Ladies and gentlemen, welcome to the Business Brew.
I am your host, Bill Brewster. As always, thank you for
listening. This episode features David
Gardner of The Motley Fool. David has a new book out.
It's called Rule Breaker Investing.
This is David's. This is the culmination of all
of his work. OK, it's called rule breaker
investing. How to pick the best stocks of
the future and build lasting wealth.
If you have followed me for a little while, you will know that
David pushed my brain to think in a different way.
When I first read him, I thought this guy thinks so, so
differently than what I think is correct that I have to
understand why he thinks the way he does.
And I have. I've gotten myself to understand
it and I see the wisdom in it. So I hope that you all enjoy
this episode. I enjoyed it.
I refer you to our first episode that we did.
I'll I'll link that in the show notes.
But that was a heck of an interview.
I was worried that this one would not be as good, but I
think it came out pretty pretty nicely.
Pretty, pretty, pretty good. Anyway, nothing in the show is
financial advice. Everything in this program is
for entertainment purposes only. Please consult your financial
advisor before making investment decisions and do your own due
diligence. This episode is sponsored by
Fiscal dot AI. You should listen to my recent
podcast with Braden Dennis in order to really understand what
fiscal AI is and where they're going.
He lays out how they're looking to eventually compete with
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As far as the the standard script goes, I here we go.
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dot AI forward slash brew. All right, ladies and gentlemen,
thrilled to be joined by the one and only David Gardner.
David, how you been? I've been really well, Bill.
It's been a great few years since we last talked.
The market's been volatile, but mostly up and personally and
professionally, it's been rewarding and fulfilling.
But that's what I'd hope for I guess any four year period or
so. So I'm excited to be here with
you today. I had so much fun talking with
you before. I'm looking forward to talking
about Rule Breaker investing well.
I thank you for coming back on. I have a fair amount of anxiety
about this conversation, in part because I really, you know, am
like impressed by you. Not to be a fanboy, but two, I
was listening to our first conversation.
I was like, I don't know how I'm going to do a better interview
than that. And, you know, it was kind of
funny. It was at the end of 2021.
You said in it, you said, look, if 2022 is a down year, that's
just kind of how it goes. 2022 was indeed a down year.
Ouch. At A at a point it looked as
though some of these stocks had no chance of coming back and
then they've come roaring back. So I mean, I, your new book lays
out the mentality of investing for the long term.
And I, I think you foreshadowed the mentality pretty well in our
first discussion, But how would you say the last three years
have have solidified previous thoughts or like, how would you,
you know, 2021 we were talking about look, it, it's, it may be
frothy, we may have a correction.
The correction seemed deeper than I thought.
But do you say that these stocks have bounced back for the most
part? They have and you know, I, I do
believe that that is what you should expect as an investor, as
somebody live in the United States of America today in 2025.
Now I think that you should expect continuously over the
course of your life that the market will one year and three
drop. And that particular year Bill, I
was cut in half. My Portfolio was down 50%.
Like that was a brutal, that wasn't just a, a down year, that
was a brutal year. And I am happy to say yes, all
time highs again, I never expect things to do anything other than
the writ large probabilities that we talked about that two
years and three the market should go up and over the course
of time 910% annualized. I do count on those things that
seems really important to to be able to consider foundational or
bedrock assumptions that you can make.
Therefore, when we do have a horrendous year, which I was not
trying to forecast at the end of 2021, I had absolutely no idea.
And it just like, I don't know what will happen tomorrow or
next year, but but I'm going to be invested through all of it.
And I've certainly been wildly rewarded for for simply being
continuously invested my whole life.
And I'm 59 now. I started 18.
So I hope I have 41 more years to invest that that will hit a
Big Magic round Number for me. Yeah, that would be nice if I
get there. But you know, I, I, how's, how
have things been with you? They've been pretty good.
You know, I, I, one of the things that we had talked about
in that first interview was I, I've sort of embraced
diversification a little bit more.
I, I was, I guess a younger me before I had kids and before I
had like real responsibility. I used to want to, you know, I,
I think I was a little bit too much gas and I've let off the
gas a little bit and I'd, I'm, you know, it, it's been a little
bit less stress. So I, you know, I don't know, do
I have to work on my returns? I I guess maybe, but I think I
need to work on owning the businesses and letting them
generate the returns and whenever they happen they
happen. Yeah, there's a great line
somewhere in my book. Most of the great lines in my
book are from other people. And one of them was from the mom
of one of our employees who said to her son Mark at an early age,
Mark, there are three ways to make money in this world.
The 1st is with your brain and the second is with your brown,
and the third is with your money.
Which one are you interested in? And Mark said, could you tell me
more about that third one, making money with your money?
And that really is literally what happens if you if you
invest and it is by far the easiest way to make money, at
least for me. I will say my psychology is
willing to lose. I'm willing to be cut in half
just months after I said, I don't know what's going to
happen next year, Bill. And and so I I think that that's
something that's probably disconnected in me.
And yet that's for good. And so I do try to make money
with my brain. Very little of the course of my
life with my brown wouldn't have made much.
Yeah, well, you and me both. With my money though, that that
is a that's a neat trick and it's not a, it's not a magic
trick. It feels like magic, especially
as you let numbers compound over the course of your life.
But it it really is very logical and it's a lot more stress free
as long as you don't sweat the downside.
How, how did you get, you know, you talk about in the book, what
one of the things I like about in the book is, is you do a good
job at framing how personalized all this can be, right?
And and you talk about selling down to your sleep number.
And you know, how did you personally get so comfortable
allowing A portfolio to be as concentrated as you have allowed
it to be? And has that shifted as you you
are maybe closer to the years of not earning as much income as
you were when you started out? Yeah, I, I think that I am, I
think I've been comfortable allowing My Portfolio to be
outsized in a few positions relatively because the only way
those positions ever got there is because they earned it.
And so when you allow a company like Amazon or NVIDIA to blow up
in your portfolio in the best sense of the term, you are as
the stock goes up 10 times in value or 100 times or my God
Bill, 1000 times in value, you really get to know it pretty
well. And also when something gets to
be much bigger as those companies among some other rule
Breakers to have done, they actually become safer and
stronger. They do become more disruptible
potentially. That's one of the brilliant
insights that Clayton Christensen offered the world
with disruptive innovation, which is that bigger companies
actually become easier to compete with because sort of
like the Roman Empire in its last 100 years, it just can't
guard everything. And it just, it's slower moving,
etcetera. And the employees aren't as
motivated and there's not as much incentive.
And so but I'm happy to say for just the best companies of our
time, that has not been true. Alphabet does not strike me as
this flabby thing waiting to be taken down by gnats and
mosquitoes and. Well, haven't you heard that
it's dead because of AI? I have heard that and you know,
I will say that it's own AI has hurt our business a little bit
at The Motley Fool because when people searched for things in
the past, they would get a link to fool.com to define that term
or talk more about that company. And now Gemini just captures it
right on the Google screen and says, oh, we think you're
probably referring to The Motley Fool.
And here's the definition of market capitalization.
So yeah, everything is an ecosystem constantly changing,
which is always worth remembering.
But I have definitely been rewarded for allowing to win in
My Portfolio. And that does mean that I've
been in balance. But also I take pains in the
book to talk about Sleep Number, which we can talk more about.
Or to point out that even though I would say a majority of my
wealth is concentrated in my top five positions, I've got 50 ish
others. And you know, some of those
will, will be awesome over time and some of my big dogs will
will decline or lose a step. And so everything is changing
all the time. And most of the time stuff is
going up. If we're doing capitalism right
and if you and I are making good calls on what we're investing
in, those things should be sort of rising over the course of
time. And I'm OK allowing certain bars
on my histograph of My Portfolio holdings, certain bars to be
bigger, taller bars because those companies went out
Netflix, Tesla and earned that in the public markets.
And I loved what they did at the start.
And I've gotten to be a fan of theirs as consumer and investor.
And so I just feel more comfortable.
If you told me that I was highly over invested in a micro cap or
in something in a genomics company that was new age that I
loved but I didn't fully know it, I wouldn't feel as
comfortable having as much in that as as I do in Netflix. 11
interest Well, there's a ton of interesting things in the book,
but one of the interesting things that you had had alluded
to is or said not alluded to. You said I, I believe that you
said when I have over allocated to an initial position, it is
almost never been like a great idea.
