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By TMFElCapitan
February 13, 2007

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

CAPS Star Talk: With David "Pencils2" Kretzmann

February 12, 2007

First of all, let me say, it is a pleasure to have David Kretzmann, also known as Pencils2, come visit my blog and chat with my six fans, assuming of course, my mami has forgiven me for that crack about her tap dancing, and is still a fan. All right! Let's get knowledge to you and mix it up with Pencils2...

EC: David "Pencils2" Kretzmann, you've been a Fool since 2002. With my math skills, that means you became a Fool when you were, what, six or seven years-old? Exactly how old are you?

DK: I'm 14 years old, and I've actually only been following the Fool since mid-2005. Huh? Well, my Dad signed up with the Fool back in 2002 and didn't do squat on the boards. That had to change, so I started posting in late 2005. In fact, my first post was a question to David Gardner about Schwab on 12/15/05.

EC: Well, Schwab my decks! As you know, most Fools are a little older than you. I myself am actually a 12 year-old boy trapped in a grown man's body, but, I have managed to snooker a woman into marrying me and having a baby with me. David "Pencils2" Kretzmann, you seem like an exceptionally nice, bright young fella. In the words of Zero Mostel in "The Producers," what went right? Tell us parent Fools a couple of things your parents did to develop your creative, independent spirit?

DK: Most are older? Shoot. I thought I was the oldest of the bunch. You learn something every day, right?

My parents have always been supportive of my interests. They support my interest in investing with the same spirit they supported my interest in Tigger. I think support was the big thing, and after all of my savings was thrown into stocks, they knew I had a definite interest, not one of those "you're interested until you find out it's not hip anymore" type of things. I think it went right because I was lucky enough to start off under the Fool's wing and go from there. If I'd started off by taking advice from "The Fagan Report" who recommended buying "The Next Wal-Mart", a company called Super-Click trading at an awesome 10 cents a stub, I probably would have lost interest and my money pretty quickly. The Fool taught me the importance of patience, investing in quality businesses, and the importance of wearing jester caps.

Another thing my parents did was to just let me go with the flow and let me explore the investing world. They didn't know too much about the topic anyway, but they basically let me roam free, and my interest caught on quickly. I'd have to say that the big part of it was that I got started off in a great place at a time when I was ready for something new. I've always liked numbers and stats, so I really caught on to the world of stocks quickly.

EC: I notice your profile says you attend, or have attended a charter school and that you hail from Nevada City. I'm picturing some sort of Northern California hippy deal where you get to run around naked, are allowed to curse and get to throw broccoli at the teachers. Am I off? And if so, how so?

DK: I'm in hippie land for sure, but you're off a bit with the charter school (we throw carrots at the teachers, not broccoli). I just started going to the charter school this year (my freshman year), mainly because I wanted a little more time to work in my investing lair. My previous school was a great school, but it took a lot of time and effort and didn't leave much time for other activities.

EC: From our CAPS scores, it's easy to see we're both geniuses. But you are currently ranked an awe-inspiring 18th out of 22,222 CAPS-playing Fools, while I am, ahem, (and achoo!), rated 2612th. So we're about the same, though one could argue you're a tad more geniusy. Tell me, in rocketing to 18th on our leader board, how has my CAPS blog contributed to your success? And don't be bashful, just let it rip. My ego can't get any bigger.

DK: 2612, a nice, round number, EC. Your CAPS blog has, uh, definitely played a large part in my success. Those 23 posts you have up there are to the investing world what Maurice Taylor is to the basketball world. All kidding aside, it's the best blog around!

EC: Hold on, let me dry my bum. Okay, tell us about the name Pencils2. I'm guessing you love to write with #2 pencils? I prefer a good strong one myself, not too sharp or I break the tip and use bad language.

