Transcript: David Gardner, Co-Founder, The Motley Fool

 

 

The transcript from this week’s MiB, David Gardner, Co-Founder, The Motley Fool is below.

You can stream the full conversation on Apple Podcasts, Spotify, or Bloomberg.The video version is on YouTube.  The full archive of MiB episodes can be found here.

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Masters in Business: David Gardner Co-founder of The Motley Fool

Barry Ritholtz: [00:00:02] Bloomberg Audio Studios, podcasts, radio News. This is Masters in business with Barry Riol on Bloomberg Radio. [00:00:16] This week on the podcast, I had so much fun chatting with David Gardner of The Motley Fool. I remember The Fool back in 93, 94 when it first launched on a OL. What a fascinating career. If you are a stock picker, if you’re someone who really is committed to finding the best companies and then riding them for decades, you’re gonna find this conversation really fascinating. [00:00:41] I thought his book was really interesting. His whole approach to life to investing is really great. I enjoyed our conversation and I think you will also, with no further ado, my discussion with the Motley Fools David Gardner. Thank

David Gardner: [00:00:55] You, Barry. It’s a delight to be with you. Thank you so much.

Barry Ritholtz: [00:00:59] I have a vivid rec recollection of sitting on a trading desk and watching you guys pop onto TV at various times. And as soon as you guys showed up, I’m like, all right, let me pull up Nvidia and Netflix. I knew they would start running and then soon turn around and fade. So it was always, just intraday, we’ll get a little later to the difference between investing and trading. [00:01:25] Yes, sir. But first, I have to go back to your background ’cause it’s so unusual. University of North Carolina on a Morehead scholarship focused on bachelor’s in English and creative writing. I assume Wall Street was not the original career plan.

David Gardner: [00:01:42] It actually was a career plan. As I came to UNC Chapel Hill as a freshman, I was telling people, I think I’m gonna go to work on Wall Street. I had a formative summer in between my sophomore and junior year where I worked at Solomon Brothers back in the day. The Good Friend era.

Barry Ritholtz: [00:01:59] I think Michael Lewis was writing Liars Poker somewhere around then. Late

David Gardner: [00:02:02] Eighties, I think it first dropped 80 89. [00:02:04] The year was 1986 for me that I was at, oh, she probably

Barry Ritholtz: [00:02:07] Overlap with him at the same time. It

David Gardner: [00:02:08] Was, I don’t recall Michael, and I’m really glad to see where he’s guys, he’s gone on to Great heights. But that was the summer I learned I was never gonna wanna go work on Wall Street. That’s that. That was a really wonderful experience.

I just realized it’s not a culture that I’m gonna probably spend time in with as an, as an adult. And so that was so helpful. I love the markets. I just wasn’t a Wall Street person.

Barry Ritholtz: [00:02:31] And you grew up in a household where markets, investing stocks were part of the daily conversation. Your dad helped you win a high school stock picking con contest. Tell us a little bit about that.

David Gardner: [00:02:41] Sure. It was actually earlier than that. It was fifth grade. It was fourth grade, really. [00:02:45] But my dad probably did what other dads did pick stocks for their son in this all boys school, St. Alvin School I went to in Washington, DC And I remember he had hard court brace Jovanovich, he had Getty Oil. This is bad, these companies aren’t around anymore too much. But that was my stock portfolio. And over the course of three months, I outperformed my classmates.  And so I won a gigantic Hershey bar, like to my 10-year-old eyes. It was the biggest Hershey bar I’d ever seen. But it was a wonderful introduction, back the real exercise. Then Barry was just to look in the newspaper to write down 16 and five eights where the stocks closed. [00:03:21] We would do that once a week over the course of three months and just start understanding the markets. So that was an early experience, but really dad was so formative for me as an investor.

Barry Ritholtz: [00:03:31] It’s always, it’s always fun talking to the youngsters who grew up with Decimalization. Yeah. Because I vividly recall what’s the price Pacini you don’t get that anymore. True.

David Gardner: [00:03:42] It’s a, it’s a whole, it’s a whole, I love [00:03:45] Your listeners Duke, Barry and I get it

Barry Ritholtz: [00:03:47] 16th and right, I get it. Yeah. Right up a stick up a half, whatever it happened to be. And then how did you end up writing for Louis Ru Kaiser’s Wall Street newsletter?

David Gardner: [00:03:56] Yeah, so I started out of college, took a couple years to read and write and travel a lot. Got married without a job, and then it was time at the age of 24 to get my first job. And as it turns out, the newsletter that was supporting Louis Rukeyser, remember his show, wall Street Week Sure. Longest running show on PBS. [00:04:14] And he had a newsletter with a financial newsletter. And I got to write the back page of that newsletter for that first job. We were reaching hundreds of thousands of people and I could pick whatever topic I wanted. So it was really fun, except it ended up not being fun. [00:04:27] And the reason it wasn’t fun is because I would pick a subject like Discount Brokers, which was a brand new amazing thing back then in 1992. Schwab, what’s that? Or Quicken. There’s now software you can DVD load onto your computer and track your finances and your stocks.

So I would write these up and then the edited version would come back with all of my jokes, color and fun stripped. And the second half freshly written by my editor, explaining all the reasons you wouldn’t want to use a discount broker or Quicken. And that’s because I was instructed, I was never, I never took a journalism course, but I was just an English major. But they told me, we have to balance it out here, David, in fact, Ru Kaiser is the personality, he’s the color of this newsletter. [00:05:15] So not you, we’re not, we’re stripping out the color. And also you gotta be, you gotta talk about the downside of discount brokers and quick. And I was like, I don’t wanna do that. I don’t see downside.

Barry Ritholtz: [00:05:23] Well, the [00:05:24] Downside is you’re taking money out of stockbrokers children’s mouths. well said. What’s the, what’s the downside of paying less to trade?

David Gardner: [00:05:33] Yeah. Well, I discovered that the downside was a job that just was kind of creatively deadening. It doesn’t really reflect on Lou Ki Ru Kaiser. It was the goal of that newsletter just to, supplement his TV show and all the rest. [00:05:44] So, but after six months, I quit the job. ’cause I was just like, this is not fun. There,

Barry Ritholtz: [00:05:49] There’s an argument to be had that Ru Kaiser was Peak financial television and it’s been downhill ever since. I like an hour week is plenty. I were, they, was he a half hour or an hour? I don’t even remember.

David Gardner: [00:06:00] Think it [00:06:00] Was an hour a week. I think it was an hour a week. Yeah, it was generally Friday. It would air different and March night.

Barry Ritholtz: [00:06:04] But Friday night, after the, [00:06:06] I remember him from Friday nights.

David Gardner: [00:06:07] And you remember his wit, he always had a monologue

Barry Ritholtz: [00:06:10] Start very dry. Yeah. Right. So let’s go over to our, what was it? [00:06:14] Elves? Wizards, I’m trying to remember. Elves, right?

David Gardner: [00:06:16] I think it was elves.

Barry Ritholtz: [00:06:17] And it was always fascinating. And I, it’s funny, I’ve seen as many of those on YouTube decades later. Yeah. That I saw as many as I’ve seen live on Friday night. [00:06:30] Okay. Like, I got no plans. All right. Let’s see what Louis has to say.

David Gardner: [00:06:34] That’s really fun that you would go back and revisit. I’ll just say he was, he was a wit he was himself outside of Wall Street. he is sort of a journalist, but he en he enjoyed bringing together brilliant minds on Wall Street. he had Peter Lynch, he would regularly focus Lynch and others. [00:06:50] And so

Barry Ritholtz: [00:06:50] Peter Lynch, Lizanne Saunders, you go down the list of people that he had, I’m trying to remember, was it Paul Tudor Jones before the 87 crash might

David Gardner: [00:07:00] Well have

Barry Ritholtz: [00:07:00] Basically saying, I’m, I’m outta stocks. I’m short. I think something terrible is about to happen. And then Black Monday happened was like, you, there was no other place to see stuff like that except we take it for granted today that it, oh, you wanna see something? [00:07:16] It’s out there. Yeah. Bloomberg,

David Gardner: [00:07:18] Right? CNBC. Right. I remember FNN was like the early player,

Barry Ritholtz: [00:07:23] Pre CNBC. Definitely that. And then CNN fn was a another one. You were right.

David Gardner: [00:07:29] So, and then, so now [00:07:30] We’re going down memory lane. Is this what? Yeah. Is this where your audience wants Barry?

Barry Ritholtz: [00:07:34] No.

