What a Coffee Shop and Its Visionary Founder Can Teach You About Investing

Though Starbucks(NASDAQ: SBUX) has gone on to become one of the most successful stock picks from the early days of The Motley Fool, the road to its approximately 700% gain was not quite so simple. In fact, it included a humbling appearance on national television as the Gardner brothers were forced to explain to the cast and audience atThe View why Starbucks shares had fallen over 30% since they recommended the stock six weeks prior!

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In this episode of Rule Breaker Investing

A full transcript follows the video.

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This podcast was recorded on Aug. 10, 2016.

"Ad: This podcast is sponsored by Rocket Mortgage by Quicken Loans."

It's the Rule Breaker Investing podcast with Motley Fool co-founder David Gardner.

David Gardner:

And welcome back to Rule Breaker Investing. It's been quite a summer for me. I hope it's been quite a summer in a good way for you. The reason it's been quite a summer for me is because I've traveled a lot, so [in the last six to eight weeks] I've been to Norway, Scotland, and Iceland. And then separately and most recently, I went out to Singapore and to Australia.

I'd never been to the Pacific Rim before. It was a pleasure to see those beautiful countries. To spend about two weeks on the Pacific Rim and, in particular, visit my Fool teams in Singapore and Australia -- a talented group of stock pickers and marketers doing The Motley Fool business both in Singapore and Australia, and that was really fun. We had a great member event in Australia, particularly, at Etihad Stadium in Melbourne with 800+ members. What a lovely evening that was.

So here I am. I'm finally caught up and doing a podcast the week that it's airing. I've been taping ahead a lot, all summer long, but now I'm back to even and really excited to be here, back in the saddle, starting August with you.

I'm going to start this week's podcast with a story, and it's a story of the last time that my brother Tom and I were on the television show The View. Let me tell you about the first time and then the last time. July 2nd of 1998, Tom and I made our first appearance on ABC's The View. Now, this is a daytime talk show primarily focused on the female audience. All of the hosts themselves are female. The staff has changed a little bit over these 18 years since our appearances on The View, but Barbara Walters was on back then. I remember that. Maybe Whoopi Goldberg was as well.

But importantly, for our appearance, it was a new host, and her name was (and still is) Lisa Ling. Lisa's not still on The View, but she's still out there doing the television thing today. But back in 1998, she was new to the show. She was the youngest member of the cast and the idea the producer had was to have Lisa pick a stock. Let's have Lisa invest. Let's have Lisa model good financial behavior for our viewers. Let's have her pick a stock, but since Lisa's not so much of a stock picker herself, why don't we invite the Motley Fools on, and we'll have them pick a stock for Lisa. And let's have a stock that Lisa likes. A company that she would use or admire, maybe as a consumer.

So we got a call at Fool HQ from the producer saying, "Hey, would you guys like to come up and think about doing this? Let's do a pre-interview first," which is often what they do on television. So Tom and I did our pre-interview. We thought about a stock. Came up with our idea. Passed it to Lisa. She said she liked the company, and she liked the product, so that was a good stock. I won't say yet what the stock is.

We went up July 2, 1998. It's a live studio audience. Tom and I came out and started the show. "The Motley Fools are here." Raves from the studio audience, because if you've been to one of those (I have, too), that's your job. You're there to rave about whatever happens on the show. All enthusiasm for the Motley Fools. Lisa's going to pick a stock, and they're here to help her do it. David and Tom Gardner are joining us. We had our jester caps on. We had our stock ready. Had a nice exchange with the hosts.

Then it was time to talk stocks, which we did. We picked the stock. The studio audience seemed to like it. Lisa knew about it ahead of time. She had already been briefed, and so it seemed to go really well. That five or six-minute short appearance on television ended. We walked off the set. The producer said, "Great job, guys. Let's have you back. Let's update the story." So July 2nd of 1998. As I mentioned, that was the day.

Now, over the next six weeks this stock lost 33% of its value. One full third of our stock pick for Lisa was gone when it came time to think about having us back on the show. And they were OK with that. We were OK with that, too. I like to talk about my losers, a lot, both on this podcast and on our website. I always have a lot of losers, so we're OK with talking about losers. They were, too. "Guys, let's have you back, and we'll just talk about it and update the story." This we did exactly six weeks later, August 16th of 1998.

Again, a live studio audience. A lot of enthusiasm. Here come the guys. They're back to talk about Lisa's stock. Lisa was smiling. Looked excited. She knew where we were headed with this. We [began] to look a little crestfallen as we started talking about what had happened [during] the last six weeks. In fact, I think it kind of went something like this.

