In this special mailbag episode of Rule Breaker Investing, Motley Fool co-founder David Gardner responds to a slew of questions and comments from Foolish listeners. Tune in as he discusses everything from holding periods to taxes, outsized stock positions, and more.
A full transcript follows the video.
This episode was recorded on March 29, 2017.
David Gardner: Welcome back to Rule Breaker Investing. It is mailbag week and wow! This might be my favorite mailbag ever. And why would that be? Because I think I've got the best questions and thoughts from you that I've ever received. I got a lot of them. I picked my favorite 12 this week.
The reason this might not be my favorite Mailbag is if I do a bad job with this ... if this podcast takes way too long ... if I don't keep things moving along ... then it could really drag. But based on your part of the equation, you have done an A+ job and I'm really excited. This is a fun mailbag coming up. So with all that said and with 12 to go, let's start!
Mailbag Item No. 1: This comes from [Jake Silverstein]. "Hey, David. Hope you're well. I'm a fan of the RB podcast and enjoy hearing your wisdom. I'm reaching out requesting a little extra wisdom. Not only do you put forth a great energy, but you also seem cool and composed." (This is a misread, but thank you Jake.) "Cool and composed, [and] perhaps even mentally bulletproof." (That is absolutely not the case.)
"Compliments aside, I'm curious if you've implemented a system, re the systems podcast, for keeping your calm when you have big losers and big winners when investing, and if this system applies to your day-to-day functioning. I recall during our coffee chat a couple of summers back," (because Jake was a Motley Fool summer intern), "that you see your losers as a smaller part of your portfolio. You focus less on them. Do you practice any similar systems?" Aspiring Fool, Jake.
Jake, thanks for a great question. Let's break that into two things. Let's focus on losers, in fact. Let's break it down two ways with stocks and then with life (when things don't go so well in life).
So starting with big losers and big winners (but again, I'm focused on losers), here's the way I keep my cool and I think you know this. The math of it. As long as you and I aren't making the small-f (that's bad) small f, foolish decision to add to losers on the way down, which is, in my experience, a rare thing for me to do because I tend to like to focus (everybody knows this who listens to Rule Breaker Investing and follows us over the years) like to focus on adding to our winners and what's succeeding.
So as long as you're not making that mistake, here's what happens mathematically as we all know. Your losers lose relevance. When I pick a really bad stock, add it to my portfolio (for shame), and it loses half its value, it is now half the allocation it once was. And if it does even worse from there, it declines further. And if I have some good winners, they grow in terms of the percentage of my portfolio that they hold. So with stocks, Jake, I find it not that difficult to accept and swallow bad losers because they lose relevance over time.
Now I need to, with extreme contrast, contrast that with real life when we do something wrong. In my experience in real life, when we do something wrong, it doesn't go away. It often takes on greater and greater significance. Some of us have lied or done something in our past that we regret, and we feel it even more 10 or 20 years later, whatever that thing is in your life. So it's a clear contrast with what happens with stocks.
In fact, I've mentioned before Henry Cloud's book Integrity. And in his book Integrity, Henry Cloud talks about how true integrity is like a ship's structural integrity; that is, you can't have a single weak link, otherwise the whole ship can be sunk. Or you can take down a big Tolkien dragon if you can find that one chink in its armor. Integrity, human integrity, often works that way.
If we're not living a life of seamless integrity -- if we're not making our best effort to cross all aspects of our lives -- then that one thing that we're not attending to can often start to exert overweight importance both mentally for us (what's going through our heads) as well as those around us. So I think there's a big difference between those two things and I hope you get that.
Mailbag Item No. 2: "Hey, David. I've enjoyed being a member of Stock Advisor for the past year. Have also enjoyed listening to RBI as well as the other Fool podcasts. It's made the topic of investing more approachable and the experience of investing and learning about companies far more enjoyable."(This one, by the way, comes from Andy Wohlfarth in Memphis, TN. Andy, thank you for those words.) "Once Supernova opens up again, which I hope will be soon, I'll likely expand my membership."
