On this Rule Breaker Investing podcast, Motley Fool co-founder David Gardner revives a theme he first used early last year, based on the classic rhyme for wedding luck: "Something old, something new, something borrowed, something blue." It suited the hodgepodge of points he wanted to make then and a similar patchwork of ideas on his mind this week.
First up, his something old comes from the March 15, 2017, podcast, when he talked at length about the ideas of educational reformer Deborah Meier. What she calls her five Habits of Mind define a set of skills, or perhaps a way of framing questions, that she thinks can turn students into highly effective thinkers. They are significance, evidence, connection, perspective, and supposition. As David notes, the same mental processes that work when you examine something in a classroom apply when you're examining something in the market, and he breaks down how you can do that in Foolish fashion.
A full transcript follows the video.
This video was recorded on May 23, 2018.
David Gardner: Point No. 1 is something old. Well, I'm going to hail back to a podcast I did about a year and a half ago and review a framework that I shared. Now, if you were listening to me on March 15th of 2017 [and I sure hope you were], then you'll remember Deborah Meier's "Habits of Mind." Or maybe you won't remember all of them. For example, if I had had to quiz myself right now on her five Habits of Mind, I wouldn't have gotten a perfect score. Things go in and go out of our minds, and sometimes I try to bring things back to my mind to be reminded of some of the fundamentals, or some of the old wisdom.
Deborah Meier's Habits of Mind struck me that way. Now Deborah Meier is an educator. She is considered the founder of the modern small-schools movement. In the prime of her career, she operated out of a very difficult neighborhood in New York City and produced spectacular gains for that district and earned her fame that way. She's gone on to write and think a lot about education, but I pulled her framework from education out of education and applied it to our subject, investing, and that's what I'm going to do right now.
With my something old, we're just going to quickly trace over her five Habits of Mind and get a little bit more educated to remind ourselves of some of the fundamental wisdoms. I hope this is helpful for you. And if you're inspired you can certainly go back and listen to the full podcast from March 15th, 2017 to go over this "something old" point in a little bit more depth.
Her five Habits of Mind are what she believes students should be taught. It's how they should be taught. They should be taught these five Habits of Mind, and if you're a teacher, you'd be preparing your lesson plans maybe with this in mind. But we're going to use this and apply it to the phrase "stock market." If you were teaching somebody about the stock market, what are the five Habits of Mind and how does this sound?
By the way, these can be done in any order. I've seen them included in different orders. I'm just going to be using my own order this week with her five Habits of Mind.
The first one I want to talk about is "significance." That's No. 1. Why is it important, you're asking your teacher or, in this case, your podcaster? Why does this thing matter? What is it, in our case, about the stock market that makes it significant?
And for me, I guess I'd want everybody to know it's a place where wealth is created. After all, every day people who use the stock market are buying or selling shares. They're shaking hands with somebody else that they'll never meet and exchanging those shares at a price that they both agree upon, and because good businesses tend to gain over time [and you and I can become part owners of those through the stock market], a huge part of the stock market's significance is that it's a great place where wealth is created.
Another thing I think that's really cool about the stock market is it puts a price on every company. You can come in and see exactly where Apple is trading right now and, as I'm recording this after market close on Thursday, May 17th, I can tell you that Apple closed at $186.99 per share.
Now, that tells you just what the price per share of Apple is, but if you were to multiply that price by all of the shares of Apple [price per share times number of shares], you'd come up with a number right around $919 billion. That's right -- just $81 billion short of $1 trillion -- in which case Apple would become the first public company in history if it makes a little bit more of a gain to become $1 trillion public company.
Isn't that pretty cool, though? Isn't that a significant aspect of the stock market, and don't you get smarter about the world at large when you can look and see the values of all these different companies? I think that's also a significant point. That's significance No. 1.
Habit of mind No. 2 that Deborah Meier suggests students should learn, and teachers should use and teach to is "evidence." How do you know? Prove it to me. And when we look and think about evidence as regard to the stock market, one thing that comes quickly to mind that I'd want anybody new to the stock market to understand is that it has risen about 10% a year for the last hundred years, or so, here in the United States of America, and that is amazing.
The earlier that you and I, in our lives, can save money and get it appreciating at an average percentage of approximately 10% a year, there's virtually nothing else like it. I mean, some things will outperform that over shorter-term periods or maybe even over longer-term periods, but not all those are as accessible as clicking a button on the internet, having saved money, and investing it quickly into a public company. You can do that with the click of a mouse these days. You can also exit that investment whenever you want to. It's a lot easier than selling a house. I think you know that.
Very liquid. Combine the liquidity of the stock market in and out with that 10% annualized average return. Another bit of evidence I'd want anybody to know who's thinking about the stock market is historically two years out of every three the stock market has risen and one year out of every three the stock market drops. It loses value.
All of that is included in those 10% annualized gains -- the good years and the bad ones -- so you can see it would be pretty silly to sell out trying to avoid that one year in three, which is never predictable anyway [to me anyway], when the stock market drops. It would be pretty silly to sell out in advance of that or hoping to avoid that and time your way back in, especially when you're having to pay commissions and taxes.