You want to talk a little bit about that and some of the the
rule prescription that you have around initial positions and how
you came up with that? Yeah, I think that's that's
really important. I mean, so much of what I'm
writing about in the book is what I've learned, and I'm not
intending it to be a direct lesson for anybody reading that
page. It's sort of pick and choose,
choose your own adventure. We all have free agency, free
will. We're each unique creatures.
We try to get to know ourselves over the course of our lives.
Just figuring out who you are is enough for many of us.
So I'm never trying to impose what I am or the things that I
do on anybody reading. But overall, I guess actually
let me let me retake that bill if I could.
All right. We're, we're, we're, we're going
to come back into the conversation here.
So the question was the the book talks about a 5% initial
allocation and you had mentioned that whenever you come in
historically it seems and whenever you've over.
Allocated to a new initial position, that has not been a
great idea. So how'd you come up with that
and you know, you want to talk about that a little bit?
Thank you, Bill. Yeah, I would say that for me as
an investor, typically whenever I have initially put in an
exciting amount and at different stages of our lives, that amount
changes, right. Probably it augments over the
course of time. But whenever it was an exciting
amount for me generally that hasn't worked out for me as an
investor. Most recently, I could just
think about some of the light non public market investing that
I do, a little bit of Angel investing, a little bit of VC.
I'm like I think this could go to the moon.
Therefore, if I put in this slightly larger or maybe even
larger than that amount, this is going to be amazing.
Yeah, I'm going to be a king. It pretty much never has been.
And now that it's happened several times, I, I'm now clear
that I shouldn't do that. And I in fact, I was saying to a
friend recently, you know, maybe I should just give up venture
capital investing. I mean, I basically am like a VC
investor but with public market companies.
But whenever I try to go to the private market, I just haven't
done that. Great.
And that friend of mine said, well, David, cut yourself a
little slack here because I think you're reflecting on a few
non public investments you've made.
And that's not a big sample size.
Like you bought hundreds, recommended hundreds of stocks
over time. And you're cutting yourself
slack there because you're losing a lot there too.
And it's working out really well for you.
And you're not saying I can't do this, I shouldn't do this.
So I think, Bill, my answer is that if these words are helpful,
then dear listener, dear viewer, take them to heart.
But I'm not trying to say my own experience will be yours.
We're all different. And I guess that all brought me
back to what I would say is the 5th habit of the rule Breaker
investor, which is Max 5% allocation.
And I, I abide by that and I recommend that to all.
We're all different. But that just means that I never
enter a position at any point that is more than 5% of my net
worth or overall portfolio and you?
Know what did you say? If If it works, all you need is
a little, and if it doesn't work all, you'll be glad that all you
had was a little. Right, that's right.
And that's a great line from Tom Angle, one of the great Motley
Fool customers slash volunteers slash contractors of all time.
And that is Tom's great line, which we have used many times
around the Fool. And I've, I've even seen in
third party books quoting Tom Angle.
It's a great line if, if it really works out, a little is
all you need. And if it doesn't, a little is
all you wanted. And, and so, yeah, but that,
that, that takes me back to like how I structured the book
because while it's natural for people to want to hear what's
the next stock? What's the next Amazon, what's
the next NVIDIA? What are the traits that lead
the to those stocks? I very intentionally made the
first third of the book the habits that you and I need to
have, the mindset that we need to have as a rule breaker
investor because we can give you great stocks or bad stocks, but
we can give you great stocks, but if you don't behave well
with them, then it wasn't great advice from us.
If you were to sell something because it dropped 20% or you
have some mechanical rule around trading in and out of things,
then you're not going to enjoy the great benefits of Intuitive
Surgical, which has been an absolute monster stock over the
last 20 years. And we can pound our chests and
say how awesome we are that we at the Molly full recommended
Intuitive Surgical at a much, much lower cost basis 20 years
ago. But if you didn't participate
with us, then that's not worth a lot to use.
So we need to, we definitely want people as investors.
We want them to behave in the best way.
And for me one of those best habits is Max 5% allocation.
So a good segue there. Why don't you talk a little bit
because look, if somebody is looking for the next great rule
breaker, why don't we talk about Starbucks in 1990?
What 8? When you got invited on the
show. Or was it 99 whenever it was 90?
8. Right.
I mean, this is how you open up the book and it's a great
illustration of the mindset required to, you know, realize
the benefits. So why don't, why don't you tell
that story? That story had me chuckling when
I read. It I'd be happy to Bill, let me
also call you out because an early version of the book,
specifically the 1st 50 pages I sent to 18 people who I really
esteem, whose opinion I wanted you were.
One of that makes me thank you very much.
That's a high compliment. You were one of them and I
really appreciate your comments back.
And those are my 17 other beta readers.
It was basically a beta test of the 1st 50 pages.
And so you got to read that more than a year ago now and the book
is finally coming out in September of 2025.
And that story only gets better with time.
And you know, there's a slightly longer form version of it in in
the book. I did make it the introduction.
That's really where we lead off the and and so in so many words,
we were going to be on a television show.
It's the view on ABC, which is still a television show, which
is not true of every daytime show on ABC or any other
network. Not a small one, right?
You get your big moment. Introducing David Gardner, he's
going to tell us the the stock to own.
That's right. And they had a new host, Lisa
Ling on on the show younger, so the youngest member of the crew.
So they had me and my brother Tom on to pick a stock for Lisa
and we we had a pre interview with her.
We're like, we should pick something that Lisa knows,
something she likes, etcetera. And and so we did.
We decided, OK, this is going to be the stock.
So we got to the show and studio audience had fun, like putting
it out there, here's the stock, here's why we like the stock,
and Lisa likes this company too. So let's make it, let's make it
that stock. And then they had us back on six
weeks later, 'cause they're like, let's update the story
just six weeks later. Not exactly out of time.
Yeah. Yeah.
Remarkably, it only took Starbucks six weeks to lose 1/3
of its value. So I these dates are seared in
my mind. July 2nd, 1998 was our first
appearance on The View. August 16th, 1998 was our second
and historically to date final appearance on The View where we
basically said we're so sorry. You know, we still love the
company. But Lisa, here's the thing.
Howard Schultz, the CEO of the company, basically said while
they had good earnings that they just reported, he was favoring
the lower side of analysts, future projections.
And you know, great companies and CE OS tend to over deliver
as they under promise, under promise over deliver.
That's what we think Howard's doing.
But unfortunately the stock dropped like 12% that day and
then it just kept going down. And here we are in 1998 and
sorry for the stock pick six weeks ago, we're down 33%.
And you know, again, for studio audience members who are not
probably stock market investors for the most part, that probably
sounded like a lot. And it, it really is a lot of
people live in fear of losing 10% or 20%.
And we have people who will join a motley full service and call
after our first bad stock pick and they're like, should I,
should I sell? I don't know what to do now.
I'm losing. Should I cancel your service?
And sometimes they do, sadly. So, you know, we are hardwired
not to want to lose as humans. So there we were doing it in a
in a grand gesture on ABC. And yeah, I guess the punchline
and the reason I put it at the front of the book is because
Starbucks is actually up 34 times in value from where we
first picked it before the 33% drop.
You would have gotten an even better return if you bought on
that second appearance and and you know, and that's way up over
the market over the same period of time.
And Starbucks is a company that has absolutely mushroomed in
size and for really good reasons.
We could talk more about Starbucks, but ultimately this
is not a story about ABC, Lisa Ling or Starbucks.
It's a story about investing and what it really looks like, what
it really feels like in a world where that word is tossed around
a lot. Bill and I'll all business brew
fellow listeners. The word is tossed around a lot,
but it's being misused a lot because really what you're
getting most of the time is trading and information that is
all about the short term. And therefore of interest on
CNBC, Bloomberg, etcetera, Wall Street Journal calling out all
the grand financial media companies of our time doing good
work. I appreciate what they're doing,
but they're very, very short term focused.
And so the notion that you would actually hold Starbucks 27 years
later comes very naturally to me.
That's basically what we've done.
And not just Starbucks, but it's so contrary, ironically, I think
from the vast majority of activity today on the markets
and the coverage of the markets themselves.
