In this Rule Breaker Investing podcast, David Gardner answers his listeners' pressing questions and shares some of their financial and investing stories. Among the topics they touch on are classics such as "How should I begin investing?" and the perils and profits of buying "overvalued" stocks, as well as some new ones including the potential for blockchain and cryptocurrency.
We also get a few bits of Foolish teasing of our host for his entertaining inconsistencies. And there's even a rare visit from Motley Fool Asset Management Chief Investment Officer Bryan Hinmon to discuss how our sister company is doing for its clients.
A full transcript follows the video.
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This video was recorded on Jan. 31, 2018.
David Gardner: Welcome back to Rule Breaker Investing! A delight to have you with me on this, the final Wednesday of the month, and that means it's time for Rule Breaker Investing mailbag and, as usual, I have a "Garden of Earthly Delights" for you.
I think that they number 10. I hope that we will fit all of these in. I will number them as we go, and if I don't get to 10, please don't blame me. It means that Rick, my producer, just thought I was going on too long. But wow, so many great notes, and I'm delighted to share these.
And by the way, part of what we do with mailbag is it's not always a hand-to-mouth thing. It's not a question from you and an answer from me. Some of these are stories from you, and I enjoy featuring those. Or insights. If you have something important to say that you think fits with Rule Breaker Investing, I'm more than happy to read it.
And once again I'll issue my disclaimer, which will be a theme this podcast, as you'll shortly find out. I will issue my disclaimer that I can't possibly feature all the great notes that I get. I wish I could. But I guess it's a great problem to have. There are too many great things to share, so I just do whatever seems to fit in any given month. Thank you, all, ahead of time.
And looking over our roster, I should mention that ahead in this mailbag, we're going to have visits from the head of Motley Fool Asset Management and Fool Funds, Bryan Hinmon. I'm going to feature myself getting called out by listeners for three separate reasons [three potential mistakes I made], and near the end we'll be talking some cryptocurrency, as I welcome in my friend Aaron Bush to answer a few of your questions. All that, and a lot more. Let's get started.
Mailbag Item No. 1: This comes from @chris_troupe on Twitter. Chris dropped me this note: @DavidGFool. "I'm 19 and I'm a huge fan of your podcast. I appreciate everything you do for the investment world. I'm opening up a Roth IRA account, and I want to buy stocks Foolishly..." That's with a capital F and thank you, Chris. "... and for a low trading fee. Any suggestions. Any advice would help. A Foolish thanks in advance."
This is a classic example of a question that's asked every single mailbag. I will get at least one of the "how I get started investing questions," and I'm going to do my best to get to these from time to time but, ultimately, I think we can do a better job at The Motley Fool providing you the brainlessly obvious resource that you would just know to check anyway, so that I don't answer what will be a recurring question.
By the way, there are a number of these recurring questions. "Things like how many stocks should I have? What's the right number of stocks?" Those are just natural, organic, good questions for you to ask. I love to talk about them here on the podcast, but I also don't want, too often, to repeat myself, so let me just be pretty straight up with this one, Chris. I told you I would feature this on the podcast because I love when I hear from 19-year-olds who are saying I'm getting started investing. Four quick answers.
No. 1. I found a lot of younger people in my life have found an app called Robinhood. You can definitely download it on the App Store. Take a look. It is basically a brokerage-commission-free way to get started investing, which is why it's an increasingly popular resource, especially for people who might be getting started for the first time and maybe with smaller amounts of money, quite naturally. So, take a look. They're not a partner of ours, per se, but one that I hear from our community, frequently, as a resource.
No. 2. We do have a Motley Fool brokers center, so for a lot of people who are looking to get started and want to compare a few different brokers, just google the phrase "Motley Fool broker center" and you'll see those are partners of ours. Advertising partners. Ones that we respect enough to feature in our center, and you can take a look and see which one you might like there.
No. 3. Just google "Motley Fool How to Invest," because beyond your question, Chris, initially about where to open the account with lower commissions, I know for a lot of people, that's just the first step; but the more important steps are often how you do it. What are some of the pitfalls? How do I make the best decisions early on as a new investor?
And by the way, it's also true for older investors. We're going to make mistakes. That's just going to be part of how we learn to ice skate together. We're going to fall on the ice. That resource -- googling "Motley Fool How to Invest" -- will take you to that page on our site which has a lot of good thinking, including our "13 Steps to Investing Foolishly," which we've occasionally had people say, "Yeah, I spent a couple of hours just reading through the 13 steps and I feel like I learned more about money than when I got my MBA degree." We've gotten a lot of plaudits, over the years, for our "13 Steps to Investing Foolishly." Take a look.
No. 4. You may have heard The Motley Fool Investment Guide just came out in its third edition this past fall. We've updated the book for 2018. This is a book that in its previous edition was written more for like the year 2002 or 2003, so it was time to update some of our similes, metaphors, and facts, and we've done that with The Motley Fool Investment Guide.
I would highly recommend that book, a product of our partner Simon & Schuster. We get a couple of bucks. It's really their product. When you're an author it's the publishing house that is making most of the money on those books, but we love that book. I hope you will, too. We put a lot of effort into updating it.
Chris, I hope that's helpful for you, and congratulations on asking such a good question at such a young age. "How do I get started?"
And on a side note, before we move on we're hearing from some college students again this month. I definitely want to mention a competition that we have for you. A way to win free money from The Motley Fool, if you like. Really quickly, we provide you one of three prompts that you can take. All you need to do is write a 500 to a 1,000 words article on one of these prompts.
- What do people get wrong when they talk to millennials about money?
- What's the next big thing/ company/ stock?
- What do you think is the biggest problem with the tech industry right now?
Any one of those three prompts -- if you're inspired by any one of them -- write us a 500 to a 1,000 words essay and turn it in. The first-place winner will get $10,000 and 20 runners-up can win $1,000 each. Again, open to all people over 18 attending college. I see the competition closes April 30th. I'm looking at the calendar. That looks like about three months from now. Terms and conditions apply. Please visit www.Fool.com/competition for more details. Thanks for your interest. I bet we have some winners listening right now.
