our better stock picks in Motley Fool history and give out the valuations and some of the traditional metrics where those stocks were trading back then. We'll be hand-picking, of course, some of our big monster winners to know that despite looking dramatically, crazily, horribly overvalued relative to how most of the world saw them back then, indeed, these stocks went on to be the best stocks, better than any of the other performers. I bet I'll have some of our talented analysts in, and we'll tell the story of some of those nosebleed valuations in the days of yore -- yes, to embolden you, Darren Pryor, and your ilk, to become more and more Foolish. You were very kind in your praise. Thank you very much!
You did say, "I literally choke and freeze on some of the nosebleed valuation levels." Now, I've learned to take the adverb literally, literally. So if that is in fact true, Mr. Pryor, I am deeply regretful. I hope it's not my tone or anything that I've said or done that would cause you literally to choke, to think that people are hurting themselves physically listening to Rule Breaker Investing hurts me...figuratively.
All right, and before I move on to Rule Breaker mailbag item No. 2 -- oh! My producer Rick Engdahl flashing in with this latest update.
Rick Engdahl: I've heard from another podcast that I really love called The Allusionist that, in fact, the latest version of Merriam Webster's includes figuratively as a definition for the word literally. The dictionary is reflective of language, not prescriptive of what language ought to be.
Gardner: I appreciate that, Rick! Thank you for that! Language does change. We all know that. But when language reverses so that something means the opposite of what it means, it starts to feel slightly Orwellian to me. But I realize, the pedant in me can never really stamp down -- I don't fully want to, but I do appreciate that language does change, literally and figuratively, Rick.
Engdahl: That's nice! By the way, the word nice used to mean stupid. [laughs]
Gardner: [laughs] All right, No. 2. This one comes from Andrew Lepla. Andy, thank you! This is probably my favorite note of the month. Love this! "Hello, David. I've been a highly engaged member of the Stock Advisor service for the past three to four years. I also listen to your Rule Breaker Investing podcast every week during my commute, and my four-year-old son is along for the ride since his day care is closer to work. He's very inquisitive, as you'd expect. We take lots of micro-breaks from the podcast for his barrage of questions. This week, his question was, 'Daddy, what's investing?' I could not have been more delighted and proud. I explained that by investing, we could own a piece of companies that make some of his favorite things. McDonald's, Disney, Netflix, Nintendo. And when they did well, so did we. He agreed that was pretty cool. It reminded me of when I was a kid, shopping with my dad. I asked him about the credit card he used. It was one random question, but what he said about having good credit and paying off your balance in full every month really stuck with me. Thanks for educating across the generations and encouraging conversations about healthy personal finance."
Well, to the Lepla family, I say Fool on! Great note! I always love it when we share it down. The more we can spread these ideas, the smarter, happier, and richer the world will be. Thanks for doing your part, Andy! Fool on!
Rule Breaker mailbag item No. 3. This one comes from Shreeraj Shriram. You write, sir, "Hi, David. I was listening to Stock Stories Volume III earlier this month, your story on booking.com, being one of the few companies that survived the .com bust triggered a couple of questions. One: we always talk about the winners like Amazon and Priceline. But I also want to know how many of your pics disappeared after the bust, especially any company that you feel in hindsight shouldn't have been recommended in the first place?"
Well, let me pause it right there before going to his second question. First of all, my stock portfolio, the public one that we were running on our site starting with AOL, and then the World Wide Web, and my real money stock portfolios -- well, my family portfolios -- all got crushed in 2001. I bet yours did, too. Almost nothing did well. Some of the best companies in the world today, like Amazon, went from $95 to below $7 in just a couple of years. It was an absolutely brutal time. But that portfolio, Mr. Shriram, that we were running at fool.com, the Rule Breaker portfolio, I don't think we had any companies that went out of business. The worst selection during that era was probably @Home, which was the internet broadband company that merged with Excite and became Excite@Home. It was, as it turns out, not very well run, in part because it was like a conglomerate of cable companies that all had their fingers in the honey pot, and it wasn't managed very effectively. Even though the dawn of internet broadband happened during that era, Excite@Home was a real loser for us.