So I, I love the leading off Rule Breaker investing with our
Ling's money thing. That was the branded feature
segment story. Because it's in fact, the reason
I even decided to do that, Bill, just before sending you the 1st
50 pages of the book was that I was speaking to a women's
investment club here in Old Town Alexandria, VA.
I was like, what's a fun story just to tell in front of the
club? And I was like, here it is.
And the best way to tell that story is not to say the company
name in the book. I don't say the company name
until we finish the story because you're like, what was
the stock? Yeah, Lisa.
And so I told it to the women's club, and they loved it.
And I was like, oh, my gosh, That is the opening of the book
right there. They just helped me realize that
this is such, such an investing story.
Yeah, well, it's, I mean, one thing that I really appreciate
about the book is, you know, look, if you see the traditional
Motley Fool advertising and I I totally understand why it is
this way, but it's like we pick this stock at pennies or
whatever. You spend a lot of the book
talking about the frequency of losses and how you have to lose
to win. And I feel like that is a real
service to the readers because you, you do not shy away from
the fact that it's a slugging game and that you know, you are
going to have the losses. An interesting thing that I'd,
I'd should have known, I guess, but I did not realize is you do
not average down. You like to make your stocks get
out of their own mess. Do you want to talk a little bit
about that? And then like, where did that,
where did that come from? I, I assume it's somewhat
related to why you don't oversize from 5% like.
But yeah, it's a it's a good way to keep yourself out of
disaster. Yeah, I think, you know, what's
funny is that I, I think my actual stock selection, the
choices that I make strike people as radical or higher risk
and rule breakery. But the underlying mindset and a
lot of the constructs which obviously emerge through the
book are very conservative by nature.
So you have this sort of I'm in a weird style box because I'm
willing to to overpay constantly for companies that, you know,
look like they're totally overvalued.
And yet when we're actually buying and managing A portfolio,
we're doing things like, hey, no more than 5% in any initial
position. I want to make it clear they can
go above 5% after that. I think that's already clear to
anybody who knows my work, reads the book or knows bills stuff
that you know, we're not talking about a cut off where you
rebalance anytime you hit 5%. Absolutely not.
And I, I guess, you know, another of my conservative
approaches or assumptions is that I don't want to throw good
money after bad. You know, dandled on my daddy's
knee. As a little investor, I was
raised to think, let's not throw good money after bad.
And really what we mean by that, of course, is don't add to your
losers. Yeah, which is so contrary,
right? It's it's the old.
Well, if you liked it, you know, higher, you should love it lower
but. Yeah.
Like what? I guess what, what led you to
the idea of, you know, I'm, I'm just going to make them earn
their way out of it. Yeah.
So I think that one of the benefits of starting The Motley
Fool in 1993 and then just growing a community over 30
years is you get to watch people and you meet them at book
signings and some of them visit your office and you have
employees and all the rest. And so you just sort of
experience how a lot of people invest, talk about their money,
trade in many cases too. And so I started to realize
especially right after 2001 when the market absolutely cratered,
especially for Internet companies, Amazon went from 95
down to seven in 18 months and our cost was 3.
So and before it went to 95. And then as it went all the way
back down to seven, I what I realized is the only way to
really lose money, like really lose money, become poor using
the stock market would be to have this strong conviction that
something that kind of actually sucks, but you don't get that is
going to come back is clearly undervalued.
And having seen people who would tell me their stories at, you
know, Motley Fool gatherings, talk about how they lost it all
as a younger investor, It's, it's that there's there's really
no other way to lose a ton of money on the markets.
I mean, I guess you could have a broadly diversified portfolio,
all of which went down. That would be one way.
But really, the vast majority of people who would ever go poor,
which is so sad using the stock market would be that they keep
adding to losers and the company ends up being, you know, Peloton
and. Which arguably is turning a
corner now, interestingly. Enough.
I do not mean to make it sound as if Peloton is toast.
I I guess I could have gone with some I mean.
No, no, I understand what you're saying.
I mean, yeah, I see what you're saying.
I mean from 2021 till now. Totally, Yeah, yeah, So right.
Like I, I, I could have gone a generation ago and and said like
buy.com, which was, you know, competing with Amazon back in
the day isn't around anymore. So I mean, that really is the
case that as long as you keep balancing out and then adding to
the things that go up and specifically that is habit
number two of the rule breaker investor add up, don't double
down. So I, I, I really emphasize
Bill, not adding to losers, but I think you're also asking about
that very contrary feeling of adding instead to winners.
And that is a very rule breakery thing that I say rule breakery
when things go against our natural instincts.
Yeah. Well, so as as I was reading it,
I was thinking, OK, this in a way makes no sense.
David's checklist is looking for theoretically overvalued
companies, right? The companies that people are
saying are overvalued and he's looking for strong past stock
performance. So you're looking for the things
that have gone up that are overvalued and you're not buying
back down. How is the how does this make
any sense? This man's a fool.
But but you know that I sat there and I was thinking about
it and I said, OK, the probability that you get
yourself like if it's overvalued and the stock has gone up,
there's the market is not completely irrational.
There's there's almost certainly some fundamental reason for
that, right? So you're probably fishing in a
pond of companies that are growing in cultural relevance
and likely the earnings are following.
And if you're not doubling down on your losers, you are removing
the risk of ruin from being enamored with a company that
just isn't what you're thinking, right?
So I kind of like I saw the genius in it, assuming that I
understand the genius, but I was like, man, this is this is so
different, but it's it makes actually quite a bit of sense.
Well, thank you. And it has made quite a bit of
sense. And a difference between writing
this book that comes out here in 2025 and my first Rule Breakers
book, which was 1999, is, is the performance that we've generated
over the succeeding time. And so part of what I can do now
is I can write the same things in some ways, in fact,
surprisingly similar things 26 years later.
But now I can say, let's look what happened.
Let's look how the stocks did, the ones that won and the ones
that lost. And yes, I always talk about
both. Very important and now I really
have drawn conclusions about and I don't think it's in doubt
anymore. Like people would review our
book back in 1999, rule Breakers, rule makers would say
it sounds crazy. I mean, he's basically saying
he's looking for the companies that people say are overvalued
and and he already wants them, as you point out, Bill to have
gone up before he recommends them, which could it's stripped
down worst form be mere momentum investing, which is not what it
is. It was, it was thoughtful, it
was done purposefully, and it was enacted with kinetic energy
one month after the next Pick, pick, pick.
I was picking three stocks a month for 20 years for The
Motley Fool. And we saw what happened.
And it it was, it was incredibly successful.
And so I think that there's no longer a debate about whether
you should do that or not. It's not the only way, by the
way, there are many ways to invest, but the rule breaker
investing way I think has demonstrated ability to squeeze
as much juice out of what the public markets give us in the
fruits that they bear for us. So that we are squeezing about
the maximum amount of juice in terms of return by following
these habits and these traits. And so, yeah, and it and, and
you lose there, too, which is why we don't add to our losers.
We're going to stick with what wins.
And in a lot of ways, Bill, I love your depiction of yourself
because you're sitting there going, this seems crazy, but
maybe there's some reason in it. And you know, I totally can
appreciate that. What what I sometimes like to
get back in touch with is what actually happens graphically
with the market over the course of 25 years, which is it tends
to go lower left to upper right. And therefore it's constantly
making new highs in order to go from lower left to upright.
And that's also true of the great stocks of every era, the
ones that are dragging the market in that direction.
And so it's actually as simple as what keeps going up.
And let's buy some of that thing, those things and let's
realize some of them won't always keep going up GoPro.
But the ones that do Tesla, even when they go sideways for five
years, Tesla are going to be, are going to lead us to alpha,
are going to be wild out performers for us.
And so it's as simple as buy the ones that are going up.
I mean, I'm obviously oversimplifying and having fun,
but if you're trying to get go, this is so contrary.
Realize it's not really that contrary.
It's actually quite logical. It's it's what happens over the
course of time to the overall market or the the winning stocks
that drive the overall market. Yeah.
Well, it it's, I mean, if you're pulling up a long like a truly
long term chart and this chart is not going up, like what's the
probability that this time is different?
Yeah, I I think it's low. Yeah, I mean, and, and the other
thing that it that game can really kind of mess with from a
mathematical standpoint is OK, fine, you can swing trade, you
know, maybe some an industrial that never trades it more than
two times. Book and real earnings don't
move. Like fine, you can maybe make
4X, you know, risk reward if you buy it really right.
