Motley Fool co-founder David Gardner has been doing his Rule Breaker Investing podcast for over two years now, and while he might love to think that his listeners religiously catch every single one, there are likely some who haven't.
So, in this episode, he's kicking off a new occasional series we're calling "Blast from the Past." He'll pick five points to revisit that he's discussed in previous shows -- ones he thinks are particularly worth a listen, whether you're getting a refresher or hearing them for the first time.
A full transcript follows the video.
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This video was recorded on Jan. 23, 2018.
David Gardner: Welcome back to Rule Breaker Investing. I'm taping this on Tuesday, January 23. I think this is the greatest day in my investing career, thus far. Maybe it is for you. Especially if you're a fellow Netflix (NFLX -0.94%) shareholder and you've held for a while, it might be your best day, too. So yes, I'm in particularly good spirits for this podcast, and I'm looking forward to introducing this new series, part of an ongoing sometimes series like some of the others we've developed, here, at Rule Breaker Investing.
But when your cost basis in Netflix is $1.85 -- that's for Stock Advisor members -- if you've been with Motley Fool Stock Advisor since 2004 [when I picked it at $1.85], and the stock goes up $22.55, or so, as I count midway through Tuesday afternoon [it's] up to about $250 a share; then, yes, you're having a very good day.
And if I'm bragging, I'm only bragging on behalf of Motley Fool Stock Advisor and on behalf of you, if you are a longtime or even shorter-time member, [because] if you own some Netflix, you own a great company. You've owned it, I hope, for a while, and you are being richly rewarded for its performance.
And I'm really happy to say that part of what we do on Rule Breaker Investing is to introduce not just a company idea, or brag about a past pick, but really specifically to lay out the frameworks and thoughts and actions that lead to these kinds of results for us as investors.
I'm really happy to say we're not a one-trick pony. Before there was Netflix, there was Amazon where our cost is $3.21 a share and it's well above that. It's outperformed Netflix, whether it's more recent picks [big winners like Nvidia], or old-time picks. If you've been with me since the beginning, do you remember America Online? That was a 250-bagger for us after six years at one point.
So, you've seen these kinds of results. You don't have to have them all. It's awfully nice to have more than one of them, but even just one of these stocks, held patiently, can erase all kinds of mistakes and take you to not just market-beating, but market-crushing returns. A very exciting day, not just for me, but for many of you.
And if you're not on the Netflix train, take heart, because you could still buy some Netflix today. A lot of people are, and they're not worrying about where the stock is. They're looking over the next 10 years, and I hope you already have that mentality as a fellow Rule Breaker.
So, [a] you could own this stock, still, and you should, I think, if you don't own it, and [b] even if you don't own this one, there are a lot of other great companies out there, and such a wonderful future for us to invest together into, even in the face of the pessimists and, of course, the occasional bear markets that will always strike and always be present. But that's part of what makes our wins possible and, indeed, so much fun. So, happy market day and week to all of my fellow Rule Breakers. Dollah, dollah bills, y'all.
As I mentioned at the end of last week -- and by the way, wasn't last week fun? I love our Great Quotes, Vol. X series. It was fun to talk about Stewart Brand. "If you're not part of the steamroller, you're part of the road." Or, "likes compasses, not maps." Such a great metaphor for us, as leaders. Or how about Steve Jobs' classic, "Stay Hungry! Stay Foolish!" That was a lot of fun to do for you last week.
This week, a new series. I'm going to call it Blast From The Past. This is Blast From The Past, Vol. I. And here's the way I've conceived of this one. Rule Breaker Investing is about two-and-a-half years old, now. We started in July of 2015. My producer, Rick Engdahl, and I, have produced for you one new podcast every single week without fail. Never taking any holidays or vacations. We're always here with new tricks for you.
But some of those new tricks inevitably have some old stories and old lessons in them. And I would be a fool -- I would be a fool -- if I expected that you remembered everything I'd said in the past. I would be a fool if I assumed that you'd listened to all of my past podcasts. I know each week we're reaching new listeners. Welcome to Rule Breaker Investing! I'd love it if you'd like to go back and listen to some of my past ones, but I don't want to be guilty of thinking that everybody remembers some of the key points and stories that I've made over the past two-and-a-half years.