Of course, I'm not shy about losers. I have a bunch of them today and Rule Breakers and Stock Advisor. I think I always will. But I am happy to say that I don't think we ever had a company like, let's say, buy.com, or Drkoop.com, or any of those dot-com bust fade-outs. Even pets.com, which did a lot of fun ads but didn't do so well, we never had any of those as our stocks. And I think the key here was that principle Rule Breaker trait No. 1: top dog and first mover in an important emerging industry. Very infrequently do real top dogs go out of business. It's usually the second- and third-tier companies that don't do so well.
I'm happy to say that you can still Google and see the portfolio that we manage. Just go back, Rule Breaker portfolio fool.com 1997 or 2001. You'll see that list of stocks that included companies like Amgen, Starbucks, Amazon, some companies that really stood the test of time, and then some also-rans. But no, I don't think any out-and-out losers.
OK, your second question. You wrote, "AOL appears several times in Fool podcasts for both its spectacular rise and fall." And you're right about that. "I know AOL was an active recommendation at some point. But did Rule Breakers or Stock Advisor the newsletters see the impending fall from grace at any point and exit from the position?"
Thank you for that question! Before I answer it, you wrote, "To close, I ask not to criticize, but to understand the full picture. I hope my questions will be answered in the true Foolish spirit. I've been amused, enriched greatly through my decade-long relationship with The Motley Fool." Well, thank you for that! And yeah, I'm always happy to talk flat-out, straight-up about any winners or any losers that I've ever recommended, ones that I hold myself and ones that you might hold.
AOL is a really interesting one because it was our greatest stock pick of all time, really, up until maybe the 10th year of The Motley Fool. It was a 150-bagger from the start when we first recommended it, the first day we launched The Motley Fool on AOL in August of 1994. It went from there to rise 150X in value by 2000. Then that merger with Time Warner did not treat either company very well. Nor was the internet treated very well in subsequent years. I'm going to say AOL dropped from somewhere around $95 a share at its high down to maybe $10, $20. It was still a wonderful 20-plus-bagger, but it had at one point been a 150-bagger.
Anyway, that's my take on AOL. We never ended up including it in Stock Advisor. We launched Motley Fool Stock Advisor in March of 2002. Never selected AOL, nor in Rule Breakers. These days, the company, brand, still out there, but it's gotten merged out and the name was changed. We don't keep up with AOL too much anymore. But some of the brass and people who started it, people like Steve Case, who's doing wonderful work in this world today; Ted Leonsis, who owns all our local sports teams; these are people who did really well, I would say rightly so. I think America Online, for its time, and for what it was doing, was truly a remarkable company. But it didn't have the staying power in a world that shifted from dial-up ultimately, to, well, ironically, cable broadband internet.
So, thank you for your questions! Happy to answer them, Mr. Shriram! Fool on!
All right, Rule Breaker mailbag item No. 4, No. 5, No. 6, and No. 7. The reason I'm going with all four at once, we are going to do them individually, but I've got a small panel that I've convened. Two of my favorite Fools. You've heard them on this podcast before if you listen to my mailbags. I really appreciate both of these people. In alphabetical order, I have Emily Flippen and Robert Brokamp. Now, under the assumption that we have at least one new listener this week to this podcast, Emily and Robert, would you both briefly -- Emily, you first -- give a line or two about who you are and what you do here at The Fool.
Emily Flippen: I'm happy you had me go first because I definitely can't follow Bro's job here. My job is on the Rule Breakers team, actually. I help on the Rule Breakers team. I also help a bit with our marijuana service.
Gardner: And at least one of these mailbag items will be directly relevant, which is why, in part, I pulled Emily in. A delight to have you, Emily! Now, Robert, apparently you're a really tough act to follow.
Robert Brokamp: I don't know why! Other than, I do celebrate my 20-year Fooliversary this year. That does make me an old Fool.
Gardner: That is spectacular! I'm honored! We've been blessed many times over for your insight. I'm not just referring to a company. I mean, employees around the company don't even really like Robert. I'm talking about all the members. The readers of Rule Your Retirement, the listeners of his podcast, presumably some of whom like him. But no, I would say that Robert is probably one of the more popular Fools here.
Brokamp: Well, golly, thanks!
