Rule Breaker Investing is back -- this time with listener questions from Entrepreneur Month.
In this episode, Motley Fool co-founder David Gardner answers questions that cover everything from investing during a recession to strengths and weaknesses, quarterly earnings, and of course, his favorite board games.
A full transcript follows the video.
This podcast was recorded on Nov. 30, 2016.
David Gardner: Welcome back to Rule Breaker Investing. I'm delighted to have you with me. This is Entrepreneur Month. That's what November has been. We've heard from my brother Tom Gardner. We've heard from entrepreneurial great Danny Meyer, restaurateur exquisite.
I admit it. I got a "2" on the Advanced Placement Exam for French. I pled with my French teacher (admittedly, I pled in English) not to make me take the AP exam. I didn't really enjoy French that much. I do still remember a little bit of it, but admittedly most of my French these days, at the age of 50, is more Franglais. So we're going with restaurateur exquisite. Then, of course, we heard from David Allen last week and you got an extra if you're a GTDer.
And this week, you've tapped into my Mailbag, because that's what we do on the final Wednesday of every month in Rule Breaker Investing. But since it's also Entrepreneur Month and I had a special treat for you and still do -- Guy Kawasaki, one of my favorite entrepreneurs, authors, and thinkers about entrepreneurism -- I started out and did a great interview with Guy, and I thought, "You know, I'll slam Mailbag into that and we'll have one full, big podcast." Then, after enjoying the conversation with Guy for about 30 minutes, I started thinking, "I can't slam a Mailbag into that. That really stands on its own."
So my producer, Rick Engdahl, made the great executive call to say, "Hey, let's do two this week." It's always a little extra work for Rick, so Rick thank you very much for doing the extra work you are. We're going to have Guy be the extra this weekend. So you've got 30 magical minutes with Guy Kawasaki coming in a few days and we're going to make this podcast -- of course, my traditional final Wednesday of every month -- Mailbag. Your Qs, my As. Got six of them this week. Really looking forward to it.
And here comes the first one. It's from Casey Mayton. Casey, [I] love this note. You wrote: "Hi, David. Great podcast today. I did notice that at the beginning you mentioned your dislike of the phrase 'life changing,' but then," this hurts to read, "but then you immediately proceeded to introduce David Allen and his book by calling it 'life changing' and 'game changing' for you. I understand your point, though. I realize it's tough for us to really focus on our addiction. Just thought it was ironic with your quick rant just before it. Ha, ha. Really enjoyed Entrepreneur Month. Thanks for an awesome podcast."
Thank you, Casey. I really love that you pointed that out. Ultimately, of course, having just praised the man, I need to ask my producer, Rick Engdahl, to walk the plank on this one because while I clearly must have said that (since you're accusing me, I'm sure, accurately), everything I do is filtered by my producer, so very clearly Rick Engdahl is at fault, not David Gardner on this one. Rick, do you want to say anything in your own defense?
Rick Engdahl: Mea culpa.
David Gardner: You really should never have to do that, but I'll say this. That was kind of a life-changing moment. Thanks, Rick (laughs).
All joking aside, though, I do need to double-underline this. I far prefer the phrase "life improving" if that's what we mean. If something came along and improved your life, don't just tell people it changed your life, even if sometimes I do it by mistake on this podcast.
Mailbag item number two. This one comes from Nick Fuller. Nick, you are @NickinSavannah on Twitter and you wrote, "As a newer person to investing, curious as to what was your advice to Fools during the recession." And a wonderful question. And Nick, I'm assuming when you say "the recession," we're talking about what now I believe history books are already calling, will call the Great Recession, which is 2008-2009, which was a worldwide recession largely triggered by the United States of America and too many cheap mortgages. So the Great Recession -- the most recent one I can think of -- what was my advice?
Well, I'm glad you asked. So here's what was happening to me during the Great Recession, and I know many of you were either members of Rule Breakers, I hope, and/or Stock Advisor and I hope you were with me back then. Both of those services started years before the Great Recession, so you were with me before then right through the Great Recession. I hope right through to today going forward.
But here's what I was doing. I pick three stocks every month for The Motley Fool. I do two for Rule Breakers and one for Motley Fool Stock Advisor. So three stock picks a month equals 36 stock picks a year. That doesn't include, by the way, the Best Buys Now selections we make, and the decisions to sell. I'm just talking about the new picks that I was making.