So, what I'm doing with this series is I'm going back and finding five things that I've said in the past that I think are particularly apt, or worth learning, or remembering. I want to make sure they're present in your head. They're frameworks or points that you can draw off of. It's almost my working assumption that to listen and get something out of this podcast, you already have things like this in your head.
Again, I'd be a fool if I assumed it's there, because it's not. For most of us, we won't remember all five of these points or stories. Maybe a diehard few Fools will, but for the rest of us, Rick and I are going to present Blast From The Past, Vol. I. Again, I have five cued up this week. Each one of them I'll give you the date when the podcast aired, and I'll give you the title. And I'll encourage you -- if you find yourself interested by the sampler point I'm bringing from that podcast -- to go back and listen to that one, because these are some of favorite podcasts to do and some of my really key points.
And, since I'm looking over my list of five, they're motley points. We're drawing from a few different fields. Making a few different points about investing, business, and our culture. That's what I love doing through Rule Breaker Investing and presenting you this Blast From The Past, Vol. I. So, without further ado, let's get started.
Blast From The Past, No. 1: Well, the date was October 19th, 2016. It was an interesting political environment in our country at the time. One month before the most recent presidential election. And on that day, 10-19-16, we presented our non-political, pre-election special.
And in that podcast, I had the opportunity to read from one of my favorite authors and share a few paragraphs from a novel that was written in 1836. The author, Charles Dickens. It was his first novel. It's The Pickwick Papers. If you haven't read The Pickwick Papers, it's a long, rollicking novel. Again -- Dickens's first novel -- very comic. I would highly recommend The Pickwick Papers if you've not read it.
The setup with The Pickwick Papers is that there's the Pickwick Club. Some Brits get together and form the Pickwick Club, and decide that they will [over the course of the coming week or month] go out, often to the countryside or out into the world, have some experiences, and come back and share them with their fellow club members, members of the Pickwick Club which will be captured in The Pickwick Papers, which is the title of Dickens's novel.
Now, in Chapter 13, there's a classic vignette, a classic bit. Classic for me. I'm not going to say that literary scholars or maybe anybody particularly focuses on Chapter 13, set in Eatanswill of The Pickwick Papers; but for me, and maybe for my fellow Rule Breakers, this is a classic vignette, and in case you'd forgotten it, I want to remind you of it, because it keys into something that happened in the last week that I think affords us some insight.
No, I'm not going to read the passage. I'd love for you to go back and listen to that podcast. That's part of the point of Blast From The Past, Vol. I, but I am going to explain what I was doing there and key into what's happening in our world today.
In Chapter 13, Samuel Pickwick, with his man Sam Weller, shows up in Eatanswill, which is believed to be, in modern-day terms, Sudbury [for those who are listening from Sudbury in the U.K.], but they find a town divided, in Dickens's phrase, between two parties, the Blues and the Buffs.
And in a very humorous caricature, the author conveys, in so many words, that anything that comes up in this town is instantly politicized. And if it's brought forward by the Blues then, of course, all the Buffs will disagree. Will rant, and rave, and say how the world is ending because of whatever the Blues are trying to do; and if the Buffs come up with something, guess what happens? You know what happens -- the exact opposite -- the Blues, on the other hand, start thinking, "If that ever happens, this town is over." So, it's the classic situation of extreme divide in politics, the Blues and the Buffs.
Now, fast forward from 1836 to 2018. I attended a performance at the Folger Shakespeare Library Theatre last weekend, and coming out of it, it was The Way of the World, William Congreve's play, done in a new, modern edition. If you're in the Washington, D.C. area, I would recommend it to you. But I started hearing chatter coming out from my fellow attendees as we all went out into the dark and cold of a wintry January night about, "Hey, you're not going to need to go to work on Monday."
And, as those of us in the U.S. will know, much was made of the government being unable to resolve its differences, and ultimately having to shut down for, as it turns out, I think one day, Monday, January 22nd. I think things are in the process of being resolved. I don't keep up very much with this, as I think you may know of me, but that was the conversation I was hearing outside.
