Rule Breaker Investing is back with Great Quotes Vol. 2, and host David Gardner is sharing four of his favorite quotes.
Find out what Walt Whitman can teach us about investing, how The IT Crowd is pushing geek culture into the mainstream, what Warren Buffett's 3 I's of every business cycle (innovators, imitators, and idiots) can teach us about the hype cycle, and how one of David Gardner's own quotes can show us how to make money in the stock market even when it goes down one out of every three years.
In this segment, Motley Fool co-founder David Gardner shares one (paraphrased) quote about the "three I's" of every business cycle: innovators, who see opportunity where others don't; imitators, who take note of what the innovators are doing and mimic it (with varying degrees of success); and idiots, who jump on the bandwagon far too late with poorly executed attempts to cash in on what everyone else is doing. Listen in to find out how we can integrate this framework into our investing choices.
Check out David's other favorite quotes:
- "Do I Contradict Myself? Very Well, Then I Contradict Myself..."
- "Stocks Go Down Faster Than They Go Up, But Go Up More Than They Go Down"
- "I Came Here to Drink Milk and Kick Ass, and I've Just Finished My Milk"
A transcript follows the video.
This podcast was recorded on March 23, 2016.
David Gardner: Quote No. 3 this week. This one comes from a much better investor than the last quote, and that's because it's from Warren Buffett. And Warren Buffett has many great quotes. In fact, I think maybe my next Great Quotes -- whenever we do Vol. 3 some months hence -- I think I'm going to go all Buffett all the time for that one, because I have lots of great Buffett quotes.
And I have to confess that I'm not even a big Warren Buffett disciple. As I've mentioned before, for those of you who know me over the long term, I've actually never read a full book about Buffett. I've seen stuff from him. I've seen him speak. I admire him a lot. I've read some of his annual reports. But I've never really taken in the man.
So I'm not a big Buffett disciple, even though I deeply admire him, and I'm very much looking forward to my all Buffett all the time Great Quotes, Vol. 3. Consider this one just a preview.
And it's his three I's. I can't call it a direct quote, because it's more a summary of his thinking, and I'm pulling this particular passage from a Harvard Business Review, which is looking at Buffett. So this is the "three I's" of every business cycle.
First come the innovators, who see opportunities that others don't. Second come the imitators, who copy what the innovators have done. And then finally, third, come the idiots whose avarice undoes the very innovations they are trying to use to get rich. Again, quoting Buffett not perfectly, but spiritually perfectly, and what a great and powerful thought this is.
On Oct. 14 of 2015 last year, I did What Is the Hype Cycle? for that week's podcast. You can go back and listen to it. And it really summarizes Gartner's framework of how things get hyped. And it's not always bad, by the way. Hype doesn't need to be a completely negatively connoted word, but for the most part what you're seeing from Buffett, here, is the hype cycle in miniature.
That is, we lead with the innovators. I call these the rule breakers. These are the visionaries. They're the ones we've talked about a lot from week to week. These are the companies that are admired because they're driven by people with a vision, and as Buffett, in the quote I just read you, says: "They see opportunities that others don't."
Second -- and this happens all the time in business -- come the imitators. We were told throughout our school days not to look at Johnny's or Sally's paper. That's cheating. You can't do that. You need to do your own work.
And a lot of us, raised on that pure ideal, emerged from college -- at least I did -- and quickly got grossed out by the simple, sheer amount of copying going on in the business world. Everyone's looking at Johnny's paper, everyone's looking at Sally's paper, especially if Johnny or Sally is a visionary and trying to do something new.
Some people will pooh-pooh it and say: "We're not even going to go in that direction. Johnny or Sally is crazy," but increasing numbers of people, especially these days, are more open to innovation and tend to just see whatever's working and try that on their website, too.
The amount of copying and pasting, and the amount of big data driving the same kinds of decisions across different groups of people has led to a ton of what, in some cases, we could call collaboration and in other cases we could call sheer copycatting that's happening all the time in the business world.
And by the way, that can either work or not. There's no guarantee that when you copy that it will actually work, but if you found a best practice and it starts to work for you, too, then maybe, indeed, not just you but others are being leveled up, in video game terms, by that innovator who came out first and did it, and the rest of us are just copying.
So thus much for the cycle. Things feel pretty good. It's when the -- in Buffett's words -- idiots show up that things get problematic. Usually at the point you've got DrKoop.com. It's also going to be on the Internet back in the dot-com days providing health advice. There are lots of questionable, rinky-dink companies that show up coming after -- note, please -- coming after the imitators that, at this point, a lot of the good venture capital is already gone, but everyone's doing it. It feels great.
And so whether it's the Internet boom of the late 1990s, or maybe 3D printing stocks in the last few years, or the Internet of Things...these are all important trends, but at a certain point what could happen -- go back and listen to the hype cycle podcast again -- is it becomes not the smart-money bet to keep copying. Valuations are too high. There's not enough capital out.
And, as will usually happen, as Gartner has taught us, these technologies will disappoint in the near term. The expectations are so inflated around them -- at even early stages of them -- that it becomes impossible for them to deliver on that, and then everything caves in, and we can look back and realize who the true innovator was, who the imitator was, and, in Buffett's line, who the idiots were.
I think that this is a really fun and good quote, and I really like that Warren put it out there. I hope that's a good and useful framework for you with maybe a healthy dose of a little cynicism thrown in.