Now into the meat of your letter. You ask: "As I am a tax attorney, we're starting in tax season. I couldn't help but wonder what your (i.e., my) 1099s look like. As you're a buy-and-hold investor, I envision there's a healthy amount of dividends. All qualified. No short-term gains or losses, and some long-term gains. Maybe a few losses. It's the long-term gains part that leads to my question about your investment philosophy."
"Buffett says his favorite holding period is forever. Realistically I know there normally comes a point where a stock should be sold -- and sometimes when folks need the money and it must be sold. Assuming you don't need the ready cash, I'm wondering when you determine to sell a winning stock, and lock in a gain, and how you go about that."
"Do you sell off only enough to get back your initial investment? Let the remaining investment essentially play with ..." (One of my least favorite phrases, here. Sorry Andy.) " ... house money? Do you sell off lots over a period of time, diminishing a position size to a certain percentage of your portfolio, etc.? Is there some other manner in which you approach logging in a win? Thanks. Keep up the great work." Andy Wohlfarth.
Well, Andy, thank you. It is a busy time of year for us all. Those of us who try to get our tax stuff done by April 15th, although in the Gardner family we often take that extension and actually get all the work done in October. But regardless, let me just briefly talk about what my tax returns look like as a long-term investor.
Primarily what I do is I hold my stocks, and you know that. And what happens is if you find a great winner -- if you find a stock that you've been patient with for 10 years like Netflix or Priceline, and the stock's up 10 or 50x times in value -- what's going to happen is that stock is going to grow to be an overweighted position (maybe an uncomfortably overweighted position) in your portfolio.
So what I've tended to do, then, is when those stocks ... (Buffett's favorite holding period is forever, you've quoted) ... when I hold forever, winning stocks become really big parts of my portfolio. Therefore, in order to balance them out a little bit ... and, again, I'm willing to let stocks become larger percentages of my portfolio than most people I know.
So I'm very OK with having a stock be, you know, a substantial part of my portfolio. I'd say I've had winners in excess of 20% of my whole portfolio. I'm OK with that, but what I tend to do, then, is I will pair selling off portions of those stocks over time when I have losers to sell, aiming to net out my capital gains to zero.
So that's probably my number one thing that I do as an investor (somebody by definition who acts over the long term) is I wait until I have a loser. It turns out I do have them from time to time and however much money I lost, I tend to just equal out with a like amount in a capital gain of an overweighted stock. I hope that makes sense to you.
I will also mention, in closing on this one, that when we make charitable donations (which we do every year in the Gardner family), I almost invariably will give away appreciated stock. It is the most efficient way to give. You are forgiven the capital gain and therefore the full amount of stock that you give to a charity can be accepted and you are forgiven any capital gains on that. So it's much more efficient than, let's say, selling a stock, paying a capital gains tax, and then later giving that money to somebody else. Just giving shares directly.
Now we tend to have a mental number in our minds, and it will be different for each of us where below that you're just going to give cash. But for larger gifts (however you want to define that), we almost invariably give appreciated stock in those same big winners that we've tended to have over the years, whether it was AOL back in the day or a stock like Priceline these days. So thank you for your questions and keep doing good work on behalf of your clients.
Mailbag Item No. 3: "Hi, David. I've got a couple for you, one investing-related and one personal." And this one starts with the personal. It's from Blair Thompson. Blair writes: "For most of my life ..." (I'm a couple of years older than you, so doing the math here, I'm 50, so Blair I'm thinking you're around 52). For most of your life, you wrote: "... all I've really wanted to be is happy. I blamed all sorts of external factors for my problems. Pursued things like money in hopes that it would make me happy. Nothing worked."
"Finally in desperation I decided that if I couldn't be happy, I could at least pretend to be happy. So I made a conscious decision to smile at every opportunity. I walked around with a goofy-looking grin. It must have looked odd, but it wasn't long before I realized I was truly feeling happy inside. I now know that the act of smiling changes your brain in just this way. I still have to remind myself to smile occasionally, but it's a lot easier now. I'm loving life and looking forward to whatever comes next."
Now normally on Motley Fool Rule Breaker Investing mailbag, I tend to want to comment on everything; but some of these are just so good this week I'm just going to leave them be and just let anybody take it in and make of it what you will. I really appreciate that story, Blair. Now to the investing point.
