One of our favorite events at Fool HQ is FoolFest, when our members get the chance to gather together and learn about investing face to face with their favorite Foolish folk. And Motley Fool Answers co-hosts Alison Southwick and Robert Brokamp think you'd all enjoy it, too.
That's why, for this podcast, they're skipping their usual witty banter (heck, Bro didn't even show up in the studio) and instead sharing one of the conference's highlights: Chris Hill's interview with the fraternal fellows who founded the Fool in the first place, Tom and David Gardner.
A full transcript follows the video.
This video was recorded on July 24, 2018.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm completely alone in the studio today, but I've got Rick working the boards, so...
Rick Engdahl: Yay!
Southwick: Yay! In today's episode of Motley Fool Answers, we're taking you to Fool Fest. It's a special 25th anniversary episode filled with investing and board game advice from Tom and David, our co-founders. All that and more on this week's episode of Motley Fool Answers.
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Southwick: Yes, it's time once again for the episode where we let our listeners in on Fool Fest. Fool Fest is our annual conference where members get together, learn about investing, and hang out with their tribe [that's us]. And because it's our 25th anniversary here at The Motley Fool, it's an all Tom and David episode. First up, Chris sat down with Tom and David. They took a look back and talked about how their investing approach has changed over the years, their favorite Foolish memories, and how things have gotten better for investors over the years.
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Chris Hill: Over the last 25 years what's one way that your investing approach has changed? And that can be something small, or that could be something that you believed in your core as an investor 25 years ago that today you just no longer believe.
David Gardner: For me, it goes back to my Yahoo! story, I think, Chris. When Tom and I started the site online on AOL [keyword: FOOL], we were basically picking stocks right out front of America. Anybody could join America Online and come see what we were saying you should do.
And when you have people doing that, you have the ultimate scorekeeper in the sky. It is everyone else's attention. And since we're very numerical in what we're doing, it can be totted up and we're saying we think we'll beat the market. We think that you can, too. In a world that it seems like people don't really believe that, let's do that.
And then we look back on the ones that really hurt that taught us something. So for me one year in I got this conviction that Yahoo! was going to be a good stock. And spoiler alert -- it ended up being a very good stock for quite a while.
This is 1995. Yahoo! is at $29 and I had calculated my own valuation for it. I had it at like $25.60, or something like that, so I was waiting for Yahoo! to get to $25.60. It never did. What it did, though, is it got to $2,560 without my [or maybe your] money on it and that was the last time I decided that I'm going to sit there and decide that I have the valuation in my head that's superior to the market's and I'm going to insist that the market conform to what I believe should happen so I can get rich. That changed me forever into saying, "It's about buying greatness. It's not about my DCF out to the second decimal."
Hill: Tom?
Tom Gardner: I would say first find people that you believe in so much. I mean this in the public markets since that's primarily where we're investing. We think of it with entrepreneurs and start-ups, but I mean it with companies of any size and in the public markets. Find people that you believe in so much that you wouldn't feel bad if you lost money with them.
I often will say that to the CEO because, of course, it fires them up a little bit more not to be that person. But I think the quality of the leadership team. What you can learn from them. Finding investments where, again, if they lost you money you would learn so much because you believe so much in them that something else must have gone wrong that you could learn. So I think really starting with the people has been a big change.
And then the second one was just listen to my older brother. That's it.
People are like, "Wait! He's your older brother? You look like you're 20 years older than him!" I tell this periodically, so some of you have heard it before, but it delights me every single time. There was a day where our awesome team in Member Services -- on the phone lines talking to all of you and making sure you're set up correctly with your services -- all came barreling out of their area laughing.
I was like, "Wow, what happened? What happened?"
"Well, this gentleman called, and we were trying to make sure he was hooked up correctly. We were asking him what service he subscribes to and he couldn't come up with a name. So he's sitting there struggling and then he just said, 'I can't remember the name. It's the one where the father and son are picking stocks.'" It gets such a great laugh it's almost like I made it up, but it's true.
Hill: I know from years of working with you and also just from talking to you over the last couple of days that you don't do a lot of looking back over the last 25 years. You're both much more interested in the next 25 years than the previous. That being said, I would be remiss if I did not ask at least one question about the past 25 years, and Tom, I'll start with you.
