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The power of crowds can be found throughout business today, from ride-sharing apps like Uber and Lyft to project-funding sites such as Kickstarter and Indiegogo. The Motley Fool was an early believer in what individuals who come together with a common goal can do. An example of that is Motley Fool CAPS, a place investors can go to share their best investment ideas with others, and learn from the tens of thousands of other investors who are doing likewise.
Yet Motley Fool CAPS is much more than that, as not only are investors rating stocks, but are themselves being rated, both against the market and other investors too.
One of the youngest investors on the stock rating service was Zack Gardner, son of Motley Fool co-founder David Gardner. In this episode of the Rule Breaker Investing podcast, David discusses with Zack the launch of Motley Fool CAPS and how Zack used it to earn top ratings. And just as any Foolish investor would do, we examine both the highlights and lowlights of his picks.
David Gardner: And welcome back to Rule Breaker Investing. I'm your host, David Gardner, with a very special guest this week, whom I'll introduce in a little bit.
But let me first of all say: Yesterday was the Fourth of July here in the United States of America. Happy Fourth of July! Happy Independence Day to all my fellow Americans and American Fools. Unhappy Fourth of July to everybody across the pond -- sorry about that. We do have a lot of listeners all over the place, so I never want to be too much of a homer, but certainly I hope everyone had a great Fourth of July.
I need to make an admission right now. I don't really know how my Fourth of July was, because my special guest and I are taping this about three weeks ahead of when it's airing, and that's because right now, as we speak, or you hear this, we're on a boat somewhere in the North Atlantic. But I always want to come out, if I can, with a new podcast every week, even when I'm away, and so I taped this one in mid-June.
So about 10 years ago, we invented something called Motley Fool CAPS; it debuted in 2006. I've certainly mentioned it on our podcasts. It's one of my favorite things on our website. It gives an opportunity for you, for me, or for anyone to come online for free to caps.fool.com and pick a stock. Maybe you like a stock; maybe you don't like a stock. You're judging that stock against the S&P 500. The question is: Will this stock beat the market, or will this stock lose to the market's average?
Tens of thousands of people have used this platform over the course of the last decade to rate stocks. And not only can you rate stocks, but we rate you -- and that's part of the fun. When you're playing CAPS, you are in a game. You're being scored against everybody else who's in Motley Fool CAPS.
A lot of us remember our SAT tests here in the United States of America. Maybe you were at the 92nd percentile on your math, whoever you were. And if you were, great job. Well, we do the same thing at Motley Fool CAPS. There are people who are in the 92nd percentile of performance on our platform. And, in fact, a lot of people that I've ended up hiring, or added to my teams here at Motley Fool Supernova, Stock Advisor and Rule Breakers -- some of my analysts, specifically, I picked because they have been outstanding on this platform. So there is a little bit of background.
Now I mentioned tens of thousands of people have used CAPS over the years to rate stocks and be rated themselves, and one of those people in 2007 was, at the time, an 8-year-old boy. He is my son Zack, my youngest child, and he's my special guest here on our July 5th Rule Breaker Investing podcast. Zack, welcome.
Zack Gardner: Thank you for having me.
David: So Zack -- you and I -- here's what we did. We'd started CAPS. You know that I'm passionate about everybody investing, including kids. And one of the things we've always tried to do at The Motley Fool (we've written an investing guide for teens) is try to get people started as early as possible.
So there you and I were, at home, sitting in front of the PC. It was even a PC, at the time, not a Mac, because we didn't flip over to Mac until 2008. But we were sitting in front of my PC. You weren't necessarily typing that well. (Would you say you were an investor at the time?)
Zack: Oh, definitely not.
David: Definitely not. But you and I talked about the stock market and that you can be a part-owner of companies. So from January 2007, when you made your very first pick -- you've made a number since then -- in each case, I asked you why. Why did you pick that particular stock? For example, the very first stock you ever picked: the day was Jan. 10, 2007. Do you remember what that stock was?
Zack: I don't think I do. You'll have to tell me.