Hey, everybody. The Motley Fools are back. Yay! Cheers! Cheers! And they've got an update on the stock for Lisa. More cheers. And that stock is down! And at that point, one of our few friends who actually watches The View on a regular basis told us, "You know, guys, I think you are the only ones I've ever seen actually booed on the show The View." So, yes, we did get a kind of good-natured, loud boo from the audience as we revealed that we had lost 33% of Lisa's fantasy money.

We talked a little bit on the show (only like another three or four minutes) about why and what had happened. It was the summer of the "Asian Contagion" for anybody who remembers that, and if you don't, just look it up on Wikipedia, and it will update you on the roiling events that rocked the summer of 1998 and our global markets. But this company had also made a serious misstep that summer, as well.

So here we are. Let's fast forward to (well, why not) right now, the second week of August. And I'm going to tell you what the stock was and reflect briefly on its performance. So the stock we picked for Lisa that day (July 2, 1998) was the ticker symbol SBUX. Now, I know some of us are dyed-in-the-wool investors. You right away know that's Starbucks. Some others may not, but that is the ticker symbol for Starbucks. Starbucks was our pick for Lisa. Starbucks did have a really bad earnings report, and summer, and lost one-third of its value.

However, since we're now looking backwards from this week in 2016, I can tell you that as of August 2 (when I had these numbers most recently updated), Starbucks, from the day that we first picked it (this includes the 33% drop) is up 701.7%. A pretty awesome stock. Up 8x in value. The S&P 500, over the same period (again, 18 years later), is up 88% from there. So Starbucks up 702% and the S&P up 88%, so it's outperformed by hundreds of percentage points. Lisa, if you're listening, I hope you held.

We never did get invited back on the show, so we've still never updated the story of The View. I'm pretty sure the producers working on the show today probably weren't the ones back then. I doubt there's any institutional memory at ABC's The View. If you are a booker for The View listening every week to Rule Breaker Investing, Tom and I would love to come back. I think it would be really fun to update the story, because I think the lesson of not worrying about short-term problems when you have great companies, great leaders, great consumer brands (everything great about Starbucks) has proved itself over the last 18 years. It is up more than 8x in value.

These days, Starbucks is worth about $80 billion as a company. It's just been a remarkable success story. And all the credit does not go to any stock pickers but really to Howard Schultz, the founder of Starbucks. And Howard Schultz and Starbucks is my focus of this week's show. I've learned a few things from Howard and from Starbucks that I hope can help make you a better investor.

I've got a few more stories to tell, and some insights and that's what I want to do this week. I've got Starbucks on the brain and I [wondered if there could be] any better way to introduce this topic than reflecting on our two appearances on The View, still awaiting that third to really close the loop on this story. But before I continue, let me pay the piper.

"Ad: This podcast is sponsored by Rocket Mortgage by Quicken Loans."

So let me talk, now, about when I first encountered Starbucks. I have to admit, since it's summer, I haven't done deep fact-checking. This is shooting from the hip a little, but I'm going to say that the company came public around 1990. It might have been 1989. It might have been 1991. Right around 1990. I remember it back then in 1990 (I was 24 years of age). I remember Starbucks coming public and the big question -- the dark cloud hanging over this stock -- was a belief among many that Starbucks was a fad.

The thinking went like this. Coffee houses in America -- a big hit new thing -- lots of Starbucks. Some Starbucks opening up across the street from other Starbucks. They seemed all the rage, but some cynics would ask where the history was of successful coffee houses in the United States of America. This is temporary. This is not something that is really going to have legs as a public company. No doubt there was a fair amount of short interest and a lot of skepticism about Starbucks back when it came public.

Well, certainly by the time we picked the stock -- we opened online with The Motley Fool in 1994 with AOL. Our website in 1995-1996. We picked Starbucks in 1997 or 1998 for our online portfolio we were running, at the time, for Fool.com. And by then it was already evident that Starbucks was not a fad, so we were not investing in the face of that prevalent belief at the time.

But there have always been questions about how this company can charge three dollars for a cup of coffee that only should cost a dollar most of the time -- that kind of question about Starbucks and really about any premium brand. Why would you pay up for something when you could get it for less somewhere else has always been, and still is a question, about Starbucks.