Mailbag Item No. 2: This one comes from a longtime member of the Motley Fool community. His name is Dave. His screen name on our site is DaGecko. I recognize Dave as he drops me this note. I just wanted to share this story.
And I should say, before I read this, that this was shared out through our sister podcast, here, at The Motley Fool, Motley Fool Answers, because I think Alison and Robert Brokamp looked at it and said, "This is so good, we're stealing it from the RBI mailbag and sharing it through Motley Fool Answers." I'm more than happy for you, whoever you are, to steal and share this story, as well. This is what he said:
He said, "Back in 1975, one of my instructors took a few minutes to talk about finances. He had a recommendation. He suggested that when we graduated we take $5 of our $625 per month that we were going to receive as Second Lieutenants -- $5 -- and do so without fail or changing the amount until we were promoted to First Lieutenant. He asked us how much we would have.
Well, knowing it would take two years until we were promoted, we quickly figured 24 x 5 plus interest would be about $125. He commented that yes, it would not be much, but the goal of the first two years was to develop the habit of saving. He then suggested that upon getting a raise [actually two raises -- one for the promotion and one for two years of service] that we save half of the increase and use the rest to pay additional taxes and increase our standard of living.
He pointed out that if we could make ends meet on a Second Lieutenant's salary in our 24th month, then we could make it during the 25th month on that amount plus half of the increase. He said to do this throughout our career and we would have a sizable sum by the time we retired. It made sense to me.
I did not have a career of military service, but I followed his advice with my civilian pay. When I was about 55, my wife and I went out with another couple and the husband asked if we had saved anything, yet, for retirement. He said they were concerned, as they had not yet started. I related the story of my instructor's suggestion and said we were probably saving about 40% of my gross salary. They were shocked.
"The next day I came home, and my wife greeted me with music to any husband's ear. She said, 'You're right!' I had no idea of what she was speaking and was almost afraid to ask about what I was right about. She said that when she'd heard my story she thought it was quite an exaggeration to say 40%. She said she'd never added it up; but did so that morning. We had some money going here, and some going there. She was shocked to find out it added up to 42%. She said she would have believed 30%, but obviously not 40%.
In all my years, I've never heard of anyone else following that approach. I've suggested it numerous times, but know of no emulators, though I think my youngest daughter and her husband have been close to following it. Sincerely, Dave."
I'm going to let that one speak for itself.
Mailbag Item No. 3: This one comes from Jumm. It's spelled J-U-M-M, but Jumm kindly lets me know that it's actually pronounced like gum. "First and foremost," he writes, "this is my first email ever to your podcast. It's been long overdue. I've been a member of Rule Breaker Investing and Stock Advisor for the past several years, and I have to say..."
This is why I read this note by the way [to Rick, my producer, and anybody listening]. He said, "And I'm your biggest fan." I mean, that's awesome!
I think each of us would like to have at least one fan in our lives, and yet we're never really sure who's our fan. But when somebody comes forward and says I'm your biggest fan, how can one not love that? So, anybody else who thinks that they're my fan, meet Jumm, because Jumm is my biggest fan. Let's keep going.
"You are, by far, my favorite investor and podcast host. Besides the fact that the Rule Breakers portfolio has beaten the market, I think what I admire the most about you is your background. You're an English major -- from the so-called liberal arts world -- and not from the finance major side of things. I am, too," Jumm says. "Numbers intimidate me. It's very inspiring to me that in order to be one of the better investors in the stock market you don't have to be a finance or business major. This also emphasizes the importance of seeing the investing world through a different lens, which can absolutely complement or better one's investing style. Thinking outside of just numbers can make one a great investor.
My question to you for this week is I'm also a very fortunate holder of Netflix (NASDAQ: NFLX), and I know it's a growing company with a lot of potential. However, that Netflix has negative cash flow and there are a lot of competitors, in terms of content out there, makes me question the long-term success of the company. In what way would you justify the valuation of the stock?" Full stop right there for now.
Well, let me say this, Jumm. In your note you go on to talk some about another company that's somewhat like Netflix in a lot of Motley Fool members' portfolios over the long term, and that would be Amazon (NASDAQ: AMZN).
And there are others. Nvidia seems to be turning into one of those megawinners that we've had for Stock Advisor members. We've patiently held that stock for 12+ years. It's been spiffy-popping regularly over the last 12 months, and I hope there will be a fifth, seventh, and 23rd stock like that in your life, Jumm, and in mine, and in all of us fellow Fools, and I trust that there will be, because great companies are made by great people and teams with great products or services that, especially when they come along, might shake the Earth when they're born and improve our lives as the consumers of those products and services.
And through the miracle of the stock market, we can be part-owners of those companies, themselves. Even though, if you're like me, you're just a lazy bum, hoping to be sitting on a beach, somewhere, and these talented people are making the world better, you and I through the miracle of the stock market can be part-owners.
And the question comes, what about sometimes when these companies look overvalued?
There are two things I want to say about that, briefly. The first is that almost always these companies look overvalued. They're going to. Amazon.com, in my experience, since we first bought the stock in 1997, has been considered overvalued by almost everybody I know, most of the time [most of those now 21 years]. And a lot of people today think, of course, that Amazon is overvalued.
That's why I've made one of our Rule Breakers principles to listen for people telling you things are overvalued because contrarily, for me, that's often a great indicator. Why do stocks look overvalued? Well, the answer is because people pay up for them. Why? Generally, because they're really strong forces for good in the business world. They're doing something really special, so a lot of people want to own their stock.
And guess what? Beyond looking at something as temporarily overvalued, just pretend that you owned one of the better things in the business world for the next 10+ years. What's going to happen if you're right? And if you and I are right -- that it is a great force for good in the business world -- it's going to do really well. It's going to outgrow that initial sense of overvaluation. It's going to keep looking overvalued to everybody.
But you and I can just patiently buy those stocks and keep adding to them. And frankly, they can generate, Jumm, for you and for me some problems in our portfolios as they maybe start to occupy too large a portion of our net worth. Those stocks as they run up 50x or 100x in value can really start shrinking what everything else is doing in your portfolio, and that's a separate thing that you're not really talking about.
I said I wanted to say two things about that. The first was just a brief thought with you about the nature of so-called overvaluation.