David Gardner: [00:07:34] Do we to is not what they want. We

Barry Ritholtz: [00:07:35] Stay down memory lane here. I’m [00:07:37] Enjoying it. They do not want that. But so let’s talk about, you go from Ru Kaiser. Where did the idea with you and your brother working in a shed in the backyard, where did the idea come from? Hey, I want to put my own ideas with personality into a newsletter. Like how did that become an actual product?

David Gardner: [00:07:59] Well, I quit that job with nothing to go to. And then my brother’s best friend from Brown University, they both went to Brown. Eric said, Hey, David, I went to Brown, but I shockingly, I really know nothing about investing in the stock market. I’m from great education, great family. [00:08:14] I’m a television sports producer. What’s going on in stocks? So would you teach me? So I spent a couple of nights just sitting down with Eric going, here’s what I look at. [00:08:21] Here’s what I do. I was raised in a family where you buy individual stocks. We’re not just gonna index here. We’re gonna, we’re gonna be cho choiceful. [00:08:31] And we had so much fun, Eric’s like, why don’t we open up? This is a newsletter. You have no job now. You just work for a newsletter. [00:08:36] I was like, okay, let’s do that. And then I flipped through a book of quotations one night and I settled on a fool, A fool, I see a fool of the forest, A Motley Fool. And I just thought, Shakespeare, those were some as you like it, act two, scene seven for those keeping score at home. But for me, this was, a character. [00:08:52] I loved studying, certainly going through school. And everyone loves Shakespeare’s Fools. They could tell the king or queen the truth. And they did so with humor.

Barry Ritholtz: [00:08:59] The, [00:08:59] The only one who could get away with it

David Gardner: [00:09:01] Also. That’s, that’s right. They were given license to tell the truth. So I sort of loved it. [00:09:05] Also li great lines like a fool in his money or a soon parted, gave us a steep hill to climb as we tried to build trust with people. Why would you call yourselves fools? And it started there and it started as a print newsletter. You mentioned that, Barry, it was July of 1993 was the first issue. [00:09:21] $48 a year. The only people who subscribed our parents’ friends, they were the only ones who pay us 48 bucks a year. Our friends sure weren’t going to for our financial advice back then. But as we started that newsletter, 1993, early 94, we were signing on using our modem, our telephone onto a OL Prodigy and CompuServe, the big three in the early private online services battle. [00:09:46] And we were starting to discover this new medium and getting fascinated by it. And

Barry Ritholtz: [00:09:50] I recall a OL as a stock was two or $3 in the early nineties. Something really moderate before it had a hellacious run straight up for that whole decade. What was it like, first of all, you guys got fool.com today.

David Gardner: [00:10:07] Nobody else wanted it.

Barry Ritholtz: [00:10:09] Every proper noun, every dictionary word is taken. Although who knows what AI and the slow shift from Google, from SEO to AI is gonna do to, there you go. All these domains, but like domains changed hands from millions of dollars. It’s kind of crazy. [00:10:28] You went to get fool.com

David Gardner: [00:10:30] No competition. It was, yeah, nobody wanted it. Nobody wants fool.com.

Barry Ritholtz: [00:10:33] Oh my god. What? So the missed opportunity was I could domain squat on every proper No. So you launched the website, how long was it before it was got some traction?

David Gardner: [00:10:44] So we really launched, first of all, Barry, it was August 4th, 1994. It was just on a OL because this is pre Worldwide web, right. People were not using that phrase yet.

Barry Ritholtz: [00:10:52] 97 was Netscape, right?

David Gardner: [00:10:53] Yeah. Something like that. Yeah. I would actually say 96 ish was when we started coming online on the web. [00:10:58] But no, it was just keyword Fool on AOL. But AOL was going through a period of dynamic growth. Unbelievable. So it’s fantastic for us. We launched in August. By November we were written up in the New Yorker in the Talk of the town section. And then we had agents and publishers saying, there’s a book here guys. And we’re on television. [00:11:16] We’re we’re, we have a radio show, coast to coast. We just, we were like the early pioneers who believed in this new medium. And we were going offline Right. As fast as we could to all, everybody else was trying to come on online.

Barry Ritholtz: [00:11:29] Right, exactly. So, [00:11:30] So you were, you were already in, I, it’s almost embarrassing to use the phrase cyberspace. So you were online, but you used

David Gardner: [00:11:38] On the Information Super Highway. That’s

Barry Ritholtz: [00:11:40] Right. But all the traditional media to point towards the website, how long did it take before you kind of said to yourself, Hey, this is a real business, I don’t have to go get a job, I could just

David Gardner: [00:11:52] Build this. We started at such a good time because a OL as you’ll recall, was a pay per hour

Barry Ritholtz: [00:12:00] Service. That’s right. In the beginning anyway. Correct.

David Gardner: [00:12:02] Like $3 25 cents. I think they raised it to four at one point. Right. And so the business model was remarkable for us. [00:12:10] If somebody spent an hour at Keyword Fool, we would get 10% of that. So if they’re paying aol four bucks an hour, 40 cents, 40 cents for any hour that anybody would spend at our site. And so with a tiny staff and a big dog that was mailing out CDs and DVDs to get onto AOL, the services cocktail coasters at parties, we really benefited from that ramp. And so we began to be able to hire other people. [00:12:39] And that when the, so that, yeah, that was it.

Barry Ritholtz: [00:12:41] When the CDs started getting mailing, I think they had moved to like all you can eat $10 Yeah. A month or something like that. It’s

David Gardner: [00:12:49] More like 30 bucks a month.

Barry Ritholtz: [00:12:50] 29 95. Exactly. Yeah. I don’t, I don’t remember exactly what it was. [00:12:53] Yeah, I just remembered that was the end of surprise bills. Oh, it’s infinite. Okay, great. Yeah, I’m on 24 7.

David Gardner: [00:13:01] And that hurt our business a lot. Oh, some It also, it also more traffic, major inflection point. Yeah. Because we had built a site that was really fun to visit. [00:13:11] We had very active forums. We were publishing multiple times a day. Lots of people were showing up. There were even chat rooms back then. [00:13:18] Right. People were spending time online and 40 cents for every hour. So we were starting to hire people. And then within a few years, AWOL went flat rate. [00:13:26] And all of a sudden we had been the stars of AOL. They were putting us forth at their partners conference. We were on the cover of Fortune Magazine just three years after we started print newsletter. We were right out front. [00:13:36] And then we became kind of poison for AOL in this sense, every hour that anybody spent AOL had to pay connect fees. Now

Barry Ritholtz: [00:13:44] It’s a cost instead of a But they’re [00:13:46] Be, yeah. They’re only charging 30 bucks flat a month. Right. And so all of a sudden, magnet sites like ours were not as popular.

David Gardner: [00:13:53] And then meanwhile, a OL understandably, we, no harm, no foul here, but they were starting to launch a OL finance and a OL stocks and competing directly with kind of where we’d camped out and built our base,

Barry Ritholtz: [00:14:05] Hold my beer, we’re gonna launch our own website, whether people access it through you or not. Yeah, that’s fine. So, and we know the how the a OL story ended at that point you’re thinking, oh, this is a big issue. How long did it take before the website hit the same sort of, oh, this is a self-sustaining business?

David Gardner: [00:14:28] Yeah, so we launched the website alongside our a OL site with our first book, the Motley Fool Investment Guide in the summer of 1996. And the website, a OL took part ownership in us. So we gave, we gave a minority interest in our company to a OL and they’re like, guys, go out on the web, compete with your own site, compete with us, Ted Leonis, who is a real visionary. And Ted was like, guys, no one’s making money on the web show anybody how to make money here on the web. [00:14:54] And so we built our website and we started pointing people to our, both our website and our AOL site. And as it grew and as AOL went flat rate, the good news for us is a lot more people came online at that point. 30 bucks a month versus $4 an hour. A lot. [00:15:09] That’s mainstream. Yep. And also good news for us is that we could survive as a free site. So we could now be free for a lot of people. [00:15:17] The bad news was, we’ve shifted business models straight up advertising. Right At that point, it’s all about eyeballs and clicks. And your customer, our customer just changed because our customer had been the beloved fellow individual investor who was taking a risk to even go online back in the day. Right. [00:15:34] And there they were paying four bucks an hour and they loved us, and they were our members and they were paying us directly. All of a sudden they became the product that we sold to advertisers. Right. Because that’s obviously the free ad business is your customers, your eyeballs are now your new product.

Barry Ritholtz: [00:15:51] And as a reminder for the youngsters listening, 96, 97, wait, you want me to give my credit card to a random moment? this is

David Gardner: [00:16:00] Such an important

Barry Ritholtz: [00:16:00] Moment. Like early days of Amazon, early days of AOL. All right. There were a handful of companies you might trust, but there’s a million websites. [00:16:08] I don’t trust any of these guys. I heard that over and over again. How long was it before you people felt, oh, we could subscribe to this newsletter, we could give these people money to manage What was the forward timeline?