A little bit later that weekend I went onto Twitter, where I spend a fair amount of time, and I saw some of the tweets coming from what I'll call the Blues and the Buffs. Now, I don't particularly affiliate with either party, and I actually enjoy not using the names of America's modern-day political parties but, instead, the Blues and the Buffs, because there is no political connotation to those colors, and so it allows me to speak freely and apolitically with a little bit of systems thinking and maybe some insights for where I think we are today.
So, I'm just going to sample a few of the tweets, and I'm going to substitute Blues and Buffs for any party mentioned, and I'm not going to source any of these, because I don't actually care so much. You're going to see it's not about who's saying it. It's about what's being said and how it's being said.
Here's one example. "Senate Blues own the Schumer Shutdown. Tonight, they put politics above our national security, military families, vulnerable children, and our country's ability to serve all Americans. We will not negotiate the status of unlawful immigrants while Blues hold our lawful citizens hostage over their reckless demands. This is the behavior of obstructionist losers, not legislators." I'll end that one right there.
Or another one. This one coming from the Blues themselves. "As President Obama said, elections do have consequences. Currently Buffs control the House, the Senate, the White House, and the Supreme Court. They have chosen to ignore Blues, policy experts, and public opinion this year and focus, instead, on gutting the ACA, rolling back environmental and consumer protections, and passing a tax break for billionaires. Now, because of their inability to govern, Buff leadership has let both chambers be held hostage by the president, etc."
And, just one more, not to belabor the point, but there were a lot of these. Another one. "Senate Blues vote to shutter down, as promised. Cheer turning backs on military, children's healthcare, and U.S. jobs. Expect more political stunts. #shameful #SchumerShutdown #HurtAmerica." And the list goes on.
Hope I didn't get your political hackles up. No matter who I'm speaking to, that's really not the point. The point is the nature of the conversation, and that's what lingers for me as I look backward to that October 19th, 2016 podcast. I'm thinking about one of my favorite business authors, Les McKeown, and his point about what happens with real leaders here in the business realm, but it's true of politics. It's true of sports. It's true of our culture.
Real leaders, as Les McKeown says, put the good of the enterprise ahead of their own ego. McKeown goes on. I'm not quoting him, here, but he talks about an enterprise mentality. The best employees at a company don't just think about their own job, or their team, or even their division. The best employees at a company are thinking about the whole of the enterprise, as they think about their place within it, and they realize that the consequences of what they do and say affect everybody, and so they put the good of the enterprise ahead of their own ego.
To read some of the tweets that I just shared with you, and others like them, what's happening, very obviously, is just constant blame. Blame of the other side. If you're a Blue, you're blaming the Buffs. If you're a Buff, you're blaming the Blues. Imagine -- imagine if you will, for a sec -- if somebody didn't just tweet that out.
Imagine if we had a politician -- a leader -- who said something like this. "I apologize, and it starts with me, and we, and our inability to get this done." How refreshing would it be in American politics today, if somebody started by saying, "It's my fault. You've elected me, and my job is to reach compromise, when necessary, and keep the government running."
I don't know the political world very well. I know some of you know it much better than I. If you know of such a politician today, if you see or saw a tweet that had what I'll call an enterprise mentality, I'd love it if you'd just drop us a note for next week's mailbag. I'd be happy to highlight the name and some of the background, including a real quote, from any politician working today [and I bet they're out there], who has an enterprise mentality and reacted that way, because that's the way we expect people to react in every other realm of our society.
I'll go to two I know really well. Let's talk about sports. Imagine if in football a team lost, and all of the offensive players blamed their defense in public. In fact, imagine if the leadership of that team, everyone on the offense said it was the defense's fault, and imagine if everyone on the defense said it was the offense's fault. Not only does that sound juvenile, and never really happens, but if it were to happen, it would be clearly an example of a failed team. The team that's not going to do so well going forward. The team you don't want to be on, or follow, when the offense is the Blues and the defense is the Buffs, and that's the way our leaders are behaving.
Or how about the corporate world, getting away from sports and going back to one we know pretty well. How many CEOs do you see just blaming, trash-talking one of their own divisions? Not that many. I can think of very few CEOs that would spend a lot of time throwing away any enterprise mentality and blaming, toxically, some aspect of their company. They wouldn't be CEO for much longer, would they?