And then the second thing -- this is something I've done a whole podcast on -- is if you want to go back and listen to my Dark Clouds I Can See Through podcast. I think that we often need to have a sense that there are powerful competitors in an area to actually and ironically embolden us to continue to hold that stock.
When other companies show up [let's say to the world of streaming -- online content streaming] with Amazon, and Hulu, and countries abroad that we don't talk about as much on this podcast, that's telling you something pretty important. It's telling you this is a really key area. Whether it was Facebook at the earlier stages of social media, or Google at the earlier stages of search, or Netflix at the earlier stages of streaming; yes, there are going to be other players. They're going to move in. But as long as I think our companies keep doing good things and are led by visionaries, I feel really good about where we and they are.
Jumm closes by saying, "Finally, I'd like to let you know how much I love your podcast." Now, I have to read this. It's not for the reason you might be thinking. This might already sound too self-congratulatory to some of my discerning listeners, but there's a point to this.
He says, "I listen to a lot of investing podcasts. You're my last one standing. I'll continue to stay. I love the fact it's not just about stocks and how to pick them, but it's about how to conduct life. How to be a better investor and a better person. Loved this week's episode. It's about leadership style and how ineffective our dear government officials sometimes are.
It reminds me of a book I'm listening to," and this is one I've not read, but I want to plug this, because I like Jumm, already, and I bet this is pretty worthy of our attention. Maybe you know it, dear listener, but I don't, Extreme Ownership, by Leif Babin and Jocko Willink. Well, when you have two co-authors who are named Leif and Jocko, I'm in!
Jumm says, "I heard about Audible.com from your podcast," [one of our advertisers], "and it's been the best way to read or listen to books while running errands. Perfect for my busy life. I love how you compare the defense and the offense of a football team and what it would be like if they were blaming each other for failure. Great analogies. Can't say enough good things. Thank you so much. Fool on!"
And a quick pause. Need to step away for a quick sec and just say that these kinds of notes -- some of the testimonials that I get -- I do love to share out. They're always appreciated. I want you to know everything is read, whether or not I can feature it on the show. I don't want to sound too self-congratulatory.
What I found, now, in our 25th year at The Motley Fool is that people sometimes love me and love me a lot when the market is up. And I find maybe I'm not so likable -- not quite as good-looking -- when all my stocks drop 20-40%, which also happens some of the time. So, I appreciate that and also the notes that say, "Hey, it's not all about the returns and stocks. Rule Breaker Investing -- being a rule breaker -- is about something more to me," which I heard in some of the notes this month. Jumm, thank you! I think you shared back some extra value, which is often what I'm looking for from good mailbag items.
Mailbag Item No. 4: This comes from Vince G. He is also a member of the Motley Fool online community. One of our premium service members. His screen name is Fool4ZTribe. I'm thinking this might be a Cleveland Indians baseball fan.
"David, I've been a Fool since 2004, I think, and a better person and investor for it. One of the raging debates and oft-discussed issues in Fooldom concerns the ideal number of stocks to hold in one's portfolio." And I did foreshadow this a little bit earlier. "I believe I'm in the minority, because I have hundreds of stocks, all Motley Fool recommendations guided by an evolving allocation strategy that assigns weights to each different Motley Fool service's recommendation."
Now, this is somebody who's obviously very experienced and deeply invested in Fool services. Vince probably knows four or more of our services and has his own allocation model that he's built up over time. And I often love it when somebody has come up with their own way of using my tool [in this case, Motley Fool services, or your tool, or any kind of tool].
Usually it shows value-add on the part of that person. Somebody who's intellectually curious and is personalizing it and making it their own, so I don't know how you're doing Vince. I guess we're about to hear, but congratulations that you've taken those steps. That's very impressive.
"Time after time," he goes on, "I hear folks, even Foolish ones, discussing that having so many stocks is like creating your own mutual fund and how hard it is to consistently beat the market with that strategy. My data says otherwise. From inception, way back in 2004, my Foolish fund is zipping along at over 12% compounded, two points better than the S&P 500." That's not bad when you're getting that kind of outperformance for 13 years.
"Last year was particularly satisfying. 31% up for this Fool compared to 21% for the market. It's not how large you make it -- it's how you make it large."
Well, thank you, Vincent! The reason I wanted to share that one is I think it does speak, maybe from a minority viewpoint, because I think most people think they can't buy all the stocks. If my brother and I each recommend one in Stock Advisor each month, they have to decide which one, or maybe they only have a certain amount of money coming in for the quarter. If there are eight stock picks in a quarter from Motley Fool Stock Advisor, they think they can only buy one or two.
These days it's certainly possible to buy fractional shares. You can, fairly easily, just follow one of our services and just buy each pick every month. Now, not everybody even wants to do that. I'll pick a stock, and somebody reasons, "I'm not convinced. I'm going to wait on that one." I, myself, as your advisor, am absolutely fine with that. Again, I love it when people make our services their own.
But it's great to hear from somebody who's actually built up hundreds of stocks, because you would think he's just his own mutual fund, and that can't beat the market, but I'm really happy that Vince keeps score. Very Foolish of him. I'm happy to share that out.
Mailbag Item No. 5: Again, this one is going to be about funds, and I've got a friend joining me, but first here's the item. It comes from Elliot Holland. Elliot says, "Hi, David and Fools! After hearing you talk about mutual funds, and agreeing in general that there are much better opportunities out there, I've been eager to share with the Rule Breakers community three extraordinary mutual funds that epitomize Foolish investing.
The investment officers have been teaching me the best practices of Foolish investing for several years, now. They are, of course," and here are their ticker symbols, "FOOLX, TMFEX, and TMFGX." Those are respectively The Fool's Global Opportunities Fund, the Motley Fool Emerging Markets Fund, and the Motley Fool Small-Mid Cap Growth Fund. "Of the 19 to 22 stocks in my Rule Breakers portfolio, three of them are these funds, and these three positions managed by Fools have given me the so-called Brothers-Gardner-like exposure to 50+ great companies carefully selected from the Motley Fool's own analysts. Now, mutual funds? Really?" Elliot goes on. A little bit further down he says, "I can't even say 'invest in mutual funds' without using old man Simpson's voice." And he even includes a parenthetical "young." You can tell me, Bryan Hinmon, whether you are young.