"I've never really understood the stories I hear about investors who panic at the first sight of trouble," Blair wrote, "and exit the market when their stocks drop. My way of looking at stocks is I hate to sell when they're up because they might go higher. I also hate to sell when they're down because I still expect them to go higher."
"In other words, I'm so afraid of losing future returns that I'll watch my stocks go down without selling. This was quite painful in 2008, but I'm now very glad I stayed with the market. I will still sell stocks if I no longer like the company (for example, Wells Fargo after their account scandal last year), but I never sell on price alone."
"I love your podcast. I've listened to them all. The length, content, and delivery are perfect. The only complaint I have is in the intro. I listen on the subway with headphones and have to turn up the volume quite loud so I can hear properly. If I'm listening to several podcasts in a row, I forget to take off the headphones in time. The crash (that glass-shattering sound that we have at the start of my podcast every week), Blair writes, "deafens me. I call it ear breakers." I think we'll just leave it there.
Blair, thank you for both of those comments and thoughts, and I'll just react briefly to your view of stocks, which is that you hate to sell when they're up because they might go higher and you hate to sell when they're down because they might go higher. You, sir, must be familiar (I'm assuming "sir" -- Blair is definitely a name that can go both ways.)
You sir, or ma'am, must realize that if you step away from a graph of the stock market ... whether it's in the United States of America the Dow Jones Industrial Average or the S&P 500, or many other global markets ... if you step away and take the long view, and look at the last century, and you look which direction that graph line goes, you know why it's a great instinct to not want to sell your stocks when they go higher because they might go higher than that. And to not want to sell your stocks when they go lower because they probably will go higher. So congratulations, Blair, for finding some winning formulas for your investing and your life.
Mailbag Item No. 4: This one comes from Augustine Beeman in Ames, Iowa. "I was listening to the Motley Fool Rule Breakers podcast a few weeks ago," Augustine writes. "You refer to the quote, 'I disapprove of what you say, but I will defend to the death your right to say it' as a quote from Voltaire."
"I," writes Augustine, "had believed this for years, but it actually is a famous fake quote of his." However, it is in line with his belief and values and you provided (Mr. or Ms., because Augustine, to me, or Augustin is a name that can go both ways) ... anyway, you gave me a link to QuoteInvestigator.com, a site I hadn't seen before. Anybody can use that site to look up quotes. And you close with: "I hope I don't offend you, but your personality type on the show suggests you love to learn new things and correct old errors, however slight. Regards."
I love that note. Thank you. As somebody who does love exposing fake quotes (for example, the unquote of Gandhi's, "Be the change that you want to see in the world"), which Gandhi never said, or Proust's, "to see things with fresh eyes," which I actually used last week, I love the fake quotes because often (a) they're great quotes, which is why we think that they were said, in this case, by Voltaire; but (b) I love to know the truth.
And so thank you very much, Mr. or Ms. Beeman, for writing in and letting me know that Voltaire's classic quote, which I love and I would describe as one of my favorite quotes ("I disapprove of what you say, but I will defend to the death your right to say it") as exposed by QuoteInvestigator.com. And by the way, there's quite a lengthy write-up with references and talking about how Voltaire got close to saying that at points in his life. Or it's in the spirit of how he acted. But anyway, I love finding out that he didn't actually say it, so I'll have to add that one to my list.
Mailbag Item No. 5: This one comes from Hugh Wade in Anchorage, Alaska. "David, I enjoyed your lifehacks podcast the other day. It created a good problem. I had to keep stopping and backtracking relentlessly to write down whatever next keeper (you kept laying out there books, movies, neurons firing, ideas, good stuff). I also thought your hack on learning retention, and quizzing, and the Kindle was pretty thought provoking."
"Speaking of paper versus digital, I have to say I'm disappointed that Stock Advisor and presumably all services (although I don't really know yet) are dissuading paper. I don't like it. I understand the argument. I think the recycling environmental argument may be hogwash. The growing and planting of trees seems like it's likely sustainable and adds to more green on this earth. (I think it's probably largely about cutting costs and not dealing with what is likely the pain of paper, the mail production, etc., which I totally understand)," you wrote in parentheses.