In fact, the closest I can think of that happening in the business world is when there's a bad merger. Sometimes you'll hear the people say, "Well, those people over at HP don't know what they're doing. We, here, at Compaq, even though we're now the same company, think differently." You sometimes hear that, and those are always dysfunctional, aren't they? Those are the companies that don't do so well.
So, if our political world treats every day like a toxic merger with the offense blaming the defense and vice versa [replicating the Blues and the Buffs], well, I'm going to say two things are going to happen before we move on to our next "Blast From The Past" point. The first is that it will continue to lose relevance. And ironically, since politics presumably is all about power, [it will] ironically lose power. Instead, the good and productive forces in our society [will continue] to take us higher and forward, [and politics] will lose relevance. And the second thing is that any efforts by enterprise-thinking leaders will truly stand out the more that happens. So, I'm never going to be running for office; but if you are, or considering it one day, I would encourage you to play the Fool, take an enterprise mentality, and start showing real leadership to your constituents. A thought.
In fact, I have one other Foolish thought that I'm not going to share because we don't have time this week, but if anybody wants to tease it out of me for next week's mailbag, I have a Foolish way to advertise politically. To send a great message in any kind of election for anybody who wants my tip. Drop us a note if you're interested in that, but I don't want to go on too much about something that I'm not that interested in. Let's go to Blast From The Past, No. 2.
Blast From The Past, No. 2: The date was October 14th, 2015. That's right. If you're following Rule Breaker Investing on iTunes or Spotify, often at least on iTunes I can say this is now below the fold. It's dropped off. It's not one of our last 100. ITunes only retains for viewer interest the last 100 podcasts from each of us, so this one's gone; however, you can still find it. If you google the phrase "rule breaker investing hype cycle," you'll find that October 2015 podcast entitled, What Is The Hype Cycle?
Now, some of you already know this and some of you may have learned that a couple of years ago, but I want to refresh it for you, and if you don't yet know it, I'm very pleased to share with you, again, just a sampler of one of my favorite frameworks, which I think can be so productive for you as you think about these kinds of emergent technologies and these disruptive companies that we're investing in.
Back on October 14th of 2015, I shared [this] from Gartner (IT -1.24%), the tech consulting company. Gartner has what it calls its "hype cycle." It's the story of technologies as they're born, and they go through five stages.
Briefly, the first one they call the "tech or innovation trigger." It's when that new thing has become possible and somebody's actually making it happen. For example, self-driving cars. Somebody -- I think Google was an early example through its Waymo division -- starts putting a car out there on the road that has some self-driving capability. That's the innovation trigger. Any meaningful technology that you and I are using today [from a smartphone, to a Skype session, to being able to ask your Amazon Echo to turn off the lights in the den], every one of those was an innovation trigger, stage one.
Stage two is the "peak of inflated expectations." Now, what will typically happen with these technologies, as Gartner's hype cycle framework teaches us, is that people's excitement and anticipation will get ahead of the actual possibilities of that technology being deployed and creating the solutions that we perceive that it could create. It just isn't ready, yet. Our human imaginations run ahead. There will be trade shows. There will be articles. People will click on certain things and not on other things.
And all of a sudden that hype that's built up -- and by the way, the word "hype" often with such a negative connotation. For Gartner I think it's just sort of a neutral word. It's just a phenomenon, and sometimes I think it can be quite a positive thing. Often really good things get hyped. Like the hype behind Lebron James, the great basketball player skipping college. Going directly from high school to the NBA. He's ended up being a pretty good player with a lot of hype behind him.
Anyway, the peak of inflated expectations is that time when, if you're picturing stock market graphs, you hit your all-time high and you're headed down very shortly because stage three is the "trough of disillusionment." What happens when these technologies fail to meet our expectations of them is that quickly they start to lose face. There will be some talk of how they've lost the momentum. People will start feeling silly for having played them up at last year's keynote conference. Or it will have been delayed. Like a great video game, all of a sudden you have to wait an extra year.
These kinds of things set in and there's disillusionment. And because there's a bandwagon mentality, often in so much of the media, including tech journalism, everything kind of turns against that technology, and you hit, at a certain point, the trough of disillusionment.