"But these young guys over there at Fool Funds have been performing portfolio management magic in the recent past, and I'm telling investors about it," etc. Down at the end of his note, Elliot says, "My question is simply how well the funds have performed over the past year, and past three years, and how are they positioned going into future trends?"
Thank you, Elliot! I decided since I don't even work at that portion of our company -- Fool Funds and Asset Management is a sister company. There's a Chinese wall, so-called, between me and us in that company; but I still do know some people in the company. I see them from time to time, and Bryan Hinmon is a longtime, favorite Fool of mine who used to work on my side of the company. But Bryan, now you're at Motley Fool Asset Management and I wanted you to come in and speak to this question.
Bryan Hinmon: Thanks for sneaking me up here!
Gardner: Absolutely. Now, Bryan, I want to start addressing Elliot's question, but I do believe you brought a piece of paper along with you that you need to read from, and I think we understand why.
Hinmon: Yes, thanks to Mary, our lawyer, for making me read this. Bear with me, now. "My employer, Motley Fool Asset Management is a separate, sister company of The Motley Fool, LLC. During the course of this discussion, I may talk about particular companies, securities, and investment strategies.
Do not take this as personalized investment advice. I am not recommending that you buy, sell, or hold any of the companies I discuss, nor am I advocating an investment strategy for any of you as individuals. You can find our funds' entire holdings on FoolFunds.com. The lists are updated monthly, but keep in mind that the current holdings are subject to change at any time.
All investing, including mutual fund investing, involves risk and possible loss of principal. Please consider the fund's investment objectives, risks, and expenses before investing. A prospectus with this and other information is available on the FoolFunds.com website. Please read the prospectus carefully before investing."
Some performance figures for you, David.
"All of the following performance figures are as of the end of the most recent month and quarter end, which was December 31st, 2017."
Gardner: You betcha.
Hinmon: "The Motley Fool Global Opportunities Fund, formerly known as the Independence Fund, gained 29.91% for the one-year period ending December 31st, 2017. Since its inception on June 16th, 2009, it has had an annualized return of 13.13%. For the one-year period ending December 31st,2017, the Motley Fool Small-Mid Cap Growth Fund, formerly known as the Great America Fund, gained 28.36% since its inception on November 1st, 2010. It has an annualized return of 14.45%. Finally, the Motley Fool Emerging Markets Fund, formerly known as the Epic Voyage Fund, gained 26.32% for the one-year period ending December 31, 2017. Since its inception November 1st, 2011, it has had an annualized return of 7.02%.
These figures represent past performance, and investment success in the past does not guarantee future success. Additionally, Motley Fool Asset Management launched The Fool 100 exchange traded fund, and its inception date is today, January 30th, 2018.
In addition to normal risks associated with the investing in equity securities, investments in the fund are subject to those risks specific to ETFs. Unlike other funds managed by MFAM, the fund is not actively managed. As with all index funds, the performance of the fund and its index may differ from each other for a variety of reasons, including the operating expenses and portfolio transaction costs not incurred by the index. In addition, the fund may not be fully invested in the securities of the index at all times or may hold securities not included in the index. For these and other reasons, there is no guarantee the fund will achieve its stated objective. For more information on The Fool 100 ETF, please visit Fool100ETF.com."
Gardner: Thank you, Bryan Hinmon! That was a delight. Rule Breaker Mailbag Item number... No, I'm joking. That was necessary, and the reason it was necessary is because this is a regulated business, and we have smart people like Mary, our friendly and smart and super, rightfully so...
Gardner: ... diligent lawyer, who is in fact on the other side of the glass as you and I speak. But part of entering the asset management field, which we wanted to do at The Motley Fool after more than 10 years, [is] we started hearing people who would call up and they'd say, "Well, I want to cancel Motley Fool Rule Breakers." We'd be like, "Oh, I'm so sorry to hear that. The market's been good. Has the service not been good enough for you?"
And the answer often, as you know Bryan, would be, "I don't have enough time. I just can't keep up."
Hinmon: That's right.
Gardner: So, it became time for us to start an answer or solution for Fools who don't feel like they have that much time or aren't interested enough to listen to Rule Breaker Investing, the podcast, or Market Foolery. They just want to be able to check the box of, "My money is well-managed. I trust that it's doing well," and so we've started, but we have to read those disclaimers.
Hinmon: Absolutely. You know, David, there are about three million U.S. households, out there, that invest in a portfolio of individual stocks, themselves, but there are 38 million households, out there in the U.S., that invest in equity mutual funds. The universe of people who do it the mutual fund way is considerably larger than the typical Rule Breaker Investing way, but I'm really happy to be here and be able to talk to Rule Breaker Investing.
Gardner: Thank you, Bryan! That's why sometimes I like to quote Henry V, "We few. We happy few," because [there are] those of us who actually care enough to select one equity over another, and I know I'm joined by one here at the table because that's what our fund managers do. They select this stock, not that one. But we are a minority when we're rolling up our sleeves as so-called individual investors.
I just want to share a little bit more with you, Bryan, from Elliot's note and then have you react to this. He said, "It's impressive to me that I have continually added $150 each month since the end of 2014, and I'm still beating the market. In January 2014 I was not yet invested in any stocks, but I wanted to be. Michael Lewis's Flash Boys -- the book about high-frequency trading -- while thrilling, gave me some terrible ideas. I already had the bad impression that for an individual investor the returns were meager and now these high-frequency guys were actually rigging the market so that most people lost money." Then he said, "Thankfully I read an article by a Mr. Bill Mann titled, Is The Stock Market Rigged? In it he said, 'Yes, but that doesn't have to affect you as an investor.'"
Hinmon: I think one of the big takeaways, there, is that Bill was alluding to the fact that one of the greatest advantages of individual investors is to be long term, and what we've done at Motley Fool Asset Management, is taken that same mindset, that same philosophy and provided it to institutional investing. We are, at our souls, Fools, as well, living the same investing philosophy that you, Tom, and all the great analysts and advisors preach.