David Gardner: [00:16:20] So thank you for that memory, because this is very important. Anytime a new technology shows up, it’s generally we’re fearful about it. What is AI gonna do to jobs? Well,

Barry Ritholtz: [00:16:29] Back then, I had a tech buddy who always used to tell me, if you wanna know where technology goes, watch the X-rated stuff course, they’ll be the, they’ll be the first with micropayments. They’ll be the first with faster than real time and streaming and things like that. And it turns out that’s a big driver of online business even to this day.

David Gardner: [00:16:49] Yeah. And I think that’s that’s true. So you’re right, premium experiences and premium services are where the web has ended up. However, there was a whole shift. [00:16:58] 98, 99, 2000. You really couldn’t charge for anything on the web. If we had tried to say, you now shall pay for our site or there we have a subscription service, we would’ve been laughed at. Right. [00:17:10] At the same time though, as a stock picker, I was picking AOL stock saying, I think this is an amazing company. And it sure enough was it ended up being 150 bagger at its top didn’t end there. But it was still a remarkable investment. And lots of people had followed us into AOL and other stocks like the Amazon. [00:17:28] And it was really going against conventional wisdom at the time to say, buy Amazon, buy AOL. And so I want people to remember that because now it looks so obvious. AOL didn’t end well. Amazon has ended really well.

Barry Ritholtz: [00:17:42] It hasn’t ended. Right. That’s right. So it’s important to remember those moments. [00:17:46] ’cause we tend to forget them. We also forget the dawn of ai. This is first thing in this ball game and people will look back and go, it’s also obvious in retrospect.

David Gardner: [00:17:54] Right. It’s always obvious in retrospect. [00:17:56] It is indeed, Barry. It’s

Barry Ritholtz: [00:17:57] At the time. It’s really challenging. So last question in this segment, if you were starting the Motley Fool in 2026 instead of 1993. So we have social media, we have free trading, we have ETFs everywhere. [00:18:15] The world is so different today than it was 40 years ago. What would you do 30 years ago anyway? What would you do differently? How would you build a site and a business today, this time around?

David Gardner: [00:18:27] Well, I think first of all, one thing that we know today that we didn’t do back then that I think is very helpful in every era is to be a purpose-driven business. And to state what is your mission? What is your purpose? And really hue to that and breathe through that and hire for that and promote because of that. [00:18:44] And conscious capitalism is one of my themes as an investor and a board that I’ve served on. So I now have those eyes that I didn’t have back then. And I think that is such a strong thing. Most of the best companies I know look at crazy business of fast food. [00:19:02] Chicken Chick-fil-A is an amazing company. I wish it were a public market company, it would’ve been one of my stock picks. But they just fundamentally act differently than McDonald’s and their competitors. And it’s because it’s like a leadership academy masquerading as a chicken joint still closed

Barry Ritholtz: [00:19:18] On Sundays.

David Gardner: [00:19:18] Yeah, exactly. Which is their choice. Radical and it, so those are the kinds of companies that I admire. And like, that’s what I’ve always wanted the Motley Fool to be. [00:19:26] So I would do that in earnest today in a way that I think would cut through a lot of the noise and people saying there’s too many choices and all the rest standing for something and then living that every day. Most of the best companies that I can think of do that. So I would be trying to do that, Barry. But yeah, it is a different world. [00:19:42] We, one thing that’s changed, I think for the worse, and I’m an optimist, almost everybody’s mailing it in with index funds these days. Like I was raised in an era where it was kind of normal, at least in my family, buy a stock these days, the conventional wisdom has become, you’d be crazy to buy individual stocks that’s so risky, just index. And while I admire Jack Bogle deeply, and I appreciate indexing and the Motley Fool has always been a big supporter of index funds, have we really got an era where you shouldn’t even pay attention or care anymore. And you can’t probably beat the market because it would just be luck to pick Chick-fil-A over Kentucky Fried Chicken. [00:20:22] I don’t think so. I didn’t think so back then. And so I would be definitely sounding that loud and clear today. There’s even more big dumb money sloshing around than ever before. [00:20:30] ’cause so much is just throwing it at everything and not discerning this one versus that one. Huh.

Barry Ritholtz: [00:20:33] Really interesting. Coming up, we continue our conversation with David Gardner, co-founder of The Motley Fool, discussing his book, rule Breaker Investing, how to Pick the Best Stocks of the Future and Build Lasting Wealth. I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. [00:21:03] I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest is Dave Gardner. He’s the co-founder of the Motley Fool and the author of the book, rule Breaker Investing, how to Pick The Best Stocks of the Future and Build Lasting Wealth. [00:21:20] So I wanna talk a little bit about the philosophy around rule breaking investing and stock selection. One of the things that jumped out of the book from your framework was top dog and first mover customer love, visionary leadership, discuss.

David Gardner: [00:21:40] Yeah. Well thank you. These are some of the traits that I’m looking for in stocks. And I think before we start this, Barry, I should just, again underline, I believe it is a worthy thing to choose stocks. [00:21:53] I really want to find the best companies of our time and I wanna own them for a long period of time. And actually it’s, it’s, for many people, it’s actually easier to find Amazon or eBay back in that era or Nvidia more recently. But to actually hold them, to hold them, to allow them to multiply in the way that they will, if you do, in my experience, that’s hardest

Barry Ritholtz: [00:22:15] For most people. Let’s, let’s talk about that. ’cause Amazon, after the.com crash plummeted to single digits. Yep. [00:22:23] Apple has had more near death experiences than I can count Nvidia. Go down the list. Google, Facebook, Tesla, Facebook’s IPO was a disaster. It got cut in half, like within few months of that. [00:22:35] And then they kind of unlocked mobile and it was off to the races. Yeah. Tesla, the, these companies trade more like cryptocurrencies than companies. How do you find the confidence and the commitment to stay with something down 40, 60, 80%?

David Gardner: [00:22:54] So thank you. And I would say first of all, it’s not worth doing that for every investment. Certainly if it were some dodgy crypto, I wouldn’t be holding. But you used an important phrase a minute or two ago, you said top dog and first mover. [00:23:09] So when I look at important emerging industries and I see a company with a large customer base, they may not be profitable yet, but they’re doing good things in this world, a world I wanna live in. And their stocks down, their stocks been cut in half. What’s the reason? Sometimes it’s the CEO like Howard Schultz back in the day with Starbucks, was just occasionally conservative and the analysts were surprised as he under promised. [00:23:35] And then the stock drops 15%, and a week you,

Barry Ritholtz: [00:23:39] You told the story about this going on the view, yeah. The stock ends up down 30%, but, and that was your last appearance. And then what happened to

David Gardner: [00:23:47] Starbucks? It went up 30 times in value. And we’ve never been back on the view, but, and by the way, I’ll return at any time. We’d love to close the loop on that story. [00:23:54] But yeah, that was 1998, early TV appearance. We picked a stock for the ladies of the view and then it was Starbucks. That’s the punchline by the way. I shouldn’t have given that. [00:24:05] But yeah, the stock dropped 30% in just a couple of months. And we went back on the show to update the story and they booed us good naturedly. And they’re like, oh

Barry Ritholtz: [00:24:15] Well. And we’re

David Gardner: [00:24:16] Like, keep holding though. Keep holding. And then they’ve never invited us back since. And it’s gone up 30, 33 times the value from our first appearance, not even including the 33% drop. [00:24:26] So, that was an iconic moment. I didn’t realize it at the time, but as I wrote rule breaker investing, I was just thinking, that’s my story. Because that’s what most people miss. Most people are following the headlines instead of following real progress and they’re chasing stuff. [00:24:42] And if you just look and ask who are the movers and shakers delivering products and services, electric cars, robotic surgery, coffee houses, better fajitas, the list goes on. Who are the,

Barry Ritholtz: [00:24:55] So I’m thinking Stryker, Chipotle, Tesla.

David Gardner: [00:24:58] Yeah. Well actually intuitive surgical. Okay. But yeah. [00:25:01] Yeah. But yes, you’re thinking exactly the comments. I was thinking,

Barry Ritholtz: [00:25:04] I’m seeing the robot that did my surgery.

David Gardner: [00:25:06] Ah, I’m very happy

Barry Ritholtz: [00:25:07] To hear that. And when I recall walking into the surgical theater and looking around and saying, oh, this is where the future is. I’ve just gone 20 years forward. Yeah. [00:25:18] ’cause this whole thing is here’s the big robot with all the like, oh, now I understand. Like the rest of the world. We’re living in the past. This technology is as cutting edge as it gets. [00:25:29] It’s, it’s really amazing.