The frictions of trading would be pretty silly to do that if you have any amount of time left on this Earth [let's say five, 10, 15, 50 years]. Pretty silly to play a game with that, so there's some more evidence for anybody who wanted to learn more about the stock market.
And then I guess the last bit of evidence is it does numerically express the rise and fall of companies and their values [and industries, as well], because you can just calculate, as I did earlier, the market capitalization of Apple, and you can see where that was 10 years ago or 25 years ago. In Apple's case, you can see how spectacular it has been as an investment. I'm darn glad we have it on my side of the Stock Advisor scorecard and I know a lot of you own it, too. But you can actually see numerically -- you see the evidence of the change in values of companies -- and you can look at the history of that. That's habit of mind No. 2.
Habit of mind No. 3 is "connection." How does this apply you might ask as a student? Why are we learning this? Why are we being quizzed on this next week? There will be no quiz on this podcast next week, but how does this apply? How can I connect into it? How does this matter not on the grand scheme? How does this matter to me?
I think that's a pretty obvious answer, and it's really good news. You and I can become owners of these kinds of great companies over the course of our lives and build up portfolios. It's very relevant to you. In fact, it's probably my surest route for you to financial independence.
There are certainly other ways to do it. Some people are entrepreneurs and get rich that way. Some people speculate and get crazy lucky. But for most of the rest of us in between, this feels like a really strong, dependable, occasionally scary [yes] route to financial independence, which I submit is a wonderful reason to care about the stock market.
That's our connection into this material and why I really wish that everybody globally was hearing this podcast right now and understood these benefits. You and I do, and part of our mandate is to get out there and spread them. The Motley Fool's purpose is to help the world invest better. We rely on a lot of you to help us achieve our purpose. Word of mouth is really important. Once people understand, to review briefly, the importance of the stock market, evidence about the stock market, and a connection [a personal connection] into it, you can see how powerful this topic is and why I really think it should be a course in every school.
The last two Habits of Mind [I'll just give them both at once] are "perspective" and "supposition." So, perspective. What is our point of view, here? What happens if you were to change your point of view? How does the stock market look from different points of view? Perspective -- we'll do that in a sec. And then supposition. What if it were different? Imagine if some aspect of this were different? Let's suppose some about the stock market.
Again, that fourth one, perspective. I'm going to admit my point of view, here, in a sec and then I'm going to change it three times rapidly. I'm going to say that I'm an American, so I have an American point of view. I'm going to say I'm a saver. I'm somebody who has money [many people don't], and I'm an investor. I'm somebody who acts, by definition, for the long term.
Let's change each of those rapidly. What if I were not American? Many Rule Breakers are not. I'm regularly getting notes for our mailbag -- from you, whoever you are around the world -- and I love that. I love connecting in to people who didn't start in this country or don't have a dependable stock market in many cases. So, you have to know your own market, in part, and I can't speak to that in this podcast.
Some markets have performed very admirably, like the American stock markets. Certainly, a lot of European stock markets. Some in Asia have been on fire at different points in history or more recently. But if you are not American, I guess I'd say to you that often you can invest in America with at least a portion of your savings and you should get to know your own country [its own history and performance of its stock markets] and decide if that's a good place for you.
So, we just changed one point of view. We left America. Let's change another point of view. We're not savers. We're borrowers. We're somebody who doesn't have any capital right now that we could invest in this wonderful wealth-generating machine. And to you and to that sort of Fool, because you're pretty Foolish, too, along with the rest of us [always hoping for better things], I would hope that you'd be inspired by what the stock market does and can do.
And for many people, you're near being a saver. Maybe you're still getting rid of student debt. You're in a context where you can be a saver. You can see your way to saving, and so I'd want to make sure that you knew about the stock market, even though you have a different perspective from those of us who are already invested.
And finally, that third change and point of view. Let's move away from investors. Let's be traders. Let's be people who really love to get in there and mix it up. Jumping in and jumping out. Day trading, if you will. People who follow the markets not on a day-to-day basis, but on an hour-by-hour or minute-by-minute basis.
And I guess I would say to you I hope at the end of your life you'll look back and say your time was well spent. I truly do hope that we're all spending our lives as well as possible. In my experience, many people are trading. I think the good part of it is they're having fun with it. It may not be with all, I hope, of their nest egg, but they might be retired. It's a way for you to stay in the game and have some fun with it. I have no problem with that.
But I would not want anybody to listen to Rule Breaker Investing and think [about] day trading or trading on a full-time basis [changing our perspective, here]. I would suggest not using the stock market but doing other things with your time. That's just a Foolish thought for you.
And then finally that fifth habit of mind, "supposition." What if it were different? Well, what if the stock market didn't return 10% a year? What if it were only 2%? Or what if it were 15% over the next year, changing the parameters of its performance? Or what if we changed capital gains taxes? What if you had a much higher capital gains tax? Well, it wouldn't be as attractive to invest in the stock market, would it? Or what if you had no capital gains taxes at all? I bet there would be more investors.
So, I don't have any emphatic thing to say with this habit of mind, other than supposing is an interesting thought game, and one you should be playing from time to time. There you have it. Something old. Deborah Meier's five Habits of Mind, and I did them in the order of significance, evidence, connection, perspective, and supposition. Thank you, Deborah Meier for your work and thanks, Fools, for listening to something old!