Gardner: In fact, you keep poaching from my team, because I no longer get to see Charly Travers, who started with Rule Breakers when we opened it up in 2004. Or Dave Meyer, who joined our team some years ago because you keep inviting them over and they say yes. They want to join your company.
Hinmon: We've got the best team in the business, David. There's no doubt about it.
Gardner: Bryan, what is your role and what are your responsibilities?
Hinmon: Just over a year ago, I took over as chief investment officer, as Bill Mann returned to the mother ship to take on some investing responsibilities alongside Tom. My job is to corral our team of six analysts and invest money that Fools give us directly. There are three mutual funds and some separately managed accounts.
Gardner: So, we read off the names of the funds, and you went back over them, again, in the disclaimer. Can you briefly, if you were trying to summarize in non-lawyerly talk...
Gardner: ... but if you have to, I'll understand. Mary will jump through the window and get us if we misspeak. But if you had to, in a catchphrase or two, just summarize what each of those three funds does, so that if I'm listening to somebody, I'd be like, "Well, that one would interest me more than the other two." Could you do that?
Hinmon: It's funny. We just renamed our funds to [make clearer] exactly what they do. The Motley Fool Global Opportunities Fund is a global fund, about 50% invested in the U.S. and 50% internationally. The Small-Mid Cap Growth Fund is exactly that: the greatest small and midsized companies that we think we are going to own tomorrow. And then the Emerging Markets Fund is simply a fund that invests in emerging market stocks. We keep it simple.
Gardner: Bryan, I know some of the disclaimer featured the performance, and trying to empathize with my Rule Breaker Investing listeners, their mind might have wandered somewhere...
Hinmon: I can imagine.
Gardner: ... in the first third or half of where you were. You read it beautifully. But beyond the boilerplate that you read, do you have any thoughts or reflections about their performance? Or is there anything that surprises you or jumps out?
Hinmon: I'll just say that if you want the performance details, please go to FoolFunds.com. We had an absolutely astounding year in 2017. I can't give enough credit to my team. Two of our three funds trounced their benchmarks, and as far as absolute performance goes, when you're notching almost 30% for a global fund and almost 30% for small-and-midcap growth, those are just great years that show stocks of the Foolish variety are really the way to go.
Gardner: One other thing I'll mention is I think there's a fourth thing showing up through the team. Could you briefly preview that?
Hinmon: Sure. We're really excited to announce that today we launched our first ETF. This is the Motley Fool 100 Index ETF. It is simply the easiest way to get Foolish investing in a diversified, simple manner. You can buy and sell just like a stock.
Gardner: And this is an ETF, so Elliot, when he wrote in, didn't even know about this, but talk just a little bit more about the nature of it being an ETF.
Hinmon: All that means is it's a structure that you can invest in. The ETF is based on an index that a colleague of ours, Tim Hanson, and his team came up with called the Motley Fool 100 Index. What that does is it takes the active stock recommendations of our five premium newsletters and the 150 highest-rated stocks in the Motley Fool IQ research database, sorts them by market cap, and buys the largest 100. These are active recommendations either in the newsletters or by Fool analysts.
Gardner: So, a lot of companies that we would talk about on this podcast.
Hinmon: Absolutely. Very familiar names.
Gardner: All right, Bryan. Let me close by asking you the question that Elliot closes with. He says, "My question simply is how well did they perform?" You gave that over the past year. "And," he asked, "how are they positioned going into future trends?"
Hinmon: I think the best way to address this, David, is simply to look at the funds' top holdings, which we publish on FoolFunds.com. The largest holding in the Global Opportunities Fund, as of 12/31 was Amazon. The largest holding in the Small-Mid Cap Growth Fund, as of 12/31, was XPO Logistics, and the largest holding in the Emerging Markets Fund was Tencent.
So, I think it's pretty easy to see that our funds are positioned to the same megatrends that are going to rule the world in years to come: e-commerce [and] social and digital media. We're thinking as rule breakers to where the puck is going and how we want to position our investments, so that we can ride those waves over the next decade.
Gardner: I said that was my last question for you, Bryan, but with you here, having read the mother of all disclaimers, I feel like we've got just a little bit more airtime, and I'm having fun, as I knew I would. Let me ask this. I've often said in talks -- in fact, I gave one two weekends ago in front of an audience.
I said the average managed mutual fund in this country turns over between 70-100% a year. And if my facts are right [I hope they are -- I've read that a number of times in the past], it means typically most managed funds, whatever they started with on January 1st, they don't still hold by December 31st. Just within that one year. I see you nodding your head, so it sounds like I'm generally on target. I hope, again, my numbers are right. Is that true of our funds?
Hinmon: Absolutely not. The same Foolish philosophy of being a long-term owner of pieces of business holds true with what we do. Historically, our average turnover is around 20%, so that means our average holding period is about five years. We're happy with that.
Gardner: I'm happy with that, too, and I know many listening, no doubt [some of whom are your customers], are probably pretty happy about that, as well. Bryan, thank you very much for bringing a little bit of additional Foolish perspective that we don't often offer on Rule Breaker Investing, and continued best wishes.
Hinmon: Thank you, David!
Gardner: Mailbag Item No. 6: This one comes from Benjamin Kaskel writing from Miami. "Hello. Your podcast reminds me, on a weekly basis, how important it is to turn down the hum of the daily news cycle." Thank you, Benjamin! "And to think about investing from principles that aren't affected by the static of the constant stream of information that bombards us.
I was listening to your Blast From The Past episode from last week, and as soon as I heard the segment about unconventional strategies, I immediately thought of the story of Cliff Young. I share a link, here, describing his successes, having not known or chosen to ignore the conventional mindset of long distance running competitions. Thank you so much, Benjamin."
The reason I wanted to share this is because I know the story of Cliff Young, and I think longer-time Rule Breaker Investing podcast listeners with great memories might remember that when I interviewed Candice Millard, right as she was releasing her newest book, Hero of the Empire, I mentioned to Candice, "You know, Candice, I think you should write your next book about Cliff Young."