Gardner: I was just having fun with that. Twenty years later, thank you, Robert!
Brokamp: Sure. So, I've been writing our Rule Your Retirement service for 15 years. In three weeks, we celebrate our 15-year anniversary.
Gardner: That is amazing!
Brokamp: Co-advisor of Total Income, one of the voices on the Motley Fool Answers podcast. I do a few other things here at The Fool. I'm in the 401(k) committee, stuff like that.
Gardner: That's awesome! Well, we may or may not have questions about some of those things. But I know the next question anyway, and I'm going to share it right now. Rule Breaker mailbag item No. 4. This one's from William Wood. "May I first thank you and all your fellow HQ Fools who do such a great job not only in giving great advice, but also giving it in such a way that makes it fun, interesting, and easy to comprehend for those of us that are less sophisticated." Well, thank you, William! Since you've heard from Emily, since you've heard from Robert, you see the kinds of fun personalities that bounce around Fool HQ and make my job -- just speaking for myself -- a lot of fun.
"Having been a member of both Stock Advisor and Rule Breakers over the past few years, I've been able to take your advice and made some great gains. For that, my family and I say, thanks $1 million! :)" Well, thank you, William! "Although I adhere to The Fool commandment that says hold for years, and always remind myself that I'm an investor in businesses, not a stock trader, I pretty much keep myself fully invested in the market, although not very often, there are times when I do need to sell something to raise some needed cash.
"My question is, how do you pick a stock to sell when that time comes? Do you look at winners first? What about losers? Perhaps tax circumstances? How do you make that difficult choice to select from your portfolio when it comes time to sell? Thanks, David! Love the show, William Wood."
Brokamp: Just start looking at individual companies. I am someone who believes in diversification and limiting, to a certain degree, how much you have in a single company or sector or industry. I'm more conservative that way. I know other Fools feel differently. I do tend to look at winners, just to make sure nothing has gotten too big of a part of my portfolio. I also look at asset classes. For example, over the last several years, U.S. large caps have done much better than international stocks, so I would be looking at maybe taking a little bit of the U.S. large caps off the table, keeping some of those other ones that have not done so well.
I also do look at tax consequences. No. 1, there would be, obviously, if you're not age 59 and a half or older, you shouldn't be tapping your retirement accounts. People talk a lot about tax loss harvesting at the end of the year, but I think it's something you should probably do during the course of the year. Look for something where maybe, if it is down below where you bought it, you could sell that, take that loss, just make sure you don't buy it again within 30 days. And a lot of people don't think in terms of the multiple purchases they've made of the same stock. They might have made multiple purchases deliberately or been reinvesting the dividends. You can identify which shares to sell for maximum tax benefit. So, those are a few thoughts on that.
Gardner: Emily, when we think about, if you're looking across a list of stocks -- we have this on our Rule Breaker scorecard. We have some stocks that are dramatically, in a sense, over-allocated. If Intuitive Surgical goes up 30X in value, it's going to count for a lot more in our Rule Breakers service than our latest pick last week, which is a very well-known ridesharing company that I can't fully share because it's brand-new information, but it's a really interesting company. So we're thinking about that, too.
Now, Emily, you're earlier on in the arc of your investing life. That's a way to say that you're younger than Robert and me. I'm just curious, personally with your portfolio, are you where you want to be in terms of the number of stocks that you have? Where are you with it? Are you making selling decisions? Share a little bit of what's behind the curtain for you.
Flippen: Sure, I definitely don't own as many companies as I expect I will by the time I reach either of your ages.
Gardner: Starts with a five.
Brokamp: Me too, just a month away.
Brokamp: Thank you!
Flippen: For what it's worth, I expect that I'll be there. Where I am right now, I feel comfortable with the number of companies that I own. That being said, I have never had to raise a large amount of capital by selling, at least not to the extent that I'd be worried about which ones I would sell. I tend to, and I expect this is because of my age, disagree a little bit with Bro's methodology. I tend to think that outperformance is attributable to a small number of companies that tend to grow a ton. If you find yourself constantly selling down these companies, you could be depriving yourself of a lot of gains. So the first thing I go to is probably the tax consequences. I imagine everybody knows their own implications better than I do, but obviously, companies that I haven't held for a full year I would never sell because of the capital gains tax being higher in regard to those. And, companies that, maybe I otherwise feel equally about, but one I have a higher cost basis on, maybe that produces a little less taxable income. So for me, the tax is probably the biggest implication. But I tend to not want to sell my winners. If a company is winning, I tend to expect it will continue to do so.