When you think about the changes in the world of investing -- when you think about the last 25 years and all the changes that have happened in the investing world -- you don't have to say it, but I'll say it. Some of those changes for the better are in part because of the work of the company that you and David built. What stands out as the most ridiculous to you?
T. Gardner: The most ridiculous good or bad change?
Hill: For good. Like, wow! Here's how ridiculous the world of investing used to be. And I'll just throw out as an example -- when I talk to younger people in the office -- and that's when I talk about Regulation Fair Disclosure. In the year 2000 the SEC, by a very close vote, voted in favor of what was referred to as Regulation Fair Disclosure. It was this radical notion that public companies should disclose meaningful information to all investors at the same time. And sometimes when I'm talking to younger people at the office about that, they look at me like I'm insane. Why wouldn't that always be the case?
T. Gardner: Yes, that only won by one vote and we're thankful to Arthur Levitt, the head of the SEC then, who really was an advocate for that and thank you to all of you. Typically the SEC when they reach for comments from the general public on an initiative will get seven, or eight, or 10 notes submitted. I think we sent 1,300 notes from The Motley Fool to the SEC. In doing all that, Arthur said [and said it in USA Today] he felt that that's what caused us to get that extra vote. So thank you for that reference, Chris. I'm going to go in a slightly different direction. Just a recent memory. We were in London traveling to open Motley Fool Hong Kong, which is very exciting for us, and in London [we met] with the owner of a Premier League football team, who's a phenomenal Fool [it's Crystal Palace if you follow football].
I'll just say that he was laughing at something that we hear frequently. It's not a big deal in life, but it just is funny. He said, "The wealth managers or wealth advisors I work with. When they ask me where that stock came from and I tell them The Motley Fool, they laugh at you guys. Like, it can't be real. Why are you doing that?"
I think I still remain very excited about bringing more transparency of performance. What's laughable to me 25 years ago is that there really was no scorekeeping going on and I think we can do a better job helping you keep score. I know a lot of you have passion for tools like My Scorecard tools and improving that, and we really want to do that.
I just think the scoring system has gotten so much better. I don't think people were comparing their returns to the index funds. In fact, I think a lot of people were talking about index funds under the random walk theory and saying it's impossible to beat the market.
I think one of the things that's helped Vanguard is our community saying, "It's not really bad. It's that that's a great place to start." And for a lot of people that's a great place to end. A totally tax-efficient, essentially free way to buy the entire market. And because people weren't keeping score, they didn't realize how much better that is than so much of the shlock that's offered by the financial services industry for investors.
But you shouldn't stop there. It's not like you can't beat the market. That's a terrible argument for a host of different reasons. It's just, "Wow, what a great baseline for everyone to use and we try and beat it."
Hill: One thing from the past 25 years that strikes you as particularly ridiculous from the world of investing?
D. Gardner: It's understandable. Looking backwards and seeing it from our vantage point now, it looks ridiculous, but at the time it made sense. As a stock market aficionado from my teens [because my dad got me started early], I had the opportunity to start figuring out what are the tools out there that could make me a better investor. And one of them was a little guide. It was a little booklet published by Standard & Poor's called the S&P Chart Guide.
The S&P Chart Guide I subscribed to. It came out on a quarterly basis. It had about 500 stock charts of the S&P 500. Maybe more like a thousand. I see some people nodding, because maybe you were a fellow subscriber. It was $50 a year, so it was not terribly expensive, but that was the only way back then that you could actually see the stock chart of stocks over the last year.
Now, if you wanted to pay up for something like Value Line [which many of us will know] then you could get it, but it's amazing to think that we were subscribed on something that would only come once every three months for $50 to see where stocks had been over the last year. And these days, obviously, we get it all for free, in real time, for far more than 500 stocks and did I mention for free.
So yes, looking backwards that's just for me a microcosmic view of many other things that were true back then. A big truth that Tom and I recognized early [maybe earlier than the rest of our industry] is that the internet could be the best friend of the investor, and it was often being portrayed as antithetical to investor interests.
Merrill Lynch, which isn't still an independent company today, used to say that the biggest threat to America's investors is the internet. And we, instead, put out a press release a day or two later and we said we think actually the biggest threat to American investors is Merrill Lynch.
