In this Rule Breaker Investing podcast, David Gardner closes out 2017 with one last shuffle through the mailbag. Among the topics he and his fans touch on are how many stocks a portfolio can have before it starts imitating an index fund, and some ideas about Foolish philanthropy and entrepreneurship. Then he shares his New Year's resolution, discusses some predictions for 2018, and brings back an old favorite essay: "Why We Invest."
A full transcript follows the video.
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This video was recorded on Dec. 27, 2017.
David Gardner: Well, here we have it, the final episode of Rule Breaker Investing for 2017. Thanks so much for joining me. I know it's a really busy time. It's so busy that I'm a little run down myself. I didn't get much sleep last night. I think I have a small temperature, but I had to make it into Fool HQ, hug the mic here for 30 minutes or so, say some thank-yous, and talk about the world. Thank you for joining with me this particular week.
In fact, another reason that I want to make sure I'm not too sick is because I bought tickets for the new Star Wars this afternoon, so I will have seen that by the time we next talk with each other. I really enjoyed Coco in the last week. I highly recommend that Disney movie as well.
And as long as we're talking about current events, I know some of you know that I'm a North Carolina basketball fan, as an alum, and North Carolina suffered what many have characterized as the biggest upset so far this year in the college basketball world, losing to Wofford, a school with 1,650 students in Spartanburg, S.C. I'm pretty sure none of those players was a McDonald's All-American or a big recruit, and yet I had great admiration watching Wofford beat North Carolina 79 to 75.
I saw some Twitter comments, naturally, about this because our own Jason Moser, here at The Motley Fool, is a Wofford graduate. He's also married to a Tar Heel, by the way, and I know he likes the Tar Heels. I have to say, Jason, I really like your Wofford team. Some people were saying, "Hey, JMo, make sure you duck when you walk into the office today."
But I think that misunderstands how I actually watch or think about college basketball. I'm not angry at Wofford. I was deeply admiring of them. And Fletcher Magee, their player who has hit more threes, more three-point shots this season than anybody else in college basketball, by the second half, I and my sons watching the game were calling him not "the legend," but since his name is Fletcher, he was "Flegend." He was the Flegend. Remarkable.
So I start cheering for the underdog. When I see Luke Skywalker show up, in this case on the basketball court, part of me can't not start cheering them on. The loss for North Carolina won't really matter much or mean much to the season, I don't think. The win for Wofford is going to mean a great deal. That is a school that had literally never beat a top 25 team in its history, and it went into North Carolina, the national champion, in Chapel Hill, and won by four points. So, good job, Luke Skywalker!
All right, it is the final week of the month, and so it's Mailbag. And this is going to be a shorter podcast, because, again, we're all so busy and I'm a little under the weather, so I've selected four items to talk through, and then I'm going to share a New Year's resolution and we'll have a few odds and ends at the end of this half-hour together.
Mailbag Item No. 1: This one comes from Eric Milton, @EricMilton8, on Twitter. It's very short. He simply wrote: "Just listened to the podcast." That would be last week's podcast -- our 2018 preview. "Just listened to the podcast and I loved the insights and ideology of each guest that appeared."
Well, thank you, Eric! I really appreciate that. Each of those guests comes from his or her own place, and that's one thing we value here at The Motley Fool. After all, we are The "Motley" Fool, and if you didn't know -- I think most people do -- but "motley" was the ragtag garment worn by fools of yore back in the Elizabethan age. They were just patchwork quilts, kind of putting together various odds and ends to make an outfit for the fools of yore.
But we have celebrated that since we started our company about 25 years ago, because we love a variety of different perspectives. That's, I think, what Rick Munarriz, Sarah Goddard, and Simon Erickson brought last week. I didn't even find I had to say that much. I think I'll say one or two things about the market at the end of this podcast, but I was more than pleased just to listen and learn from those people that I've known for 10 years or more, on average, and whom I hand-selected because they have very interesting perspectives.