Gardner: I'll put it down the middle, those are two good perspectives. In some ways they come from us at different stages of our life, even though both of what Robert and Emily said are just good philosophical stances that contrast somewhat with each other. But when we first wrote The Motley Fool Investment Guide, my brother Tom and I, I believe I wrote the chapter on selling. And the way I put it back then was, we try not to sell, but when we do or when we need to sell, we'll often ask ourselves, what do we believe in least going forward in this portfolio? It isn't necessarily about a winner per se, or a loser per se. It's more just going forward from the point at which you're going to need to sell, ask yourself, which seems to have the least potential? Sometimes that's a huge winning position that's maybe running out of gas, or it's already such a big thing that you should let go some of it. Other times, it might be a loser, something you're sitting there going, "That didn't fulfill the thesis that I had, so I'm just going to sell that." So I'm not sure in the end if it's about losers or winners.
I do think about taxes. Maybe a little bit more like Emily, I tend to just sell off my losers and hold my winners and love my winners, Robert. But every day, Robert, you're seeing people write in who have overweighted positions. And often the best advice they can do is to pare down those positions.
Brokamp: We've seen that in our Supernova service, with Phoenix, when which regularly sells stocks to simulate a retiree portfolio. And it was regularly selling Netflix because Netflix was doing so well, it was overwhelming all the other holdings.
Gardner: That's right! So there is a consideration of just, is anything highly imbalanced, which was true for that portfolio. It tends to be true of my portfolio in life. So when I'm looking to give money away, I'm often going to give away appreciated shares, not cash, that's the most efficient way to give. And I'm usually going to be giving away my biggest winners. So, William, I hope that's helpful for you!
Brokamp: Can I make two more quick points that don't necessarily apply to William? That's, one, if you're retired, studies indicate that you should drain your taxable accounts first before tapping your tax deferred. And, for people who have a mix of stocks and actively managed mutual funds, I think you should always evaluate your mutual funds every year. We know that many of them tend not to keep up with their benchmarks. That's a great place to get some cash if that's not keeping up.
Gardner: Awesome advice! Thank you, Robert! Thank you for rounding that out! For a lot of listeners, it's not about this stock vs. that stock; it's about allocations in multiple different kinds of investments. There are a lot of considerations there. All right.
Well, let's stick with the theme of selling here as we go to Stephanie Zenos' question next, Rule Breaker mailbag item No. 5. "I'm a longtime Rule Breaker subscriber. I've been listening to your podcast since episode one." Thanks! "I'm a big fan and have shared your podcast with many people who asked me how I learned to invest. I'm very happy with my Rule Breaker annual returns of almost 20% per year the last nine years. I have a BIG financial event coming up. I'm about to cash out my company's stock and I want to know how to invest it Rule-Breaker-style. Now when I say big, this chunk of stock is worth, after taxes, roughly 5X my last full-time salary, or 12X annual expenses." Very helpful context. Thank you, Stephanie!
"No pressure, right? It's also about 3X the amount of my Roth IRA, which is where the bulk of my investments live as a 33-year-old woman. One final tidbit: I work for myself these days, so my investment account types are limited."
I'm once again looking closer to Robert for this one than Emily initially because Robert, you're looking at this all the time. Let me just finish out her note here. "Where can I invest this money? Just a brokerage account? How should I go about investing it, since even spreading it out over, let's say, 20 stock picks would allocate more than 3X what I ever had before to a single stock. What a doozy. Thanks again for all you do at The Motley Fool. Any help would be much appreciated. Most sincerely, Stephanie."
Brokamp: Stephanie, my first piece of advice is to see a financial professional for a couple of reasons. No. 1: When you take possession of a company's stock, there are a few ways to do it. Some ways are easier on your tax bill than others. So you definitely want to get expert help on that, No. 1. No. 2: If you're self-employed, you can create your own retirement plan. It might be a solo 401(k). It might be what's called a SEP. Depending on your situation, one might be better than the other. You can even create your own employer match because you employ yourself. You might be able to get some more money in a tax-advantaged account than you think. Those are my first couple of pieces of advice.