But I, you know, I don't know the math of your strategy.
What you're looking for is the ones that can be 1000% returns
right or or more right or grow infinitely.
Yes. And you know, you said something
earlier, a great phrase I wanted to call back out and pull back
up because you were talking about how companies that I would
say the rule Breakers, which by my definition are the companies
that start as David and overcome Goliath and end up the best ones
becoming rule makers. These companies have increasing
amounts of cultural relevance. That was the phrase that you, I
think it was either that or very near that phrase you threw out
about 20 minutes ago. And that really is an important
factor that we should all be thinking about when we asked
what are the stocks that can rise to the moon or keep going?
Because by the way, the moon's pretty close.
They're starshot stocks that that we've had the experience of
1000%. Great.
But what about 10,000%? And, and the only way that
you're going to get that kind of investment, two factors. 1, you,
you need something of high, high cultural influence and
relevance. And two, you need to keep
holding it because you're never going to make 100 bagger if
you're not willing to let it become a 100 bagger.
And there are a lot of people who who are not, they don't have
a habit of doing that or they don't have a predisposition to
allow themselves to win like that.
And again, not everybody should. And I've had stocks where the IT
went up 10 times the value and I sold it a loss.
And that hurts. And some people for them that
would be like, I am quitting investing.
I give up because I had made 10 times of my money and I just
sold it a loss. And I can only say, you know,
welcome brother, sister. Like I, I have done that and
I've done that not just in my own portfolio publicly.
I recommended that to people who pay us for our advice of The
Motley Fool and we had a nine bagger and I'm so sorry.
We're selling at more than 50% overall loss in the position.
I hope you're enjoying this program.
I'm interrupting it to remind you that this show is brought to
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it is rumored that the product will make you the best analyst
in the world. So why is that you just the the
starting valuation was just too high and the business eroded or
something like that and then you held it long enough that it came
back nine times. Is that what you're saying?
Well, I'm thinking specifically, let's say of 3D systems when 3D
printing heated up 10 years ago and we generally love new trends
and possibilities and there are more in our society today than
30 years ago when we started The Motley Fool.
There are more rule breaker possibilities and amazing things
coming then we could have foreseen a generation ago or 100
years ago. And so get excited about all of
the possibilities that technology is going to bring us,
our kids, our grandkids, because those are the companies that we
want to own. But thinking back to 3D Systems,
it basically shot up. I mean, there's a hype cycle,
Gartner's hype cycle specifically.
I think it's a good framework for people to know, and the peak
of inflated expectations is one of the phases of that cycle.
And it's almost always going to happen.
There's no way not to for it to happen with AI or the Internet
or genomics, electric cars, the list goes on.
There's always going to be early stage.
We humans can see new possibilities.
That just can't come to market soon enough.
And if they do, they may not even be relevant when they
arrive or they may not work out. But we can see ahead of that.
And then people are paying up for those stocks in advance of
that. And then, you know, things come
crashing down and we end up with deflated expectations.
And a lot, a lot of times we just write it off all together.
3D printing I think today is a bigger business than it was in
2016, but for that stock anyway, yeah, that jumped up 9 times in
value for us in Motley Fool Stock Advisor, I think in less
than two years. But then company was trying to
get big fast by being acquisitive and, and you know,
in the end 3D printing wasn't a consumer revolution.
You I, I, I appreciate some 3D printing that I noticed in my, I
don't have my own personal 3D printer, but we were for seeing
that possibility and I think the market was as well.
So that's an example, Bill, very specifically of basically a 10
bagger that we sold at a more than 50% AH.
So it went up. Nine years later.
And came down. Interesting, and I should have
made that more clear when I explained it, but.
Yeah, well, now we have. Yeah, and you know my own habits
can come back to bite me, right? Because I'm pretty sure as it
went up three times in value we added and then now we're up 9
times in value and I don't remember adding right then.
But the point is as it devolves unravels and and doesn't just
come back down to earth because town closer to hell, the burning
flames of hell somewhere below the surface of Earth.
I was like, yeah, this one didn't work out.
Unfortunately, we also added to it.
So but I'm willing to look like an idiot, a common fool if you
will. I'm willing to have egg on my
face or air ballot from the free throw line 10 times in a row in
a way many people probably would not be OK with.
I am. I do think I benefited from
that, but it's part of my nature, therefore to adopt this
approach to investing where for others it may not make 100%
sense. Yeah.
Well, that I mean, that makes sense to me.
So one thing that I've heard you, I mean this, I think you
said this on Patrick O'shaughnessy's podcast way back
was you said you like to be the first to buy and the last to
sell. You know, how do you figure out
like the, the 3D printing story? When is it the time that you
say, OK, maybe this isn't what I thought, you know, how do you,
how do you figure out when you're the last to sell?
Because if I recall correctly, you had a similar ride on
NVIDIA, but that was a good one to hold.
So where, where do you sort of massage that decision?
Making. Well, first of all, I default,
as you know, because you've read the book.
I, I, I, we invest for at least three years.
So before I were were to enter a position or recommend a stock,
I'm I'm there for at least three years.
So there are additional implications of that, like we
need to have a sustainable competitive advantage, which is
the second trade of the six traits of rule breaker stocks,
because if we're going to be sustaining our investment for a
long period of time, we darn well better have some great
dynamics in place. So I guess, you know, that's
part of my mentalities. I go in right away playing the
long game. And I do believe I don't have
statistics for this, but I believe I'm in the minority of
the market. Well, you had the graph in the
book that that what the Twitter poll that showed the average
person's 18 months, right? Yeah, well, it's not the average
person. Market.
Participant. It's actually institutional
money managers. And yeah, it is there in the
book. It was a Twitter pool done by my
friend and fellow former fool Joe Magar.
And it was it was from Bank of America and it was surveying
professional institutional money managers saying what is your
time frame? And it averages to what I had
always on my own adopted as my answer without any statistics.
So when Joe showed that it's six months, I was like, that's what
I've been saying. That's.
Yeah, that's right. It wasn't 18, it was 6.
I'm sorry. What did you, what did you say?
You said that you thought that maybe 18 months is the longest
that anybody. Yeah.
And you know, whether it's 6/12/11 or 18, it's not three
years. Yeah, the main point is, and
again, so many of the people I roll with, people who are, you
know, part of women's investment clubs, long time Motley Pool
members, my good friend Bill Brewster, others, most people
have a longer term time frame than that.
And we're talking about your money and we're talking about
your entire life. I think we should have whole
life span Is is the the the real time frame we should be living
our lives and investing our money.
And so that's why I'm always fully invested at all times and
that's through every down period for a stock or the overall
market. I think we should be investing
getting on that train as early as possible.
First Depot, we can get your kids started and and be there
the our whole lives. You will be wildly rewarded and
there there's a huge opportunity cost that people have paid by
not taking that approach. So therefore, obviously, yes, we
start with a three-year minimum position.
So Bill, when 3D Systems and NVIDIA are both active pics of
mine and they're both going up, I'm like, great, that's what I
thought. These are companies that are top
dogs and 1st movers in important emerging industries.
That is the first trade of a rule breaker stock.
They they conform to that. They're going up, we're going to
keep holding them. And then I keep holding and
holding some more, and one of them gets dunked on and the
other one goes sideways for three years, and we're still
holding. Because I've already experienced
in my life watching great stocks lose a lot of value and then
come back. And, you know, part of the trick
there of holding is you're looking at the company and what
it's doing, not the stock. Because stocks are always
exaggerating the movements of what's actually happening with
the underlying businesses. And, you know, I'm not blaming
the market. The market's trying to forecast
what this means for the future, but we're all guessing, and the
stock market price discovery mechanism is one of the single
best predictors you'll ever find for guessing where the world is
headed. So you know much respect to the
market and how it prices things. And most of the businesses
Netflix quick stir 2011 that make mistakes, even if
self-inflicted gunshot wounds. These companies are actually
more resilient and stronger than you would think from a market
movements and B, the media, which is often integral to
driving market movements up and or down.
And so you start looking at Netflix going, OK, so Quickstir,
I'm a Netflix customer, let alone shareholder.
I don't, I don't like this move. This is very frustrating.