"However, for me the paper aspect is kind of part and parcel of how I relate to the Fool. I, too, have moved surprisingly to digital (even reading to my daughter on the Kindle, utilizing it in ways I hadn't anticipated). However, paper still has a place, especially for this individual, and likely my demographic. I'm 51," you wrote. "Also I would add the paper version has also become watered down, etc." Hugh Wade. Anchorage, Alaska.
Hugh, you're right. We have been removing the paper option from our membership services over the last few years and in fact, this month marks our final paper issue of any one of the Motley Fool services. Ironically, perhaps, it's the Motley Fool Rule Breakers issue. So Rule Breakers was the last to keep some paper going here at The Motley Fool.
Now I certainly understand your feelings about paper. I know that a lot of people enjoy just taking the paper around and reading it at whatever convenient place they have, and I understand not everybody enjoys reading on an iPad or a computer. However, we absolutely have data tested everything that we've done, here, and in lots of other ways at The Motley Fool.
I'll tell a story to close this one about how I had a conversation with Steve Case, the founder of America Online, a couple of decades ago and what I learned from that. But I want you to know that a very, very, very small percentage of Motley Fool members actually wanted the paper or asked that we maintain it. It was such a small percentage that we decided it was not cost-effective.
And I believe, as well, that we will improve our services as a consequence of being fully digital. In a lot of ways, we were still running as an old paper publishing company in terms of when we would put out information. We had very much kind of a monthly hamster wheel that I was on that I needed to write this certain stock, or a write-up or an intro on these certain dates in a way that really didn't feel dynamic and digital, and I think ultimately we'll serve our members when we get away from that, as indeed we have over the last few years in a lot of our services.
So I absolutely appreciate that we've taken away something that you value. And I'm sorry for that, but I also want you to know that you and I, if we like paper, are in a very small minority of people who really care about that, and I believe that we will be unconstrained, and I hope more effective as a customized, dynamic, digital publisher working with you to help you invest better, which is the purpose of The Motley Fool.
Now, I mentioned the Steve Case story. I want to tell this one briefly, because it was very instructive for me at an early age. It's a little bit of a digression. I'll keep it short.
So a lot of us remember America Online. It still exists today, but back in the 1990s it was really the King Kong of online in lots of ways. It was the company that brought America online during that decade when the online medium really became popular, and it also became such a major publisher and such a venue for other publishers. And certainly with the merger with Time Warner (as kind of a merger of equals), right around the year 2000 showed just how truly massive America Online had grown so quickly over the previous 10 years.
Now I had an opportunity -- because we were an early publisher, as some of you know, on AOL, [and] that's really how The Motley Fool got its start -- I had an opportunity to spend a fair amount of early time with the AOL people. After all, The Motley Fool happened to have been birthed in Alexandria, Virginia. It could have been Alexandria, Louisiana, or maybe it should have been Bermuda, but we started right here nearby where we grew up in Northern Virginia, here in the Washington, DC area. And AOL was here, as well, so we got to spend a lot of time with them. And at one point, I'll never forget a conversation I had with Steve Case, who was the CEO and founder of America Online.
AOL was just, that week, in the process of raising its rates and this triggered big articles from The New York Times, from The Wall Street Journal, and others questioning the decision that AOL had made to raise its rates. Questioning it in such a way that the stock declined markedly, maybe that day or that week. I'm going to make up, because I don't actually remember, that it was maybe down 6% based on, let's say, a Wall Street Journal article talking about how AOL's raising its rates.
I happened to be at a conference that had Steve Case there that very day. So I had read the article. As an AOL shareholder, I was aware of the business situation as well as I could be as just a private shareholder.
But I had the opportunity to talk with the CEO at the time, and without being cocky, and without scoffing too much, Steve Case said to me that day, "You know, it's interesting how the press is covering that. It's like they don't know that we do elaborate amounts of testing well in advance of all decisions we make, especially all really important decisions that we make." And so Case said, in so many words, "We already know this. We got this. This is fine. Our users are not going to have a big deal with it."