David Gardner: [00:25:30] I love that. And I’m so glad to hear that for you in successful surgery, which is what we all want, robot or human. But yeah, it turns out there are lots of advantages to robot assisted surgery. Yes. [00:25:40] And Intuitive Surgical has really been the pure place small companies. Stryker is a more bigger diversified company. Yeah. Anyway, but for each of these, like,

Barry Ritholtz: [00:25:48] I just happen to remember what the little logo on the saw, the last thing I saw. That’s

David Gardner: [00:25:52] A good thing to do. Yeah. They’re

Barry Ritholtz: [00:25:54] Like, this’ll help you relax. And then the next thing I know, I’m in recovery. Wow. But the last thing I saw was the Stryker logo.

David Gardner: [00:25:59] Great story. And, so it’s funny you mentioned the future and feeling like you’re living the future. That’s generally where I try to be as I pick my stocks. And just for the fun of it, one of my best stock picks and the last 15 years has been Tesla, which I picked in 2011, still holding. [00:26:15] And I bought, I’ve owned a number of Teslas since, and I was driving around in Tesla in 2013. My license plate in Washington DC is future. Like, no one else thought of it. So I’m, I’m watching out for the future Washington DC and I’m driving around going, I really am inside the future.

And I’m surrounded by not just other cars that aren’t yet, but a whole industry, gas stations, et cetera of things. Right. There’s not as much maintenance needed. So that’s a great iconic example of, for me, whether it’s Starbucks back in the day, which was questionable for a lot of people ’cause it looked like a fad.

That was the big wrap on Starbucks early nineties. Where have coffee houses ever come from in America? There’s no background for this. This is such a fad paying five bucks for coffee. Are you serious? Right. That, so AOL was all just chat rooms. They were all gonna be hyped.

No one will ever give their credit card over the internet. Tesla electric cars will never work. Intuitive surgical. Why would you have a robot when humans can do it just as well do the list goes on at companies

Barry Ritholtz: [00:27:15] All the way around. Why would you have a human when a robot can do it, that

David Gardner: [00:27:17] Is indeed

Barry Ritholtz: [00:27:18] More, not only just as well, but more consistently. Yeah. And it doesn’t matter if they had a bad night, it’s, it’s fine the next day.

David Gardner: [00:27:26] And minimally evasive. Right. And speaking of the next day, you’re walking home the next day, that night it’s most of

Barry Ritholtz: [00:27:30] Two days. Oh no. Same day you walk outta the hospital. It’s kind of terrifying.

David Gardner: [00:27:34] Although you’re still on a lot of drugs at that. Yeah. [00:27:36] So, well one of my heroes is Clayton Christensen, who wrote The Innovator’s Dilemma. And he’s somebody who helped me understand and think about disruptive innovation. And I’ve always invested in the innovators. And back to your earlier question, Barry, I can keep holding my Netflix when it loses two thirds of its value when I believe in Netflix and I see visible proof every day of how important Amazon back in the day, Netflix, Tesla, the list goes on, the companies we’ve mentioned. [00:28:03] So that helps me hold these companies. If you follow the company as opposed to the zigs and zags and the stock charts or the headlines, you’re going to be much more patient, I think, as an investor. And that has been my, that’s been a superhero power for me.

Barry Ritholtz: [00:28:15] So walk us through your stock picking process. How does a company first land on your radar? What sort of analysis do you do? When do you decide you’re comfortable to put it on your buy list? [00:28:28] And are there any non-negotiable check boxes that you say, Nope, that’s a knockout. They don’t

David Gardner: [00:28:34] Have this. every one of those questions I could possibly fill your ears up. So I’ll try to be brief. I love the questions in reverse order, by the way. [00:28:42] I’ll say any non-negotiables. I don’t invest in companies whose fundamental business is to take money from other people. And so you’ll never see me recommend a so-called gaming stock. And I think sports betting is a joke. [00:28:54] And it’s, while I think it always should have been legal, I think it is a sad waste of money for anybody who does the math. And so that would not be on my list. No Mott lethal member has ever received a gaming recommendation from me.

Barry Ritholtz: [00:29:05] And they have been very destructive, primarily to college age men. Yeah. There’s a growing gambling addiction problem. And these companies just, that’s their, that’s their clients.

David Gardner: [00:29:17] Yep. And I will say I love sports. I know you do too. And I’m happy making a bet with friends. [00:29:23] But if you really do the math of a 50 50 prospect where the house takes out its 10% Right. And you just do your expected return and play that forward with all your money, I know where that goes. And you could have had nine to 10% annualized returns.

Barry Ritholtz: [00:29:36] There’s a huge [00:29:36] Difference. You [00:29:37] Knucklehead, there’s a huge difference between doing a box for the Super Bowl or something. Yeah. For March Madness.

David Gardner: [00:29:44] Yeah. Have fun

Barry Ritholtz: [00:29:45] And betting on free throws. it’s, it’s just, it has nothing to do with sports. That’s just the medium by which they are tickling your adrenaline and dopamine. It’s, it’s so, and yet the these have become giant

David Gardner: [00:29:59] Businesses. Yeah. And, even something as innovative as prediction markets, which I am fascinated by, are also being turned into quick money and or sometimes questionable who can influence the outcomes of prediction markets. So these are unfortunate things where I think they’re fascinating to follow, but if you’re serious about your own money and you would like financial freedom one day, you’re making a huge mistake if you go there. [00:30:19] So back to your question, that’s a non-negotiable for me. I don’t like businesses that just fundamentally lead people who don’t know math to give their money away regularly. I don’t feel great about that if I’m a shareholder.

Barry Ritholtz: [00:30:31] So let me roll you back a little bit. How does a company typically find its way onto your ra radar? Is it something you’re using or something you hear about? Like where do most of your these ideas come from?

David Gardner: [00:30:43] So the ideas come from, first of all, I’m an early adopter, so I’ve got a closet full of things where I bought the thing early first gen and it’s not really working or wasn’t relevant anymore. And so, but it also meant I bought Tesla very early on. I, and I tried online services with my scratchy phone. That sound we can all hear if you’re over 40 years old today of logging onto AOL.

So I love the new, I’m excited by ai and that’s not an industry by the way, that is a plate tectonic shift for our society that’s gonna create many industries, many of which don’t even exist yet. Just as we were excited about the internet with Amazon, where my cost base is today, is 16 cents still holding? Uber hadn’t even shown up yet. Google hadn’t shown up yet.

It’s, it will be years before AI companies that are amazing, that are great stocks show up. So no one should feel anxious that they don’t have an AI portfolio yet. But anyway, so I’m an early adopter and then I’m connected to a community, the Motley Fool community, our forums, discussion boards, meeting people of book signings. The list goes this conversation right now.

Barry Ritholtz: You mentioned Stryker. I probably need to look back at that one. I’m curious how it’s done. So I’m just always listening.

David Gardner: Of course, social media is full of these kinds of opportunities. So intellectual curiosity is the flame that will burn my whole life long. And in many of my fellow fools, and I think my host today as well. So I think that if you’re curious and you’re asking questions about where society’s headed and you’re specifically looking for products and services that will improve our lives and our kids’ lives, you’re going to be looking, you’re gonna be fishing in the right pond.

Barry Ritholtz: [00:32:14] So once something falls on your radar, you have six rule breaker criteria. Walk us through those six. Yeah, I’ll do really that’s the heart of the analysis that you do, right? It

David Gardner: [00:32:24] Is, it’s, it’s six traits that I’m looking for. And that’s the middle of my book. And I didn’t start the book that way. And we could talk about that later if you like. [00:32:30] But let me just rattle right now through my six traits of rule breaker investing. And by the way, I’ve used these now into my fourth decade. I didn’t just come up with these yesterday. This is exactly what caused me to pick AOL, Amazon, Tesla, Nvidia, the list goes on.

And it’s, some of them are so contrary, which is why I think it works. Number one, top dog and first mover in an important emerging industry. We already spoke to that one. We could go deeper.

You might. So for today, that might be Nvidia, it might be Broadcom, it might be aASM lithography, it might be AMD, it could be any of the semiconductors or some of the software companies. Google, Microsoft, whoever.

Yeah. And also by the way, restaurant companies, retail, and every industry I’m asking who’s the innovator? I wanna know who the Inno And if you honestly just only focus your stock market attention on the biggest innovator in each industry. Some of them are small emergent, some of them are big. [00:33:25] You’re gonna do so much better as an investor.

Barry Ritholtz: [00:33:27] So Starbucks the third place. Yeah. That was the big driver of them. Chipotle, they came up with a way to assembly line fresh food.