The final two stages are the "slope of enlightenment," No. 4, and the "plateau of productivity," No. 5. And what I'll say in closing about this is that the slope of enlightenment is just a slow [movement] upward. After everybody has left that thing for dead it turns out, since it was a real technology, whether we're talking about genomics back in the day, and the hype and expectation about personalized medicine that we're still not really getting quite yet, but slowly, as we proceed up that slope of enlightenment, it starts to happen.
3D printing. Maybe alternative solar and wind energy. Maybe even, arguably, something like virtual reality or augmented reality. After it gets past a trough of disillusionment [I'm not saying that's true, necessarily, of any of those], you start to enter that slope of enlightenment when you start seeing yes, it is real. It is happening. You can see it in different ways. But, as you hit that final plateau of productivity, ironically, it's almost like it's invisible.
Let's go with voice activation. Eventually, we're all just talking to our Amazon Echo. We're not yet able to speak, like Douglas Adams's The Hitchhiker's Guide to the Galaxy with the Babel Fish in our ear, quite yet, but that's clearly coming along [the ability to speak into your phone]. You're standing in the middle of Pakistan, and it's translating Urdu to something else. That's coming, but it's almost receded away from top of mind for us, and so a lot of us are now thinking more about, let's say, robots. Here's something on the hype cycle these days -- blockchain.
Anyway, it was enough for me, here, just to familiarize you with the framework. I do encourage you, if you feel motivated and you want better pattern recognition, to go back and listen to What Is The Hype Cycle from October 14th, 2015.
Before I go on to point three, I should mention that one thing has happened in between that hype cycle podcast in 2015 and today, and that is that I recommended Gartner stock in August of 2016. About 10 months later, I started scratching my head asking myself, "If I'm going to value Gartner and its hype cycle, and I think it's a good company, I should research it further." I decided ultimately to recommend it.
So, if you're a Rule Breakers member, you probably know that Gartner is an active Rule Breaker. I'll mention we recommended the stock, whose ticker symbol is [IT], at $90.11. It's up to $138.48 last I looked. That's up 54% since August of 2016. The market up 34%, so I want to thank Gartner, as well, for being an excellent stock that you and I can get invested in. A $13 billion company today.
I guess I would be remiss if I didn't mention that Rule Breakers members should all be pinching ourselves just a little bit. Before I go onto point No. 4, it's rare that I can go back and say that over the last six months of our 12 Rule Breakers picks, half of them are up 40% or more.
Now, again, if you're actively a member of Motley Fool Rule Breakers, I hope you know this. In fact, those six companies include one that I rerecommended just last month and it's up more than 40% as a rerecommendation. But truly, it's an amazing time to be invested in these kinds of companies.
If you're a longtime listener, you and I have already shared some bad times together when, at least for me, my portfolio dropped 25% in three months in early 2016. So, we've seen some tough times. I know it's been a strong market, overall. Whenever I hear that the bull market's been going on for eight or nine years uninterrupted, I always think back to how I lost 25% of my portfolio in three months just about a year and a half ago, or so.
But, back to the main point. If you're not already a Motley Fool Rule Breakers member, I'm going to suggest you take a hard look at the service. You can check it out at RuleBreakers.Fool.com.
Blast From The Past, No. 3: The date -- June 1st, 2016. Yup, that means it's still above the fold in the last 100. By the way, I should mention what's about to drop off for those who like the accessibility of iTunes. The two that are about to drop off in the next two weeks are How Sports-Talk Radio Makes You a Better Investor. That was a fun, two-part series I did back-to-back just about a year and a half ago. Just plugging that one, that series if you're a sports fan before it disappears from immediate view.
Anyway, back on June 1st of 2016 it was our first-ever Campfire Stories. It was Vol. I of Campfire Stories where I got to tell some of my favorites. I'm not going to tell them here [I'll tell one of them], but ones that I hope you'll go back and listen to if you don't already know are what happened when I did an early morning stint co-hosting CNBC and what I learned as I talked with the hostess off the air. I also got to tell the story of Pixar vs. Disney and how each of the companies framed up the world differently as they competed head to head back in the day with their various animated films. And then there's also a six-card memory trick laced in there as one of my Campfire Stories, which is always a fun psychological point to make.