And so there I was. A guy who in the morning had read the press and a newspaper about a business move, but then in the evening talking to the person. And when I tried to decide which one do I want to believe more (do I want to believe the CEO or the journalist), it was very clear to me (and a wonderful decision that I made to keep holding that stock over the course of the following 10 years) very clear to me that the CEO was the smartest guy in the room. He had all the cards and it was based on the amount of data testing and learning that an online company can do.
That's all a really long way of closing up this answer to your question by saying that we have really tested this and made sure, with our users, that the shift away from paper is OK. And I know it's disappointing to some, and certainly to you, sir, but please know that we don't make decisions like that lightly. We deeply test and learn.
Mailbag Item No. 6: This one comes from Craig Coleman. "RBI Team: First time. Long time. Always wanted to say that. I've been learning the Foolish way to invest for many years. Have rebuilt my retirement portfolio based on many Foolish recommendations." And you list five steps:
(a) Start with starter stocks. We name those, by the way, in Rule Breakers and Stock Advisor. If you're a member of those services, you know that we have a list of starter stocks, so Craig says start with starter stocks (b) build up to 20 or more stocks (c) buy and hold (d) don't buy on the way down (e) no one stock has more than 10% to 15% of my holdings.
By the way, that's a pretty darned good list of five items enabling somebody to construct a market-beating portfolio that will make them and their family very happy over the long term.
"To date," Craig goes on, "I have about 25 stocks and some index funds to round out my portfolio. As I add to my retirement, should I ...?" And here's a multiple-choice question for me [with] three choices: "(a) should I buy winners, keeping my stocks at 25 or so (b) buy more new stocks. How many stocks in one portfolio is too much? (c) Diversify into REITs, bonds, or other?"
Craig closes: "I'm in my early 40s. Still have a way to retirement so I'm comfortable with being aggressive. Thanks for any tips." Craig.
Craig, my answer to that is typically probably (b). I think that you should buy more new stocks. How many stocks in one portfolio is too much? Well, in my own family portfolios (and this is aggregating a few different, because I invest for my kids' portfolios) probably I have about 55 stocks.
Now I'm obviously more interested in this than the average person -- the average bear, I almost said, but that doesn't really work in stock market terms. It's just an idiom that works outside the stock market -- than the average, maybe Fool. I think a lot of us initially don't want that many stocks. I will say this. A lot of our members have more stocks than that. As we age, over the course of time, typically if we're buying and holding we're going to keep growing the number of stocks we have.
So how many stocks in one portfolio is too much? I would say whenever you start to feel like it is too much. That's, for you, what is too much. And that might even be different numbers at different points in our lives when we have more or less time to spend monitoring these kinds of things.
So I am telling you that if I were answering your question, I would take (b), but I have no problem with (a) or (c) and each of us, in the end, is trying to make the best decisions given the context that we each, individually, have. And that's why the Fool does not provide individualized advice through a service like Motley Fool Stock Advisor or Rule Breakers -- because there are so many different contexts.
We're here to help you get to know yourself and get to know other people. That's one of the beauties of our discussion boards. You'll start to meet other people who are in like situations and you can compare notes and we hope, at the end of the day, invest better. Thanks for that question.
All right. I announce halftime. That is six of our 12 points.
Mailbag Item No. 7: I just want to play a tune for you. [Song is "In From the Cold" from Satellite State.] I hope you enjoyed that as much as we did. That's from Andy Lehman. Andy is a longtime Rule Breaker Investing listener, a Rule Breakers member, and, as you can see, a talented musician, as well. And he just sent a care package last month with his new CD soon to be released, so if you're interested in Andy, you can certainly look him up on Twitter or Google him and maybe find more of his music.
We absolutely appreciate when artists share their work. We kind of think of ourselves as fellow artists. We take a very right-brained, I hope creative approach to thinking about money, so we've always been very sympatico with artists across all disciplines and some disciplines work really well to playing on podcasts like music. Others -- let's say Claymation -- don't work so well with this podcast, but we appreciate all the creativity, Andy. Good luck with your career.