David Gardner: [00:33:35] Yeah. The fact that it better quality, the fact that it happens to be Mexican based is almost revent irrelevant. You see Kava today doing the same thing with Mediterranean. And I’m sure there are dozens of others coming up. [00:33:47] There are, and by the way, not all of these work out as stocks. I certainly have a closet full of bad stock picks as well. And we could talk about that later. But that’s very important. [00:33:56] If you have sort of a venture capital mentality as you look at the public markets, which is how I describe myself, you need just like a vc, you need to be comfortable with losing. It’s,

Barry Ritholtz: [00:34:05] It’s okay. In other words, it’s, you’re, you’re looking for here a hundred investments, 50 A aren’t gonna work out 30 will do. Okay. But it’s the top two or three that make it worthwhile.

David Gardner: [00:34:15] Yeah. And I truly go into all hundreds saying, I like this company. I believe in it, I hope it works out, but I’m never loading up on one, et cetera. So top dog and first mover and important emerging industry of my six traits, that’s the most important. [00:34:29] So number two, we’re looking for a sustainable competitive advantage.

Barry Ritholtz: [00:34:34] A moat as Buffett likes

David Gardner: [00:34:36] To say, you bet. And because we’re holding stocks for a dead minimum of three years, preferably three decades, sustainable competitive advantage really matters. And that takes many forms. We could talk about that. [00:34:50] Number three. So the first two are about the company, the third is about the stock. And this is, I’m looking for a strong stellar past price appreciation in the stock.

Barry Ritholtz: [00:35:01] In other words, you’re not looking for the cigar stub to use Ben Graham’s the opposite phrase. You’re looking for something with a little momentum and where more and more investors are stepping in.

David Gardner: [00:35:13] There’s a chapter in my book and it was an eye-opener as I wrote it and realized it, where I listed out seven of my best stock picks from intuitive surgical to Netflix, to Apple, to Amazon, to Nvidia and a couple of others. And I noticed, and I only realized this in retrospect, that in the three to nine months leading up to my first pick of them, on average they had risen 30 to 90%. And a lot of people, I think most people when they are researching a stock, it goes up 50%. They’re like, oh that’s missed it.

Barry Ritholtz: Right? It’s done. Right.

David Gardner:  Yeah. And so part of the reason rule breaker investing works is because I’m willing at that point, not just to buy it, but to actually be more excited about it. Because clearly the market is noticing what’s happening now. And when companies rise, reflexivity starts to show up, Barry, they start having more resources. [00:36:04] They’re getting mentioned on Bloomberg radio, all of a sudden a lot of good stuff starts coming to them that strengthens them. That’s not a reason to look for another cigar bot and ignore Nvidia. So that is trait number three, stellar past price appreciation in a world where most people are like buy low, sell high, right? I’m looking to the 52 week low list friends, not the 52 week high. And when I say friends, I mean that’s the average person speaking. I’m looking for the 52 week high.

Barry Ritholtz: Give us four, five, and six.

David Gardner. [00:36:31] So number four, it’s all about the people. We’re looking for smart backing and excellent management. So it’s the human capital. And this is again, in some ways obvious.

Yeah, we’d love to have Steve Jobs be our CEO. Yeah, we’re glad that Jeff Bezos is our CEO or Warren Buffett. But keep in mind, and this is a really hidden in plain sight, I think profound insight that most people don’t see, even though I, it’s hidden in plain sight, there is no number to express the value of the CEO running companies. So we have a whole Wall Street world that’s built on valuation rate ratios, generally off of earnings or cash flow, sometimes off of assets.

And they’re not including that Elon Musk is the CEO of the company. And by the way, there are a lot of CEOs who are subtracting value from their companies and there’s nothing to express that. And so we have a whole world driven off algorithms that increasingly is computer trading. It’s not even humans anymore. [00:37:29] And they’re not noticing or caring. I think about trait number four, who the heck’s running this thing and who’s backing it? That matters deeply to me, especially if I’m holding as I do for three decades. Number five, we’re looking for strong consumer brands.

I love companies that have raving fans. And it doesn’t mean every time that they are a consumer brand. Stryker Drilling, intuitive surgical, these are not consumer brands per se, although Intuitive Surgical with its Da Vinci surgical robot, you will hear your local on your local radio if you still listen to it, you’ll hear an ad for the hospital bragging in some cases, right, that they have a Da Vinci. So there is some brand recognition there. [00:38:07] But Starbucks, Netflix, Amazon, these are all my best stock picks and I bought them years ago and still hold them today. And they all exhibit that strong consumer appeal. And the final probably my favorite secret sauce. So if you’re following us, the first two are about the company, the third was the stock, then the next two, four, and five, the people and the brand are about the company. [00:38:30] Number six is about the stock. And it’s specifically that the stock is generally considered capital o overvalued by the, by the world at large, by Wall Street commentators by people in Barons, CNBC, never Bloomberg Radio

Barry Ritholtz: [00:38:45] Course. So a little, so a little contrarian perspective,

David Gardner: [00:38:47] We are specifically wanting people to call out Tesla as ridiculously overpriced. Amazon will never make money. Intuitive surgical, when I first recommended it over a hundred bagger ago, it was at 73 times earnings. There are people, if they even do pay attention to stocks anymore that say I would never buy a stock with a priced earnings ratio of 73. [00:39:06] The list goes on.

Barry Ritholtz: [00:39:07] So a lot of times when we see stuff, especially with a company that’s relatively young, you start to see the company grow into their valuation. And NVIDIA’s a great example. It was a semi maker then. It was a floating point chip maker for gaming before it did the pivot to full ai. [00:39:29] ’cause FPU are turns out to be better than CPUs for large language models. And I don’t pretend to be a wizard on that CPUs

David Gardner: [00:39:38] Than GPUs, graphic processing’s units.

Barry Ritholtz: [00:39:40] Yeah. I dunno what F is floating point unit, but GPUs, that’s exactly right. But, two years ago Nvidia was like a 75 pe. Now it’s like a 40 PE and falling can’t some of these overpriced companies just grow.

David Gardner: [00:39:58] Apple is another example. For the longest time people looked at Apple in the two thousands when that Newfangled iPod came out and said, oh they don’t have any profits whatsoever. Why would I wanna own Apple in oh four or oh five? [00:40:15] So I think that first of all, let’s be clear, there are things that are overvalued that you and I would not wanna buy. But if you’re following our conversation, if you’re buying a top dog and first mover in an important emerging industry with a sustainable competitive advantage, stellar past price appreciation, excellent management, smart backing, strong consumer appeal, it has all five of those things in place. And then some guy on CNBC is telling you it’s blatantly overvalued. It’s crazy. [00:40:43] No one should ever buy that stock. Amazon do bomb cover of Baron’s. That is the special sauce that causes me to say, bam. Now we’re buying and well the Amazon, it’s so contrary.

Barry Ritholtz: [00:40:54] The Amazon bomb was, I wanna say January, 2000. And we did see a giant collapse. What was the QS fell about 82% pizza trough. That’s a pretty

David Gardner: [00:41:05] Big block. I experienced it all the way. In fact, our cost basis 16 cents, it had gone up. It was a 30 bagger. [00:41:12] And again, when I’m picking stocks, this is not for my, this is not for my own portfolio. This is not, this is lots of people following the Motley Fool. This, these are people subscribing to us. So right. [00:41:21] When I pick a good stock, it feels really good. It’s not about me. When I pick a bad stock, it doesn’t feel very good. It’s not about me or a

Barry Ritholtz: [00:41:29] Big, a good stock that hits a buzz saw when a market gets shellacked. Exactly. And you could own anything during the financial crisis. Everything still got cut in half more or less. [00:41:38] It was quite a, quite a

David Gardner: [00:41:40] Crash. You’re right Barry. And the truth is that if you follow any of these companies, I’ve, I’ve littered our conversation with 15 to 20 company names that are really 15 to 20 generationally great stocks. Every single one of these stocks has lost 50% or more of its value more than once. [00:41:57] Which means that if you’d followed Motley Fool advice, depending on your timing, you might love me or not like me. You might be like, yeah I got in there but got cut in half and I got out. We’re holding all the way through. We’re buying and we’re holding. [00:42:11] So I have watched Amazon go, this is kind of pre-split. It was at three when we first recommended. It went to 95 down to seven during that two 2001 era I recall for sure.

Barry Ritholtz: [00:42:22] Incredible. More splits soon after. Yeah,

David Gardner: [00:42:24] Yeah. It’s now split down to 16 cents, which by the way is also my cost base is on Nvidia. Thanks to the magic of stock splits, they both got me at my 16 cent. Cost base is still holding. [00:42:34] So, but to do that like Nvidia just three years ago lost half. Its value in one year. This is one of the largest

Barry Ritholtz: [00:42:41] Companies. It was like four months in the it get cut in half. Yeah. Right.