I first read about Cliff in the book, Tie-Ins for Life, which I've mentioned a few times in this podcast in the past. Great stories from a Marine Corps martial arts teacher sharing stories that he tells to his Marines. Some great storytelling, and one of them is about Cliff Young. Just to share a little bit from Benjamin's link, which is elitefeet.com/the-legend-of-cliff-young. I'm sure you can google that and find more.
Every year Australia hosts a 544-mile -- that's right -- 544-mile endurance race from Sydney to Melbourne. It's considered among the world's most grueling ultramarathons. The race takes five days to complete. It's normally only attempted by world-class athletes who train specially for the event. These athletes are typically less than 30 years old and backed by large companies like Nike.
Well, in 1983, a man named Cliff Young showed up at the start of this race. Cliff was 61 years old and wore overalls and work boots. To everyone's shock, Cliff wasn't a spectator. He picked up his race number and joined the other runners. And I'm just going to leave it enticingly, danglingly right there.
Anyway, I appreciate you writing in because you were reacting to our Blast From The Past last week and some about How David Beats Goliath. And I hope everybody enjoyed being reminded of some of those traits, that strategy, and that approach. Cliff Young was definitely a David facing the Goliath of the world-class runners he was competing against, and it is a remarkable story. You can just look it up on Wikipedia, too.
I should mention, by the way, before we go to the next item, that Candice Millard's next book will be on the subject of the discovery of the source of the Nile. We'll have to have Candice back, but the year won't be until 2021, because she spends about five years researching and writing each of her books. So, putting in a plug, there, for Candice. Look forward to learning more about the story of the discovery of the source of the Nile.
Mailbag Item No. 7: Lucky seven, although I'm not sure this one's that lucky. This is from Rick Zabrodski -- @rzabrodski on Twitter. "We all have investing biases that can get us into trouble," Rick writes. "Is buying at the top of the hype cycle one of yours?"
I think that's a great question, Rick. I'm probably going to say in some ways guilty as charged, although I want to qualify that a little bit. The very nature of rule breaker investing has you and I, and fellow rule breakers, trying to think forward, trying to ask ahead of time where the proverbial puck is headed and trying to skate our money, there, ahead of time.
[Therefore], it's very natural, as I've pointed out in the past on this podcast, that we're buying early and watch [those who know the hype cycle and listened to last week's podcast] our money go up and then down the hype cycle and then, because we keep holding, when these companies win back up, and often up for a long time afterward.
So, yes, Rick, I can definitely look back and see times that I bought at the top of the hype cycle.
Now, that doesn't mean it ends up badly. Sure enough, sometimes, it does, and I've talked, in the past, about how many losers I've had, and how I have more bad losers than anybody who picked stocks in Motley Fool history. The good news is when it works [as we've talked about a lot in the past], it wipes out all your losers when you find a Netflix, or an Amazon, or an Nvidia, etc.
And the other thing I want to say about this is that I really don't try to time any of my buys, Rick, and I think all my fellow Fools know this. What we do in Stock Advisor and Rule Breakers, and what I coach you to do with your money, is be methodical. Save. Think of that story from Dave DaGecko earlier this podcast. Save every single time and move that money from your savings account into your brokerage account, or through your 401(k), and invest.
So, that means yes, I am buying at the top of the hype cycle and the bottom of the hype cycle because I'm buying every single time. That's what we do through our services. We try to take market timing out of the equation altogether. I don't think I'd be very good at that, so I don't even make it a factor in how I approach my money and my advice to you with your investing.
I really appreciate the question, Rick, and I think it's always worth being aware of. That's why I like to talk about the hype cycle and make sure that my fellow rule breakers understand the ins and outs of it. Of course, there's more information for anybody who wants to go back, and just google that podcast and listen more about what the hype cycle is. It's a link. It's available on the internet. You can write, "what is the hype cycle, rule breaker investing," and find that podcast and listen to it for the first time [those who have not heard or learned that framework before].
Mailbag Item No. 8: This continues the theme of calling me out, so let's do it. This one comes from the assistant professor and academic internship coordinator at College of St. Scholastica in Duluth, Minnesota, John Dargan. And in a longer note [I'm just pulling out the middle of it], John writes, "Only because you said at 12 minutes and 30 seconds of a past podcast," [that's the actual time stamp] 'I need you to call me out.'" He said, "Only because of that, I'm going to do it. You said it with such sincerity I have to oblige."
So, at 18 minutes, 45 seconds of that podcast you started talking about New Year's resolutions. I love how you think about them. Focusing on concepts and phrases rather than numbers and goals. At 19:50, you unveiled your resolution for 2018 as 'declutter,'" which, sure enough, I did.
You then defined it and described your thinking about it. This all makes perfect sense," John writes. "You finished this at 20:15 and your very next topic was about your daughter, whose goal was to read or collect more books. After expounding on the virtues of having more books than you can read, you came to the conclusion that having excess books makes you prioritize your reading, and 'the outcome of doing so is to focus the mind.' This, too, makes perfect sense, even though it is completely opposite to the idea of decluttering. I've decided to go with a combination of your ideas and make my resolution to declutter my space and live with as much clutter as possible in order to prioritize and focus my mind to the maximum. Maybe I've got it all wrong," John writes.
Well, it sounds like I'm the one who kind of got it wrong. I love the juxtaposition of me saying passionately something out one side of my mouth and then, in the next breath, approximately six minutes and 15 seconds later something completely different. I call that I guess -- let's call that "motley."
And I have to sneak into this item another call-out of me. This is from Zach Eaton. This is a quick one on Twitter. "Couldn't help but chuckle when I heard @DavidGFool say that The Fool was looking for GUI Interface designers," [GUI -- graphical user interface] Interface designers, since RAS Syndrome was so recently mentioned on @RBIPodcast. Well played, Zach!
You know, it took me saying I'm going to do a weekly podcast in July of 2015 to now get to the point two-and-a-half years later when I realize just how much I suck!
Mailbag Item No. 9: It's time to talk cryptocurrency, so we have to bring Aaron Bush, our Motley Fool cryptocurrency... I don't know if expert... I mean, is anybody really an expert emerging? Authority. How about that, Aaron? I need to bring you in to answer this. Maybe one other this time around.
Aaron Bush: Well, thanks for having me, again! I'll take any title I can get.