Mailbag Item No. 8: This comes from James Chen. He is the CTO at Derivatas. "Hi, David. You often have mentioned you place a high premium on the character of the leaders and the culture at a company. I couldn't agree more. In fact, one of the reasons that I love The Motley Fool is because of the kind of leadership I see in you and your brother Tom." And he goes on to say some other nice things and I just don't want to overstate, here.
So, "You guys are an inspiration to me," he picks up, "as I continue to learn how to lead as the CTO of our small start-up company. Yet," James goes on, "despite understanding its importance, I often find it very difficult to truly get to know the leaders of a company. With the exception of those high-profile leaders ..." Let's say (I'm going to throw in one) like Elon Musk, "there's usually a limited amount of publicly available information on the leaders of a company, especially if the company is smaller."
"Most certainly don't have a weekly podcast that I can listen to. There may be a brief biography [or] maybe some comments on sites like Glassdoor, but it's rarely sufficient to get a holistic understanding of the character and values of a person like this. What are some of the things you personally do when you want to do a due diligence on the leaders of a company?"
Well, James, I think there are two types of companies I want to speak to briefly, here. One is the public company and the other is the private company.
So for public companies, this is actually something I have done a past podcast on. In fact, I'm now looking over my roster, here. It was January 20, 2016 so you may not have been listening about a year and a half ago when I did this, but you can go back and listen because all of my podcasts are free and up there, forever, for anyone to listen to. This one was entitled, The YODA, (that's an acronym), The YODA Method of Measuring Management. So I hope you'll find some insights there.
But I do want to mention, certainly in passing, that things like videos, in which CEOs or CTOs or CMOs ... there are a lot of those videos these days of people speaking at conferences. Or they might have been on CNBC. I find those very useful. I think just Googling people ... I mean, heck. Some of us Google our friends. Presumably if you're Googling somebody who is a VP or higher-level at a prominent public company, you can find quite a lot about them if you look.
And finally, I'll just say one thing I'm a real sucker for, especially because this is the Rule Breaker Investing podcast and we're looking for rule breakers. I love to find visionaries. And usually visionaries speak out. In fact, some of my favorites tend to be critics of their own industry as they launch their new product or service. Visionaries trying to make the world better, and so they have a lover's quarrel, often, with their own industry.
So those are some of the things that I do and look for, for public companies. It certainly is far easier today than it ever was in the past to look up and learn what high-level people at companies think, who they are, and what they've done, again, than it ever was in the past. Not that it's that easy. It does take extra effort, but if you're going to contemplate a significant investment in something, I would encourage you to do so.
And, of course, through our services Stock Advisor and Rule Breakers, we do spend some time (probably never enough time), but some time looking at the leadership, because after all, it's their decisions that are really going to cause our stocks, over the course of time, to sink or swim. It is the human capital driving even what looked to be highly capital-intensive businesses with big machines or large capital investments. Not in people, but it's the human capital, even, that's driving those companies most of all.
Now in the case of private companies, I'll just say all of the above. You can Google people. You can look for videos about them. But at least for private companies (and I know you work for one, James), I think maybe you have an opportunity for some of these in your industry to meet them directly, far more than most of us would as public market investors.
So in that case, I just like to look people in the eye. I'm one of those people who believes the eye is the window to the soul. The more face time that we can get with other people, and get a read on them over the course of time, and start to build (or not) trust with them or in them [is] really profound. So I think with private companies we usually have more of an opportunity to do that. Anyway, I wish you the very best.
All right. Well, I realize we're on number nine of 12, so I need to speed it up. Well, this next one is pretty quick. Several of you came in with this idea, but I'll just provide it through the words of Eric Eason.
Mailbag Item No. 9: "Hi, David. I enjoyed your latest podcast, Gotta Know the Lingo. Actually, I've enjoyed them all, all the way back to the first one." Thank you, Eric, for being a longtime Rule Breaker Investing listener. You concluded: "This episode, though, with the spiffy-pop" ... (one of my favorite terms in Fooldom) ... "with its introduction soon after Aaron's discussion of dividend yield," (again, this is on the Gotta Know the Lingo podcast of this month) ... the idea of the divi-pop popped into my head, so here it is."