I'm going to have to separate my streaming queue from my DVD
rental queue. This is back when we were still
renting DVDs and that just feels customer unfriendly.
And the stock is dropping and Netflix lost 2/3 of its value
inside of a year based on a decision that it made and then
retracted. And the worst we could ever do
is lose 100% of our money and I've never quite done that,
though I've gotten near. The best we can do is infinite
upside, as you already mentioned, and therefore tie
goes to holding. And so when I said on Patrick
O'shaughnessy's podcast, I try to be in ahead of most others,
never first in I'm not AVC and then I try to be out after most
everybody else. When you're out holding the bag
on a bad stock at the bottom, you just look like, again, a
small F fool. And I'm always happy since I
named myself from the very beginning of our paper
newsletter for parents friends a fool.
I'm OK, I'm actually OK with that.
I'm OK people saying you know you're an idiot, you suck.
How could this happen? Because the upside of being
right and just being lazy and holding both NVIDIA and 3D
Systems next to each other is so amazingly awesome.
But most people don't know that because most people never hold
stocks long enough to realize that Ling's money thing should
have been a thing. And Intuitive Surgical is a
monster. And so is Booking and so so's
tracks and MercadoLibre other, you know, stocks that we haven't
mentioned yet in our time together that have just been
gigantic winners for us at at Motley Fool rule Breakers.
And, and most people don't have an experience of having a
monster winner, like the idea of a spiffy pop, which you know,
some of your listeners will know, but most of the world
doesn't know what that is. When I say that the idea of
having that is for many people an alien experience, like how
could you do that? And yet it's happened thousands
and thousands of Times Now for for me.
Too many people chasing teenies man.
There you go. And I love that phrase, and I
think we've had fun with that. Indeed, we have Mercardo Libre
actually was, I was kind of it popped into my mind when you
were talking about what happened with Starbucks, right.
Just because this previous quarter they kind of invested in
I guess fulfillment expense and and maybe took this the the foot
off the gas a little bit on profitability in favor of market
share, which we'll see how it all turns out.
But seems to me not the dumbest management decision if you're
actually running the business for the long term, right?
Yeah, I feel really good about Marcada Libre and I have for for
well more than a decade it has been, it has been the single
best stock pick for the two services I picked for in this
case a rule Breakers it is AI think it's 178 bagger over the
15 years we've held it and that includes, you know, any recent
drops. The company, one of the things
I've done on my podcast is I did this over six years.
I picked 5 stocks as a little basket and I did that.
I did that 30 times in a row space by 10 weeks each time.
And it's just all part of my free podcast.
I was like, hey, these are just samplers.
Like we already own all these stocks in our services.
We have lower cost bases usually.
Then the sampler you're getting like the same sample you get a
Whole Foods when they give you a little piece of cheese or a
little sip of wine, a sampler. I was saying here are samplers
of the stock picks from my services.
And the very first five stocks sampler I picked was when I
started my podcast. It was the, IT was, It was
September. It was September 2nd.
You and I are recording this on September 2nd.
Oh, there you go. How about?
2025 and it was literally 10 years ago today that I picked my
first sampler was called 5 stocks for the next 5 years and
it's now 10 years later, which is more like my time frame.
And yeah, I was going back and reviewing what I was saying as I
made MercadoLibre one of the five stocks I picked 10 years
ago today. And MercadoLibre was at a $5
billion market cap. And I was saying at the time,
and by the way, I was right, so I'm bragging.
I was saying at the time, MercadoLibre at a $5 billion
market cap today, 10 years ago, is basically like saying if you
could go back in time and buy eBay and Amazon in the 1990s at
their respective market caps, do you think that would be a good
buy? And the answer is yes, You would
have loved in 2015 to get the cost basis of Amazon and eBay
from 20 years before. And I'm really happy to say the
Maracana Libre's market cap today is 122 billion.
So yeah, that was a hell of a buy.
And by the way, it looked overvalued and they probably had
dropped, you know, 30% twice in the year leading up to me
picking the stock and re picking the stock in 2015.
Anyway, in some ways, this is like a great microcosm of what I
try to do, which is get people realizing it's not about where
things have been, it's about the future.
And so, Bill, I love MercadoLibre right here today at
$122 billion for the next 10 to 20 years.
Didn't you have like one of the all time great Amazon calls in
like 98 when you said something along the lines like people say
it's just a bookstore but think about all the other places they
can go. Wasn't that you?
I'm pretty sure it was you. It was I I will say that you
know, it's I mean, I, I, I can't say if it's all time great
because I think others can decide what what's like Hall of
Fame worthy, but. Well, it came into my feet.
Is somebody saying David had one of the all time great calls?
Well, I mean, what's fun about that is that, you know, we we're
still holding and, and, and it's right there on the Internet.
You can Google it for free. And it was the summer of 1997.
And yeah, you could read my exact write up from, you know,
first paragraph to the last one. And we're now 28 years later and
my cost basis is $0.16. So it's, it's been, it's been
smoking hot. And and I mean, what an
incredible object lesson in what I ended up calling Rule Breaker
investing because all of the factors, all of the bears, the
dark clouds you had to see through were so evident from the
very beginning, including the stock having doubled before I
picked it. Like all of the things that I've
tried to teach the world are implicit in that one story.
And I think it's been maybe the best stock you could have owned
since 1997. And in a really weird, this is
kismet, this is destiny, this is outside of my own control.
But in a really weird fun coincidence Bill, I would say
the other stock that is a clear rule breaker that would become
the next generations great stock is NVIDIA and I picked that and
my cost basis is the same for both really and NVIDIA it is
$0.16. Thanks.
Well, the next time you get anything close to that,
everybody should. That's that's the magic lesson
right there. Well, I guess, but you've had.
Splits and whatnot, yeah. As you well know, those stocks
were never penny stocks, but literally my cost basis is $0.16
now for both of them. NVIDIA has split 120 for one
over the years. Wow.
And so, but, but both of them exhibit this, the pattern that
we're talking about, the six traits of rule breaker stocks.
And, and I was just like I said in Patrick's podcast, I was in
early and we're still holding for both of them.
And they've been, I think they've been probably two of the
best stock picks you could have made on the markets in the last
30 years. And I used the same methodology
to pick both. And at the time I picked both,
there were a lot of bears there. There were a lot of people
saying I would never buy the stock there.
I'll wait for a dip. Yeah, one of the things that I
like that you did in the book was you had like, I don't know,
call it 8 to 10 charts maybe. And they went from the bottom
left, you know, they, they corrected a little bit, but they
were quite a bit higher than where they started.
And you, you said, like, I'm proud to say that I recommended
all these, but not at the bottom right.
I, I recommended them after they had run up a decent amount,
which, you know, I just, I felt like through the book, there was
a real sense of honesty and embracing of, you know, the
things do go wrong. And I, and I, I appreciate that
in an industry where most people boast about their wins, you kind
of let your wins speak for themselves and, and rub your
face in, in the downside, which I believe sets up the new reader
at least, at least you've done what you can to prepare somebody
mentally, whether or not they have the psychology is sort of
outside your control. I appreciate that Bill.
And you know that that chapter was a lot of fun to write.
And specifically, that is Chapter 9 of the book where I
talk about trait #3 of Rule Breaker stocks, stellar past,
price appreciation. And the fun of writing that
chapter was realizing, because I didn't realize it until I
started to write that chapter here a year ago, that seven of
my best picks ever all together had the same chart pattern
before I picked them. They were up 30 to 90% in the
three to nine months before I picked them.
And so hilariously, that chapter leads off as you mentioned with
their stock graphs. And in every case it looks like,
you know, you must be bragging, Dave, because in the lower left,
you know, it started there and then look, it goes up like 80%
like 6 months. And the, the main point is you
already pulled out is that I didn't pick it there at the
bottom. I actually picked it at the end
of the graph at the top, and those weren't my losers.
Those were my best picks. And so it was such an eye opener
for me personally as I wrote the chapter to put those up.
And I hope that just jumps out to people.
And again, not every stock that you buy at its new high is going
to work out well. There are cyclicals, there are
junk stocks, there are meme stocks.
The list goes on. But for what we're talking about
during our time today, Rule Breaker investing, if you're
finding companies that comport themselves to what I'm looking
for, stellar past price appreciation, as it turns out,
is an excellent indicator of future winning results.