Part of the power of The Motley Fool -- I hope you know this Eric; I think you do -- is the community that we have, that we've built over 25 years. We have so many wonderful thinkers and writers. People just dropping great notes on our discussion boards or who become full-time writers at Fool.com. Or analysts. Many of the analysts that I work with here at the Fool started as just customers back in the day. Some of them were 12 years old, reading The Motley Fool Investment Guide about 10 years ago.
It's an embarrassment of riches, I think, and it's always my pleasure to find these kinds of people and get their perspectives into this podcast. So thank you, Eric!
Mailbag Item No. 2: This one comes from Dave Rossman. It's a longer note, so I'm going to truncate it some, Dave, but thank you for writing in. Dave writes, "As a huge fan of The Motley Fool, I'm always looking to learn how to better construct and manage my portfolio that I've spent the last five years building. While I started with subscriptions to Stock Advisor and Rule Breakers, I've since upgraded to Market Pass and more recently to Motley Fool Premier Pass.
In my progression through these different services, and my interest in upcoming trends like AI, crypto society, etc., I keep adding more stocks to my portfolio to 'reflect my best vision for the future.'" I appreciate that allusion to one of my favorite lines. Thanks, Dave! "At this point," you go on, "I have 50-plus stocks in my portfolio, which widely range in market cap and industry. So while listening to different Motley Fool podcasts, from time to time the topic comes up about how many stocks I should have in my portfolio. While answers do vary to this question, it does seem that The Motley Fool prefers 15 to 20, maybe even up to 30 stocks.
"I truly understand the reason behind this direction. The core or target audience, I would assume, is more beginning investors, and by putting out a larger recommendation, you could overwhelm an early investor. I get it completely. I've been there," Dave says, "but in response to this question I've heard many times on podcasts that once you get more than 15 to 20 stocks in your portfolio, it could perform closer to the index, and I disagree with this argument."
Dave goes on, and he cites a couple of reasons, but basically he talks about how if you take the whole market -- let's say 5,000 or so stocks -- and you just strip out all the bad ones, you'd still have hundreds and hundreds left, but mathematically you would easily beat the market, since the total market return is just averaging all of those different returns. Even if you're not particularly good at finding the good ones -- you're just good at avoiding the bad ones, David would point out -- you can do pretty well as an investor and you might have hundreds of stocks.
Dave concludes his note by saying, "With 50-plus stocks in my portfolio, all Motley Fool recommendations, proud to say that year to date 2017, while the S&P index is up 19.52%, my portfolio is up 26.59%." Again, that's with 50-plus stocks. "That is the sole reason why I invest," Dave says, "to beat the index."
Well, that's very Foolish of you, Dave. You and I share that same urge, to beat the market indices. After all, if we're not going to be beating the indices, then we could just buy and own the indices. But I, as a fellow 50-plus stock guy, am not somebody who believes that you should just never have more than, let's say, 15 or 20 stocks, or you'll start to approximate an index fund. Simple math will say with every additional stock that you add, that chances are you will regress to the mean of the market, but I think you can have a few hundred stocks.
We have members who have bought literally every recommendation we've ever made in Motley Fool Stock Advisor, and that's going back to March of 2002. They're way ahead of the market, and frankly, it's easy to see why. We put the numbers right there in Motley Fool Stock Advisor. If you have bought every one of my recommendations over the last 15 years, you've about quadrupled the market's return.
I don't think that there's any magic number or that you need to limit yourself to a certain number of stocks. I do think it comes down, largely, to how much energy, time, and interest you have, and I think I'm speaking to somebody who has quite a lot. When you're quoting me market averages and returns to the second decimal, saying the S&P's up 19.52%, that suggests to me that you're somebody who puts a lot of time and effort here, and look, you're getting rewarded for it.
So great job, one Dave to another. Well played! And I like your perspective.
Mailbag Item No. 3: This one comes from Dave Geck. Now, I have to pause, because before I go to Dave Geck's note, which I greatly enjoyed, Dave, and you'll know why, I have to point out that my name is Dave. I just answered a Mailbag item from Dave Rossman, and as a Dave I'm now speaking to Dave Geck. And it reminds me of a Dr. Seuss poem that I absolutely have to share with my listeners right now, because if you've never heard Too Many Daves before, you need to know it, whether your name is Dave or not. So here we go.