And Eric goes on. Here's the definition: "The receipt in a single calendar year of dividends per share greater than or equal to the split-adjusted purchase price of your shares." Eric goes on. "This is a really hard achievement, as it requires ultra-long-term holding of an exceptional company that issues dividends. So, for instance, at a 3% dividend yield, it would need to be a 33-bagger, and such growth stories seldom offer dividends during their growth phase, so I doubt any recommendation in Fooldom has yet divi-popped, but I'll wager the day Amazon, or Baidu, or Intuitive Surgical issue their first dividends, it might be an instant divi-pop. Here's looking forward to our first divi-pop."
So through this Mailbag item, again, Eric, but a number of others (Jason Newman, Scott Phillips), you all came up with that phrase divi-pop to describe that concept, and you know I love the invention of new terms and concepts, especially ones that are aspirational for a lot of us. So there it is, my friends, because you listened to this edition of Rule Breaker Investing, you now know you're part of a precious few who now know we few (we "band of brothers") ... we band of brothers and sisters and Fools ... you know now what a divi-pop is.
Mailbag Item No. 10: Love this. It's a simple point. Jason Ruse @RoosBrews on Twitter. Simply wrote: "At RBIPodcast. Mental Tip:" (this comes from our Mental Tips, Tricks & Lifehacks) episode. Inspired by it, no doubt. Jason, you said, "I use $15,000 as my ZERO amount in my checking. I never fall below that number. If my balance is $15,001, I feel I only have one dollar."
Love it. You know, a lot of people try to maintain ... here's a good, aspirational thing for a lot of us ... three months of living expenses. If you could save three months of living expenses as an initial goal. It's hard for a lot of us. But if you can get there, then we think every dollar beyond that should be invested. Can be invested for the long term.
And so it's, again, it's the same kind of mental tip where zero is not really zero. You make three months of living expenses already saved as zero, or in Jason's case, he makes $15,000 in his checking account as zero. These are really helpful mental tips, tricks, and lifehacks. Thank you Jason.
Mailbag Item No. 11: "Hi, David. I absolutely love your show. Pretty much every single one of the Motley Fool podcasts." Thank you, [Abrielle], who wrote this. "I'm a big fan. Also a member of Stock Advisor." Wonderful.
"I have a couple of questions for the next mailbag. Hope you can include them. Number one: How do you feel about investing in companies with a negative earnings per share or a negative P/E ratio? My understanding is this means the business is not profitable, so I stay away. However, I know your service probably looks at those types of companies. How would you evaluate a business with such negative metrics? Do you look at sales growth, for example, to gauge potential?"
Well, let me answer that one right away before going to your second. The answer is that what we look at, most of all (and we covered this a little bit in Gotta Know the Lingo). If a company is not making money, you want to know its burn rate. Again, in that podcast, just a couple of weeks ago, we talk about burn rate.
But you want to know how much money does this company have as cash in its bank account because, just like individuals, companies have bank accounts, too. How much cash does it have? And then on an annual basis -- sometimes on a quarterly basis -- ask yourself how much [it is] burning. And how quickly, therefore, might it burn through its existing cash before needing to raise more money, assuming it could do so if it's not profitable. So knowing the burn rate, understanding that simple metric is really helpful from a numerical standpoint.
Now forget about numbers for a sec. Using your eyeball often gives you some gut read on companies. Is what the company is doing special? Is it competitively defensible against competitors? Is it important, the work that it's doing in the world? These things matter a lot. It might look like right-brained, qualitative stuff, but when they go to raise more money, if a company is doing something serious that has real competitive advantage, etc., even if it's not making money at that early stage, often it can really succeed with more access to capital.
It's been pointed out many times before. Companies like Amazon started out not profitable. For a while America Online, which I mentioned earlier this podcast, during its golden age. Just before that it wasn't making money. But we still take investments in these companies if we see them adhering to some of the things I just conveyed to you. So thank you for that question.
Abrielle, you closed with, "I know you advocate adding to winners, which I completely understand the why. However, I'm still afraid to add to winners because of an increase in my cost basis. I'm happy to say the ones I'm thinking of adding money to have gone up by over 50% in some cases. Some have doubled. What are your thoughts on that?"