Hill: "What is your most memorable moment from 25 years of Fooldom?"
D. Gardner: [Laughs] I thought it was going to get easier as we went. I'll give two. One is the very first time The Motley Fool was ever printed in The Wall Street Journal. I will never not still love that moment. It always gets me back in touch with before all of this, and all of the things that have happened over the last 25 years when Tom, our friend Eric, our small team, and I [with a newsletter for our parents' friends] got The Motley Fool referenced in The Wall Street Journal. We thought that was hilarious. And really, to get back in touch with that now 25 years later, how awesome is it that we're creating a financial enterprise of I hope real consequence in this world and it's bearing the name The Motley Fool. I mean, to me that says good things about the future.
I always go back to that first time that we pulled that phrase from Shakespeare and thought that would be fun to do that. It shows up all of Wall Street's wise men. It just undercuts all of the pomp and circumstance and three-piece suits and all the rest. And arrogance. Let's be fools. That's the first time that happened with The Wall Street Journal.
And then my other moment -- I mean, there's so many moments -- and I appreciate the question. I think it was April Fool's day. Was it 2014, Tom, or 2015 when we fully paid off external debt?
T. Gardner: 2014.
D. Gardner: Fourteen. Thank you! April 1 -- 4/1 -- April Fool's Day 2014 we became a fully autonomous corporation with no debt. And I know some of you know this story and we're not going to go back over it now, but at one point we looked at it and we realized that we had nine figures of debt to pay off. Not that we couldn't have done it other ways, but we actively chose to buy out our VCs and the money that had been invested in us in order that we could become our own thing and make our own decisions as a private company that had no outside ownership.
And so for about five, six, seven years [Chris, you were there and many other Fools in the room were there with us all the way through], we took all of our cash flow and we just paid it out. We had no R&D. We didn't have anything that we could do. We could be scrappy and innovate in little ways, but we had no R&D. All of our cash flow going out the door. And now, for the last three years [and you're starting to see what this looks like], we're starting a venture fund. I'm looking forward to talking with some of you about that this afternoon. We have a lot of new enterprises that we're contemplating, some of which we're enacting.
We're going to try and make the world more Foolish, and I think a lot of it goes down to "Let's pay off the $100+ million of debt." And my brother Tom, more than anybody, has had that vision, and has enabled our enterprise to do that. And that is a pretty awesome thing. So those are two memories that I appreciate in our first 25 years. Of course, I'm much more interested in the next 25 years for our portfolios and certainly for our business.
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Southwick: Now let's look forward and get some investing ideas. David shares with Chris Hill the trends he's watching as well as 10 stock picks.
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Hill: "What new technologies, innovations, and trends are you most excited about moving forward?"
D. Gardner: There's no question that artificial intelligence is going to be like Wi-Fi in 20 years. As Kevin Kelly was saying in San Francisco, 20 years ago not a lot of us knew what Wi-Fi was, and these days it's this invisible thing [this layer around all of us] that we hope is there and that we want to perform well for us and that's made our lives better.
AI is going to be like Wi-Fi in 20 years. There's going to be AI all around us. It's going to be in our phones or whatever we're using as phones at that point. It's going to be in the apps that we're using. It's going to be in tangible things around us as we walk past things. In the same way that we're hitting more three-pointers as NBA players these days than we were 20 years ago, we're all going to be a little smarter and better served, and the world will be more personalized and customized for us.
AI is huge, and that's a big part of NVIDIA's story that I wasn't counting on when we first picked it as a graphical processing gaming company in 2005. I love companies that evolve and morph -- technologies that do the same as genomics. Obviously Editas (EDIT 0.44%) and CRISPR technology. These are really important things.
The other thing I just want to make really clear is No. 1, we all have to be willing to lose and be wrong. What I just said about AI might look silly in 20 years. I don't know if anybody will want to see the Fool Fest video in 2038 of what we did today.
But we could be wrong, so you need to always be willing to be wrong. There's not a stock that I own personally [and I hope this is true of you, as well], that if it went to zero would devastate me financially. It would hurt a lot, because I have some seriously overweighted positions, but if any one of those companies went to zero, that would be still OK. It wouldn't change my life grandly.