By the inimitable Theodor Geisel himself, Too Many Daves. Here it is:
You know, I think, of all those, my favorite is Zanzibar Buck-Buck McFate. I haven't googled that term, but I'm wondering if anybody has ever named anybody else Zanzibar Buck-Buck McFate. I think it should happen.
All right, back to Dave. This one starts, "Dave: I, Dave Geck, from El Paso, Texas -- I recall you said you liked it when people added from where they were -- had listened to a few of the RBI Podcasts and liked them, so my Thanksgiving Day resolution was to catch up. Today I did so just in time to have another appear. Had to write in, jerk that I am, and mention I chuckled merrily during your 23 November 2016 interview with David Allen." By the way, are we keeping score here? Another Dave, with the David Allen podcast. "During the first few minutes you railed, a bit, about your dislike of the phrase 'life-changing experience' and preferred something along the lines of 'life-improving experience.' You made a solid argument that all experiences are life-changing, but they may not improve your life. You then started the interview and quickest gushed to Dave something along the lines of his book was 'game- and life-changing' to you. From this, can we infer that you did not find that his book improved your life, but instead may have changed it for the worse?"
Nah, guilty as charged and, Dave, if you listen for another podcast or two forward, I think I do admit that mistake. But if I didn't then, I'm going to do so now. I'm glad you called me out. I appreciate it. I expect people to call me out. I need people to call me out. When people call us out, as long as it's done constructively and even lovingly, especially if it's by a fellow Dave, it can only up our game.
You went on to say, Dave, in your note, "I was glad to note this under the 'misery loves company' category. I had recently spoken with one of my sisters, and I mentioned it irritated me more than it should when people use the word 'I' when 'me' was appropriate. She said yes, it should bother me because, as she pointed out, I made this mistake from time to time. I denied it vehemently, told her to point it out when she heard me. Not five minutes later, she pointed it out. When she repeated what I said, I was aghast to recall that she spoke my words correctly and I was in error. I told her that it was nice to know, at least, that after all these years she was perhaps listening to her little brother." Signed, David Geck.
I think we'll let that one stand on its own. Of course, we have a lot of fun with language, and games, and business, and investing on this podcast, so this one you file under the language category, and I appreciate the sharp listenership that I have somehow managed to attract here, as we enter the third year of Rule Breaker Investing.
Mailbag Item No. 4: All right. So I'm going to get to talk about a New Year's resolution or two in a few minutes, but first I want to present my final Mailbag item for this podcast. This one comes from another guy, but his name is Kevin. Kevin A. from San Antonio, Texas.
"I'm a longtime listener and fan," Kevin writes. "I recently met a financially challenged neighbor in my community who is a member of the unbanked." Again, this is in San Antonio, Texas. "She decided to leave her job working for an abusive boss and committed herself to start a small business in dog grooming, thereby serving her love of animals. As it happens, I had recently tried my own hand at grooming as a money-saving strategy, giving me some personal insight into the skill required to do this well. Sorry to my three dogs," Kevin adds.
"Ultimately, I decided to provide a personal loan to my friend to start the business, as small business in America is the greatest engine of wealth creation ever conceived. I am interested to see whether providing start-up capital to a motivated member of the unbanked could lift her out of poverty through entrepreneurship. As the business is still in formation, time will tell the score, but this has raised my awareness of how the unbanked are able to participate in the modern economy using only electronic payment platforms, as well as the critical role of access to business capital, in addressing poverty.
"I know you conduct Foolanthropy every year, and if you don't already, I would like to humbly suggest creating a foundation to provide loans and mentorship to the unbanked poor to improve themselves and their communities by starting small businesses." Kevin Akers, San Antonio, Texas.