And it's the opposite of, again, what most people would think.
Well, and I, I think when you layer on the 5% Max position
size and then the ability to add up over time, it encourages
fishing in a pond where things are on average going well.
Trying to look for companies that you think can dominate 10
years out in a world where most people are thinking no more than
six months. And you know, it's sort of sets
yourself up for maybe playing the game in a different.
Way very well summarized. That is exactly how I would
describe what I'm trying to do. Do you want to talk?
I would be remiss if we didn't chat a little bit about the, you
know, how to build your portfolio.
What I'm I'm going to, I can't. You can think of the words
better than I can. You wrote the book.
So let's let's talk about the sentence that you've is sort of
the foundation for. Portfolio construction.
You bet so so the structure of the book is 3 parts.
Also it's a short book. One of the things my.
What goes it flies by? Thank you.
One of the things my wonderful editor Craig said is he's, he's
a Brit. So this is a slightly affected
accent. He's like David, you know what
people like. And I was like short books.
Like what? Do people like short books?
Yeah, that's right. What?
People don't like is 100 pages of filler.
So I was like, you're right. And really, at heart, I think
I'm a writer. That's what I started out as in
school and what I've loved doing.
And I've written a lot of things over the years, including more
than one book. But this is the first book I
actually wrote all by myself. And with that guidance from
Craig, I'm like, you're right. Let's make this a fun, ripping
good read. We're going, we're, we're going
to a subject that matters deeply to me.
So it's not that we're treating it lightly, but let's make it
entertaining. That's what we have to do with
The Motley Fool. Otherwise, we're not very
foolish if it's not fun. But let's also, you know, let's
cover a lot of ground all at once.
And since this is my final stock market book, I'm leaving it all
out there on the field. So the, the organization of the
book is 3 parts. The first part is the six Habits
of the Rule Breaker investor. We've talked a little bit about
that. Second part, because we got to
talk about stocks, the six traits of the rule breaker
stock. And then the third part in my
mind, inevitably, if you're talking about habits and then
stocks, what results is a portfolio yours?
And so the six principles of the rule Breaker portfolio.
SO3 lists of 6. I like the number six because
it's enough to remember, but also not too much.
So you can keep it in mind. I think you can remember all six
of these. At least I can for all three
lists. If it, if I started saying 7 or
8, you wouldn't get it. If I said two or three, it's not
enough. So I like the number six.
And so the six principles of the rule breaker portfolio and you
know, the very first one is the one that matters most.
In fact, the 1st in each of my lists of 6 is the big, big one
that matters most. And for portfolios, it's to make
your portfolio reflect your best vision for our future.
So there's no asset allocation in there.
There's no numerical guidance. There is a very strong belief on
my part that you and I will do better with our portfolios if we
can look up and down the portfolio and say, I love those
companies. I admire what they do.
They express me. If my buddy at work saw My
Portfolio statement, they'd be like, yeah, that's Dave.
Yeah, no, he. Those are his companies.
Just like our books on our shelves kind of show who we are
to people who pass their eyes across our bookshelf, Our books
are our friends. The exact same thing should be
true of your portfolio. And obviously we're all seeing
different parts of the elephant. We all have different tastes,
passions, interests, hobbies, professional insights.
We're all unique. And I literally strongly believe
you will do better if you're investing right along that
dynamic. You will literally have better
numerical performance then if you don't or if you give your
money over to somebody else, if you just mail it in with an
index fund, etcetera, you will do better.
And that's why it's the most important of My Portfolio
principles and it's kind of about you and getting to know
yourself and over the course of time, getting smarter about what
wins. We should all be fans of the
game and seeing why does this person or stock win in that
situation, company and those don't.
We should all constantly be learning and leveling up.
I'm a video gamer still at 59, just as I was at 19.
Leveling up is a phrase that means a lot to me.
What do winners do? They win.
Let's learn from them. And and once you have your own
winners, then you have your own lessons that you can base your
future decisions on. And I think your money should be
inside your circle of competence.
You should be constantly growing your circle so that the
perimeter keeps extending. And yeah, make your portfolio
reflect your best vision for our future.
And that phrase our means that we need to think beyond
ourselves sometimes. Like ask yourself, it might be
something that you personally as a pet project or product or
stock feels right for you. But also get outside your own
head and just ask what's important for the world at
large. All of the great stocks of every
generation are going to be monster winners because they
were relevant. They were adding value to the
lives of many, many people. And so it's that expansiveness
that defines rule Breakers to me.
And so for our own portfolio, we want to constantly be learning
and growing. And especially if you're going
to buy stocks directly, which by the way, is another thing that
people will tell you not to do. And there's another place where
I, as David, love to take on Goliath and say that's such a
shame if people think that they shouldn't buy stocks directly.
Doesn't have to be with all your money, but just tuning out and
just going, yeah, I'm just DCA ING into whatever.
I'm not really sure giving it over to my money guy, you, you
are robbing yourself of so much growth and and fun.
And I would say success if you do that.
And I realize we're all time starved and not everybody has
time or interest in investing in stocks directly.
But at least for those who want to read my book, I'm speaking to
you because I believe that you're the person I'd invest in
any group of people. If you have that degree of
intellectual curiosity, willingness to take risk, to be
responsible for your own actions, I'm investing in you.
And you and I are investing in companies by doing that.
And we're going to we're going to win a lot in this world where
most people don't seem to want to do that.
So I think I just went off and ranted, Bill, I think I lost.
No, it's always a good. Rant you didn't lose anybody.
You didn't lose anybody, especially if they, if they're
the type of person that gets the portfolio section then then they
really are and. A minority.
The reason I sent you my first 50 pages is because another
thing I learned from Craig, my wonderful publisher is one
person in three is still reading non fiction books typically
after page 50. Therefore, David front load your
best stuff. Let's let's lead off with NVIDIA
and Ling's money thing. And those are great stories and
fun to tell. But I sure hope that I've
written a book that people, if they're taking themselves and
their money seriously, would want to read all the way
through. It is a short book, but that's
that section on portfolios is just as important as as anything
else really. And each of the six principles,
I think should be really helpful in a world where many people
have not been coached at all on how to build or maintain a
portfolio that's that's a secondary or tertiary thing For
most people, if they're even investing in stocks, they're
like, what's the next one? But they don't necessarily have
frameworks that they can rely on to help them build that
portfolio over the course of their lives.
Yeah, well, I mean, I said it to you in our first interview and
I, and I'll say it again. One of the things that I
appreciate so much about stumbling upon your work has
been that it's such an antithesis to the my
interpretation of the traditional Buffett teachings
and the idea of buying overvalued securities and
diversifying while, you know, the, the, the contrast is
concentrate. You know, I mean, I, I think
Charlie is very misunderstood sometimes when he says he'd had
50% in his best idea. But nevertheless, the quotes out
there and then you combine that with rule #1 is don't lose
money, rule #2 is, you know, never forget rule #1 It's just
such a different method of thinking.
And I and I think both approaches can probably lead to
the same path for the right personality.
I do think your approach is almost certainly more anti
fragile for most people. Appreciate that.
And you know, I wanted to talk some about what's maybe my
favorite chapter in the book and what would be for me what was
the deepest insight. And you know, I go there more
with business brew than I would with the view, right?
So this is a conversation, this stage of our conversation is
about for people who really want to think hard about valuation,
which most people don't and really which in some ways I
don't. But this was the key insight, I
think, that I had in recent years.
So we probably didn't talk about this four years ago, but in
chapter 12 of the book, I basically ask, why is this true?
Like why is this happening? That specifically, I am
targeting stocks that are quotes overvalued and by most measures
and media reporting and all the rest, they're crazy overvalued.
Since I completed picking stocks for The Motley Fool in May of
2021, I'm not as actively researching or looking at
stocks, but I am still adding some to My Portfolio.
And in recent years, for example, a nice rule breaker
winner for me. I credit my wife Margaret for
this even more than myself has been Palantir.
And so Palantir, once again, poster child for crazy
overvalued. True today, true a year ago,
true three years before that. And and it's a monster.
It's a rule breaker, it's a multi bagger and it's so quotes
overvalued. So in chapter 12, I think I hit
on the key insight and you know, I hope people will buy the book,
but if you don't and you're listening to us right now, I
think this gives you a lot, a lot of juice.