David Gardner: [00:42:43] So

Barry Ritholtz: [00:42:43] This is just gonna happen.

David Gardner: [00:42:44] 2022, it really got [00:42:46] Shellacked. This is not gonna happen for companies that are not dynamic, this is not gonna happen so much for cyclicals. I mean there will be some cyclicality, these are rule breakers, these are stocks that by most popular view were blatantly overvalued. You should never have bought Amazon all the way through, et cetera. [00:43:02] And so they’re gonna be more volatile. Netflix was gonna get put outta business by Walmart. I don’t know if you remember this, but back in the day of the red envelopes, all of a sudden Walmart said, Hey, you can just drop it off at your Walmart, your DVD, you don’t have to mail it back to Netflix. That was gonna, Netflix was supposedly toast then. [00:43:18] So I’ve a OL was gonna be toast. It eventually was kind of toast, although it sold out the

Barry Ritholtz: [00:43:23] Merger was the problem. Yeah.

David Gardner: [00:43:24] But I’ve watched, it’s such a key indicator, trait number six when people say it’s toast that not for every stock, but for the rule breakers, that is magic. It has been for me.

Barry Ritholtz: [00:43:36] Huh. So I wanna ask you about the first stock you purchased where you said, oh this checks all six boxes. This is my rule

David Gardner: [00:43:47] Breaker. It was a OL. Yeah, definitely

Barry Ritholtz: [00:43:50] AOL 19 91, 4, 5, 6.

David Gardner: [00:43:52] We literally picked it the day we launched on a OL 1994, August 4th, 1994. And from that point I watched a OL and again we were, I mean we’re always fully transparent. People are like, wait, you guys are on a OL, is there a conflict of interest? You’re recommending AOL stock? [00:44:07] No, we know what it is because we’re on it. We see what this can do for investors and what the future of the company is. It’s pretty self-evident, you [00:44:16] Know, you’re right. And yet not everybody would’ve felt that way back then. But it was, I mean we had no inside view of a OL. We were separately domicile, but we watched a OL grow and it was such an object business lesson as an entrepreneur for me. [00:44:31] And, but as a stock picker, I was watching it get called out as the most overvalued stock repeatedly by August. Bodies like the world economic, it’s not the world Economic forum today, but basically all the economists in the world would get together every summer and two summers in a row. It was like 96 and 97. They voted the most overvalued stock and it was the stock that we had backed. [00:44:53] And our members were like, guys, they’re calling it the most overvalued again. We’re like, this is an amazing company. It went up 150 times in value. And I learned so much from that experience. [00:45:03] And as we mentioned, it didn’t end there. It started to drop back and fell back and eventually just kind of got taken over. And, it emerged with time Warner. When

Barry Ritholtz: [00:45:12] When people stop calling stuff over valued and every analyst on the street has a strong buy on it,

David Gardner: [00:45:18] That’s usually

Barry Ritholtz: [00:45:18] When you wanna be on the other side of that. Right. That

David Gardner: [00:45:22] Can, that can be true. I will also say though, not always, but No. I definitely appreciate the sentiment and I smile at that ance with you as well. I will say that we typically just hold, well longer than whatever analysts are thinking or saying. [00:45:35] We don’t really pay attention. So you’re not

Barry Ritholtz: [00:45:36] Quarter to quarter, is that what you’re saying?

David Gardner: [00:45:38] Not, yeah. No. I mean we love following business. By the way, one thing you asked me to think a little bit about is there anything that people should be talking more about, especially if something that troubles me. [00:45:48] And a quick example would be, I really think we should have companies reporting every three months their financial results. And you may know there’s a movement afoot. Yes. To allow some companies just to report twice a year. [00:45:58] I think that’s a really bad decision. And I hope we don’t do that. I hope companies will self-report and choose to be transparent on a regular basis with their results.

Barry Ritholtz: [00:46:07] Yeah, I’m gonna take it a step further than you and say, and I wrote this before AI was ubiquitous. If you want to get rid of quarterly reporting instead of going once or twice a year, make it real time and 24 7 really cool because you could update that. You could set up technology to update, here’s where we are, here’s how close we are, here’s our range. You can Monte Carlo what we would likely to do each quarter. [00:46:34] And so the problem is the focus on quarterly. If it was all the time, like you can look at your portfolio or your checking account 24 7, you shouldn’t, but you can. And it’s made, I remember in the nineties or in the two thousands, we would be printing stuff out, folding ’em up, sticking ’em in envelope, sending them out. And the quarterly report was a, when I was a junior, having to do that crap in the mail room, it was a big deal. [00:47:05] The quarterly report. Yeah. Now nobody really thinks about your portfolio quarterly. ’cause you can access it whenever you want.

David Gardner: [00:47:13] It’s kind of, I think it’s absolutely heading in the wrong direction. Yeah. Well [00:47:16] So more transparency is, the theme here. But, so for me, I think a lot about, what is gonna be in the best interest of armchair investors like me because Barry, we are, we’re individual investors and so I’m there representing anybody who is in an investment club or was given a portfolio of stocks and they’re trying to figure out how to make better decisions. And I think it’s so rewarding to pick stocks in a world where it’s increasingly called out as crazy talk to actually buy an individual stock.

Barry Ritholtz: [00:47:49] So we talked earlier about stocks like Apple and Nvidia, Netflix and Amazon that have all gotten cut in half repeatedly. How do you tell the difference between a stock that’s just going through, so sort of regular volatility versus GE got sliced in half. We look at, I’m not even talking about the Lehman Brothers or the WorldComs of the world, I mean just stocks that their best days are behind them. How do the difference between just a regular stumble and beginning of the end?

David Gardner: [00:48:23] Well, [00:48:23] First of all, I’d say you can’t know. it would be two headstrong of me to say, here’s what, here’s what you do, here’s how. So for me, I just like to keep my stocks in place and recognize some of ’em are gonna trip. I love horse racing metaphors and not every horse is gonna win the race. [00:48:39] Not everyone’s gonna make to the race. Some get out to great start and don’t finish well and I can’t always know. But by holding I allow the ones that clearly will win to win. So grandly, when you make more than a thousand times your money on Amazon or Nvidia, it doesn’t actually matter that you had some dogs in your portfolio. [00:48:57] So you can be wrong and that’s okay. ’cause being right is so much more valuable. I will also add though, to answer your question a little bit more directly, usually the companies that fall and don’t come back are being disrupted. Earlier I mentioned Clayton Christensen innovator’s Dilemma. [00:49:14] You can usually kind of see it that the world is changing. The company might still be best in class and it may have a famous CEO that everybody loves, but all of a sudden there’s this upstart might be a whole industry of new players. And when I see that in a company going down, I may not wanna hold onto that stock. But if Netflix, which has been ascendant now for 20 plus years, every time if it’s down two thirds of its value, which has happened more than once, including Quickster, I keep holding that one. [00:49:43] Right? So the question is, does this company remain a rule breaker? Is it a top dog and still first mover in an emergent industry? And when it is, I’m gonna keep holding that stock.

Barry Ritholtz: [00:49:54] Coming up, we continue our conversation with David Gardner, co-founder of the Motley Fool, discussing his book, rule Breaker Investing, how to Pick The Best Stocks of the Future and Build Lasting Wealth. I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. I am Barry Ritholtz. [00:50:27] You are listening to Masters in Business on Bloomberg Radio. My extra special guest is David Gardner. He’s the co-founder of the Motley Fool and the author of the book, rule Breaker Investing, how to Pick The Best Stocks of the Future and Build Lasting Wealth. When did you realize that Blockbuster was being disrupted by Netflix and ps? [00:50:50] At one point in the two thousands, Netflix tried to sell themselves to Blockbuster for $50 million and they turned them down.