Thank you, Kevin! You know, we have done some work in the past with Foolanthropy. Past partners and nominees for our Foolanthropy Charity of the Year have been microcredit loaning organizations. Certainly Grameen. The Grameen foundation was an early Foolanthropy partner. Mohammed Yunus, who I think won the Nobel Peace Prize, is a great example in Bangladesh of the power of what you're describing.
And while many of us may imagine that Bangladesh, with all the poverty it has, would be an ideal place for it, and it probably is, microcredit and microlending is happening globally. And what I think is great is that you made it local, because you're talking about microcredit in your own neighborhood, finding somebody that you deem admirable -- and she sounds admirable -- in a tough situation. She's going to make the best of it, and she's going to start a business.
And we love that. And part of why I love conscious capitalism is because it grows out of a belief that by starting businesses, entrepreneurs, large and small, are trying to make the world better, and the ones that have a strong heart as well as a strong mind, those add immeasurable value to our world.
I really appreciate your point about small business in America being the greatest engine of wealth creation ever conceived. I agree with you. We had the largest GDP of any country that's ever existed over the past year, and while there are some other big countries, like China, that may come along and in time even supersede America's GDP, we'll see. If that were to happen, I think that's awesome. I want every country in the world -- I bet you do, too -- to add value. To be places where people can start businesses.
A lot of the theming of conscious capitalism is that the unacknowledged heroes in our society are often the entrepreneurs -- again, big and small. They're creating most of the jobs that are created. And businesses that do well reward all their stakeholders -- their shareholders as well as their customers, as well as their employees, and their partners and suppliers, and their community at large.
So good for you, Kevin! Good on ya! I'm glad to share your Mailbag item, here. I think it's perfect for this time of year, so it's my delight to share it. I also appreciate that you're not talking about it as a fairy-tale ending. You're talking about something that hasn't happened yet, and you're going to see how it works out. Good for you, and keep us apprised!
And I should mention -- and if you're a regular listener you already know this -- that The Motley Fool's Foolanthropy partner this year is All Hands and Hearts. I did an interview with David Campbell -- did I just say somebody else named Dave? Did I do an interview with Dave Campbell last week? I did. That was a Rule Breakers extra for last weekend. I hope you enjoyed my conversation with Dave Campbell.
And I hope you'll take a look at Give.Fool.com. Sign into our site. Consider sending off a check or volunteer. Get involved with Foolanthropy. It's wonderful to see the Motley Fool community come together every year, at the end of the year, to give away money. We have given away, through our members, millions of dollars over the course of the last 20 years. It's a remarkable, not-often-told story what Foolanthropy does, and we're excited about All Hands and Hearts, and all of the other great charitable causes out there. So thank you, Dave!
Well, I mentioned I wanted to share a resolution or two. Every year around this time of year I start to feel it. I start feeling it. I start thinking about the year ahead. And I don't write down my resolutions with numbers attached, necessarily to be measured. I do realize that old business saw "If you can't measure it, you can't manage it," which tells part of the truth. I don't think that's always the case, but I admittedly don't really go with measurable New Year's resolutions.
I know I'm speaking to some people who do. Some people are quite hardcore about it, and probably more goal-oriented than I am, and probably more awesome than I am, and I'm delighted that you're even listening to this podcast, you people. But for me, it's more a thematic thing. I'll come up with a word, or a brief phrase, and I save them.
Evernote is where I house so much of my thinking, and notes, and things over time, and so I can look back and see that in 2004, it was "get organized" with David Allen. That was a year after I read that book.
In 2007, to do what I say and say what I'll do. And to speak more softly in 2007. I'm not sure how I did with that one, but you're seeing kind of the run of these for me.
In 2012, offense! I just determined for reasons I can't quite remember, it felt very visceral and very right for 2012. I'm going on offense. That was five years ago.
In 2018, I'm sharing it out. I'm going with the word "declutter." Declutter. Googling the term, briefly: "To remove unnecessary items from an untidy or overcrowded place." Declutter. That is both a physical, visceral goal of mine in 2018; to get rid of more stuff. I've got a lot of stuff. Maybe you do, too. But it's also a psychological and mental thing as well. Declutter. Let's declutter our minds. Let's simplify.