And my head was under a pillow, as I had to decide which stocks to recommend. Every one of those months it felt like, in 2008 and 2009, I did not want to have to do the work. I didn't feel good about the stocks I was picking. Everything I picked in 2008, it seemed like it had lost 50% by the time we crested into 2009, and I was still having to pick stocks and at the time it didn't feel good at all.
So to answer your question, Nick, what was my advice to Fools during the Recession? Well, I'm now proud, in retrospect, to say, some of the best advice I've ever given. I'll give a few numbers in a little bit. But primarily I think the advice that I was giving wasn't so much what I was saying. It's what I was doing. And what I was doing is I was doing the exact thing in 2008 and 2009 that I did in 2007, 2006, 2005, [and] 2004. [In] 2014, 2015, 2016 and yes, a new year coming upon us, 2017. And that is I was buying.
Now, not all of us are at the same place in life. Some of us are near the end of our investing careers and we're starting to make sure we don't lose money with the money, the capital that we have in the market. Maybe we have more in bonds, although that hasn't been a great place to be. Maybe we have income-producing stocks and we're not as interested in rule breaker investing.
Some of us, on the other hand, are just getting started. Nick, it sounds like you're one of those. You said "as a newer person to investing." Congratulations. I'm trying to find as many of you as I can because I think your life will be much better the earlier you get started investing. I think we can all be nodding our heads in agreement, regardless of what age we are, once you recognize the benefits of something that traditionally rises around 10% a year. Yes, some years it's down 25% -- other years it's up 35% -- but on average stocks 9-11% a year. Therefore, by simple math, the earlier we all can get going, the better.
So we're all at different places in life in terms of how much risk tolerance we have for the market. But for me at the age of 50 -- or back then I was closer to 40 -- 10 years from now I'll be more like 60, I'm going to be doing the same thing. I'm going to be saying you and I should be patient. We should be regularly buying. We should be saving capital and buying stocks in the market. We should be holding on to those companies if they're good companies fulfilling our theses. Yes, sometimes they look overvalued, and sometimes they look undervalued, and sometimes what they look like isn't really what they are.
So in 2008 and 2009, going back to the Recession, I didn't want to be picking stocks, because anything I was doing was imploding within a few weeks or months of my picking it. And yet now just to share with you some of those picks. In Stock Advisor, I picked Hasbro. It's up 260%. I picked Marvel, which became Disney, up 515%. I picked Apple, 2008, up 378% since then. I picked Canadian National [Railway]. I mean Canadian Nati -- this is just a railroad that's up 228% since then. Illumina up 200%+. McKesson -- the big medical products company -- McKesson is up 237%. My only regret about that stock pick for Motley Fool Stock Advisor is that it's actually losing by the market by two percentage points. It's up 237% but the S&P 500, since then, up 239%.
So I hope, Nick, it's coming through to you, clearly, that often when it feels hardest to buy, we're going to end up with our best returns and the other side of the coin is true. Often when it feels easiest to buy, we might sometimes have some of our most disappointing returns. But taken all in all, stocks will be overvalued and undervalued. They will rise and fall over the course of time. But time is our friend and being net long, and a net buyer, and buying with every dollar you have at all times, and patiently holding that for 10+ years is going to make you a very happy person.
You know, I look back at the Rule Breakers issue. I'm looking at February of 2009 -- maybe the darkest single month. And for Rule Breakers I picked Monster (the drinks company, the energy drinks) and I picked Salesforce.com, a wonderful idea from Tim Beyers on my team. And those two stocks are up, respectively, 710% and 955% since that month -- that golden month -- February, 2009. That month felt horrible to me. And since I know all of you were old enough to be living in the Recession, whether or not you were investing, you know how dark that time was. And now we can look backwards. I see Mercado Libre up 1,030% since then. We see truly remarkable returns.
So I hope I am laying in some education --some perspective, Nick and everyone else -- that I think, in the end, it's not that I timed it great or not. It's just that we kept getting in the batter's box. Swinging every single month even when it didn't feel good. I think that's really what you need to do to be truly an Investor.