But speaking of psychology, probably my favorite story from that podcast was my story of the five monkeys. I have occasion to tell this one from time to time. If you remember this from almost two years ago, God bless you! But if not, I'd love to share with you right now the Story of the Five Monkeys. Again, a psychological experiment. Probably never actually took place, but here's the way it reads.
You start with a cage containing five monkeys. In the cage, hang a banana on a string and you put a set of stairs under it. Now before long, a monkey is going to go to the stairs and start to climb toward the banana. As soon as he touches the stairs, what you do in this experiment is you spray all of the monkeys with cold water. [Monkeys don't like cold water.] After a while another monkey makes an attempt with the same result. All the monkeys are sprayed high-powered, cold water. Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it.
Now, for the purposes of this experiment, we're going to turn off the cold water. There will be no more spraying of monkeys in this experiment. Further, we're going to remove one monkey from the cage, now, and replace it with a new one. So, the new monkey is going to see the banana, and he's going to want to climb the stairs. To his horror, all the other monkeys attack him. After another attempt, and attack, he knows that if he tries to climb the stairs, he will be assaulted.
Next, remove another of the original five monkeys and replace it with a new one. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment with enthusiasm. Now, again, replace a third original monkey with a new one. The new one makes it to the stairs and is attacked, as well.
Now, two of the four monkeys that beat him have no idea why they were not permitted to climb the stairs or why they are participating in the beating of the newest monkey. After replacing the fourth and fifth original monkeys, all the monkeys which have been sprayed with cold water have been replaced. Nevertheless, no monkey ever again approaches the stairs. Why not? Well, the punchline goes, "Because that's the way it's always been around here."
Such a fun story. Such a compelling point.
One of the things that we do in our organization -- and I've shared that out through this podcast -- and that we look for in other organizations whose stocks we're considering picking is the culture. We pay a lot of attention to culture.
In fact, in some ways you can think of Motley Fool investing, that you and I do, as almost cultural anthropology. You're studying and trying to understand how one group of people thinks and acts vs. another.
And what's so compelling to me about the five monkeys story is that it teaches us the importance of making sure people know the culture and understand the history of it, where it came from, and why we're doing what we're doing.
Now, every organization evolves and changes over time, so I'm never suggesting that culture is just chiseled in stone, is monolithic, and will never change. No, the only constant is change, but another pretty good constant [not 100% like change constant] is the constancy of the purpose of an organization, and the history, and how it got from there to here.
And if you have employees in your life, you owe it to yourself and with that enterprise thinking [that we love to see in all realms of our society], with that enterprise thinking you should do your best to make sure he or she, as they onboard, and throughout their experience with you as your employee, that they understand your culture and that they could do a pretty good job explaining it to the newest monkey to come aboard.
And finally, whoever wants to hear [in any kind of institutional or professional environment], whoever wants to hear the phrase, "because that's the way it's always been around here," unless it's said in a good and positive way? But here, clearly and often that phrase is used by people who have kind of given up and, as the monkeys teach us, sometimes they're not even sure why things have been done that way around here. So, pay attention to culture. Blast From The Past, No. 3.
Blast From The Past, No. 4: Well, this one was inspired by @HodaMehr, one of my Twitter friends. Hoda said, "David, did you see that John Malkovich video before the football game on CBS last weekend?" Now, I know there are a lot of football fans, American football fans listening who know what I'm talking about; about a four-minute video that was incredibly well done and well produced. All the way self-effacingly humorous when you've got John Malkovich, but also always stirring, because John Malkovich can really rile any viewership.
He does a beautiful job, and they had a lot of fun with the idea that what you're about to watch, the football game you're about to watch, is a classic David vs. Goliath scenario. And by the way, just google John Malkovich, NFL. If you didn't see it, you could watch the four-minute video. It's so well done. I recommend it to your attention.
Anyway, Malkovich throws away the script that he's been given. It's overwritten, and poorly written, and he just spontaneously ad libs how really to cast a David vs. Goliath tease for an upcoming broadcast. It's beautifully done, and Hoda, thank you for noticing it. I liked it, too.