David Gardner: [00:50:58] Yeah, it’s, it’s like Yahoo could have bought Google. You love those stories. Yeah, but, I would say that I never really thought too much about Blockbuster as a stock. I remember we had the CEO on our Motley Fool radio show, and at that time, blockbuster maybe had 25 million customers and Netflix had 1 million. [00:51:14] And he was like, we’re watching what they’re doing. It’s, it’s neat what they’re doing. I don’t think it’s a, it’s not a big scaling thing, right?, it’s kind of a niche thing. [00:51:22] Do you wanna mail your DVD back and forth? And that, I think it was John anco, but good man, probably, but wrong. He was wrong. And so it wasn’t so much that I ever cared or love Blockbuster, I just was watching this rule breaker emerge and it was doing crazy stuff. [00:51:38] Like you can’t just drop it off two blocks away at your blockbuster. You have to mail it and keep a queue and send it back and forth, but

Barry Ritholtz: [00:51:46] The queue is half the value of it. Here’s all the movies I wanna see, which, by the way, every time I roll into Blockbuster, it’s rented. And I’m not even talking about a Saturday night, like on a Wednesday. What do you mean you don’t have this? [00:51:59] Remember those

David Gardner: [00:52:00] Days? So instead just working through the queue, Netflix was like, so that the initial question is, wait, you want me to nail DVDs back and forth to, oh, I see how this works, but this’ll never replace Blockbuster to no late fees. Oh my God, why do I want to give anything to Blockbuster? And it was super disruptive before online streaming

Barry Ritholtz: [00:52:25] And as a, as a master of business administration. Actually, I don’t have an MBA neither, but I know I’m neither a master of business, God beautiful. But as students of the game, as people who love business, what actually was happening was Netflix was changing the business model of the consumer proposition and the whole industry, right? Because as you just pointed out, blockbuster was a transactional late fee driven, and all of a sudden you’re subscribing to Netflix, you’re now in a subscription relationship, very disruptive. [00:52:52] There was no, there was really no precedent for that in that industry. So it looked like this crazy thing, and it was easy to mock. Why wouldn’t you just drop it off a block away, mail it to these people? And yet it fundamentally changed the business model forever. [00:53:08] And then we’re not even talking about streaming, which we don’t have to, but they keep innovating. And, [00:53:11] And the interesting thing is, you men, we were mentioning late fees. if you get a late fee from your bank or a bounce check fee or something, it’s part of your statement. It’s not the same thing as showing up and having someone say, gimme another seven bucks. What do you mean give you another seven bucks? [00:53:31] It was just like so annoying it and alienating, like, I think it’s a good rule of thumb. Try not to really piss off all of your clients, all of your customers. Not a good long-term strategy.

David Gardner: [00:53:44] I have a small confession to make that Wall Street Summer, I referenced when I went to Solomon Brothers, we did, we had a video out from Blockbuster and we kept it the whole summer. We just kept not returning. We were irresponsible college sophomores. And at the end of the summer, I’m not even sure, like we had racked up a triple digit late fee,

Barry Ritholtz: [00:54:01] Right? And the video is 20 bucks to buy. Exactly. Just go buy another

David Gardner: [00:54:05] One. So we had a friend of ours who is British, go in with a British accent and explain to Blockbuster that we were renting his place. He doesn’t really know about it, but here’s this video that he found. And so we kind of got out of that one. [00:54:17] It wasn’t totally above board. So I’m happy now to admit that this is helpful for me. But yeah, that was kind of the state of things, the anxiety, the angst around returning a video late and not feeling great, from a consumer branding standpoint. Right.

Barry Ritholtz: [00:54:32] So yeah, Netflix love them. So, [00:54:34] So let’s talk about rule breakers today. They’re gonna be in different spaces, biotech, defense, tech, obviously ai, and a lot of these areas don’t have a whole lot of earnings or, and they do have a massive cash burn. So how do you think about valuation in the space? Does it not matter if the growth is there? [00:54:54] Define the modern era of rule breakers.

David Gardner: [00:54:58] So I would always be, first of all, looking at industries and you just did that some, and, even something like biotech, which you said, right? That’s, as, Barry, that’s multiple industries, right? there’s, there’s, so the internet was never an industry. AI is not in industry. [00:55:14] So we’re talking about, again, huge technologies. I was saying earlier, plate tectonic shifts for our society. And you’re looking for the beneficiaries and you’re looking for the visionaries who are starting something that might sound a little crazy, like mailing DVDs back and forth, or an electric car. And you wanna get invested in those. [00:55:33] Assuming that you agree with the vision, you think the person is great. You and I were referencing investment research circa 1980s, nineties, an annual report being mailed to you through the mail. That was about all you had. There weren’t online forms or anything these days. [00:55:47] You can watch long form YouTube videos watching any CEO be interviewed and learn a lot about their character, which carries, which matters deeply to me, I’m a big character person, so I wanna feel really good about the people I’m invested in across my portfolio. So we’re looking at important emerging industries, and we’re not trying to force things that don’t exist yet. There’s no ultra AI stock. Nvidia has been an amazing hold for us now 21 years in counting. [00:56:13] It was not an AI company when I first recommended it, but we’re still holding. But, these things are gonna emerge. I already mentioned earlier things like Uber, Airbnb didn’t show up till more than 10 years after the internet had really started to penetrate American life. And so for me, it’s just keeping our eyes out, whether it’s genomics or some Duolingo, a video game on your, on your phone where you’re learning languages. [00:56:42] Again, all of these are from different industries, but they are the innovator. And so yeah, we’re, we’re staying focused in the modern day go forward on what are the companies that are going to add value to our world in a way that is consumer noticeable, and when they’re called overvalued, that’s even better for us as rule breaker investors.

Barry Ritholtz: [00:57:01] So let me share some criticism that you share with Warren Buffett of all people, when I’m doing my research for this conversation. One of the things that came up was you have this really good long-term con track record, but if you’ve been involved in more recently, in the past 10, 15 years, well all those Amazon’s Netflix, apples from the early two thousands are driving most of your gains. From what I’m hearing from you’re implying that doesn’t really hold true. If you look at the Teslas and the Ubers and the more modern positions respond to that criticism, Hey, if you weren’t in it in oh three, you really didn’t get any benefit.

David Gardner: [00:57:43] I, well, first of all, I would say that invest every day of your life every two weeks if you can, young people, the first thing you should do is open an account if you haven’t already save. And with every paycheck, try to put up to 10% away and put it in if you want. You can index, but I think you should be buying stocks as well alongside that and learning as you go. And anybody who’s playing the long game in the markets as they start to hit their 30th or 40th year, which is where I am, it’s always gonna look like all your big winners we’re the first 10 years, because of course they are. [00:58:16] Literally, Amazon is now more than a thousand times of value for me. I’m not trying to be Amazon guy, you don’t walk me, you don’t see me walking around going, I’m the guy who had Amazon 16 cents. I also have that for Nvidia. But just by the nature of compounding Barry, which I think you understand as well as anyone, it’s always gonna look like all your big winners were early, but, whether it’s Tesla, Pickton, 2011 or Shopify in 2016, these are all rule breakers. [00:58:45] They’re not gonna hit right away. Shopify has been up and down, but mostly up. It’s a great example of a rule breaker circa the last 10 years, not the first 20 years, but I never want people to forget. We were right there at the beginning with a OL, and we were picking a OL and Amazon and Starbucks, by the way. [00:59:02] And the list goes on. So I would just say compounding numbers are always gonna make it look like all of your big winners are early in your career.

Barry Ritholtz: [00:59:10] So before I get to my favorite questions is just one question I’m excited to ask you when you’re looking ahead, what trends, what businesses, what ideas generally get your curiosity going?

David Gardner: [00:59:23] Well, this is, this is, and in the same way that seven Up was the uncola back in the day, this is an unanswer because by

Barry Ritholtz: [00:59:32] The way, you’re talking to a generation

David Gardner: [00:59:33] I know that

Barry Ritholtz: [00:59:34] Has no idea what that means.

David Gardner: [00:59:35] I but you and I do though. Yeah, course. And we got some of our peeps listening. Right. [00:59:39] For sure. So, yeah, I should have just answered the question. So I look for companies that are conscious capitalism kinds of companies. I want companies that first of all are doing good in this world by my perception. [00:59:56] A lot of people think it’s a trade off in life. They think capitalism is greedy and evil and, you’re abusing workers and it’s all about maximizing shareholder value. I completely disagree in many cases, sure that exists in the world, but that’s not the story of Amazon. Amazon is a big, beautiful, amazing enterprise that helps save lives during COVID. [01:00:15] And yes, they’ll get criticized for some of the things that they’ve done. And Jeff Bezos is considered an egomaniac by some. But net, please, Amazon is a huge value contributor. So that’s an example of a company, Reed Hastings and what he created at Netflix. [01:00:30] There’s a whole 80 page slide a lot of entrepreneurs have seen about how Netflix does culture that they just kind of shared out. And you could see why they’re so successful. ’cause how they treat their employees and the standards that they hold where doing good actually leads to doing well. And again, many people think that’s a trade off, or they don’t actually think that’s real. [01:00:49] So I specifically want you and I to make our portfolios reflect our best vision for our future. And so every company that I already like, invade against the entire industry, the gaming industry earlier, sorry, gamers, but by the way, I’m a gamer, but I play video games and board games, not 50 50, and the house takes 10% game. But I would say that you’re looking for the people who are doing good or within their industry, they’re admired for how they treat their employees, how they win for their customers, and how their partners and suppliers are proud to be associated with them. And guess what, usually the stocks end up outperforming in a world where many people think it’s too risky to even buy individual stocks. [01:01:28] So the more there’s big dumb money sloshing around out there, Barry, the easier it is for stock pickers like me, like you, if you like anybody listening to us, to actually pick and discern the good companies, hold them longer than Wall Street, longer than the headlines than CNBC will be talking about and do really well.