David: Marvel. It was Marvel Enterprises (Marvel Comics at the time). I insisted, Zack, that you tell me (a little 8-year-old kid) why. "What is it, Zack? Why are we picking Marvel today?" And I would type in your answers verbatim. You said at the time, "Because we have the board game, which is quite good, and it makes really good video games. My favorite superhero is Thor."
So what we're going to do on this week's special podcast is we're going to go back over some of your hits and misses. We're going to review what you were saying at the time. We're going to see what's happened 10 years later, and what lessons we can learn. Are you ready?
Zack: Let's go.
David: Are you game?
Zack: Always.
David: All right, good. Do you remember what the board game was that you were talking about, there?
Zack: Honestly, I don't know. I could probably recall the video game, but the board game is going to be a hard one.
David: It was "Marvel Heroes." It's a cooperative board game that I bought at the time, and for you, since we were not big comic book readers -- I don't remember you reading a lot of comic books -- it was more about the games we were playing. We had a number of Marvel video games as well. My other question for you is, before we get to the next one, is Thor still your favorite superhero?
Zack: I think I'm going to have to go with "yes."
David: Go with "yes."
Zack: I mean, if we were looking at the movies, maybe Iron Man, just because Robert Downey, Jr. plays the part incredibly well, but you can't argue with Thor. I mean, the dude's a god.
David: Good point. And speaking of "godly," you killed it with this pick, as you will well remember. Marvel has since been bought out by Disney. That happened on Aug. 31, 2009; Disney paid $4 billion. The transaction actually consummated in 2010.
In fact, the very first day, Jan. 1, 2010, you were closed out of that position on CAPS. The stock had gone from $27 to $54, so you were up 98%. The stock market over that same two-year period had declined 21%. And you know this: In Motley Fool CAPS, we take the return that you get for the stock versus the stock market, so your stock's up 98%, market down 20%, so you got 119 points to kick off your CAPS scorecard. Pretty promising, right?
Zack: Yeah. I wish it was all that good.
David: Your next pick was Google, and I want to read for you what you said at the time. This was Jan. 23, 2007. And by the way, you had a red thumb on Google, so you were picking it to lose to the market back in January 2007. You wrote simply, "Google (and then all caps) STINKS. (All caps) BOO, GOOGLE." How much time did you really put into the thinking?
Zack: That's like I saw it at eight years of consideration right there.
David: [Laughs]
Zack: Really, it was the consummation of my life to that point. It was just all put into that pitch.
David: I'm assuming you don't remember this (I don't either), but you closed that pick out eight days later. Google had gone up 5%, the market had gone up about 1%, so you were four points underwater there, and you closed it out.
Zack: I have no regrets there.
David: And today, Zack, I note that on this same scorecard (which is on CAPS at SweetZ64, which is your CAPS page), you have Google long. In September 2012 you had a change of heart. You wrote, "While it may be one of the single, safest buys ever, it's still a welcome addition to my portfolio," making it sound as if safety was not what you're shooting for.
Zack: Probably not if you look across some of my picks. Highly volatile, but I figure [you should] get something safe in there, because there's nothing wrong with that.
David: And we're going to get to a few of those, but I will say Google is up 97% since you picked it. The stock market is up 42%. That one's worked out well. Not all of them, by the way, have worked out well --
Zack: [Laughs]
David: -- we'll get to those in a little while. So let me just go over a few other funny highlights. You picked Starbucks on Jan. 11, 2007, so just about 10 days after you started. You wrote at the time, "Really good company. My dad takes me there a lot. We go to it a lot. It has the best madeleines in the world," and then all caps, "YUMMY!" I know you still like Starbucks' madeleines.
Zack: I stand behind those words, even right now.
David: It is a timeless stock and a timeless product. What was funny is that one day later -- because people can comment on CAPS, just like you can comment on Facebook or Fool.com today -- a comment came in. I never read it to you at the time, because I thought it would make you feel bad. This clearly came from an adult. He didn't know that an 8-year-old kid was who he was talking to.