But in particular, I remember first picking that stock. It was longtime advisor Jeff Fischer -- if you're a Motley Fool fan, you know Jeff Fischer's work in Motley Fool Pro and Motley Fool Options-- and Jeff and I were in tandem helping manage this portfolio in 1998, or so. And I remember Jeff looking across the desk to me. We had computers right next to each other in those days at Fool HQ.

He said, "Dave, Starbucks!" It was one of those stock picks that seemed so obvious that it hadn't even occurred to us that we might buy shares in it. And I'm darn glad we did, at Jeff's behest, because it's been an absolutely tremendous performer ever since then, despite some rocky times. But credit goes, initially, to Jeff Fischer for saying we should bring Starbucks into our Fool portfolio, our Rule Breaker portfolio at the time.

But now I want to go to a little bit more on Howard Schultz, the founder of Starbucks. And the reason I want to talk a little about Howard is because I've had personal experiences with him, all positive. I've learned a few lessons from him, and I just want to explain how that happened to be.

In the first place, Howard had a venture capital firm (still does) called Maveron. Maveron was Howard's money and then Howard invited a lot of his personal friends and his extensive business network. That funded the first fund for Maveron, which is today a successful venture capital firm, and some of that money went into The Motley Fool back in the late 1990s.

So we had an opportunity to meet with Howard, both in Seattle and back in Alexandria, Virginia where Fool HQ is based. We went to some conferences, etc. So we had an opportunity to listen and learn from what I believe to be one of the 20 great living entrepreneurs of our time. And the first lesson I want to share with you -- I've got a couple from Howard -- has nothing to do with Starbucks, really. It has to do with IPOs and IPO investing. Here's how it started.

At the time, we were all considering the possibility that The Motley Fool might, one day, go public. In fact Maveron, at the time, would have loved to see us go public, because valuations were inflated. It would have been a great time in the late 1990s to go public, but we chose not to, and we're all glad today at The Motley Fool that we did make that choice to stay private all the way through. But we were talking about the possibility of being public, and Howard shared his philosophy with us about how to think about going public, because he had obviously done it very successfully himself about 10 years before.

He said, "Guys, here's how it works when you go public. You need to know, with virtual certainty, your next four quarters of operational performance. You need to know ahead of time that you've got it nailed."

Howard [went on to say this], and he might still agree with this today or he might think differently. I haven't updated this story. I haven't seen Howard in some years, but this spoke to me very eloquently at the time, and I'm going to give you an example of how I put this concept into practice in a minute.

Howard said, "It's so critical when you come public. It is your one shining moment in front of Wall Street, and the world, and you darn well better not screw that up." So companies that go public, and then a quarter or two later all of a sudden underperform the numbers that they'd been sharing with the world, was the kiss of death. That meant in Howard's opinion that Wall Street will walk away from you. Potentially, forever, you are toast. You made a horrible decision if you brought your company public, and you didn't already know you had your numbers sewn up.

As we all know, companies typically underpromise and like to overdeliver on numbers. It's not really a cynical thing. I think it's pretty much what investors in the world want to see. We all want pleasant surprises in life, so smart managers of companies have consistently done that over time, and certainly Howard is one of those people. So Howard would say, "Let's make sure we have our numbers nailed and let's be conservative with our guidance and then let's beat it time and time again."

Now how does this actually inform our investing? Let me give an example of what I did -- a rare thing in the Rule Breakers service -- in 2005. In 2005, we had picked Great Wolf Resorts, which some of you may know as a theme park, except it's all about water. It's water rides. You stay at the hotel and then in the morning, everybody puts on their trunks and has fun with all the slides and chutes. I think there was one in Williamsburg, Virginia, not that far away from us at the Fool at the time. Great Wolf Resorts continues to operate today. It wasn't a great stock, which is where I'm going with this story.

The very talented Rick Munarriz is our internal expert about all kinds of theme parks, rides, and amusements, in general, at The Motley Fool. A wonderful long-term follower of that industry. And Rick liked Great Wolf Resorts at the time. So on the Rule Breakers team, I get team input from people like Rick. I always make the final calls for any stock pick that's made. All the good ones and all the bad ones I'm on the hook for, for Motley Fool Rule Breakers. So this bad investment is on me, not Rick. I agreed with Rick at the time and picked that in April of 2005.

Great Wolf had come public very recently. Then in the intervening month, or two (I believe it was its first quarter out as a public company) all of a sudden the numbers come out and they've disappointed all expectations. This is about seven years after I heard Howard explain his philosophy about taking a company public, and how he had done it with Starbucks, and if we ever did it with The Motley Fool, how we should do it, too.