One of the ironies, now looking backwards just a few days later, is that as it turns out, David lost that football game. It was an excellent football game between the New England Patriots and the Jacksonville Jaguars. The Jaguars were the David, and they had the lead 20-10 and gave it all away at the end. So, Goliath won that one, which I think is not really the point of David vs. Goliath.
Anyway, Blast From The Past, No. 4. March 22nd, 2017. The title of our podcast that week, How David Beats Goliath. And I was reacting at the time to a wonderful Malcolm Gladwell article that he originally penned for The New Yorker and then turned it into a book in which he talks about how David actually does beat Goliath.
So, I highly recommend that podcast to your attention. That's an easier one to find because it's less than a year ago. And, of course, if I summarize too much this podcast will be far too long, so I'll just tease you with a couple of the key insights about how David really does beat Goliath.
Gladwell cites a military database that's gone back through human history and identified all military encounters that we are aware of, and ones in which one side has a 10x advantage on the other. Ten times the force. Maybe, surprisingly, the Goliath, the 10x side, wins 72% of the time. Now, the reason it's a surprise is because I think most of us would assume it's about 95% or 99% of the time. It turns out it's 72% of the time. So, good news. When you greatly outnumber your foe, you do win more often than not, but pretty surprising that 28% of the time, historically David finds a way to beat Goliath.
Gladwell goes on to point out if you filter for when the underdogs had these conditions in place before these battles [a] they knew they were the underdog [b] they acknowledged that they were the underdog and [c] they adopted an unconventional approach because they were the underdog. Amazingly, filtering that military database, the underdog, David, then wins 63% of the time. The majority of the time. David stops looking so much like a David when you hear those numbers.
So, Gladwell goes on, and I do in this podcast, of course, go on to unpack that some, talking about a few key traits that are in place when David is beating Goliath. I already tipped off one of them -- taking an unconventional strategy.
A second trait, often in place, is that it will be adopted by an outsider. Not one of the insiders. Not one of the cool kids, or the favorites. Enjoying them, as I am right now, AMC's TURN on Netflix. I'm about midway through Season 1, looking back at the American Revolutionary War. We can think about I don't know that the British were 10x-ing Americans. I don't know how the military database reads that one, but one thing's for sure. The Patriots were the underdog at the time, but that outsider mentality often can unite people in a way that being one of the cool kids or insiders doesn't, as effectively.
And finally, Gladwell points out that not knowing the conventions of how a game is normally played can turn out to be an advantage. Now, of course, in that podcast, I talk about how that's what Rule Breaker Investing does. After all, we have adopted an unconventional strategy to beating the market, something a lot of people think you can't do [beat the market]. We're often buying what people consider to be highly overpriced stocks. We're often getting into them before the mainstream. And then, maybe ironically again, we're continuing to hold them well past most of the mainstream.
This approach has been adopted by outsiders. You and me as fellow Fools -- we are from Main Street. I don't have a background in Wall Street -- you may not, either -- but here we are as common Fools, outsiders, beating the market and not knowing the conventions, sometimes, of how the game is supposed to be played turns out to be an advantage.
A lot of people think you have to read Benjamin Graham and be well steeped in Warren Buffett even to go ahead and invest on your own, whereas I, myself, have never read a book about Warren Buffett. I greatly respect the man. I've made that clear in the past on this podcast. I've dedicated an entire Great Quotes, Vol. X to just Buffett quotes on their own. But, really this whole approach that we're taking is the outsider's view. Perhaps, ironically, I can have fun with the idea that it's named when "When David Beats Goliath" and you, along with me.
Anyway, that article, and then the podcast, I've got a few great storytelling examples. Of course, Gladwell, the consummate storyteller, telling an incredibly great story about a girls' basketball national championship. I don't have time for that now.
I will briefly mention another example he gives, which is a military naval [simulation] in the 1980s. An outsider who is kind of a computer geek shows up at a weekend competition sponsored by the military. A serious one that has you selecting -- basically paying points -- to build your own naval armada, and you and I are going to go head-to-head in a computer simulation to see who wins.