My other standard piece of financial advice that we give at The Fool is, any of this money that you expect to spend in the next two to four years, for me, that's better just kept in cash, CDs, short-term bonds. I'll leave it at that for your expert opinions.
Gardner: Good. I will note that Stephanie, in her note, wrote a postscript, saying, "I know this may be more of an Answers podcast question." Indeed it is, Stephanie. You went on to say, "But I really appreciate the Rule Breakers spin on things."
Emily, I'm not going to put you on the spot here, but can you add a little Rule Breakers spin here? Stephanie would like that!
Flippen: Sure. Coming from a Rule Breakers mindset, I think everyone's first instinct, especially if you've been a long-term investor, is to take that money and put it into a lot of companies that you really love. We've seen a lot of new recommendations coming out on the service. There's a lot of companies that if I had a ton of extra money, 12X my annual spending, I would love to buy.
At the same time, our willingness does not always match our need. Sometimes it's OK to take your time investing that money. I agree with Bro's analysis that the best thing to invest in immediately would probably be a fee-only financial planner who can provide that tailored advice.
Beyond that, it's OK to invest it in a broad-based index fund if you're not sure what you want to do in the meantime. There's nothing wrong with that. Maybe what you do is invest it temporarily, and then as you see opportunities, slowly draw down on it. That type of investing, a lot of times it doesn't produce the same returns as if you had just invested all that money immediately; but it does provide a little bit of peace of mind as you roll money from maybe an index fund into a lot of these growth-style companies that we invest in in Rule Breakers.
Gardner: Awesome! Thank you, Robert! Thank you, Emily! I'll just add that I'm a big fan of patience as well. Stephanie, I think it's natural, when you get a whole bunch of money, maybe more than you've ever seen all at once, to think that you have to do something. But I think I'm backing up my teammates here when I say that you really don't have to do anything. Emily just said you could put a portion of it in an index fund. You in your own note said, "If I put it in 20 stocks, it would be a lot in every stock, more than I've done before." Well, I would say, why 20? Why not 30 or 40 or 50? And you don't have to do 30 or 40 or 50 all at once.
Certainly, The Motley Fool does have some services that are helpful. In December of last year, we did a Blast Off service where we blasted at you 20 stocks that you could buy. And those stocks have done wonderfully. That was 20 all at once. So, for somebody with a need like yours, you might be interested in services like that. Navigator, which is a Supernova service which is being marketed right now on our fool.com website, if you're a member of Rule Breakers and Stock Advisor, I'm pretty sure you're hearing about it, that would be another way to build a portfolio right now with a lump sum, the situation that you're in.
But we're the first to say, make sure that you understand what you're doing. Do not rush yourself. And if you took that big lump sum and decided, "I'm going to divvy it up into 24 pieces, and each of the next 24 months, I'm patiently going to 1/24 of it in something that I understand and believe in," I think you'll feel great about it whether the market goes up or down over that time. If the market goes down over the next two years, you'll be glad you didn't do it all at once. You'll be glad you spread it. If the market goes up over the next two years, you'll be glad you started right away. A lot of people get paralyzed by their lump sum. By making it a dollar-cost averaging exercise, Robert, I think in a lot of cases, we've helped Fools remind themselves that it's not about binary buy or sell, yes or no; it's about being incremental.
Brokamp: Yes, I totally agree. And we've often talked about the thirds strategy as well. You buy into a position in thirds and gradually move in. At your age, you've got time. You're at a life stage also where you might be making decisions about cars and houses and kids and families, and you'll be happy to have some of that cash on the sidelines. So really, I would say there's just no rush on it.
Gardner: Stephanie, thanks for listening! Thanks for writing in! Fool on! Congratulations to you, at a great stage of your life! It sounds like something really special that you've earned. That makes us all happy.