DK: Do I dare reveal the mystery behind the name? Well, my Dad's partner in music somehow came up with the idea to call my Dad "Pencils" something like 15 years ago. When my Dad got caught up with the internet boom, he tried to sign us up for this crazy service called "eBay." He wanted our username to be "pencils", but someone had already snatched it up. pencils2 seemed the most reasonable name that he'd be able to remember (as he puts it, he's got a good memory but it's short). When he signed up with the Fool 4 1/2 years ago, pencils2 was the moniker he chose. Now that I'm adding glory to the moniker, I'm gonna need to patent it soon.

A little more complex than #2 pencils! I'm more of a pen guy myself, so it's a little odd, but hey, it's an odd world. I've tried Googling "pencils2" and it brings up "GREAT DEALS ON #2 PENCILS!!" and "Get your #2 pencils from the people you trust." So, I could see how people would get that image rather than the image that it's a nickname with a number added to it.

EC: You have your own message board within Fooldom called, "Pencils Palace." Is that where people can gather and do some Dungeons & Dragons type stuff? Debate which Disney Princess has the best home? What exactly goes on at the Palace?

DK: The Palace isn't a fantasy land, it's a land of future value, economics, investing, my musings, and stock write-ups. There's several others posting there, and anyone's welcome, beginners, advanced investors, the whole shmere.

EC: Nothing beats a shmere. Okay. I just checked it out. I see that your most recent post deals with a pact between Brazil and Pakistan to search for oil. Man, when I was 14 my brother was ripping me off by talking me into bad trades in our Strat-O-Matic baseball league. I'm actually still traumatized by the time I traded All Star 3rd baseman Ron Cey for 7 really crappy Chicago Cubs. I figured "7 for 1, how could I lose!?" Anyway, I see you also have your own "Pencils2 Fund." Why did you start that? And how is it going?

DK: Brazil, Pakistan, and oil -- can you get much more excitement than that?

I started the Pencils Fund project for a couple reasons: 1. To get some action going on my board; 2. To get more recommendations on my posts; and 3. To see if I could beat the market like 75% of all mutual funds failed to do over the past 30 years. Basically, when I buy a stock, I do a write-up on that stock with info like why I bought it, what I'm looking for, etc., and I track it. It's my real money portfolio, and I hope to keep the project going for a long time. Write now I'm beating the S&P 500 by more than 10 percentage points, so it's going real good. Still lagging Berkshire Hathaway, though. The Pencils Fund has only been in action for 10 months or so now, and it's more of the long-term performance that I'm worried about. In the short-term, most mutual fund managers can beat the averages, but over the long run, they fail miserably.

EC: Condemning! Okay, let's get down to the meat and potatoes of investing. I want my fans to get the real scoop on becoming truly great investors. And because I'm so passionately committed to this, I am taking it upon myself to ask the tough questions no one else is asking. So, what kind of snacks do you eat while studying your investments?

DK: Great question. I like variety, diversification, so to speak. Will it be Lay's BBQ chips today or kettle cooked like yesterday?

EC: A chip man. Salse verde Doritos are the path to this valentine's heart. Do you have a personal investment fight song? Like I'll crank up Syd Vicious screaming his wild man cover of "My Way" because before I pick a stock I want to be in the right frame of mind. And I want the Stock Market to know that El Capitan does things his way. And he wouldn't hesitate to avenge the death of his grandfather his way if a villain had killed his grandpa unjustly. Do you have any rituals or things you do to make like a high school dancing basketball player and "get your head in the game?" Take us into your mind right before you pull the trigger on an actual stock purchase.

DK: You know, not that much happens. Before I buy a stock, I make sure I know everything I can about the company before I pull the trigger. I always miss something, but I like to have as much info as possible. So, I may double-check a few things, but overall, I just put in the order and hope it's the right place for my money. If you have second thoughts before pulling the trigger, that stock isn't for you. Your comfort level should always be as high as possible when it comes to stocks. You want to always know why you bought a stock when you did.

EC: Which nickname do you like best? Buffalo Bill Mann, The Manniac or Bill "The" Mann?

DK: Oh boy, the Fool's gotta get some videos going on these characters. I could totally see a Bill Mann cartoon being a hit. I'd have to say Buffalo Bill Mann and The Manniac have big potential. You're in the Hollywood area, EC, you oughta put something together.