And here it is. Most of the things that matter
most in business that cause businesses to win and lose are
not measurable, are not captured with a number, therefore do not
appear in the financial statements.
And all of the best companies therefore look overvalued
because all of the conventional people are using price to
earnings, price to cash flow, maybe price to book in some
contexts, and they're just doing ratios off of outputs.
They don't look at the inputs and specifically I'll give two
quick examples. Specifically, two of the biggest
factors for companies that have been my biggest winners are who
is running that company and the brand slash reputation of that
company. And part of being an
entrepreneur myself is that I know how important these things
are because I see it in my own company.
And I'm, I'm an acute observer of other people's companies
because I am an entrepreneur myself.
And so I know how important it is the culture of a company, the
brand of a company, the, the leadership.
And there are no numbers for the things that matter most.
And so I believe the big mistake being made, Bill, is that we're
not actually putting a number on Jeff Bezos and we're not putting
a number on Howard Schultz. We're not putting a number on
bad CE OS that subtract value. They're out there, no question,
people subtracting value from the enterprise they're
overseeing. And so, I mean, is there a more
important single input probably than that?
Probably not. In my mind, it's kind of like
NFL quarterbacks, they are the highest paid.
It's about a lot more than them. The offensive line is almost
always underrated, but nevertheless, they still are the
focal point. And imagine if we didn't even
look at them as we're valuing NFL teams because that's what
people are doing with stocks they're not looking or caring
about. I mean, they may well speak to
it and they may care, but they don't have a number and their
valuation models don't price in Jeff Bezos.
And once you start to realize that for visionary founder CE
OS, in some cases, it's incalculable how valuable they
are. Elon Musk is incalculably
valuable. I realize there are mixed
feelings about him and there are a lot of Elon haters out there
as well. But I mean, if you simply look
at the value that he's created, that he's behind, it is, I
believe it's higher than anybody living today.
And and that's one factor. I said I'd give two quick
examples. The second is the brand of a
company. There is no number on the
financial statements for the value of Apple's brand,
Starbucks's brand, brand. And so you have people who are
valuation focused, who are academics or they're analysts or
they're just armchair investors, and they're so focused on their
traditional valuation metric. And for me, they're missing
who's running the company, the brand value of the company.
There are no numbers on the financial statements.
I would also add the innovative capability of that company.
Can they innovate their way out of a box or not?
I would also say because I've seen it first hand, corporate
culture, the culture of companies is rich and deep.
Those things are actually the gating factors that create wins
in, in in life, business, in the world.
And when they're invisible to valuation models, you end up
saying about all the greatest companies, they're overvalued.
And you often end up saying for crappy companies that are that
have bad features among those four that I trotted out that
they're so undervalued and that they look undervalued to you and
you're willing to buy them. And so I think because I'm
trying to leave it all out there on the field with this stock
market book, my final stock market book, that's like my
grand conclusion. And it's just one chapter.
But I think it explains why it was a stroke of genius 27 years
ago when I said I am looking for things people are calling
overvalued. And at the time I wrote that and
said that, I didn't understand fully why that would work.
I just had watched it work like AOL.
The first great stock for me was so overvalued and it went up 150
times in value as people talked it down all the way up Wall of
Worry. So Bill, I wanted to go there at
some point in this interview. We didn't probably talk about
that four years ago because I was still thinking it through,
but that's sort of where I am on this and why it works.
How much? Of the of the results, do you
think, OK, let me let me ask this in a way that actually
makes sense. The overvalued portion of what
you're looking for, how much of of that do you think comes from
the life cycle relative to Tam and potential Tam expansion that
these companies end up with? Right.
You talk about how much Nike paid for Tiger.
Well, Tiger at 22 is a lot different than Tiger at 40,
right? So like, I mean, I, I, you know,
I saw that NVIDIA, I mean, I opened up the cash flow state.
I just went to fiscal AI shout out to them.
I just went to the cash, you know, the cash flow statement
for that company. I mean, you're looking at a
company that in April of 2023 did what, 7 billion of LTM cash
from operations. Now it's 77.
Incredible. Like that is, that is wild.
And I realized that AI was maybe not foreseeable, though some
did. I, I don't know, you know what,
what you had said about it. I suspect you saw it.
Can you just talk a little bit about the size of the company
relative to the Tam and then also the myth of the law of
large numbers? You bet, fun topics.
So I, I would say first of all that, yes, the total addressable
market is, is something that we should be thinking about, no
question. And, and here we get into in my
mind, AVC mentality. That's what venture capitalists
do. They're sitting there at earlier
stage, Series A, Series B, we have a motley flow venture
capital fund at Series A like we do this now too.
I'm not on it because I'm not a professional VC, but I think it
really matters. You want to be asking that and
you raise a really important point, which is it's not fixed.
And so for my greatest stock picks, and these really were, I
think pretty much the greatest stocks you could have had on the
markets over the last 30 years, Amazon, NVIDIA, Tesla, the list
goes on. Intuitive Surgical, we never
talk enough about that amazing company, but the total
addressable markets keep expanding.
And of course, this is always been true, right?
Going back to Amazon as Earth's biggest bookseller, like that's
all they were doing at the start.
And then they added music and videos, and then it became
ladders. And then all of a sudden they
bolted on Amazon Web Services, and then they're competing with
Netflix on Amazon Prime Video. And all of these things emerged
over time. And I foresaw none of them in
1997. I don't, not only me, I don't
think anybody understood what cloud services would be.
I'm sure there was a visionary that was talking about it maybe
in a futuristic book, but there was no sense of that popping up
for at least a decade. So part of what you're doing is
you're discovering along with the stocks you're owning.
If you're finding the top dogs in first movers and important
emerging industries that stocked pond you were referring to
earlier, Bill, you're you're going to over index to to
discovering these various sorts of companies.
And now that I've watched my caterpillars become butterflies
over and over and butterflies become even bigger, crazy, crazy
butterflies, I know this is this happens.
So I would never have predicted when we first recommended NVIDIA
as a video game graphics card company in 2005, tax day 2005, I
would never have understood what you just described the, the, the
cash flow of the company becoming and just mushrooming.
It's not just not possible to know that even five years ago,
that's shocking and I know it can happen and we're invested in
such a way by following I think the traits I'm laying out that
we're discussing, we're putting ourselves in great position to
have those companies in our portfolio.
We don't have to be geniuses predicting what's going to
happen next because that's increasingly hard to do.
So I think that total addressable market is such a
valuable statistic. I hear you on Tiger at 22 versus
Tiger at 42. I agree with that statement.
And the good news is, companies are different than human beings.
Their life cycles can extend, and they can actually all of a
sudden be 20 times more youthful and powerful 15 years later than
they were at their youthful and powerful peak, supposedly,
right? And that's a really beautiful
thing to know ahead of time. And I've just seen it happen
over and over. Intuitive Surgical, you know,
started by basically trying to provide the da Vinci surgical
robot for doctors who wanted to use robot assisted surgery to
remove the male prostate gland from men around my age who get
prostate cancer. That was it.
That's all they did. And then they're like, except
that I think we could also do hysterectomies for women.
And, you know, now that we think about it, we could bolt this on
or try this new indication. Sometimes it was the doctors
themselves who love the machine, wanting to experiment with it.
And now more and more forms of surgery are becoming robot
assisted, which by the way means that you and I walk off the
table minimally invaded a day or two later when it used to
require 3 days of recovering at the hospital because we got cut
up. And we may be living through a
time where all surgery will be robot assisted before we're
done. And Intuitive Surgical basically
has no Pepsi to its Coke. If it's Coca-Cola, I cannot find
the Pepsi. Intuitive has a higher R&D line
than many of its competitors have revenue lines.
Blue Ocean my friend out front. It is a beautiful company and
what what I love about our conversation.
I love many things and thank you for having me back.
And you know, I think you. Dude, anytime, anytime you want
to come on, just be like, I want to come on.
You get it like and and and part of what I love about you is that
you're very open minded. You're not, you're not being a
plemicist, you're not defending old school valuation techniques
or being some wild eyed crazy futurist and not being bugged
out of that. Like I'm always trying to hit
golden means generally. But I really appreciate that
that we're having this conversation.
So. So dude, you've been you've been
doing it for too long with results that make too much sense
to not at least try to figure out where is the genius in this?