Well, at the risk of repeating myself too much, I will keep this very short. I wouldn't spend a lot of time thinking about your cost basis. That is in the past. When you buy a stock again; yes, you are adjusting your cost basis higher or lower based on how that stock was already doing. But all that really matters for you is not what you already paid for the stock a year or two ago; but what you're about to do with capital now.
So I would encourage you to continue to add money to things that you think are working and to companies that you admire and want to be part of, and don't sweat looking backwards at the cost basis.
Mailbag Item No. 12: And finally this week, Mailbag item No. 12. I'm going to have to abridge this one because there's a lot here, but here's the guts of it. It's from Bill Housley. "David, this morning I woke at 4:30 jetlagged from my recent trip to Jordan. I spent some time researching the 5 Habits of Mind." Now that was another podcast this month from Deborah Meier, the 5 Habits of Mind.
"Great stuff. I will certainly use this. The other jewel I use weekly was your presentation on the hype cycle." And that's another podcast you can listen to in the past, where I talked about Gartner's Hype Cycle.
"But I posted the following on the Motley Fool Podcast's Facebook page," Bill writes. "Last month several podcasts recommended books to read. I picked up, One Up On Wall Street by Peter Lynch. It was first published in 1989."
"One sideways observation is that in almost all cases where Peter writes that Company X is better than Y because of this or that today, 28 years later almost all the X and Y companies are out of business." And that then spawns a bunch of comments that Bill includes from our Facebook group. By the way, I hope you've joined our Motley Fool Podcasts Facebook group. It's a fun and lively place to be if you enjoy Motley Fool podcasts.
But at the end of it, what Bill essentially asks is, "Is anything really built to last? Or is disruption the norm of the times in which we live? It seems to me that the answer makes a big difference on how we manage our portfolios. Cheers to all and thank you. PS: Alison should be getting a postcard from Mount Nebo, Jordan." Well thanks, Bill. You're obviously a Motley Fool Answers listener who sends us postcards, which Motley Fool Answers requests, and it's a lot of fun for all of us to see them when they get sent.
So this is just my closing comment for this week's mailbag. I'm going to keep it quick, but I've definitely gone over my own standard for how long my podcasts should be each week. I just want to say that in my experience, when you look backwards and look over 25 years and find companies that were written about 25 years ago aren't around today, it doesn't mean they went bankrupt. Often what it means is they ended up getting acquired by somebody else. In some cases they've been taken private.
Because I've been investing since I read Peter Lynch's book myself in 1989 -- and I've used a very similar approach that you see me use today, which is to tend to hold things over the course of time -- I definitely recognize that a lot of the companies I held 15 years ago aren't still around today, but please don't mistake that for thinking that they weren't built to last or that they went out of business in a bad way. In many cases, they have been built to last. They remain part (maybe a small part, a division of another company).
I'll give two quick examples to close. Two little companies that I invested in in Motley Fool Stock Advisor. If you're a longtime member you'll know this. A little company called Pixar and another little company called Marvel. Two of my better picks as Motley Fool Stock Advisor stock picker over the last couple of decades. Both of them today, I think we all know, are owned by Disney. Both of them are not out of business, but they are out of business as public market stocks.
They have been tremendous investments and Marvel, in particular, allowed us (because Disney paid up a big premium for Marvel), we got into Disney stock at a much lower cost basis than Disney investors at the time, because we had a highly appreciated stock that has since gone on, as part of Disney, to add huge amounts of value and Disney's been a great stock, too.
So just realize that if Peter Lynch was writing about a company back in 1989 or if David Gardner was talking about a stock in 2004, Pixar (that isn't still around), that's not necessarily a bad thing.
Thank you very much for suffering this fool gladly for one of our longer Motley Fool podcasts, but I do want to say, in conclusion, that this was probably my favorite set of mailbag items. I couldn't include them all, nearly, but thank you very much for caring, for writing in, and for making Rule Breakers hum. 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.
David Gardner owns shares of Facebook, Netflix, Priceline Group, and Walt Disney. The Motley Fool owns shares of and recommends Facebook, Netflix, Priceline Group, Twitter, and Walt Disney. The Motley Fool recommends The New York Times and Time Warner. The Motley Fool has a disclosure policy.