EC: The kid has more ideas than my agent! Fantastic boy. What tools do you use as an investor? Excel spreadsheets? Pencils and paper? Chimp and dart board? Abacus? Help all 9 of my fans see the David Kretzmann tool kit.

DK: I think investing should be simple, so I actually don't have a lot of tools or formulas. All of my research is done on Yahoo!, Google, the Fool, and the company's web site. That's about it. I do look for certain things for my normal long-term investment: A company with a sustainable, strong product/service, a strong balance sheet (low debt, good, fairly stable stash of cash), and a business producing strong cash flow that's fueling growth. I look at these things in this order if I find a company I'm interested in:

-- cash flow statement
-- balance sheet
-- income statement
-- P/E (compared to competitors, considering growth potential, etc.)
-- management
-- insider ownership and activity
-- press releases - look for estimates/guidance, among other things
-- web site (product info, investor relations)
-- Webcasts, if available

Not too many formulas or anything, because I don't think you need such things. Warren Buffett looks for companies with a product he easily understands and knows will be around for a long time (gum, for example) and management that he really likes and trusts. There's not many formulas involved. Keep it simple and invest in what you know and love.

EC: As a huge fan of my work, you know that I serve as a stroller for the "Start Here" board in the Rule Breakers service. And you know that I can break six bricks if I lift my eyebrows quickly enough. David "Pencils Deux" Kretzmann, in your TMF Profile, you state that "Rules are made to be broken." Oh, wait, pardon me, you wrote "Records" are made to be broken. Close enough. As an investor what is your favorite rule to break?

DK: The illusion that the individual, "small" investor can't beat the averages or the Wall Street hot shots. With my Pencils Fund project, I hope to show people that the small investor, even a teen, can beat the averages over the long run. I don't know if that's breaking a rule, but to me it seems like it's a rule that the small investor can't compete against the Street and his/her only place of refuge is with an index/mutual fund of some sort.

EC: And, what records do you hope to break? Pogo sticking? Unicycling while eating a hoagie?

DK: Hmm... there's a lot of them that I wouldn't mind breaking, I don't think I can narrow it down to one. I like seeing physiological barriers broken, like the four-minute mile or climbing Everest. Those are the records that are meant to be broken.

EC: Think you got what it takes to be the top-rated CAPS player in the world?

DK: Maybe for a little bit, but I think the highest I've ever gotten to was 4. It's hard to catch up to Russell, Seth J, and The Manniac. Someday, though, someday.

EC: I'll give you $100 - that's one HUNDRED dollars today, this very day, if you'll give me just 0.5% of your pre-tax earnings from age 20-30. Before you answer, remember, a bird in the hand is worth more than two birds in the bush, so I think you're up a bird. Yay or nay?

DK: Oh jeez, now we're getting into math. Well, I'd have to say nay, even though that hundred bucks is pretty darn tempting. I mean, if I make only $10,000 a year through that ten-year period, you'd take $500. Hopefully I'll be able to make more than $10,000 a year, so unfortunately, it'd be nay.

EC: Then can I borrow a hundred?

DK: If I make less than $2,000 during that period, sure, I'll give you $100 for not taking you up on your offer. That'll teach me! Now I'm motivated, too. But remember, not till I'm 30...

EC: Smart boy.

DK: I didn't learn whatever that's called for nothin'.

EC: One final question. Which number is greater? The number of times Rex Moore tells us he respects the management savvy at Portfolio Recovery Associates or the number of years it's been since dinosaurs walked the earth?

DK: Man, another toughy. Probably Rex commenting on PRAA's savvy management. I think savvy management beats dinosaurs any day.

EC: David "Dos Pencilares" Kretzmann, with young bucks like us in the world, I think the future for America looks brighter than ever. Thanks a lot for coming.

DK: It does look bright, possibly even brighter than the glow off Tom G's head? Thanks for having me, it was a blast.


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