Right? Like if, if you just look at
that and you say, well, I'm not going to even think about it,
then like, I don't know, you're not, you don't grow.
Yeah. And because I'm specifically
investing trying to Max out my returns and, and do that
especially for our members, because in the end, picking a
stock for our members that goes up for, you know, hundreds of
thousands of people versus just me and my little portfolio is
much more deeply meaningful both personally and for the valuation
of my own company, right? You're trying to pass the Bezos
test of creating wealth for others, right when he wanted the
list. Yeah, no, I I didn't even
remember. That was the Bezos test.
But by its very nature, if you're a financial services
company, or in our case, an advice company, that that's the
heart of what you do. That's why learning like part of
the reason I wrote the 1st, 3rd of this book, which is material
I've never put out before, is because I've had those
conversations with Motley Fool members who are like, you know,
I wish I'd stuck with Apple because, you know, you guys
picked it and then I, you know, it went up 100%.
I was like, I sold out. I sold half because, you know,
you're playing with the house's money.
Silly things that are in people's heads about how they
should invest because they haven't been taught habits.
And so I know that we haven't maxed out for our own members
what they could have done in part because they don't have the
context. They didn't have the habits or
the portfolio principles that I wanted to make sure I laid down
here as I exited the stadium and said, like, this is my final
stock market book. I want to make sure it's not
just about NVIDIA or Amazon. It's specifically about holding
them. And it's specifically about
managing A portfolio that lets you sleep at night so that you
can win with a smile on your face and not get stressed out
because you're adding to losers all the way down or you have too
big a position in one monster stock and you're not sleeping
well at night. So, so it's the whole context.
I think it's, it's, it's the habits and the stock trades and
the principles of your portfolio that to me need to all hang
together and speak to each other.
And one thing I say near the end of the book is I hope any one of
these 18 chapters is helpful on its own.
I hope any one of these just UPS your own game.
But when you start letting them play into concert like
instruments with each other, that's really when the beautiful
music happens. And for me, these are the 18
that I have going on all the time and I'm trying to make them
simple in 10 page chapters that are fun, punchy and give you
like more than you knew when you started.
One of the best compliments I've gotten about my book is from my
friend Dan, who's an entrepreneur here in Washington,
DC. And he's like, he was my first
reader of the full book and he actually cancelled all his
afternoon appointments to finish the book because he just started
in the morning. He's like, I can't stop.
And he said this is not an investing book.
This is actually a book for entrepreneurs and business
people because what you're doing is you're talking about what,
what wins and works in the marketplace, but you're actually
doing it ostensibly from the position of picking the stocks
of the companies that win in the marketplace.
And I, I, I love that he said that because I hope.
Well, the companies that win in the marketplace are the
companies you want to own the equity of.
Hell yeah on average, right, Unless you pay an egregiously
expensive multiple. And even then, over the long
term, a lot of those can still end up outperforming.
I mean, it's interesting because, you know, I mean,
there's anyone that doesn't know the studies of how, you know,
overvalued facts tend not to perform.
You should read the studies, but also like, think about what
we're saying here, right? And I don't know.
I appreciate you for opening my mind.
I think it makes a lot of sense. Well, thanks.
You know, I, I, I would be remiss if I didn't mention that
my mind has been opened 1000 times over now because of the
business we started. I mean, so many Motley Fool
members, I quote them in the book.
Some of my best passages are just from something somebody put
up on a, a forum, a Motley Fool message board.
I was like, that is such a good point.
So I have been unbelievably accelerated and rewarded by just
having conversations like this most of the time online, not on
a podcast with so many people over the course of years.
Like we started The Motley Fool as an AOL page like it was pre
web, like the world, the phrase World Wide Web wasn't out there
yet. And so but I was there from the
earliest days with my dial up modem going.
This is awesome. I'm an investor and I can
actually talk to people work in this industry who are using the
product or service as professionals that I'm just
researching. This is incredible.
I, I grew up at a time where the big step you took as an investor
was to call the company's, call the company's investor relations
number, which itself was sort of a, a research item to find out
what was the number. And it sometimes wasn't toll
free. So they could mail you their
paper annual report from the past year, so you could read and
learn about whether you'd want to buy that stock and maybe be
assisted by by services like Value Line, which was a big
black tome of lots of numbers. And since I love numbers, I was
comfortable with that. But I mean, that was investing.
And then there I am in my 20s going, wait, hold on, this is
crazy. I can actually, you know, that
dial up sound in your computer that's in our heads, especially
people over the age of let's say 35.
I mean, that is amazing. I can talk to people and ask
them questions about stocks and they can ask me back.
And that's how the fool started. So thank you for saying that
I've helped open up your mind. My mind has been so greatly
enriched by so many people over the course of 30 plus years just
running a community site about investing.
Yeah, I would think so. We got we, all right.
We got 4 1/2 minutes before you got a hard stop here.
So I got AI Got a simple question for you.
How do you defend against AI taking some of your content off
the fool? Yeah, well, first of all, I
think the answer is realize that's going to happen.
And really the truth is the content has been taken off the
fool by many people for many reasons over the years.
And I think if you're a secure, successful person, you should
take some pride in that and say go for it.
In fact, when they're the a couple of years ago when Open AI
and ChatGPT was just starting to come out, there was a list of
the 20 most scraped sites that created Chad GBT.
We were #8 at full dot. Hey, that's a compliment.
I mean, it was. Now the New York Times has tried
to turn that into a lawsuit. And I kind of understand why
they might cause intellectual property should be defended up
to a certain point. But so, yeah, I, I mean,
obviously I'm, I'm proud that that we've built up something
that people would want to scrape as much as it has been and is
Reddit is also scraped. Reddit is very much a community
site, kind of like ours. Reddit's bigger than we are,
even though they started after we did, so good on them.
But yeah, I, I would say, you know, slightly more broadly, one
of the things I'm writing is a bonus chapter for the book,
which I'm going to pin up on the book's website, which is Rule
Breaker, investing.com. And I'm just going to answer
some FAQs, kind of like the one you just asked, Bill.
We are running out of time, so I'll be brief, but I actually
think that AI is, is an incredible help to our business
because it I think enables us to do a lot of work we couldn't
have done as fast as we could before.
You can now basically take the entire market down to a simple
screen or write an article that pulls insights that we could
never have had before. Not everybody has the time,
interest or insight to build machines like that.
So 1 great thing my brother Tom, our CEO, has done is really
bring AI into our business. And you know, if you're a Motley
Fool member, you are regularly getting AI enhanced content,
whether it's words written or lists of stocks.
And so we're of course embracing that because just like the
Internet showed up about one generation ago, we're like, we
love this thing, let's go. That's our attitude.
At the same time, you know, if AI ends up, you know, hurting us
badly over the course of time, that will mean that we didn't we
weren't relevant. Maybe AI became more relevant to
people and you know, we're all using it.
If AI personally helps me do better than I've done, I'm like,
great, let's go because that sounds like I'm doing less work
now and getting better returns. But I also want to close this
answer by saying, and I'm going to say this in my bonus chapter,
but anybody who's been buying stocks directly over the last 30
years has been competing against AI all the way through.
Well, AI just showed up in the popular consciousness in a lot
of ways. Computer algorithmic driven
trading has been out there in force for decades.
For anybody who's been buying stocks directly, you've been
competing as AI on both sides of the trade all the way through.
And I've done well. I've done.
I'm not actually worried. I don't think AI is about to
take away all the alpha that everybody had.
In fact, most people are dialing their computers to try to make
money inside of a second. Yeah, well, I was going to say
my sense is your time horizon. What AI is trained in is likely
quite different. I agree, in fact AI doesn't even
have enough sample size in some ways to be meaningful or have
deep insights for the long term. But if and when it does and gets
that, I'll be using it too, my friend, because I love power
tools and AI for our business has been 1 and I expect for all
of us, Me personally, it's been an incredible tool for the last
two years across all dynamics in my life, just like the Internet
was one generation before. So there's a quick thought.
All right. Well, thanks for coming back on
and Congrats on the book. People should get it.
I'll drop it in the show notes and appreciate you.
Thank you Bill, really enjoyed our conversation.
Once again fool on my friend all.
Right, you too fool on. None.
Music. The.