Barry Ritholtz: [01:01:48] So let’s jump to our speed round, our favorite questions. Love it. In the last five minutes we have, starting with, who are your early mentors who helped shape your career?

David Gardner: [01:01:57] So my father, who at the age of 18 said, here you go, David, I’ve been investing in this for you from birth. This is all you’re ever getting from me, really. And I’ve taught you how to value line that big black tome, the numbers of investing. And I know you love sports statistics. [01:02:12] Another of my mentors Bill James, the awesome baseball statistician, actually he was a journalist, but James who influenced Moneyball, of course, of course. So who I met before, but, these are early people who convinced me of the fun of life and that it could be counted with numbers. I’m an English major, but there’s a, there’s a big left brain going on with me with loving numbers and baseball stats and college basketball stats. Ken Palm, by the way, Ken Palm, that is a $25 subscription any sports fan would enjoy. [01:02:45] So the Peter Lynch, I’m thinking about Clayton Christensen, I mentioned. These are all people who really have helped me think about what wins.

Barry Ritholtz: [01:02:56] Look, you mentioned Moneyball. Let’s talk about books. What are some of your favorites? What are you reading right now?

David Gardner: [01:03:02] Yeah, so first of all, I’m reading right now the score by Teen Nen. And the score is an amazing, but I think the subtitle is something like How to Stop Playing somebody else’s Game. And Nen is a games philosopher. So people are, philosophers about ideas or art. [01:03:23] He specifically looks at games and his book talks about how social media, for example, is sort of a game. Like as soon as you start imposing likes and follows, you’re playing somebody else’s game. You’re playing Twitter X’s Game or Facebook’s game when you have to accept GPA as a measure of how well you’ve done in college, and it becomes big and bureaucratic and everybody’s using that. You are unfortunately playing somebody else’s game. [01:03:48] Sometimes you have to do it. But being self-aware of what is motivating you, it is an amazing book and I highly recommend this score. I’ve had Tina Nguyen on my podcast a couple of times, love the Guy. we just can’t geek at about board games. [01:04:04] But that’s what I’m reading right now. But, when I think about books, it’s a motley array of books,

Barry Ritholtz: [01:04:09] No pun intended.

David Gardner: [01:04:10] Barry indeed, I mean The Inevitable by Kevin Kelly’s a great book about the future. I’m a big Kevin Kelly fan. He founded Wired magazine. He’s a genius. [01:04:18] I enjoy Arthur Brooks’ columns in The Atlantic. He writes about happiness. I really loved his book. Love Your Enemies talking about the divisiveness in our country and how to solve that. [01:04:27] And I would love to see more of that. Stephen Pinker and all of his data accumulation around technologies, trends in our culture. It seems always to be smart, to be a pessimist. You always sound smarter when you talk something down. [01:04:42] And yet we’re pinch yourself that you’re living today. I know we have a lot of problems. We have many better problems. There were many worse problems in over human history.

Barry Ritholtz: [01:04:52] Stephen Pinker reminds us of that, right? [01:04:54] Our world in Data. Yep. Aunts Ling, same thing. There you

David Gardner: [01:04:57] Go, Barry. Exactly.

Barry Ritholtz: [01:04:58] And I was rudely using my phone to get the exact name of a book that I’m gonna recommend to you. ’cause it’s sitting on my desk and the author is Danny Font. Everybody loses. And it’s all about the tumultuous rise of American sports gambling and why it’s such

David Gardner: [01:05:18] A, I’m glad he wrote that.

Barry Ritholtz: [01:05:19] So I, it’s literally waiting for me to, it’s next up this giant I love it thing, but yeah, it’s writing your, writing your mo Yep. I mentioned earlier some streaming to, and we’ve been talking about Netflix and Amazon. So tell us, what are your favorite Netflix or Amazon Prime videos, or what podcasts are you listening to?

David Gardner: [01:05:43] Thank you. I really enjoyed Apple’s Pluribus, if you saw that. It’s

Barry Ritholtz: [01:05:48] Also in my queue next up.

David Gardner: [01:05:49] Totally. It looks great. Totally recommend that. That’s just season one. [01:05:53] We have a lot of British comedy fans in my family. So shows like Mitchell and Webb, the comedy duo, their clips are all over YouTube, but it crowd hilarious show streaming. Totally recommend that. Not as funny, but very British, all creatures great and small, just an absolute very interesting.

Barry Ritholtz: [01:06:11] The early [01:06:12] 20th century.

David Gardner: [01:06:13] Exactly. Just such a slow horses great show. Apple and, or sure. I love sci-fi, I love all the Marvel stuff, by the way. [01:06:21] Marvel’s been an amazing stock for me. It got bought out by Disney. That’s right. So these days we have a very low cost basis. [01:06:26] You couldn’t have gotten, because when Disney bought Marvel at a huge premium, we marvel shareholders, we happy few buying a rule breaker that looked overvalued. Right? We’ve ended up doing really well. So, but, and are obviously Star Wars and I love brands and I love family entertainment. [01:06:41] So those are some that come to mind.

Barry Ritholtz: [01:06:43] I just flew back from San Francisco and on the flight I re-watched Deadpool and Wolverine and it’s like, I forgot how much fun that movie was. Yeah. Really a blast. Our final two questions. [01:06:55] What sort of advice would you give to a recent college graduate interested in a career in investing?

David Gardner: [01:07:01] Well, I would first of all say that you should pick individual stocks and you should pay attention to the game. And you should love it. You should have a lot of fun. I love sports. [01:07:10] We’ve talked, I know you do too. We’ve talked about that a lot. People follow their sports teams day to day. I follow the markets day to day. [01:07:17] And the difference is, you actually can make serious money by learning and following the market in a way you never will. As a sports fan. And I love sports and, sports can be a little bit more fun day to day, but the markets are open every day. Your NFL team only plays on Sundays and starting to figure out what wins in the marketplace and why is that app on your phone, not somebody else’s app? [01:07:37] What’s in your fridge? What are you wearing? Noticing the things that go on around you. This is gonna lead to riches, but it’s also gonna open your mind to awareness of what’s happening in our society. [01:07:47] And I do think that people who are taught to index and not really care are kind of walking blind in society when they could be poking their feelers up, seeing what’s happening in genomics or robotic surgery or whatever. And I’m an English major and I care about these things and profiting as a consequence. I would also say to any young person, start investing yesterday.

Barry Ritholtz: [01:08:08] And our final question, what do about the world of investing today might have been useful back in 1993 when you were first getting started?

David Gardner: [01:08:16] I would just say that when I first got started in 1993, investing was more of a math exercise for me. I was taught by a dad. I mentioned value line, lots of ratios that we know. I never learned financial statements until I bought how to read a financial statement the year after I graduated college thinking, I kind of missed that. [01:08:35] I never really did that. And so I was very numerically driven. I think what I’ve realized is that using your right brain in a world where many people are just using their left brain is where the real values added. My favorite chapter in my rule breaker investing book points out that most of the things that win in business are not actually on the financial statements. [01:08:58] We’ve already talked about a few of them who’s running the company? That is incredibly important. How about the brand value of a company? Most of those are never expressed anywhere in the financial statements. [01:09:07] The culture of the company. Can it innovate? Those four things are the bedrocks as an entrepreneur. I know I see it in my own company. [01:09:14] When we fail and when we succeed, none of those is being captured in the financial statements and we’re living in a left brain driven algorithmic world. And so I think here now I see, and I only think longer term than I ever did before when I was 30 years ago, I think longer term today at the age of 59 than 29. And I use my right brain, huh.

Barry Ritholtz: [01:09:34] David, thank you so much for being so generous with your time. This has been absolutely fascinating. We have been speaking with David Gardner. He is one of the co-founders of the Motley Fool and author of the book. [01:09:48] Let’s see if I can spit this out. Rule Breaker investing, how to pick the Best Stocks of the Future and Build Lasting. Well, if you enjoyed this conversation, well check out any of the 627 we’ve done over the past dozen years. You can find those at YouTube, Spotify, apple, Bloomberg, wherever you get your favorite podcasts. [01:10:13] I would be remiss if I didn’t thank the crack team that helps these conversations come together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Lucas, my podcast producer. [01:10:28] I’m Barry Riol. You’ve been listening to Masters in Business on Bloomberg Radio.

 

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