Mailbag item number three. Oh, and this is a question that ... I do this every few months. I wrote this one myself. I'm asking myself this question and it's kind of a general question that applies to -- I guess it applies to investing or business. It's as much a life question, though. And it's this simple question. Is it better to focus on your strengths or your weaknesses?
You know, you can hear very persuasive arguments about both directions, here. You can definitely hear people talk about how what our education should be doing for our kids is take the kids who are A's and take them up to an A+. Why are we trying to make somebody who's not good at math work extra hard to get from a D to a C when really wouldn't we be best off, as a nation, and wouldn't this person be better off if we could turn their A into an A+? So a very persuasive argument.
I also hear, sometimes, the other argument, which is can you really be a fully educated person when you're going through and you are, as college counselors will call you, a "pointy" candidate. That is, you have a very clear single strength, but you're not very well balanced. Maybe you emerged from your education without really knowing much history because you were so focused on mathematics. So you can easily see either side of this coin.
Here's where I come down on this one just as a result of some recent thinking. I think, contextually, it's important to identify who we are talking about, here. So here's my general rule for focusing on strengths or focusing on weaknesses. We're going to talk about two different types of people, here, very briefly. We're going to talk about leaders- coaches, and then we're going to talk about performers-players.
So I think let's start with the latter, performers-players. I think it's really important to focus on your strengths. When you're a performer out there, you're onstage. You're out in front of people in a field or a stadium. I think we need to take all of your A's to A+'s. The reason that you're going to end up wearing the uniform, or getting to sing onstage in front of everybody, is because you're awesome, and the only way to be awesome is to study awesome, double down on awesome. Take whatever is your single, strongest strength and max it out.
And by the way, there are other people who have that strength and they're looking to do the same thing, too. So if you're a player or a performer, I think [when] focusing on strengths (both in your education, in your hobbies, in your calling in life), it makes a ton of sense to ignore lots of other stuff that you're not so good at (and possibly some downside to ignoring those things), but to go for it, and go all out toward your strongest strength.
Now, by contrast, I think if you are a leader, a manager, a coach (somebody responsible for lots of others), I think it makes a great deal of sense to focus on your weaknesses. And that's because (and I'm borrowing this one from a book I read years ago called Integrity by Henry Cloud). Integrity -- the title reads -- The Courage to Meet the Demands of Reality. Integrity is really important if you're trying to be a leader. And what he means by integrity is not necessarily what you or I think at first glance, because a lot of us, when we think of integrity, maybe the first thing you think of is honesty. Do you have integrity? Are you honest?
But, no. What Cloud really goes into in his book is more the concept of structural integrity. So what's a classic thing that lacks structural integrity that's highly relevant to December, 2016? Let's go with the Death Star, since the new Star Wars movie's coming out. And the problem with the Death Star is, as impressive and imposing as it was, it had a structural flaw which was exploited (no spoilers). So if you haven't seen A New Hope, I won't spoil the ending.
But let's just put it this way. If you are a leader trying to be big and imposing, guiding an empire, overseeing lots of humans, I think it's critical that you make sure you address your weaknesses. That you do not have, in Henry Cloud's terms, a lack of integrity. A lack of structural integrity. So there's a brief thought. Mailbag item number three.
Mailbag item number four. This comes from Patrick Ercole. Patrick, I've been enjoying your stuff on Twitter. You're @patrickercole on Twitter. You wrote, "Given similar longevity but diverging performance, why would Fools opt for Rule Breakers over Stock Advisor as an all-in strategy?"
Well, it's a very good question. You're asking a good person to answer it -- because I oversee both services -- but it's ultimately not really as much about how I might answer it. It really is how The Motley Fool might answer it. So I asked Tim Hanson, who leads up product, here, at The Motley Fool, to draw a distinction between them for you. And then my friend Rex Moore kicked in some stuff, as well. So Patrick, here you go from a couple of Fools.
So Tim said if you don't know what type of investor you are, Stock Advisor is probably the place to start. "Historically," Tim wrote, "its picks have run the gamut. There are small caps and large caps. Things that would be classified value and growth. Representation from almost every industry. Things that pay dividends and don't. Companies that have been analyzed via any number of frameworks. So if you're looking to learn generally about investing," Tim wrote, "build a diversified portfolio. Get a taste of everything. Stock Advisor is your solution.
