David Gardner and The Motley Fool have been known to take something of a contrarian stance on what to do when a stock seems "overvalued." But some of the Fools favorites fit that description, and have for a long time -- including Netflix (NASDAQ:NFLX).
In this segment from the Rule Breaker Investing podcast, David Gardner explains why he happily invests in businesses that appear far from cheap.
A full transcript follows the video.
This video was recorded on Jan. 31, 2018.
David Gardner: Mailbag Item No. 3: This one comes from Jumm. It's spelled J-U-M-M, but Jumm kindly lets me know that it's actually pronounced like gum. "First and foremost," he writes, "this is my first email ever to your podcast. It's been long overdue. I've been a member of Rule Breaker Investing and Stock Advisor for the past several years, and I have to say..."
This is why I read this note, by the way -- to Rick, my producer, and anybody listening. He said, "And I'm your biggest fan." I mean, that's awesome!
I think each of us would like to have at least one fan in our lives, and yet we're never really sure who's our fan. But when somebody comes forward and says I'm your biggest fan, how can one not love that? So, anybody else who thinks that they're my fan, meet Jumm, because Jumm is my biggest fan. Let's keep going.
"You are, by far, my favorite investor and podcast host. Besides the fact that the Rule Breakers portfolio has beaten the market, I think what I admire the most about you is your background. You're an English major -- from the so-called liberal arts world -- and not from the finance major side of things. I am, too," Jumm says. "Numbers intimidate me. It's very inspiring to me that in order to be one of the better investors in the stock market you don't have to be a finance or business major. This also emphasizes the importance of seeing the investing world through a different lens, which can absolutely complement or better one's investing style. Thinking outside of just numbers can make one a great investor.
My question to you for this week is I'm also a very fortunate holder of Netflix, and I know it's a growing company with a lot of potential. However, that Netflix has negative cash flow and there are a lot of competitors, in terms of content out there, makes me question the long-term success of the company. In what way would you justify the valuation of the stock?" Full stop right there for now.
Well, let me say this, Jumm. In your note you go on to talk some about another company that's somewhat like Netflix in a lot of Motley Fool members' portfolios over the long term, and that would be Amazon.
And there are others. NVIDIA seems to be turning into one of those megawinners that we've had for Stock Advisor members. We've patiently held that stock for 12+ years. It's been spiffy-popping regularly over the last 12 months, and I hope there will be a fifth, seventh, and 23rd stock like that in your life, Jumm, and in mine, and in all of us fellow Fools, and I trust that there will be, because great companies are made by great people and teams with great products or services that, especially when they come along, might shake the Earth when they're born and improve our lives as the consumers of those products and services.
And through the miracle of the stock market, we can be part-owners of those companies, themselves. Even though, if you're like me, you're just a lazy bum, hoping to be sitting on a beach, somewhere, and these talented people are making the world better, you and I through the miracle of the stock market can be part-owners.
And the question comes, what about sometimes when these companies look overvalued?
There are two things I want to say about that, briefly. The first is that almost always these companies look overvalued. They're going to. Amazon.com, in my experience, since we first bought the stock in 1997, has been considered overvalued by almost everybody I know, most of the time -- most of those now 21 years. And a lot of people today think, of course, that Amazon is overvalued.
That's why I've made one of our Rule Breakers principles to listen for people telling you things are overvalued because contrarily, for me, that's often a great indicator. Why do stocks look overvalued? Well, the answer is because people pay up for them. Why? Generally, because they're really strong forces for good in the business world. They're doing something really special, so a lot of people want to own their stock.
And guess what? Beyond looking at something as temporarily overvalued, just pretend that you owned one of the better things in the business world for the next 10-plus years. What's going to happen if you're right? And if you and I are right -- that it is a great force for good in the business world -- it's going to do really well. It's going to outgrow that initial sense of overvaluation. It's going to keep looking overvalued to everybody.
But you and I can just patiently buy those stocks and keep adding to them. And frankly, they can generate, Jumm, for you and for me some problems in our portfolios as they maybe start to occupy too large a portion of our net worth. Those stocks as they run up 50x or 100x in value can really start shrinking what everything else is doing in your portfolio, and that's a separate thing that you're not really talking about.
I said I wanted to say two things about that. The first was just a brief thought with you about the nature of so-called overvaluation.
And then the second thing -- this is something I've done a whole podcast on -- is if you want to go back and listen to my "Dark Clouds I Can See Through" podcast. I think that we often need to have a sense that there are powerful competitors in an area to actually and ironically embolden us to continue to hold that stock.
When other companies show up -- let's say to the world of streaming, online content streaming -- with Amazon, and Hulu, and countries abroad that we don't talk about as much on this podcast, that's telling you something pretty important. It's telling you this is a really key area. Whether it was Facebook at the earlier stages of social media, or Google at the earlier stages of search, or Netflix at the earlier stages of streaming; yes, there are going to be other players. They're going to move in. But as long as I think our companies keep doing good things and are led by visionaries, I feel really good about where we and they are.
Jumm closes by saying, "Finally, I'd like to let you know how much I love your podcast." Now, I have to read this. It's not for the reason you might be thinking. This might already sound too self-congratulatory to some of my discerning listeners, but there's a point to this.
He says, "I listen to a lot of investing podcasts. You're my last one standing. I'll continue to stay. I love the fact it's not just about stocks and how to pick them, but it's about how to conduct life. How to be a better investor and a better person. Loved this week's episode. It's about leadership style and how ineffective our dear government officials sometimes are.
It reminds me of a book I'm listening to," and this is one I've not read, but I want to plug this, because I like Jumm, already, and I bet this is pretty worthy of our attention. Maybe you know it, dear listener, but I don't, Extreme Ownership, by Leif Babin and Jocko Willink. Well, when you have two co-authors who are named Leif and Jocko, I'm in!
Jumm says, "I heard about Audible.com from your podcast" -- one of our advertisers -- "and it's been the best way to read or listen to books while running errands. Perfect for my busy life. I love how you compare the defense and the offense of a football team and what it would be like if they were blaming each other for failure. Great analogies. Can't say enough good things. Thank you so much. Fool on!"
And a quick pause. Need to step away for a quick sec and just say that these kinds of notes -- some of the testimonials that I get -- I do love to share out. They're always appreciated. I want you to know everything is read, whether or not I can feature it on the show. I don't want to sound too self-congratulatory.
What I found, now, in our 25th year at The Motley Fool is that people sometimes love me and love me a lot when the market is up. And I find maybe I'm not so likable -- not quite as good-looking -- when all my stocks drop 20-40%, which also happens some of the time. So, I appreciate that and also the notes that say, "Hey, it's not all about the returns and stocks. Rule Breaker Investing -- being a rule breaker -- is about something more to me," which I heard in some of the notes this month. Jumm, thank you! I think you shared back some extra value, which is often what I'm looking for from good mailbag items.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Netflix, and Nvidia. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.