In this episode of Rule Breaker Investing, David Gardner looks back at an essay he wrote nine years ago based on the simple idea that if you have to think too much about why a company is worth putting in your portfolio, it may not be worth it at all.
Now, he considers the companies he touted back then in retrospect -- both winners and losers. Big picture, elevator pitches for many of these companies have worked, and when they didn't, you could usually see it coming.
A full transcript follows the video.
This podcast was recorded on Jan. 18, 2017.
David Gardner: Welcome back to Rule Breaker Investing.
We're going to have a little bit more fun this week. Last week, in retrospect, just wasn't that much fun. I think I did foreshadow it at the start of last week's broadcast when I mentioned it's not really that much fun for me to go over my six worst picks of the last three years -- which is what we did -- and those who slogged through all 41 minutes with me including, most of all, my beleaguered producer Rick Engdahl ... thank you. Thank you for being there right to the very bitter end of it.
But this week, by contrast, we couldn't help but have more fun, and we're going to, because I'm going to really just focus on an essay I wrote eight years ago. In fact, it was almost nine years ago (March 10, 2008) that I published Great Stocks Don't Make You Think! That is the title of this week's podcast -- and that's where we're going to be focused -- coming off of talking a lot about losers, loser stocks.
It was one of my teenagers that first taught me that you can point your index finger up and then extend your thumb outward, and then you can take that "L" letter that you've created with your hand and you can put it on your forehead and walk around and be a loser, so I've definitely gotten that gesticulation from my kids time to time over the years.
But, no, we're going to be focused, now, on winning. Not as easy to do. Well, I guess it is with your hand. Just those three central fingers and you can just put that up on your forehead because we're going with winners, now, which is where we spend most of our time. Great Stocks Don't Make You Think!
Before I read ... I'm going to read this essay. Then I'm going to update my thoughts for 2017. I'm going to read the essay, but before I do, just a little bit of background.
In it I mention Steve Krug. Steve Krug is a user interface expert. An information architect, I guess, is the more official title these days. If his Wikipedia page is accurate which, well, maybe it is, Steve Krug lives today in Chestnut Hill, Massachusetts. I've been there, since I toured Boston College with one of my kids looking at colleges, so I'm pretty sure Boston College is probably not far from Steve Krug.
Don't know if Steve works at BC, but it looks like he continues to give user interface consulting and coaching. He's his own one-man company. But his book, Don't Make Me Think!, is what inspired this essay, so that's a little bit about Steve Krug in advance.
Also, this essay mentions some companies. Some of them are still relevant today -- some aren't -- and I'll speak to that at the end. Without further ado, let's get started with Great Stocks Don't Make You Think! So again, this is dated March 10, 2008.
My greatest financial investment thus far is providing the start-up capital for my company The Motley Fool. I'm not here to write about that today -- maybe another time.
I'm here today to share the secret behind the second greatest financial investment I have yet made: The shares of America Online (now Time Warner) that I bought in 1994.
By March 2000, I had made nearly 200 times my cost of just six years before. A 200-bagger! Ever had one of those -- purchased as a young person in your 20s? Quite a heady impression it made on me -- talk about creating a lifelong love affair with stocks.
I hope I catch another 200-bagger sometime again. But this article isn't about hope. It's about how. You ready?
Don't make me think!
First, by way of explanation, let me tell you about the best book I've read so far in 2008. It's called Don't Make Me Think!, by Steve Krug, and as near as I can remember, it contains no mention of the stock market, investing, or 200-baggers. It's just a very readable, insightful book on Web design.
Don't Make Me Think! is not just a catchy title; it's author Steve Krug's first law of making a great Web page that is easy to use. He writes (and I quote):
People often ask me: "What's the most important thing I should do if I want to make sure my website is easy to use?" The answer is simple. It's not, "Nothing important should ever be more than two clicks away," or "Speak the user's language," or even "Be consistent." It's ... "Don't make me think! ... It means that as far as humanly possible, when I look at a Web page it should be self-evident. Obvious. Self-explanatory."
My single strongest piece of investment advice -- distilled from more than two million Motley Fool books sold over the past decade -- is almost the exact same point. It goes something like this: "When we look at a great stock it should be self-evident. Obvious. Self-explanatory."
Better -- shorter -- than Lynch's two-minute drill
Does that sound simplistic? Outrageous? Famed fund manager Peter Lynch stated that we should all be able to explain our reasons for owning a stock in a two-minute pitch. Lynch is counseling us to "Keep it simple, stupid." If you can't explain to a friend in two minutes why you own any given stock in your portfolio, the implication is clear: Sell that stock.