I hope you're not on margin. I hope you're not loading it up on one stock or anything like that. I don't want you to do that, because we can be wrong. That's a big part of being a Rule Breaker and thinking about the future is always being willing to be wrong.
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D. Gardner: All 10 of these are companies that are not presently, I don't think, featured in any other Motley Fool services. We just picked them, once or more, in Stock Advisor or Rule Breakers. I think I emailed you this list last night.
Hill: You did.
D. Gardner: So I need to go back to my email and get it. Let's go alphabetically. And yes, this is time to take notes because we don't have a graphic for this one. I'm just going to go through these 10 companies quickly and alphabetically. Some of them you'll recognize, I hope.
The first one is Adobe (ADBE +3.79%). The ticker symbol is [ADBE]. The company is a worldwide leader for artists and graphical designers creating all kinds of great stuff largely in an online world which benefits from Adobe Graphics. Adobe Acrobat. Everybody knows Adobe. Of the 10 companies, this is the largest company. Its market cap is $119 billion as of yesterday.
I think it's been an outstanding stock in the past. I think it will remain one. They moved from a subscription-based software product -- people got annoyed by having to upgrade and rebuy each year in that old model that we remember from the nineties -- and they went to a cloud-based, subscription-based product. And they kept their worldwide leadership doing that, which is a hard trick to pull, and they've done it really well.
The next one is Dassault Systèmes (DASTY +2.18%). The company's ticker symbol is [DASTY]. This is the second-biggest company on the list. Alphabetically it's also second. Dassault Systèmes is a French company. There aren't a lot of great French stocks, in my experience. That's why I like to highlight Dassault as an example in a relatively socialist country of a really fine capitalistic entity that's created a lot of value.
And in particular, it's their CAD/ CAM software. It's their computer-aided design software. And in a world where we're moving not from lots and lots of graphics just on the internet, but toward virtual reality where there will be even more graphical components to our online experiences, I really like Dassault Systèmes.
Third and fourth are both "E" companies. The first is Editas Medicine. The ticker symbol is [EDIT]. It's the company that is behind the CRISPR technology. There are a few other players out there in the world. It's a fascinating technology. We don't have time to talk about it right now. Some of you already know it, and if you don't know it you should google it and understand gene editing and how it might change your life and mine and the world at large.
I hope we'll make good use of it. Like any powerful technology, it can be used for good or for ill. The internet is used largely for good, but often for ill. That can also be true of gene editing. But there's no question that this will be a net gain and will save many lives and improve the world at large. I really like Editas, but it's an early stage company. It's only a $2 billion market cap. It's the smallest of these 10 and so it is a company that you realize could vanish overnight if things change one way or another.
Then the fourth company is Etsy (ETSY +3.27%). I think a lot of us know Etsy. [ETSY] is, of course, the ticker symbol. You can go to Etsy.com and buy somebody's handicrafts. There's a wonderful community of makers and then buyers. It's a tough thing to compete with, even in an Amazon-led world, and it's been a good performer. It's a $4 billion company over at Motley Fool Rule Breakers.
Next let's go to two companies, companies five and six, both of which have two-letter ticker symbols starting with the letter "I." The first one is [IQ], and that's iQiyi (IQ 0.35%). And that's one of my most recent picks. That's in Motley Fool Rule Breakers. That's the Netflix of China. It's starting from a $7 billion market cap and there's never any pure analog.
Baidu is not actually the Google of China, but they're clear enough or fair enough that you can make these comparisons. If you like Netflix and you believe in that business model, you realize it's really hard if you're Netflix to get into China. China has a firewall up against a lot of incursions of big-time American players. Baidu's been the beneficiary of that. Google hasn't been able to get into China so well, so we've owned Baidu stock. It's done really well for us. I think iQiyi is maybe another example. That we'll see.
And then the other "I" is IT. And Gartner (IT +2.29%) -- which I think a lot of us know -- is the tech consulting company. Today it's worth about $12 billion with its Magic Quadrants, if you know that, or the hype cycle, which I've talked about on my Rule Breaker Investing podcast. They're the company behind that. And what I like about Gartner is that in a world in which there's so much complexity and oncoming technology and development all the time, you can see the benefits of being the person, the company that explains to people that might want to use these technologies how the world's changing. With more and more tech coming online I like Gartner a lot.