We're coming out of a year of plenty. 2017 was a remarkable year for investors, and there's a lot of abundance around us. I realize there are a lot of political questions -- not just in this country but worldwide -- but you also have to see that in light of what's happening in the world, which is a very strong worldwide economy and lots of great things. Great things being funded.
Yes, some of the new cryptocurrencies and some dodgy stories I'm hearing are talking about how a company renames itself from Long Island Iced Tea to something like Blockchain Iced Tea and the stock goes up 300% in one day. We're seeing some of those, I would say, somewhat troubling stories. Probably inevitable stories. But at the same time, look at the strength of the American economy and the global economy, and I think we're all coming out of a year of plenty, so I think it feels right to start decluttering some.
So, just sharing it out. That's where I'm headed. I was talking to my daughter -- my daughter to whom I dedicated my slam poem on this podcast a month or two ago. But I was talking to my daughter who's now no longer a newborn. Nope, she's 23. She was pointing out an article to me and said, "Dad, read this article!"
The article basically said we should surround ourselves with books. We should surround ourselves with more books than we know that we will ever read. And the older we all get, we can more easily see that we're not going to get to all the things that we want to get. But even at the age of 23, she is surrounding herself with lots of books, because the outcome of doing so is to start to focus the mind.
You start going, "OK, clearly I'm not going to be able to read all of these books around me. For me at the age of 51, let me be choiceful, then. Let me make sure that I'm reading the things that I really want to read." And that's not just true of books. For me it's true of board games. It's true of Netflix streaming shows. Movies. We are awash in content. Talk about abundance. And there's only more Netflix shows, books, video games, and board games coming out next year, and the year after that, and after that.
So I can definitely say I've over-surrounded myself in my house with board games, and I already know I'm going to die before opening all the shrink wrap on all of them. But maybe that's helpful for you when we think about, again, decluttering. Simplifying. The year of declutter.
And here's another thought, not necessarily a resolution, but I was thinking back to a great quote from "Great Quotes, Volume IV," which was an Aug. 17, 2016, podcast I did and the Nell Minow quote. Some of you who were listening back then will remember this. Many of you may never have heard this quote. I love it, and I'm just sharing this one with you right here.
She said, and I quote, "I wrote not one, but two articles for The Huffington Post about my advice to graduates, so you can look that up. But my most important piece of advice," she said, "is never, ever, ever, ever, ever," I'm quoting here, "ever use the word 'busy.' That's one four-letter word that I would never use," said Nell Minow.
"And the reason for that," she goes on, "is that people use that word as an excuse, and it's a genuine insult to whomever you're talking to. It pushes them away, instead of bringing them in. It also makes it impossible for you to think honestly to yourself about what your own priorities and choices are.
"So never," she closed, "never use that as an excuse. Never use that as a brag. It's very popular here in Washington, D.C. Just don't use that word, and you'll become much more in tune with what you're doing, and much more open to hearing from other people."
All right. Well, as I do every year this time of year, I'm going to close with my brief essay, "Why We Invest," but before I do that, a thought or two about the stock market. I'm going to predict ahead of time -- I hope you know where I'm headed with this -- the market goes up next year. And I see a smile from Rick Engdahl, my producer, through the glass, because he knows that that's always the right bet and I'm right two years out of every three, so I'm well ahead of most of the market timers who aren't much better than 50%. So I'm going to say the market goes up next year, and I reserve the right to be wrong.
However, one thing that I will say, and I hope this is helpful, is I'm almost certain the market will not nearly be as good next year as it has been this year, and I think we have to pinch ourselves. If you listen to me reviewing last week the five stocks we put under the tree a year ago -- and they were some of the biggest, best companies that I can think of -- every single one of those five, Amazon, Apple, Activision, Facebook, Netflix, was up more than 50% this year, and those were already megacap companies in many cases. So the chances of anything like that happening again, in 2018, I would say are nearly zero.