Well, I like Lynch's point. He's talking about understanding before acting, which leads to better actions. It's certainly helped me. But now let me help you. I want to go a bit further -- I want us to go beyond Lynch, looking not just for good actions, good stocks. We're now looking for great stocks. So here's my attempt at a eureka moment:
Great stocks -- those that are the true leaders of real emerging industries -- don't take 60 seconds to explain. If you can't communicate convincingly to a friend in a sentence, even a mere phrase, why she should own this stock over the next five years, chances are it's not a great stock. Now, it might be a good stock, or a winning stock (and no complaints about that), but it won't be a great stock.
Proof by example
Back to America Online. Let's do our one sentence: The 1990s were the decade that America went Online. How could you not own shares?
Ready for more greatness? Try video games: "Entertainment is becoming interactive, and video games will outsell the box office."
This simple sentence has netted Motley Fool Stock Advisor members a five-bagger, and counting, in GameStop. My March 2003 recommendation of Activision -- hitting its five-year anniversary this month -- is now a seven-bagger ... and counting. Great stocks can -- and often do -- ride the same trend.
You want more greatness? "Electronic maps, always at hand." Investors who believed that global positioning system (GPS) would hit megatrend status have made a pretty penny. Speaking of electronic and always at hand, how about this one on a related note: "They enable you to email anywhere." Well, I never did pick or buy Research In Motion, and I've paid quite an opportunity cost for failing to recognize this. The BlackBerry maker is up about 65 times in value since 1999.
Are you getting the hang of this?
Do you see how "don't make me think" stocks -- what I have previously called the "obvious greats" -- work? They lead you to the best investments of your generation, when bought early and held patiently for long periods of time. Google investors know exactly what I'm talking about. Even with the stock down more than 40% from its 52-week high, Google is still a five-bagger and counting, from its 2004 IPO.
And then there's capitalism spreading in China, one of the great stories of our time. It's analogous in its own way to the dawn of the Internet, in terms of the opportunities for investors.
Over at my Motley Fool Rule Breakers, we've been calling Baidu.com the "Google of China" for some time -- a phrase that clearly passes my one-sentence test. Baidu was the top-performing Nasdaq 100 stock last year (up more than 245%), and it's still worth less than 1/15th of Google itself -- yet it has 74% of the search engine market share in China.
What's your line?
My intent here is not to suggest you buy Google today or hop aboard the Activision train or go load up on (God forbid) Time Warner. Nope. I'm here to shine a bright light on the mostly right-brained, big-picture thinking -- or lack of over-thinking -- that will improve your chances of finding the next great stocks of this generation.
So what sentences might you have in mind? (One hint: New energy sources.) And remember -- if you can't say it in a single sentence, don't bother pitching it to me too hard.
From here, allow me to suggest two next actions. The first: Buy Steve Krug's book. If you have any interest at all in the Web, or even more broadly just in good design, order Krug's book and appreciate how he crafts his prose using the very same elegant design principles he's expounding.
Action two: Take a 30-day free access pass to Motley Fool Stock Advisor. In Stock Advisor, I am actively picking stocks guided by the very same principle I've just outlined in this article.
And that's where it ended.
OK, I have a bunch of thoughts to share real quick reflected back on that read and those facts and thoughts.
OK, I knew it was going to be a shorter podcast this week than the last one, so I'll rifle through my thoughts real quick. I bet you might have a few, and at the end I'm going to ask you to share, so start to take some notes and get ready.
One of my first thoughts is -- and this is my happiest thought of all -- at the start of the article, I talked about how it would be nice to achieve a 200-bagger. Didn't know if I'd do it again. I'm happy to say that when Amazon crossed $642 a share that was a 200-bagger off of my original recommendation in 1997 at $3.21 a share.
So since 2008 I'm happy to say I've nailed my second 200-bagger and I'm still looking at others like Netflix, Priceline. I have my eye on you -- you people working at Netflix and Priceline. Keep working hard for shareholders. That was a great deal of fun and very profound and important for me, as I'm sure it is for anybody who's owned Amazon stock for the last year or 10 years or 20 years.
Another one is that a few of the stocks in the article, for example GameStop, were sold, so GameStop is not still a stock that we have in Motley Fool Stock Advisor, whereas Activision Blizzard, which is now no longer Activision but Activision Blizzard, has been held and I'll update some numbers in a little while.
So for the most part the stocks I mention in the article remain active picks today, now nine years later. I never did pick Research in Motion, the maker of the BlackBerry. I was, at the time, sad that I hadn't because it fit a lot of the things that I look for, and it was up 65 times in value over the previous nine years. But I guess most of us are really glad that we never did buy because the stock has certainly been a dog as BlackBerry got replaced by Apple.