"Rule Breakers, on the other hand, tends to drill down into companies that would generally be classified as more growth oriented. The market caps of the typical recommendation in Rule Breakers also tend to be smaller. The names slightly more volatile," Tim wrote, "and it's relatively rare that a Rule Breakers pick pays a dividend. So if you're more interested in growth investing and learning about how to become such an investor, than Rule Breakers would be the right solution." That's the way Tim put it, and I think that's a good answer.
My friend, Rex Moore, added, "The Motley Fool Stock Advisor service is great for all investors, from beginners to experts. It has the distinction of being the only stock picking service anywhere that provides recommendations from both Motley Fool co-founders, David and Tom Gardner." (We each pick one stock every month). "Provides a great education to our members." That's a focus that Rex is underlining there.
He says, "If you consider yourself more of a stock jock," which is a phrase we've kicked around Fool HQ from time to time (these are people who really love the market and are aiming to beat it, and often are fairly competent individuals [who say they] can beat the market), "hoping to turbocharge your portfolios potentially even more, you should consider David Gardner's high-growth stock service Motley Fool Rule Breakers. This service also features two stock picks each month. David and his team actively seek the multibagger stocks of a lifetime," etc., etc.
Patrick, I think you're noticing that Stock Advisor traditionally has outperformed Rule Breakers, and that's why you're saying the divergent performance. I will, of course, immediately note that both services are substantially beating the S&P 500 and I would say, in recent years, Rule Breakers has probably underperformed a little bit some of the stronger, more [stable] companies. I think that's more an artifact of just the last few years. No prediction about going forward.
Of course, I love them both. They're both my children. I'm happy to say they're both (admittedly I'm biased), [so] I'm giving them both an A. But I hope that helped you distinguish between the two. Of course, a lot of our members enjoy both of those services, which I certainly appreciate. And once or twice a year we open up Motley Fool Supernova, which allows you to upgrade to the ultimate service which brings all of those together if you're kind of a "my style" investor. Anyway, thanks again to Tim Hanson of The Motley Fool and Rex Moore for answering Patrick's question.
The next one comes from Foolingthemarket, @FoolTheMarket on Twitter. Got to love that handle. You asked should you try to get in before earnings or wait till after. If so, how long?
Well, it's one of those eternal questions and here's how I'll rephrase that question. Do you think the coin is going to come up heads when I flip it next, or tails? And the truth is it's about a fifty-fifty thing and I have no consistent answer that I can give to that searching question because it really is a coin flip. Often stocks will trade in advance of their earnings. Expectations for good earnings, the stock starts to move up. Earnings come out, they're so-so, stock drops. If you look backwards three weeks before any of this started, you'll see the stock actually net closes ahead of where it was three weeks ago, but if you bought the day before earnings, you're disappointed because you only enjoyed the drop part of that.
The truth is that I love following earnings. It's always exciting. It happens four times a year. Four times a year American companies (and some others around the world) report their earnings. We all get to see their progress. And naturally the stock market is reacting, sometimes dramatically, to what the companies are reporting, good or bad, but there's never going to be a good approach to doing the "should I buy before or after earnings."
What I'll say is this. If you're really focused on transacting in and around earnings -- which I'm not -- but if you are, consider buying half before and half after. That way you will never feel bad about what you've done. So I hope that non-answer was an effective answer. Thanks for the question.
And the last one. This is a composite question. Not one of you, in particular, asked the exact question I'm about to answer, but there was a lot of board games talk in and around the @RBIPodcast Twitter handle in the last few weeks, and understandably, because board games [are] not just something that I love.
And not only have I featured a few game designers (Jamey Stegmaier, Rob Daviau) on this podcast in the last 12 months, but it's coming up on that holiday time of year where if you're like me, a portion of our Thanksgiving week we actually call "Thanksgaming" in my family. We take it arguably more seriously than the turkey and the gravy, and, of course, a lot of us like to give gifts in December and board games, I think, are a wonderful gift.
So the question is basically what a few good gift game ideas [are] this December. I've got three for you real quick to close and they're ordered in terms of complexity. So the first one I'm going to lead off with is a game that was a big hit when we played it at this year's FoolFest. FoolFest is our annual Member Event where people come from not just around the country but sometimes around the world to come visit with us Fools. It's kind of our Omaha, if you will, for those who are Berkshire fans.