Gardner: Excellent. Good. Great attitude. Very Foolish of you. Aaron, you read this note. I shared it with you ahead of time because I wanted your perspective. Let me read it. This one goes like this. "My name's Greg Allen. I'm a sophomore at the University of Colorado, Boulder studying finance, math, and minoring in economics and, potentially, computer science, if I can find the time. I'm fairly confident I've had discussions about bitcoin, blockchain in at least one of my classes every week I've been at CU since my first week of classes one year ago.
In finance, there is the People's Bank of China working on transitioning the yuan to a cryptocurrency. In math, there's the puzzle of hash function." By the way, I'm not going to claim to understand all the things that Greg is talking about in this, but maybe Aaron does. "In econ, there's a Peruvian economist using blockchain to establish property rights in developing countries, and in comp psych, everyone is trying to figure out how to hack bitcoin or make their own cryptocurrency. The blockchain and the innovations surrounding it have been causing so much disruption in each one of my chosen fields of study," Greg writes, "that it's become hard not to think of long-term applications.
Now, in recent episodes of the Motley Fool Money podcast, the war on cash has been mentioned. With governments and companies around the world making the move toward eliminating cash, I don't think it's too bold to say that most of the cash around the globe will be gone within 25 years." And I think I'd agree with you.
"While the older generations have quickly dismissed the cryptocurrencies of today, younger people are tired of cash and are increasingly demanding digital money over cash." Even some not-so-young people like maybe me, for example. "A month ago, a friend of mine was upset he was paid back some money in cash because, he said, he didn't know what to spend it on. Now I know that sounds wrong," Greg says, "but it's true.
What I don't think has been properly addressed by the whole war on cash movement is where exactly the money's going. It's not hard to imagine that instead of cash made of paper the world will operate on cash made of long streams of data, which could be equally hard to forge.
Now, this digital cash could be treated as valid U.S. currency and traded as legal tender; however, there needs to be some way to ensure that this set of data representing that amount of money actually belongs to this person and is the actual amount the buyer says it is. To keep track of this, it's feasible each government would come up with a blockchain ledger for its individual currency, as this has proven so far to be unforgeable, but a heated debate in my econ class last semester left the room split on whether or not every currency being transitioned to a blockchain cryptocurrency would essentially be the same as having a global currency where exchange rates don't exist."
By the way, this is a very thoughtful note, Aaron. I know you're not possibly going to be able to speak to all of this, because this is Greg's reflections on a year of classes in fields that are very relevant, and it's all being talked about and there's a lot of disruption. Anyway, I'm going to keep going with Greg's note.
Gardner: We're near the end, but this is really fun stuff. "What this has led me to think about is how today's cryptocurrencies play into the war on cash. There are several serious flaws in today's cryptocurrencies that would make it pretty hard for governments to follow their models; however, it seems that there will always be a market for a currency such as bitcoin that's linked to an online wallet instead of an individual's identity for legal and illegal purposes," Greg writes. "If my assumptions are right, could bitcoin and other cryptocurrencies have a long-term value that hasn't truly been recognized?"
Maybe we should start there, Aaron, but the last couple of things he says are, "Could the war on cash lead to an actual use for these cryptocurrencies, and have cryptocurrencies just come too early for markets rationally to make sense of it?" Greg closes he's the director of finance for his student government at the University of Colorado, Boulder. "By the way, thank you folks for the great podcasts you guys put out. They've been great guides for my investing strategies for the past three years." Love to hear young people getting it going. "And wouldn't have been able to find my biggest returns without them."
Well, thank you, Greg Allen! And now Aaron Bush, let's talk.
Bush: All right.
Gardner: Aaron, I figure you brought some ideas, here, and I don't want to deflect that, but is it a fair thing to initially ask the question that Greg asked of you toward the end? Should we start there? If his assumptions are right, could bitcoin and other cryptocurrencies have a long-term value that hasn't truly been recognized?
Bush: I think that's a good question. I'm going to say yes. That might sound surprising given the bubbly behavior that is out there. People jumping in...
Gardner: And people making 5X their money in two weeks. These kinds of things. It's happened a lot over the last year.
Bush: ... without really understanding what they're doing. I still think that there is long-term value that has not been recognized. I will caveat that by saying I think 95%+ of what's out there will fall 95%+. I think that's important to understand. That said, there still is that 5% or the top few assets that are attacking really big, important markets and are doing so in smart ways, just waiting for the proper infrastructure to be in place. I absolutely do think that smart investors looking at the right places over time will find unrecognized value.
Gardner: I think we can both grant Greg that possibility. Aaron, what else was prompted in your mind by his note?
Bush: Still answering that core question, I'll say I think there is unrecognized value from future applications for two main reasons. One is that cryptocurrency is largely a misnomer, and many people don't recognize that. While certain crypto assets do enable digital currencies, there are other use cases.
Blockchain fundamentally transformed digital networks into markets, and these networks can represent computing resources. They can represent online communities. Prediction markets. Many other things that haven't even been thought of yet, probably. Currency is one application, but really the tokens that the crypto assets are chopped into just capture the scarce value of whatever that underlying service is, so I think we'll see more than people are expecting.
Second, while blockchains may be used for government-backed currencies one day, to me that's kind of ironic, because bitcoin's breakthrough was allowing digital currencies to be owned by "the people" for the first time, absent any government or central authority. The fact that it lives on the internet and transcends any man-made, national boundary and can't be shut down; I think that's a pretty big deal and the implications for what that means are yet to be seen.
Gardner: Aaron, do you have Bitcoin, yourself?
Bush: Yes, I do own some Bitcoin.
Gardner: And how many cryptocurrencies do you have, assuming you have more than one?
Bush: Right now, I only have three, but I expect that to ramp up pretty significantly.
Gardner: And why is that?
Bush: Part of that for me is that it's been a learning process, and so I started with the biggest, most popular ones really just to learn.
Gardner: Such a great way to think and act. Test and learn. Dip your toe in.
Bush: Right. And through owning Bitcoin and Ethereum, the two largest crypto assets, I've learned a lot about how the space works, and have really come to understand that what you see in the mainstream media is pretty misleading in that there are lots of other really interesting projects that are out there.
