This week is the 120th Rule Breakers podcast, and as Motley Fool co-founder David Gardner looked back, he realized he's covered a whole lot of subjects in those shows. More to the point, with all those episodes behind him, there are some areas he may not have covered in detail in a while. So he's getting back to basics with a set of ideas he thinks any Foolish investor ought to take for granted -- because he's not taking it for granted that everyone knows them.
In this segment, he lists the six qualities he wants to see in a company and a stock before he adds it to his portfolio -- and while five of them might not surprise people, the sixth is the counterintuitive "secret sauce" of Fooling investing.
A full transcript follows the video.
This video was recorded on Oct. 11, 2017.
David Gardner: Foolish Self-Evident Truth No. 7: This is a brief restatement of the Rule Breakers six traits -- the six things that I'm looking for in my favorite stocks. There will be a tendency or temptation for me to attempt to illustrate each one of them, here, but no. That results in far too long a podcast and good news, some of that material has already been done on this podcast and as you help us build the Rule Breakers Starter Kit, we'll probably pull from that. But let me just briefly restate the six traits, in order, that I look for when picking stocks.
- I love to find "top dogs and first movers in important emerging industries." If you're not the lead husky, the view never changes. I love to find the lead huskies, especially in emerging industries, technologies, and world changers.
- We're looking for "sustainable advantage" -- sustainable competitive advantage -- that can often be gained just through sheer business momentum by the big players. Facebook becomes unstoppable at a certain point within its industry. " Patent protection" helps a lot, especially for some of the medical companies that we invest in. "Visionary leadership" is a great form of sustainable advantage. We have Jeff Bezos, you don't. Try to beat us. Or just "inept competition." That's also a great way to find sustainable advantage. When all of the players in your industry aren't really serving customers [cable industry] and you enter with a new model, you can start to win over not just customers, but shareholders if you're Reed Hastings at Netflix, let's say, because you've got some inept competition. So, that's sustainable advantage.
- "Strong past price appreciation." Yes, very contrarily, we're looking for stocks that are doing very well. That may already well have doubled over the last six or 12 months. Most of the world, in my experience, I submit to you, is looking at the list of 52-week lows asking which one they want to buy. We're looking at 52-week highs.
- "Good management and smart backing." The value of visionary leadership is always underestimated by the markets. Smart backing [looking for which VCs, which venture capitalists are funding these enterprises]. Some VCs, just like some CEOs, are better than others, so keep an eye on that.
- I love to find companies with "strong consumer appeal that have a brand name." That know how to market well and speak well, truthfully and authentically to customers. Winningly. Often with some humor. Strong consumer appeal of great brands.
- Yes, the ultimate secret sauce of Rule Breaker Investing. We want to hear that our stocks are "overvalued" according to the financial media.
The more prominent the voice calling our stock the more overvalued, [often] the better it will be for us as investors because when you have those first five principles in place, to restate-top dog and first mover in an important emerging industry with a sustainable advantage, strong past price appreciation, good management, smart backing, strong consumer appeal, and somebody at Barron's or on Seeking Alpha [or sometimes an anonymous short seller] starts saying it's so overvalued.
I'm pretty sure I know which way things are going to go over the only term that counts which is, by definition for investors, the long term. It doesn't always work, which transitions me to No. 8. It doesn't always work, but when it does it works wonderfully.