And that's one of the thoughts that I wanted to share, which is that technology keeps changing, and so sometimes we change out the big winners. America Online, my first 200-bagger, is not a stock that I own anymore, and hasn't been very interesting for a long time.
And certainly, Research in Motion, the maker of the BlackBerry, really fell apart -- both of them disrupted by new technologies. In the case of America Online, it was broadband. And in the case of Research in Motion, really it was the iPhone, I think, most of all. And so that's just interesting to note.
I do want to say I think we had it right, though, when we talked about in the article electronic maps, or having your email always in your hand. So the technology call was right. Certainly emails, texts, photos, a supercomputer in our hands these days -- nine years later -- with phones like the iPhone 7 have truly enabled shareholders in companies like Apple (or to a lesser extent but still meaningfully Garmin), or even companies that benefit from ... Their businesses are built on electronic maps like, let's say, Zillow. All of those have been winners. And most of all Apple since 2008. So it's interesting to have seen that.
I want to update some of the prices from that article. So Google at the time, which I mentioned had done quite well since its IPO, even though it had sold off 40% in 2008 -- Google, as I wrote that article that I read for you today was at $200 a share. Today it's at $826, so it's more than a 4-bagger. By the way, the S&P 500 over the same period is up 80%, so not a bad nine years -- but not a great nine years -- 80%.
Baidu mentioned, as well, in the essay at $30 at the time that I was writing and it is now at $180, so it's been a tremendous 6-bagger. And since both of those stocks were companies that remain active rule breakers at much lower prices than those, the multiplying of those shares over the last nine years has been profound, again, for Rule Breakers members.
And Activision -- which is now Activision Blizzard, no longer Activision -- is up from $14 to $38 over the same period.
So I hope you get the overall intent. The overall intent of the article was to get you to think big picture and not get too into the nitty-gritty. Again, I love Peter Lynch's dictum: You should be able to give the elevator pitch two minutes long to anybody to explain why you have any stock in your portfolio.
But I truly believe if you're thinking about the great stocks, you're thinking about the zeitgeist. I never did take German, but I'm pretty sure "zeitgeist" means the spirit of the age. You're thinking about looking backwards from history at this era. History is going to say what were the big developments and really the big companies connected to them. Driving them.
So America Online in the 1990s. Amazon.com over the last few decades. And I've mentioned a few others. I'll mention a few others before we're done. But these are the stocks that I think you'd want to be able to tell your descendants you owned. You'd love to be able to say, "Yeah, I had Amazon over those 20 years as e-commerce spread globally." Or, "I had Netflix as movies and entertainment moved to become globally, digitally streamed."
And so this is the intent, again. And just to reread a couple of sentences that I think are the most important takeaways from that article, they go like this:
"My intent here is not to suggest you buy Google today or hop aboard the Activision train or go load up on (God forbid) Time Warner. Nope. I'm here to shine a bright light on the mostly right-brained, big-picture thinking -- or lack of over-thinking -- that will improve your chances of finding the next great stocks of this generation."
So a lot of them are obvious. Think about Amazon, the No. 1 global e-commerce player. Also happens to be, by the way, the most customer-centric company in the world, as Jeff Bezos has always talked about the goal of Amazon.com.
Or Netflix, as I mentioned. Global leader as movies and TV become digital streaming entertainment. You probably can put together a better sentence than I can about Facebook. I don't use Facebook every day, but so much of the world does. An obviously great stock. Another one of those "don't make me think" companies.
And you don't have to fill your entire portfolio with "don't make me think" companies but, darn it, I sure do think you should have some of them, and if they perform well, and if you're right, they'll end up being the foundation stones of your portfolio built from this point going forward.
So I'm going to challenge you here right at the end. I'm going to challenge you to articulate as best you can ... either looking at stocks in your portfolio or stocks that you're researching ... I'm going to challenge you to put in one sentence, let's say over Twitter in this case, why you think that's a great stock.
And maybe we'll have some fun at the end of the month with some of these on Mailbag ... but I challenge you to put the ticker symbol out, put a single sentence or phrase out, maybe tag it with @RBIPodcast, and we'll feature some of those at the end of the month.
Because I know I have a few ideas what might make for great stocks, but our Rule Breaker Investing podcast listenership -- our Motley Fool community -- has many, many more good thoughts than I can muster, so I look forward to learning from you.
And in fact as I bid you adieu, I will note that next Wednesday is the final Wednesday of the month, so this is your opportunity to fill up our Mailbag. So whether it's a great stock that doesn't make any of us think or a question that you have, I'd love to cover some of that as I do at the end of every month, 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.