And I thought about what had just happened with Great Wolf, and I decided, then and there, with Rick's agreement, that we were going to sell that stock out of the Rule Breakers service right away, heavily influenced by the notion that if you're going to go public, it's a bond, it's a trust that you have with new investors and Wall Street. You darn well better live up to your numbers.

Sure enough, Great Wolf did not, and I guess it's kind of a happy or sad ending, depending on your viewpoint, here, because that was an excellent sell that we made just three months after we picked the stock. Very rare for me, as an investor, to do that in Stock Advisor or Rule Breakers. We sold Great Wolf at a loss. We picked the stock around $20. It lost 35% of its value over those three months, so we sold it somewhere at $12 to $14 a share. Seven years after that, Great Wolf was taken private at a price of $5 a share.

So one of my best sells. One of our best sells we've ever made in Rule Breakers. Not something to celebrate, though, because we picked the stock and it lost 35% for us and our members in just three months' time. But thinking back to Howard's wise guidance and directly applying that, in that situation, helped us make better investing decisions. And I know you know this if you're a regular listener of this podcast. That's what I'm here to help you do -- make better investing decisions. That's why The Motley Fool exists. Our purpose is to help the world invest better.

I hope you'll remember that Howard story, and you'll apply that to your own investing. I have no problem investing in IPOs, in companies that are newly public. Some of our best stock picks have been companies that have done that. But I very carefully watch those numbers those first few quarters. Because what's the company that nails the numbers? That's usually a company that was locked down. Probably well-managed. Was ready for it.

What about companies that don't? That suggests to me they're disorganized. Not very well-managed. Maybe it was a desperation IPO or a very opportunistic IPO but not an initial public offering that would have been well-timed if companies are underperforming their numbers just a few quarters in. So something always to think about, something I've always thought about ever since learning that from Howard about 20 years ago.

Another thing I learned from Howard Schultz -- he had a great line. He said, "At the end of the day, people don't want to know you're the best at what you do. At the end of the day, they want to know that you care." I think that's a really important statement for any entrepreneur. Really for-profit or not-for-profit, I think most of us as customers of any organization would certainly value knowing that we're working with the very best. And for most of us, the feeling that the person or entity cares about us and our family (or whoever you're taking to that business) counts for even more than that. That's the real humanity of it.

[Today some people still think Starbucks is evil.] I've never thought Starbucks is evil. I think it's one of the great companies of our time. Certainly [with] any successful company (Apple, Starbucks, etc.) there will always be people who think it's not good. It's wrong. That's definitely not me with Starbucks. I saw very sincerely in Howard how he thought about his business, and how he thought as a businessman, and I've only seen that proven out eloquently over the last couple of decades watching and holding Starbucks stock. So at the end of the day, people want to know that you care.

And now I want to shift from Howard back to Starbucks for just a little bit more thinking. Just a few concluding thoughts this week. More storytelling and thinking than any real organized presentation for you.

I want to point out that Starbucks is one of those classic examples for us, as investors. Investors, by definition, act for the long term. One of those classic examples of a stock that you should just have kept buying and adding to. And I don't mean to use the past tense, because I think you should own it today and you should just keep buying more over time.

Now not every business or stock works out that way. But when you have a visionary CEO, and you have a really basic, universal product like coffee ... and you have an entity that is capable of delivering on a promise every day ... then whether or not you like Starbucks, you have to admit they're very professional. They are very consistent. And for some of us, they're excellent. They are, in Howard Schultz's words, that third place. If your first place is your home and your second is your workplace, Starbucks for a lot of people is that third place where they can meet a friend.

And delivering on that promise (as long as Howard has been doing it with, again, that universal product and that great consumer brand) are the kinds of companies that we love as investors. That we should be looking for -- not just in this industry but in any industry. For a lot of us, I think one of the hardest things to do is to add to a stock that's already gone up.

But I think we need to disabuse ourselves of that. We need to disavow that old bias, and we need to recognize that usually in life (and I've certainly said this before in the weeks and months of Rule Breaker Investing past) the winners typically keep on winning in this world, and whether we're talking about Howard himself, or Starbucks, it's a very clear example and by no means a unique example.

Many of the companies (from Disneyto a company like Priceline, which has been such a wonderful performer for us in Motley Fool Stock Advisor) are really well-managed corporations by good people who just get the job done, time and time again. And again, this is a minority of companies on the public markets, but these are all the ones you should be owning and adding to.