And at FoolFest, we played a game after FoolFest. We handed out copies and it's called Codenames. And it's a word game. If you ever remember the old game show Password, where you give a one-word clue, and your partner tries to guess what you're clueing him with, that's the way Codenames works, except that you're all looking over a table full of words in front of you.
Half of them are the red team's words and half of them are the blue team's words, and when I give you a clue, if I'm the red clue giver, and you're listening to me as my red teammate, I'm trying to point you to the words on the board that are ours. If you point at one of the other words, mistaking my clue, you'll give the other team a point. And it's first team to get all their words on the 5x5 grid of words.
I've done an OK job of trying to quickly explain a game that really doesn't take long to explain or play, but you'll play it over and over. It works for all ages. You can play it with four people, which is probably the classic way (two clue givers, two clue recipients), but you can also play it with four, six, eight. You can even play it with one, or two, or three, which there are variants for.
Anyway, Codenames is a wonderful game. It is highly accessible. That's why I'm leading off with it. If you've not played it, I encourage you to take a look, and if you have played it, you might be interested to know that Codenames: Pictures, the sequel, also just hit in the last few weeks. So it's Codenames, but instead of with a word, it's with pictures.
Game number two. Again, increasing the complexity now. It's probably my favorite game of 2016. It's called Terraforming Mars. If that sounds like something you're interested in, you'll be glad to know that the game is highly thematic. In fact, there's a lot of science in this game. It's still an extremely fun game and a great strategy game.
You'll be learning, all the way through, what the three key things [are] we need to do to terraform Mars in the centuries ahead, and they include things like, well, let's get it up from 0% oxygen to 14% oxygen; let's get it up from a temperature of -30˚ Celsius up to +8˚ Celsius; and let's get some ocean on that planet. You'll be doing that cooperatively with other people around the table, although ultimately each of you is a corporation separately trying to add the most value to terraform Mars.
The game plays accessibly. The game comes with a ton of cards. You have a random mix of cards that you play each game, but you're playing over a board. You're competing with your neighbors but having a lot of fun together. It's extremely educational. It is an outstanding strategy game, so Terraforming Mars is number two.
And I'll close it out, of course (how could I not) with SeaFall. I know some of you will remember my interview with Rob Daviau earlier this year. It is a Legacy game. I'm not going to explain it, here, because we don't time, but you can definitely go back and listen to my interview with Rob Daviau when he talks about SeaFall coming out, and now it has come out.
And since I've already seen some of you at various Member Events throughout the fall, I know some of you have purchased SeaFall largely as a consequence of listening to this podcast and I have my copy, as well. We have not broken it out yet, but it's a deeper, longer game.
It's a game that you play with the same group of people, and each time you play the game, what happens next is based on who won the last game or three games ago, and you are getting to bring out your Sharpie marker and write your name on the board, or name of island. As you explore the world of SeaFall, you're tearing up cards and adding new cards. The Legacy game has you, almost like a video game, unlocking new stuff as you play. It's a remarkable production, and so I'll mention SeaFall, as well. Again, increasing complexity, so those last two really for serious gamers. That first, I hope, for everyone.
OK, we're just about done, here. I want to mention you can check out past episodes of Rule Breaker Investing and all The Motley Fool's podcasts at our podcast center. That's at Podcasts.Fool.com and while you're there you can check out our subscription services. A new issue of Motley Fool Rule Breakers, which I talked about this podcast, comes out with two new stock recommendations from me the last Wednesday of every month, right around Mailbag. You can check it out by going to the podcast center and scrolling to the bottom of the page. That's Podcasts.Fool.com.
Also, if you haven't already, please subscribe to this podcast on iTunes or Spotify. And you can follow us on Twitter @RBIPodcast. Follow me on Twitter if you like. I'm @DavidGFool. Finally, I hope you'll give us a review. Throw me some stars. Let us know how we're doing.
Well, thank you again for listening [to] this week's Motley Fool Rule Breaker Investing podcast. I do want to absolutely mention coming this weekend my 30-minute interview with Guy Kawasaki, the entrepreneurial great, the advisor, the author. I'm really proud to be featuring Guy and to be closing out Entrepreneur Month with Guy Kawasaki. Enjoy your weekend. 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.