It doesn't mean that I'm a bear. It doesn't mean that I think the market's going down. You already heard I think the market's going up next year. But I want to make sure that you're disabusing yourself of the mentality that we're all kind of owed this ongoing prosperity. It will be all the cryptocurrencies that will keep going up. And all of your stocks. Even your biggest ones will go up another 20%-30%. I hope so, but I would guess no chance will those five companies go up 50%-plus in 2018.
So if that's helpful for you to reset your mentality at a time where maybe not enough of us, too many humans look in their rearview mirror and make decisions looking backward, I want you to start looking forward and recognize it's going to be a very different year in 2018, and I'm looking forward to it.
Before I present "Why We Invest," I want to mention next week's podcast to kick off 2018. It's going to be "Campfire Stories, Vol. III." We've done this twice before, about once a year on this podcast. Next week I'm going to be featuring listener and member stories, so if you enjoyed some of the voices you heard last week when I welcomed in my three Foolish analysts, you're going to hear from some of your fellow listeners.
If you have a good story -- if people tell you around the fire, Christmastime, that you're a great storyteller, and you have a great story about an investment, or a business you started that's not too long a story -- I'd love to think of featuring you on next week's "Campfire Stories, Vol. III" show. Drop us an email. RBI@Fool.com.
All right, so to close, "Why We Invest." I first wrote this, I know, seven years ago this month in 2010, December.
Why We Invest
My favorite episode of my favorite miniseries, Band of Brothers, is entitled "Why We Fight." Without wishing to spoil the story for those who haven't yet seen it -- do such people exist? -- I won't give away the answer to the question, but the episode is a beautiful, sad, and gripping piece of Hollywood poetry, and the phrase "why we fight" has since stuck with me. And it's begun to morph into my own phrase -- my brief reflection this month -- why we invest.
Let's peel every layer of the onion away at the start. At the root of the fruit is this simple reality: We work hard in this world to build up savings. That savings we call capital. Our capital represents the sum total of our life's efforts, expressed monetarily above and beyond what we've spent.
When we invest, we're doing something very wonderful and very difficult. We are forfeiting the enjoyment of the use of this capital in the near term. All our instincts and temptations, many of our peers, perhaps even a spouse, urge us directly or subtly by association against this. "Spend it now," reads, or sings, or shouts any one of thousands of messages confronting the typical adult every day. But investors take at least some of their capital and do the exact opposite. We forgo the instant gratification.
That, on its own, is admirable, but we go one further. We investors -- we crazy investors -- forfeit the enjoyable, immediate use of our capital for no certain reward. As stock market investors in particular, we invest willingly knowing that our unspent and unenjoyed capital may actually, at least partly, disappear. If there's a better reason for us calling ourselves Fools, I don't know that the world will ever find it.
In particular, practicing my own unique style of investing -- you've got to know it here on Rule Breaker Investing, the podcast -- as a more aggressive investor seeking to maximize my returns, I flat-out know that I will lose money on many occasions. Throw in the academic studies that say investing in individual stocks isn't worthwhile, because you can't reliably beat the indices, and now you can see why do-it-yourself equity investing is a niche. It's a niche we've been helping to grow at The Motley Fool, but it's a niche.
Here's why we invest -- for our children and grandchildren -- because our parents and grandparents did, and made our lives so much better. Because every dollar we invest helps support the companies and businesses we admire and buy from. Because we love and celebrate ownership and believe this world would be far stronger for more owners, not more renters. Because the academics are wrong. Because with Arthur O'Shaughnessy and his ode, "We are the music makers, and we are the dreamers of dreams," and investing is our instrument, and making dreams come true -- sorry, Disney! -- is a very real Motley Fool end. I see it happen with amazing testimonials, bull market or no, every day on our discussion boards.
Oh, and have I forgotten? I should throw something in here about achieving financial independence, too, so that you and yours can be self-determined -- not income-determined or government-determined -- and a hundred other reasons besides. These are all, in part or in whole, why we invest. Keep at it, dear Fool!
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. David Gardner owns shares of Activision Blizzard, Amazon, Apple, Facebook, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, Apple, Facebook, Netflix, 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 has a disclosure policy.