You have people from the military. You have very serious military strategists -- people steeped in history -- at this competition. And I believe a computer professor [his name is Doug Lenat] shows up and out of nowhere beats everybody by using a completely unconventional strategy. In his case, rather than buy some aircraft carriers, and then some battleships, and some destroyers, and some smaller boats, and having a diverse mix of naval capabilities; Lenat and his algorithmic routine that he developed called Eurisko [I love this story] teaches him simply to spend all his points on PT boats.
Now, PT, as you may or may not remember, is short for patrol torpedo boat. PT boats. So Lenat just spends all of his points on PT boats, sits them there without moving, and as every other competitor faces him [again, some very serious people with serious resources behind them that weekend], his PT boats just go and shoot down what's coming at them. And when he loses a dozen or 50 of them, even if they go down, they're cheap losses. From a human dynamic, it's sad to think that you would lose anybody, but from a grander campaign view, these are losses you can abide, and as it turns out, that PT boat strategy won hands down.
In fact, in 1982, a year later, those who sponsored the competition changed the rules so that Eurisko couldn't come back and play the same game. They said, "You actually have to have fleet agility." There were some new rules put in there, and so Lenat reprogrammed Eurisko, which told him to still buy the same PT boats, but for this competition, in order to up his fleet agility, he had the PT boats, after they fired, sink themselves. And in the game rules he was playing by, that was enough to up his so-called fleet agility and, sure enough, he showed up with Eurisko and won again.
So, unconventional strategies adapted by outsiders often who don't know the conventions of the game; that turns out to be an advantage and David beats Goliath.
Blast From The Past, No. 5: And closing out this week, Blast From The Past, No. 5. Two years ago, this very week, was the first mention [it was, in fact, on a mailbag episode] of the novel Ready Player One. My ever-talented producer, Rick Engdahl, went back into the archives, googled it, and found it was January 27th of 2016 when I started sharing a reading list that encouraged you to consider reading the book Ready Player One if you hadn't already.
Now, many of you had beat me to it. This novel had been out for some years before that. It's a wonderful story. Kind of set in a future world where virtual reality plays much bigger than it does today. Many of you later came on to Twitter and said, "Thanks for that book recommendation. I really enjoyed Ready Player One."
Well, some months later it was June. I remember saying on this podcast I'd love for this to become the podcast where people discovered ahead of time that Ready Player One was going to be an awesome movie. And that's right. If you're a fan you probably already know this. If not, you still have time to read the book before Ready Player One comes out this summer, but I'm really happy.
Just like we try to find stocks before most of the mainstream -- even if you're hearing this right now and you think everybody's already heard of Ready Player One -- most of the world still doesn't know it. They're starting to see the trailer for the first time, but Steven Spielberg, who's directing the movie, and the composer, the music done by the inimitable John Williams. I'm pretty sure they're going to produce a special movie this summer.
So, Blast From the Past, No. 5 [makes] a few different points. Over the last few years of this podcast, we've talked up Ready Player One. This is just my way of hyping the movie. I hope you'll go see it. I bet you'll love it. In an earlier era, I remember writing online at the time that we had The Motley Fool portfolio before we even had Motley Fool Stock Advisor. I'm going to pat myself on the back, here. This was all real, and the articles are out there to prove it.
I was playing up the idea that Lord of the Rings would be coming out as a movie at the time, and I was talking about what a Rule Breaker that movie would be, and I'm absolutely delighted. That's still probably my favorite set of movies of all time, those three Lord of the Rings movies.
So, I probably can't claim you heard it here, first. Maybe some of you did hear it here, right now, first, but keep an eye out for Ready Player One coming out to a theater near you this summer. It's another example of what we try to do as Rule Breakers, which is to get ahead of the mainstream, figure out what's cool, get invested in it, and then love it for a long time, much longer than most people will stick with it. [This] is, well, frankly, how you end up some days with the greatest day of your investing career, because you bought and held something great and stuck with it.
Well, speaking of mailbag, I was checking back. November 2015 was our first month where we had mailbag for those keeping score at home. But, yup, next week is our latest Rule Breaker Investing mailbag. If you're inspired or challenged by anything you heard this week, or last week, or the week before, I'd love to talk about it. Mailbag is yours. E-mail us [email protected] or, of course, you can always just tweet out to @RBIPodcast on Twitter. In the meantime, have a wonderful week and 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.