And then my last four are an "L," an "M," a "P," and a "T." The "L" is Live Nation (LYV 6.29%) [LYV]. Live Nation is a company that -- I think a lot of us know this -- in a world where lots of rock stars these days make their money off of their tours [not off of their album sales], Live Nation not only owns the venues where a lot of rock concerts happen and partner with and own some of the artists in those venues, but it bought Ticketmaster, so now it also sells you the tickets to go to the venues that it owns to watch the acts that it's partnered with. I really like Live Nation. I think it's a really strong competitive advantage and a tough one to compete with.
Similarly Match Group (MTCH +0.00%) [MTCH], which is the eighth stock and the "M" stock. I think a lot of us know Match.com, Tinder, etc. It took a little bit of a spill about a month ago or so [you guys talked about it on Market Foolery] because Facebook said, "Hey, we might want to start doing dating. We have a lot of data and [one way you might meet people is through] Facebook." And maybe you don't need Match.com, or Tinder, or the 40 or so other dating sites that Match Group owns, but I still really like Match Group's focus in this area. Their leadership. And the stock has almost bounced all the way back from that spill that it took. Match Group.
And then the last two. Palo Alto Networks (PANW +1.56%) [PANW]. This is a company that's behind firewall security that offers that for a lot of its partners. Our wonderful team in the previous hour talked about the importance of security and companies like Okta. Palo Alto is in this world.
And I like it relative to a couple of my loser picks in computer security. I took a shine to a few companies like FireEye and Fortinet [which actually has worked out pretty well]. But I took a shine to these companies because I believe that obviously cybersecurity is going to be around for the rest of our lives. For the rest of our race. I really like a business that is going to be that constant. However, those companies were smaller caps, and Palo Alto Networks tipping the scales at a market cap of $19 billion is a more substantial, bigger player that I think is in a better position than some of the smaller fry.
The very last one is Teladoc (TDOC +5.72%) [TDOC] which I know you've talked a lot about on Market Foolery and Motley Fool Money, and I know Jason Moser has been a fan of Teladoc. I am, too. It's a pick in Rule Breakers. [We offer a lot of benefits to our employees, and those employees don't always have time to wait in line at the doctor's]. Just to pick up a phone and talk about something. Start a relationship with somebody who's part of your corporate benefits if you're employed and it's part of your health approach, your health strategy. I think that's a good business.
It's still small. It's a small company. Teladoc is the second smallest on the list at $3 billion. A lot of people have Teladoc but don't use it. It's a tiny percentage of people who actually use this service, but it strikes me as something that will only be increasingly relevant in the future. There we go. There's my next 10.
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Southwick: Finally, let's wind down our time, here, at Fool Fest. It's not a conversation with Tom and David if we don't talk about board games and how they've influenced their investing approach and even some recommendations.
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Hill: "What is your current favorite board game and is there one with decision factors similar to your investment approach?"
D. Gardner: We'll each give a quick answer. Probably my current favorite board game is a game called Terraforming Mars. It is awesome. I made the mistake of saying that to neighbors who just moved in across the street from us. They said in a very loving and enthusiastic way, "David, we see you love games. We saw your game room in your house. What's your favorite game?"
And I answered honestly. That was a mistake because as fellow gamers, you should give something that's easy for people to pick up and learn like Codenames, which we're going to be playing in a little while. A wonderful game.
But I said Terraforming Mars, and so I got an email back the next day. "Thank you so much! We just bought it on Amazon, and we look forward to sharing it with our two 12-year-old twin daughters." And the thing with Terraforming Mars is that you have to be willing to read rules for about an hour, teach the game for about an hour, and then spend about three hours playing the game. It's an awesome game, because we're terraforming Mars. You learn a lot, and it's infinitely replayable. It has a couple of great expansions. It is an awesome game. That's my favorite game...
T. Gardner: I'll just say...
D. Gardner: ... in the last year.
T. Gardner: ... kind of restating some of the joys of what we've all created together is the network that we have and the people that we've met along the way, and I'm going to encourage you to cross the floor at the cocktail party and go talk to somebody that you don't know. I know that's going to happen anyway, but I would encourage you to go a step or two farther in that this evening [and anytime you get together at The Motley Fool] because you will, as I am, be truly blown away by who's here in the room and who we've gotten to know over the years.