All right, Rule Breaker mailbag item No. 6. This one comes from Alejandro Sanchez. Alejandro writes, "You recently got a very critical email about recommending marijuana companies with criticism about how the use of marijuana is so damaging. The view of the writer is so narrow. If he is to pass judgment, he should look at other societies where other drugs are not criminalized. Also, I live close to Denver, within 20 minutes. I practice in two hospitals. I can tell you, by far, alcohol is more damaging. Additionally, the writer is not taking into consideration the damage that illegal drug consumption in the U.S. causes to neighboring countries, causing murders due to drug trafficking. Putting your head in the sand will not solve the problem. How many years of a war on drugs need to go on to realize for all us that it'll never be won? Someone said doing the same thing over and over expecting a different result is lunacy. Moreover, your focus is to help investors, not to pass judgment on morality. This requires one to be open-minded and see the pitfalls that others might miss. And on that, you are a great resource. Keep up the good work, Alejandro Sanchez."
Emily, I'm turning to you. You work some on our marijuana service. I think we answered that question a month ago in this mailbag. I think David Kretzmann, who's also done a lot of good yeoman work in that area was with me, and we talked that through some. Do you have any reflections or thoughts, having heard this note, and maybe having listened to the podcast a month ago?
Flippen: Yeah. The original email actually doesn't bother me that much. That was my perspective too, for a long time. If you had told me a year or two ago that I was working in the position that I am today, I probably would have told you that you're crazy. But our opinions are shaped by our experiences. I think the person who wrote that email is probably not the only person who has had negative experiences or negative exposure to the marijuana industry. That's perfectly fine. But you'll notice that Mr. Sanchez has had very positive experiences with the industry. When you're looking to invest in marijuana, it's important to educate yourself about the good things, the bad things, the reality of it. As I continue to learn more and more about it, not just as an investment, but as a commodity, as a medicine, as something that has changed people's lives, both for the better and for the worse, I realized that there's a really big opportunity. In my opinion, there's an opportunity to do something better for the world, more so than there is for an opportunity to do something bad. And when I invest in marijuana, I don't feel like I am doing something bad for the world because I'm aware of all the positive things that we see coming out of a lot of the companies that we invest in.
Especially here on the Marijuana Mavericks team, and Marijuana Masters, depending on what country you're listening from, we spend a lot of time thinking about the quality of the companies that we invest in, and the impact that these companies have on the world. I think there's definitely a time and a place for socially responsible investing. If your experiences with marijuana have been very negative, then by all means, don't invest in this space. But if you're part of the group of people, and that now includes me, much against my original way of thinking, if you're one of the people that is interested in this space and believes in this space, then I think there are a lot of really good socially responsible ways of getting exposure.
Brokamp: I totally understand this to a degree. So I'm a kid who grew up very religious. I still have never been drunk; I've never done drugs. I have gone a little bit the other way in terms of how I feel other people should live their lives. I think, do whatever you want, as long as I don't have to pay for it. As a father, I don't necessarily like the idea of my kids going out into the world and being able to experiment with a lot of things. So, I understand feeling very mixed about this new trend of making marijuana more acceptable. I'm coming from this as someone who has no personal experience with any of it, so I can't talk to the investment merits. But I understand this feeling of, I'm not sure I'm totally comfortable with this yet.
Gardner: I think that's great! Thank you both for such eloquence and your thinking! For my own part, I think any listener of this podcast, or anybody who's followed me over the years, knows that I say, make your portfolio reflect your best vision for our future. Some of us see in that future that we hope for the benefits of something like marijuana or alcohol or sports betting. Others of us see the detriments and vote or root against those things. We're here to encourage each of you to align your money with your beliefs. The Motley Fool is not officially endorsing any of these things. As stock pickers, we're going out and taking our best shots at figuring out what's going to win. But I will tell you that I do think a lot, and I would hope that a lot of us do, about the morality of what I'm saying and doing. That's very important. I'm not an amoral person that's just putting out whatever stock I think will win out there. You'll notice, if you've followed me over 26 years, that I've never recommended a company that's behind gambling. I myself am fine with gambling, but I just think from a Motley Fool standpoint, the very nature of that business is to run people's money down over time. After all, that's why these companies exist today, and the house always wins. I also am not a big fan at all of state lotteries, which I think are the biggest loser investment being promoted to the public every single day out there. But we're not really about political stances. I hope what I just said, or Emily, Robert, it doesn't sound in a way stiflingly political or trying to influence you toward our individual viewpoints. We all have different viewpoints. Everybody listening to his podcast has a unique variety of hundreds of thousands of experiences and opinions that each of us has experienced over the course of our youth and adult lives. That should shape how you invest. Make your portfolio reflect your best vision for our future. Thank you, Mr. Sanchez! And thank you for the gentleman who wrote a month ago!