I have taken it kind of slow to get into other ideas, because there really is so much hype out there, I don't want to just jump in without fully knowing what I'm doing with my money, but I have started a slow process of ramping up my investments into other things.
And just as the infrastructure in this asset class builds, more will be made possible, and I expect more worthwhile investments to come online in the next several months and years.
Gardner: So, Greg Allen, there are some thoughts for you. Aaron, I can't let you go without asking you just one more quick question, because people do keep writing in about this. Nishant Guman, or maybe Gumani, wrote me and said, "Hi, David. Started following blockchain and cryptocurrencies. Recently listened to the Rule Breaker Investing podcast in these topics. I enjoy listening to them. Helped a great deal in developing my understanding on digital currencies.
"My question," he said, "is if I sell my bitcoins or Ethereum, etc., then what are the tax implications? How do we get around it while filing taxes? Owing to the fact that cryptocurrencies are highly volatile at this point, I think that knowing the details thoroughly regarding buying and selling them is very important before investing."
"I'll say on a side note that I have a friend who's invested in one of the lesser-known currencies, which has done very well for this person. It turns out, however, he can't just sell it. There's not just a ready market. You can't just liquidate it right on Coinbase. He would have to convert it into other cryptocurrencies, I think he was telling me recently."
Do you have anything for us about buying or selling, or tax implications?
Bush: Keep in mind I'm not a tax expert, so take this with a grain of salt.
Gardner: There are none associated with this podcast.
Bush: But the last time the IRS laid out any crypto guidelines was in 2014, and quite a bit has changed since then. I suspect that this year, 2018, will probably be a landmark year for taxation policies, and we will learn more what to expect. This is how I'm treating it and how I expect things to be treated going forward.
Bush: Pretty much every event, whether it's mining, selling, airdrops, or even just exchanging one token for another token; all of that will be a taxable event.
Gardner: If you're generating a gain...
Bush: If you're generating a gain or income.
Gardner: Or I guess even a loss.
Bush: Or if it is coming in as income vs. capital gains, too.
Bush: So, it could be treated a little bit differently, there. And even though most people view bitcoin and altcoins as digital currencies, the IRS views it as property, so that's why it's treated that way. That means selling, exchanging will trigger the capital gains tax, and receiving crypto as income, whether it's from mining or a form of payment of some type will be taxed as income.
My recommendation about how to treat the taxes is just to play it conservatively. I would keep track of all of your sells and come tax season, just go ahead and report your sales. This is a more annoying process than stocks, simply because exchanging tokens for other tokens is just how you get your foot in the door. That triggers selling events, when really you're just trying to buy something in the first place. I think it's best to just play it safe, there.
I do suspect that over time we will see pretty dramatic changes in how crypto assets are taxed. I think that privacy coins paired with anonymous wallets will be a pretty huge phenomenon and that will let people shield their actions from the government. I'm not recommending doing that.
Gardner: We don't do that on this podcast.
Bush: Honestly, I don't know how the government will react when these things come online, so I do think that this is a morphing environment that the IRS will have a tough time adapting to; but just in terms of buying, selling, and exchanging, I would treat it very similarly to how you would treat either income or stocks with capital gains.
Gardner: Excellent, Aaron! And yes, neither you nor I are tax experts; and even if we were, it's not even entirely clear right now. But I think it is always prudent to pretend that it's all real, because it pretty much is and probably will be recognized as such, as law continues to evolve and notice what's happening in the world. Aaron, thank you very much for yet another appearance. Maybe three of our last 10 podcasts. You're my most frequent guest. Thanks!
Bush: Well, it's an honor, David. Thank you!
Gardner: And finally, this month, Mailbag Item No. 10. "Hi, David. Not sure if this will make it to the mailbag or not; however, this year I learned from the podcast how to embrace my failures and be humble. The humble part I learned when I first met you in November 2016, when I visited Fool HQ to do an interview with Alison Southwick," [of Motley Fool Answers fame]. "I had the privilege of meeting you. You're a great mentor to individuals like myself. Meeting you was an honor. A rare opportunity. But your humbleness will always live with me." Well, that's very kind of you, Cory Glenn.
"2017," Cory writes, "was a very challenging year for me as I continue my military career, and received orders to Sasebo, Japan without my family. Listening to your podcast and hearing you acknowledging your small mistakes on the podcast allows me to think that if a successful person can be humble enough to embrace your mistakes, then I surely can do the same. While I might be away from the States and family, I continue to keep track on Fool.com and with your podcasts. Thanks for all you do.
On a separate note, if I could ask for a Christmas gift, would you be kind enough to sign a copy of The Motley Fool Investment Guide? This will be a treasure copy for myself. If you're willing to grant it, please let me know."
Well, Cory, I remember when you came and visited us a couple of years ago. It was a delight to meet you, then. Your contributions to our Motley Fool community. I recognize your screen name from our discussion boards and several others I featured this time around. Cory, it would be my delight to sign you a book. We'll work it through our subscription information that we have for you. I'll just say what a great way to end this podcast. Merry Christmas, Cory Glenn!
And to all the rest of my Fools, thanks a lot for suffering this fool gladly. One of the longer podcasts. It seems like the mailbags are probably always going to be a little bit longer, because there's so much to share and lots to react to and think about together.
It was a delight, and since you've stayed with me this long, I feel like I owe it to you to talk about what we're doing next week, and get excited, because every nine or 10 podcasts I make five new stock picks on Rule Breaker Investing and that's next week. So, it will be a five-stock sampler. I think I'm going to go back for a second helping of a theme I've used before, Five Lesser-Known Rule Breakers. We're going to go with that next week. Also, I'm going to review one of my past five-stock samplers; the Five Stocks to Feed the Bear, which we did a while ago.
My fellow Fools, let's get ready to talk some stocks next week. In the meantime, Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at RBI.Fool.com.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of Alphabet (C shares), Amazon, Facebook, Netflix, and Nvidia. Bryan Hinmon, CFA owns shares of Facebook. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Netflix, Nike, and Nvidia. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool recommends XPO Logistics. The Motley Fool has a disclosure policy.