He wrote, "Yeah, what a great reason to recommend a stock. Thank goodness there's people like this investing, or else the efficient market hypothesis would be true and there'd be no money to be made."
Zack: [Laughs]
David: That's what he wrote a day after. His screen name, for the record: EB38. I don't know if he's still active around Fool.com. And that's not the only comment. There was one other comment made -- this one in September 2011.
This person said, "Most people invest like this, and most people should. Never change, young man. Don't let these FOOLS corrupt you!"
Zack: [Laughs]
David: So now to review your very controversial Starbucks pick with your thinking at the time. Highly criticized by somebody. He was calling out the efficient markets theory (or hypothesis, if you like). And Starbucks picked at $16.35 that day. Today it's, mid-June, clocking in around $55. It's up about 240% and the stock market is up about 55%. You probably hadn't checked back on that or seen that lately, but that ended up being a great pick. Do you have any reflection about that? What can we learn from that moment?
Zack: Pick stocks that matter to you. Although I probably wasn't qualified to be picking anything at 8 years old, just picking [a stock] where you know what you love about it and you know why it's valuable, or why it could be valuable in the future, is just a great thing. It's a solid investing strategy, as our second commenter said.
David: Yes. And the longtime great investor Peter Lynch, of Fidelity Magellan fame, wrote a number of fine investment books, and one of them talked about how he went to a Boston elementary school, I think, and worked with the kids there in an investment club, and they crushed the market. They crushed the market. That's, of course, a great headline and a story at the time when Lynch's book came out, but it's kind of the same thing. Keeping it simple. There's something excellent when you don't try to be too fancy and you don't try to out-think the market. You just go with things that you like.
David: Now the next one I want to talk about with you, Zack, is Lumber Liquidators.
Zack: Oof!
David: So the day was Sept. 21, 2012. Your comment at the time, as you put a green thumb saying this stock will beat the market, was: "After an outstanding performance in Olympia 1," which I'll explain in a sec, "this stock has convinced me it is really worth buying."
Now, Olympia 1 is one of the missions in Motley Fool Supernova, and it's a game mission. For those who are in Supernova, you'll know this. We're running Olympia 4 here in 2016. But [for] Olympia 1, the goal was, from the day we started that mission, [to find] what stock will be the first to double. [From] all the stocks in the Supernova universe, all my picks in Stock Advisor plus Rule Breakers -- it's a contest -- each member can [pick] five different companies [to select] which one will double, and Lumber Liquidators, shockingly, was the first one to do it. It was the first winner of Olympia 1 in 2012. It doubled, and I think that impressed you at the time.
Zack: Unfortunately.
David: Yes. So the stock, at that moment, was $52.14 a share. Again, Sept. 21, 2012. Zack, do you know where it is today?
Zack: A lot lower than that.
David: [Laughs]
Zack: About half, maybe?
David: Let's go with from $52 a share to unlucky $13 a share today --
Zack: Oof!
David: -- and you've left that one open, so we're looking at a 75% drop for you. The stock market, up about 42% over the time, so you're sitting 117 score minus in the hole. Have you checked in with Lumber Liquidators in recent years?
Zack: Well, I think the lesson here is: Do your research. I couldn't tell you what Lumber Liquidators did at the time. I still don't think I can.
David: All right.
Zack: I know so little about the company, but really, do your research. Don't pick things based on hype.
David: Good. I like that lesson. And you know, hardware flooring is the business, and at different points, it's been a very good stock; but it's gotten in some trouble, even with the authorities in recent years, and it's been not such a good stock. In fact, in Motley Fool Rule Breakers, where we had picked it in 2009, we did eventually sell at around this time last year. It was a gainer for Rule Breakers. It was up 7% overall, but that was after having earlier doubled and given almost everything back, and well, losing to the market.
Another stock I find on your CAPS scorecard is a company -- and I don't think you know this -- when you picked this stock at the time, your grandfather was sitting on the board of directors of the company.
Zack: Which stock is it?
David: We'll hold off on that for a quick sec. Not only that, Zack, but little eight- or nine-year-old Zack put a red thumb on this company. You didn't know this, but you thumbed down and said this stock will lose to the market, for a company where your grandfather was sitting on the board.