All right, and closing it out, Rule Breaker mailbag item No. 7. This is from Stuart Simpson. "Foolish friends and David, I'm finally back to a financial point where I can put cash in my investing account again!" That's a big moment for Stuart. Congratulations, Stewart! "I have a portfolio full of winners like Apple and Nintendo," and some ticker symbols I don't recognize like OHI, CGC, ACB, "oh, and one other -- SHOP." Well, that's one that we know. Shopify is a big-time Rule Breaker winner. In fact, Stuart in his note writes, "It. Is. A. WINNER!
"I know I should let my winners run wild, and this is most definitely a wild-running winner, but my Gardner-Kretzmann Continuum is like a 0.17." He's illustrating by saying, he's 34, he only has six stocks so far. "I feel like I should be adding more companies instead of adding to this winner. What would you do in this situation?" Real quick, I'll poll my crew here. Emily Flippen, what do you think Stuart should do?
Flippen: Well, you've inadvertently asked the wrong person. Working on both Rule Breakers and Marijuana Masters, in which both services Shopify is an active recommendation and a great performer, I tend to think this is a great company. Sure, the valuation looks crazy. But as you mentioned earlier, there are so many companies that, if you'd invested in when the valuation looked crazy, you were leaving so much money on the table. So, I tend to think I want to add to my winners, especially when you see a company like Shopify. I mean, they are just expanding their reach, more than any other company, even in the marijuana space, that I'm seeing right now. They've recently increased the fees for the clients on their platform and had virtually no churn as a result. That gives them so much pricing power. I see Shopify as such an amazing investment, even at today's prices -- and it's a very, very frothy valuation. I will give him that.
So, I tend to think, who cares about how many companies you own, as long as you're really sold on the ones that you do own. If you're really sold on Shopify, sure, add to it.
Gardner: All right. And, presumably for a different viewpoint, Robert Brokamp.
Brokamp: [laughs] The old fuddy-duddy guy is going to give his fuddy-duddy diversification advice. Depending on what Motley Fool service we look at, we recommend that you own anywhere from 15 to 30 companies. I'm going to stick with that. He is young, he's got plenty of time to ride out the ups and downs of a concentrated portfolio. I would be much more concerned if he said he was within five years of retirement. But he should go with whatever he wants to do, but I'll stick with my standard blah, blah, blah, diversification stuff.
Gardner: With this one, I think I'm more with Robert. I mean, we all love Shopify, but with six stocks, and presumably a big-time winner that's rolling up, I definitely think you should get a seventh, eighth, ninth, tenth stock, even if the source of funds needs to be one of your big winners. If it's Shopify, which wouldn't surprise because it's up about 9X in value over three years, that's a great source. Just sell off a little piece of it every month. Just dollar-cost average your way out of a very large position, Stuart. I think you have an opportunity really grow a portfolio now. I like a minimum of 15 stocks in a portfolio. That's just my personal number. Others may have their own thoughts. So, at seven, you're about halfway there. A GKC of 0.17 is telling you, sir, all you need to know. Make the right call here, Stuart!
All right, well, that ends this month's Rule Breaker Investing mailbag. Thank you to my special guests Emily Flippen --
Flippen: Thank you!
Gardner: -- and Robert Brokamp!
Brokamp: Always a pleasure!
Gardner: Look forward to, maybe we'll see each other a month or so from now!
Next week on the show, it's time for our latest five-stock sampler. Yep, I'll be picking five new fresh picks along a theme that I haven't decided upon yet. In the meantime, we wish you all the best with your investing, your business, and your life. Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. Rick Engdahl has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Booking Holdings, Intuitive Surgical, Netflix, Shopify, Stamps.com, Starbucks, Tesla, Twitter, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.