I'll just emphasize the conversation yesterday with Matt Calkins. Matt, after we did the interview in our office two months ago or so he said, "Hey, you guys should come over for game day at my apartment." So we went over to Matt's place, about 20 minutes from here. Dave, one of his sons, and I played games, which was awesome. A lot of Appian developers, there. It was just kind of fun. You get to know a little bit about their culture, but the great thing is playing games.
And so I played Matt, and I'll just cite this game I think many of us know. It's worth playing it, if you haven't recently, and that is the old classic Acquire.
Hill: "Being a board game player, what game has taught you the most about how to best invest in the stock market?"
D. Gardner: I don't think any game does a particularly good job talking or teaching the stock market. In fact, one of the things we're doing [and I'll probably mention this sometime tomorrow], is that we're building, in a very low-key way, a mobile game at The Motley Fool where maybe next year at Fool Fest you'll be playing it. And I hope if you do that you'll enjoy the game. We'll have a little bit more information about that tomorrow.
Because even our Motley Fool mobile game isn't really about the stock market. The stock market is a great game on its own, and to win it you and I know we should show patience and we should build things up over years. As Epictetus said in a quote that I had on my podcast last week, "No great thing is ever created suddenly."
So the problem with gamifying the stock market is you can't really do that in one sitting. And if you do it, it looks like a stock market simulation accelerated in some weird way. It's just not that fun a game, I don't think.
When I think about how we can learn about the stock market through games, we did once have a Motley Fool game called Motley Fool Buy Low, Sell High created by one of our favorite game designers, Reiner Knizia, who was our partner in that. It's still available. There are some box editions online. It's not actively sold anymore. But Motley Fool Buy Low, Sell High does a good job teaching kids or grown-ups, people of any age, that once everybody else has walked away from something, that might be a good time to buy.
The problem with that is it's not really my Rule Breaker approach, but it is a great lesson about when popularity wanes, that's a good time to act. I like the lesson of that game.
Hill: "To what extent, if any, does the way that you approach board games and your love of board games affect your view of investing and the way that you invest?"
D. Gardner: I'm tempted to want to make all kinds of important connections, because then it would justify all the time that I've spent board gaming... I could say what a good investor I am, and if you board game more you'll be a better investor. I'm tempted to do that, and I'll try to do that.
There are two things that I love about games. One is they have rules. That's one of the definitions of games. A rule set, a framework, the design of a rule set or a framework [one that could hold up for decades, like the game of Acquire], or one that would have just shown up recently [deck-building games like Dominion] is a really great achievement, and some of my favorite artists are the designers of games, because they're thinking through systems and then they're putting it out there, and you are I are trying to beat each other with them. One of the things that I love about games is that.
And the second thing that I love beyond rules is that I love that we score. That's the most important thing for me as an investor, and I think for a lot of us. Really since the first day that we launched The Fool, Chris [August 4th of 1994], we put our own real money online that day and we said we're going to invest it in front of America. Anybody who wants to come to AOL [keyword: FOOL], you can see what we're going to do. We're going to tell you ahead of time what we're buying so you can front run us if you want. And that first week we bought AOL, which was a great stock pick. It was really the scoring out front of the public that has forced us to learn, change, evolve, and continue to evolve.
That's another thing that games do so well. They give you a score at the end of the game. And if you're a gamer like I am -- and I know there are a lot of you -- you've lost a lot. And so you're OK with losing. Losing is how we learn in a lot of ways. The score that we get at the end of each of these games closes a loop on a system that makes us smarter the next time we play it. And I love that about games and I think that can help us all as investors.
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Southwick: Well, that's the show. It's edited competitively by Rick Engdahl. Our email is [email protected]. Don't forget to send us a postcard while you are on your holiday travels. Rick, particularly. You're traveling somewhere. Are you going to send us a postcard?
Engdahl: I'll send you something from Dollywood.
Southwick: There we go! We'll take it. Our address is 2000 Duke St., Alexandria, Virginia 22314. For myself and only myself today, stay Foolish everybody!