You obviously don't know. I'm going to give you three company names. I'm going to let you guess which one of the three we're talking about, and in alphabetical order so there's no bias, here. Best Buy, Ruby Tuesday, or Safeway?
Zack: Oh, man. I would have no regret about shorting any of those, but I'm going to go with Ruby Tuesday.
David: And that is the correct answer. Now again, you did not know this when, on Jan. 25, 2007, at the age of eight, you had thumbed down your grandfather's company. You've left this one in, ever since. Ruby Tuesday that day was at $28.08. At recent prices, Ruby Tuesday is below $4 a share. The stock has declined 86% in value since you put a red thumb on them, and the stock market is up 53%. You have made few better picks on your CAPS page than that pick: That is your single best red thumb. There is no stock that you were more bearish on that has done better than Ruby Tuesday for you. Would you like to apologize to anyone?
Zack: No.
David: [Laughs] I think the correct answer is, "I'm sorry, Pop-pop."
Zack: [Laughs]
David: I will say, to his credit, what a wonderful grandfather you have. He's been off the board for quite some time. In fact, probably sometime right around when he left -- maybe Ruby Tuesday's never been the same since.
David: Before we get to your top three picks -- and your most recent three picks, with which we'll close it -- I want to look at one other red thumb you put on. Do you remember Evergreen Energy?
Zack: I do not.
David: So today it reads with this ticker symbol on your CAPS scorecard: EVEIQ. Now, I know you've been a summer intern this summer at the age of 17 at The Motley Fool, and I know you've learned a little bit about ticker symbols. And the letter Q -- when it's on the end of a ticker symbol -- what does that frequently mean?
Zack: That they've filed for bankruptcy.
David: That's correct. And so when you picked Evergreen Energy, I think it was just EE back in the day. I can't exactly remember, and you probably don't either, but you thumbed it up, initially, on Feb. 1 of 2007. And you made no comment at the time, which is unlike you, because we made a big point of trying to say to type in what you're thinking each time.
You closed it out just three weeks later. You were some kind of crazy trader --
Zack: [Laughs]
David: -- and the stock was down about 6%. I guess you didn't like that, so you exited. But then you came back, one month later, and put a great big thumb down on Evergreen Energy. And Evergreen Energy, at the time, was at $6.70 and it would later be closed out at $0.22, and that was in December of 2011. Zack, I want to read you briefly this article from Bloomberg dated Jan. 24, 2012:
"Evergreen Energy files for bankruptcy, cites lack of financing. Evergreen Energy Inc., a developer of alternative fuel products, filed for bankruptcy protection, saying it was impossible to maintain operations with a lack of financing. The company listed assets of about $240 million and debt of $25 million in Chapter 7 documents filed yesterday," etc. Evergreen "remains unable to obtain additional financing, and, given its current financial condition, there is substantial doubt that the company will be able to continue operations ..."
My question for you, Zack, is would you like to apologize to the CEO of Evergreen Energy --
Zack: [Laughs]
David: -- or the people of EE?
Zack: I think I'm going to pass on that one, but I do remember why I picked this one, if you'd like to hear.
David: I would love to hear.
Zack: If I remember correctly, the top [CAPS-ranked] Fool at the time, TMFEldrehad, and my little 8-year-old mind, decided to click in. The top Fool: you know this guy's got to have all the great picks.
David: Right. He's the guy who's ahead of thousands of others. He's the No. 1 guy on the platform.
Zack: Yeah, and one of his most recent picks, at the time, was EE, so I was like, "You know what? Let's go for it." Let's trust the wisdom of the smartest guy out there, at least to me, and you know, it worked out.
David: Wow. And TMFEldrehad, who is Russell, a longtime member of the Fool community, absolutely killed it there, because a few years later, you and he both enjoyed, if enjoy you did, the bankruptcy of a company that you'd given a red thumb to.