I'm happy to say that we started Motley Fool Stock Advisor in 2002, and it was time to add Starbucks to that portfolio. Then we added it, again, in 2011, and these are just winning positions. So concluding thought number one of three is keep investing in these types of companies, and I'm speaking specifically about Starbucks even right now, here today. Even at an $80 billion market cap.

Concluding thought number two is there were some very painful times to own Starbucks over the last two decades. I already talked about The View, a really bad six weeks that seemed embarrassing for us at the time in the media. But since then, Starbucks has had some horrendous underperformance at different points in the last 20 years, and often it was Howard overreaching. He's a very ambitious person.

Howard, at one point, decided that Starbucks.com could be a major hub. Starbucks has always tried to make music a key part of the experience. You see music you're hearing played in the store [for sale]. Music cards have often been sold in lots of different Starbucks stores. But he's tried to make Starbucks count for a lot more than just a coffee shop.

Sometimes he's been a little bit political. He's encouraged baristas to open up political conversations with people before. Just part of the social aspect of Starbucks. Howard's also really walked the walk in some surprising ways. I think a lot of us know he's developed a program to help pay for college for some of the baristas at Starbucks, which is a remarkable thing.

I was just reading at the end of this July a press release talking about a new Starbucks opening in Kuala Lumpur, Malaysia. What's special about that one? Well, it's a collaborative effort with the Society of Interpreters for the Deaf. It opens its store in Malaysia with 10 deaf partners and three hearing partners (partners being how they refer to their employees). That's pretty remarkable.

So those kinds of experiences. Panera has done some special things like that. These are pretty remarkable efforts on the part of the private sector to help change the world in almost a public sector way. In fact, sometimes some of my favorite companies we say have the brains of a for-profit and the heart of a not-for-profit.

I know some people really hate Starbucks (and I'm sorry if that's you), but I think Starbucks has really exemplified that more so than most public companies in the United States or the world today, frankly. That's concluding thought number two, that Howard has made some major missteps and you had to sit there and watch the stock get cut in half more than once, over these last couple of decades, to get that 8-bagger that's so far ahead of the market.

And concluding thought number three (and maybe I'm riffing a little bit off of reflections on last week's podcast, "I Own the Water", with Donald Trump), is in a world that's so often (in my experience and in my 50 years) looked to our political leaders for so-called leadership, I will just say, again, probably the Fool in me here (the contrarian), has so often found the greatest leaders in my life from the private sector.

Howard Schultz is a great example of that. Hundreds of communities, like Ferguson, Missouri, need economic development. Their citizens need job training. Their neighborhoods need stability and hope. And what was Starbucks doing, recently, but opening up a new Starbucks in Ferguson. "Already a rallying point for more investment," said Dan Bish, Ferguson's community development coordinator. Bish said, "Starbucks was a huge get for us," (I'm quoting there), "helping spur investment along the entire corridor. We're saying 'they're willing to invest in us, so you should invest in us, too.'"

And so I'm just concluding with a thought this week. This is borrowed from one of our great online contributors, whose screen name in the Motley Fool community is CromulentBrad. In a post earlier this year on Starbucks, CromulentBrad said, and I'm quoting: "This is how you ignite economic development in an area desperately in need of it. Progress comes from leaders like Howard Schultz -- people willing to put their money and reputation where their mouth is," and this is a little bit of cynicism on the part of my friend Brad, "not the yammering hammerheads currently clogging our airwaves promising change."

So whatever you might make of that viewpoint, I'll say this. So many of the great leaders -- from Steve Jobs to Howard Schultz to Reed Hastings at Netflix to Bob Iger at Disney and of course, to Warren Buffett at Berkshire Hathaway-- are people who are making real changes in our world, not through things like foreign policy or economic policy but through real actions creating jobs, and I think, whether in good or bad neighborhoods, creating success for customers who willingly buy from them. That sounds like leadership for me, and I will always vote for that.

Thanks for listening to this special Starbucks edition of the Rule Breaker Investing podcast. From The View in 1998 to the Great Wolf IPO in 2005, right through to going forward, I hope you've enjoyed a couple of lessons that I've learned from Howard and Starbucks over the years.

And in next week's episode, I'm going to go back to the "quote machine", so it will be Great Quotes, Vol. 4. Lines I want to share with you that I think are great for investors, businesspeople, and citizens of the world. 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.

David Gardnerfree for 30 daysconsidering a diverse range of insightsdisclosure policy