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I owe Motley Fool CEO Tom Gardner a huge debt of gratitude for allowing me the opportunity to reverse-engineer his investment process. Tom and I recently spent several long, somewhat tedious days in a quiet conference room in Alexandria, Va., where we analyzed his recommendations, pored through his writings, and dissected the performance of roughly 15 years' worth of stock-picking efforts. It wasn't easy, but it was worth it. Together, we created a virtual treasure map for the dedicated stock picker.
I am now free to share certain pieces of this map with all of you at Fool.com. I suspect you'll be very pleased. Lest you forget, Tom's investment philosophy is one that helped him beat the market in two highly successful stock newsletters, Motley Fool Hidden Gems and Motley Fool Stock Advisor, and he used this exact framework to generate tremendous multibagging returns with stocks like Middleby and Buffalo Wild Wings.
Unfolding the map
Tom's stock selection process is an effective combination of five component steps. They incorporate a few obvious elements of stock selection (basic accounting, basic financial statement analysis, etc.), but are also derived from various other hard and soft sciences that many seasoned investors may be surprised to see.
To help ourselves and others, we spent a good deal of our time distilling this treasure map down to its most useful, most powerful elements. If this model were a brand of liquor, it would be moonshine -- simple, but powerful enough to knock your socks off. We made certain that the framework is not just a mash-up of numbers, but the right numbers. Not just all the tools to evaluate a management team, but the right tools. It has all the complexity it needs, but no more.
Without further ado, let me reveal the basic framework for how Tom looks at potential additions to his portfolio. We call it "The 5 P's":
- People: The quality of leadership and corporate culture at a firm.
- Profit: The financial strength of a business.
- Potential: The size of the forward opportunity of a business.
- Position: The competitive strength of a firm.
- Purpose: The X-factor, or the amount a business is changing the world for the better.
You probably need more detail than the simple framework I've presented above, which is why I've created five quick videos to explain more about each one of these sections. This should give you some meat to add to the skeleton above. Click the individual links above to hear more about the 5 P's.
The 5 P's
To give you a little preview, let me say that Tom would point to firms like Whole Foods (Nasdaq: WFMI ) , Costco (Nasdaq: COST ) , and Netflix (Nasdaq: NFLX ) as companies that are having great success on all five counts of the 5 P's framework. These are all great, built-to-last businesses that are led by visionary leaders and, as a result, they are all constantly ripe for investment dollars.
But I should also say that Tom's screen will not tell you how much to pay for a given security; only whether the business is structured for long-term success. Investing is a function of both picking the right company and paying the right price for that company. Please keep that in mind when using this tool.
The bottom line
Ultimately, we're all looking for simplified ways to achieve investing success. This framework should prove to be exactly that: a simplifier. This is how Tom Gardner looks at businesses and this is how he helped steer two wildly successful stock-picking services for over a decade. I'd advise you to at least take a look. I know my stock picking will never be the same again.