All right, Zack. Let's count down your top three of all time. Your third-best pick ever...and by the way, we already gave your worst pick; it was Lumber Liquidators, so we Foolishly covered our bases by making sure we talk about our losers, as well. Your third-best pick ever -- and you said this about it when you picked it -- again, January, 2007, a magical month for you. You said, "Well, lots of people like this stock. It has tasty food." Do you know what that company is?
Zack: McDonald's, maybe?
David: That is correct. McDonald's is your No. 3 performer. You picked it at $32.56 in 2007, and here we are, now, about, again, 9.5 years later, and it's gone from $32 to $122. McDonald's is almost a four-bagger over that time, with the stock market up about 50%. So a score of +219 as we tape this podcast.
Your second-best pick, Zack? "This is a really good stock." April 2007. Do you remember this? 2007 was not a great time to be buying stocks.
Zack: Well, yeah. There was the whole financial downturn.
David: Yeah, like that whole financial downturn for the next two years --
Zack: Just a little thing, you know.
David: -- that sunk almost everything. So here you were, perhaps naively, wet behind the ears, a greenhorn, saying on April 22, 2007, "This is a really good stock, and they have lots of good games. And I play some of them." Do you know what that company is?
Zack: Oh, man, no. I would say, like, Nintendo, but it's not going to be Nintendo.
David: I intentionally did not let you look at your CAPS page before this interview, so I could have these sincere conversations with you. So, close. You did have Nintendo as a pick. It was not a great pick for you.
Zack: Yeah, I know.
David: But this is a company that is one of our Starter Stocks and one of stars, today, for Motley Fool Stock Advisor.
Zack: I got it, I got it: Activision Blizzard.
David: You bet. It is Activision Blizzard. You picked it at $9.47. I'm pretty sure it sunk from there over the succeeding 18 months or so, but today it tips the scale at $39. So that's been a four-bagger for you for just patiently waiting and staying invested for, now, nine solid years.
But that's all just a mere prelude to your No. 1 pick. The date was Jan. 25, 2007. Again, this company, and the market itself, would have some really tough moments in the succeeding nine years.
The pitch -- and I know you already know what this stock is. In fact, you wrote this pitch four years later. You were just reflecting on the pick at the time. It was in 2011, so it's five years after you wrote this, but you wrote in 2011: "Man, I got this one a long time ago. Being very young at that time (in fact, I'm only 12 right now), I just picked stocks I liked, but look how it's turned out. I'm an all-star even though I'm one of the youngest people on CAPS!" (We'll talk about that at close.) "With a current score of 1,147.94, this stock has made me the investor I am today. Thanks to the fact that my Dad, David Gardener [sic] found it."
Oh, thanks. I didn't even know you called me out there. By the way, our name has no "e" after the "d" --
Zack: [Laughs] Oh, man.
David: -- but we can talk about it [laughs]. "The new streaming feature is even better because it still has a large number of movies and shows, but it is not necessary to mail the DVDs back as they do not have to send you one." I can see, with time, you were able to write more ably, even though, occasionally, you would misspell a word. And that company, of course, is Netflix. Zack, you were up 2,685%. You have a 27-bagger in Netflix. The market, over the same time, is just up 53%, so you were over 2,500 points ahead of the stock market.
I've got some good news for you. I know you already know this. The top three picks that you've made here, on your CAPS page, you also own in real life. And that's really, in the end, what we're trying to model for everybody who's listening to us today, or who's been part of Rule Breaker Investing this first year as a podcast -- and that's to get invested. Find companies that you like. Companies that impress you. Companies that are leading. And darn it, hold onto them.
And the stock market -- and what it did in 2008-2009, right after you made this pick -- was brutally bad. And then the Qwikster fiasco that Netflix's self-inflicted gunshot wound -- to its, well, we'll just say its foot, not its head -- in 2011-2013. That whole [period] really hurt the stock. It lost three-quarters of its value, and yet here we are reflecting back saying 27 times your money. Pretty sweet.
And to close, I mentioned earlier I'd [disclose] your most recent three picks, and they are Whole Foods Market, Tesla, and Amazon. You made those a few years ago, so you need to get back to the platform and maybe pick a few new stocks. Of those three, one of them's been a loser, so far, and that's Whole Foods. But you did get Tesla pretty early, and Amazon's more than doubled where you picked it since 2013.
So Zack, looking back over this, there you were. You were an eight-year-old kid and I was, I don't know, a 30-something dad. Do you remember those times, at all, in front of the computer?
Zack: Very, very little.
David: Very, very little, yeah. So now, at the age of 17 -- still a very young man and an investor -- reflecting back and thinking through what we've done together, and what we just talked about on this podcast, can you draw, maybe one, two, or three lessons?
Zack: Let's start with this. Take all the help you can get because, why not? You know? Free resources are amazing. Paid resources -- potentially better. So I have you as my dad, and you got me my best pick, ever. A 27-bagger. Incredible.
David: Well, that's great, except that you did pick it. That's one thing I always like to say. Even if I make a good pick in Motley Fool Stock Advisor or Rule Breakers for any of our members, I didn't hold their hand and say, "Buy this." It was actually that they decided, eventually, to follow the advice. To call up their broker, or to tap through the computer, and that's what you did that day, is you made the pick. But keep going.
Zack: And similarly, I was just going to say, with Evergreen Energy, just look at the better people than you out there, because they're always out there, and learn from them.
David: That's a great point. In fact, one of the beauties of Motley Fool CAPS is it is a transparent platform, so you can see next to the screen name of anybody on the platform, their rating. So if it says, for example, 86.11, that means that they're in the 86th percentile of performance. They're ahead of 86% of the rest of the people, and that would actually happen to be you.
You're at 86.11, so you're grading out of the top quintile. You're not the top decile, yet. You still have a little bit of work to do. But over the course of history, now, of almost 10 years of your CAPS presence, you've racked up a total score of 3,590 as of this taping. So those are just points of alpha. If a stock went up 10%, and the market went up 9%, then that would be plus one point of alpha; so you racked up over 3,000 points of it.
And yet, interestingly, Zack, do you know what your accuracy is? Do you know the percentage of the time you're beating the market?
Zack: I'm going to say about 40%.
David: 43.24%. In other words, less than half the time, you got these picks right. But what's the mathematical lesson? And I know one thing. Your SAT on math is better than mine. So what's the mathematical takeaway from that?
Zack: Well, you actually just led incredibly well into what my second point was going to be, and it's that a big winner is always better than a big loser. You can only lose 100% of your money, but you can gain (if you look at Netflix) 27 times your money.
David: That's right. In fact, Zack, looking over the losers -- and again, more than half the time, you've lost, so far, at the age of 17 on your CAPS page -- I'm happy to say people like TMF Eldrehad had it more like getting it right 70% of the time. So it is possible, certainly, to up that percentage for you. But even given that, if you add up every single loser that you've picked, and you aggregated those points, it comes to about minus 900 alpha. In other words, that one pick three times all of your losers put together. That's good math. Zack, any other lessons? Or are we done for today?
Zack: Well, I think one last thing. Just looking at the profile as a whole, it just shows the power of time. As you were saying, buy-and-hold is incredible. [It's] only about nine years that the profile has been around, and you can accumulate so much just by holding stocks over only nine years. You aggregate that over a lifetime, it's incredible what you can do. So invest early.
David: And I'm going to leave it right there.
Zack Gardner, thank you. It's actually your second appearance on Fool radio or a Fool podcast. Do you remember your first?
Zack: No, but people always tell me about it.
[Child's voice] "I'm The Motley Fool Radio Show. We discuss personal finance and investing. People, including the host, guest, and you, our listeners, may have an interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. Do your homework and make your own decisions.
"And remember! You can learn a lot from a five-year-old. For instance, did you know that it's possible to live in an underwater pineapple? SpongeBob SquarePants does!"
David: And that about wraps it up for this special holiday edition of Rule Breaker Investing. Zack, thank you again.
Zack: Fool on!
David: And Fool on to all of you wherever you are. See you next week!
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.
