Motley Fool co-founder David Gardner has a remarkably good track record in the market. Does he only pick winners? Heck no. But does his portfolio of stocks outperform the market fairly consistently, and over the long term? Oh yes, and by an appealing margin. (Feeling skeptical? Look deeper into our website and see for yourself -- the man keeps score of his performance with ritual consistency.)
Naturally, you might want to replicate such profitable results, but to do that, the answer isn't simply to copy his stock buys -- it's to emulate his investing style. So on this week's Rule Breaker Investing podcast, Gardner shares the six core traits of his investing philosophy.
A full transcript follows the video.
This video was recorded on Sept. 19, 2018.
David Gardner: Let me tell you, again, the story about my friend Igor's friend.
Igor was a summer intern we had on our investment team. On one of my investment teams here at Fool Headquarters. I'm going to say this was maybe nine or 10 years ago.
And I'm always interested when we have young people who are interested in the stock market and investing. Math shows -- and really just intelligence shows -- that the younger we get interested, the better off we are.
So the best time to find out about this podcast, or about the stock market, is when you're 15, not 50. More than happy to take all comers, but the earlier you get on the train of compounding returns, the better, so I'm always interested when young people have the same interest I do, which is in investing and in the stock market.
And, yup, Igor was one of those guys and Igor, who I believe was originally from Russia, was a college student and joined us, here, at Fool HQ. And I asked him, "How'd you get started?" because that's always my second question. First, "Are you interested in the stock market? Oh, really, great! How'd you get started?"
And Igor said, "Well, it was my friend at college who got me started. A friend. Maybe like sophomore year I met him. He taught me some about this subject and here I am, now, a senior and I'm fascinated by that. Even have this internship, here, at Motley Fool Headquarters. But it's interesting," Igor went on, "because my friend doesn't invest anymore."
And I said, "What? You mean somebody who's young and who was precocious enough to have taught you investing a couple of years ago doesn't even invest anymore?"
And he said, "Yeah." And here's what was happening. He was a focused investor, so he would only take a few positions. He'd load large portions of his money into just a few stocks and the companies that he typically would look at would be like very small-cap biotech companies.
So if a drug didn't get approved -- you can actually see how this would play out -- or when you're investing in things that will blow up, and you're only invested in a few firecrackers, it might be that none of them is actually a bottle rocket that ever soars, and so you could easily see, in retrospect now, how Igor's friend could have ended his investment career, maybe running himself out of money because of how he'd chosen to approach investing.
So I've always enjoyed that story that Igor told. I've referenced this before on this podcast, but it's going to enable me to talk about something I hope is special this week. I hope this is one of the truly memorable Rule Breaker Investing podcasts that you hear, because I'm going to be introducing some new content -- new ideas -- to help you as an investor, and it's going to enter not right away, but maybe the canon of how we do Rule Breaker investing.
So that's the focus, and I'm going to explain a little bit more about that in a sec, but back to Igor's friend, or how that person, or how you and I are investing.
I think there are two questions. There's the what and the how.
The what is what you tend to invest in. Like what type of company. Do you invest in Rule Breakers? Do you invest in dividend-paying stocks? It's the ticker symbols, the company names, of course, behind them. The companies behind those names. The what.
And then there's the how. The what is about the companies you're investing in. The how is about you. How do you invest? So there's the what and the how, and you can ask yourself as a fellow investor and a fellow travelers in life, here [a fellow Rule Breaker with me], what is your what and what is your how?
And what I realized, using that framework for Igor's friend, is that his what was like development-stage companies that had no real profits and were very subject to binary decisions that could, depending on which way they go, blow everything up. That was his what. And his how was he tended to load large portions of his money into those companies. That was his what and that was his how.
And I think I said to Igor that day at our meeting in Fool HQ -- I think I said, "You know, that's interesting. Now that I'm thinking of it in those terms, here's my what and here's my how," and I'll share them with you right now.
My what is I like to find the most innovative companies of our time and I like to make sure they're not just R&D firms, or they're not just a hope and a dream. They're actually real-world companies delivering outstanding solutions, often disrupting the industries in which they are participating; but they're real innovators and they could be potentially big-time innovators. Like maybe one day they'd grow up and be Amazon.com.
Those are my whats. I've always loved those companies. I think you and I should spend almost all of our time, if we're trying to beat the market and we care enough to select stocks, I think we should be spending a lot of our time, anyway, looking at those kinds of companies. That's my what.
My how is that I tend to buy and not really to sell.
I try to get in before the vast majority of others and out well after the vast majority of others. That's a quote that I've sometimes used in the past -- one of my maybe legacy lines one day that I'm hoping to just convey -- how we do the "how of Rule Breaker Investing." In before the vast majority of others. Out well after the vast majority of others and it's that second part that's so key. That's kind of our how.
And what I said in that meeting 10 years ago was, "I think that's why this approach works, because a lot of people who might go for innovators think that those are really high-priced stocks, or they're momentum stocks, or you need to figure out when to sell those because they're going to collapse, probably, at some point. I mean, you need to act in a volatile manner around volatile innovators."
But we, instead, on this podcast and in my services Motley Fool Stock Advisor and Motley Fool Rule Breakers, I've got a scorecard almost two decades long, now, of stocks where we basically bought them and then kept holding. We did the opposite of how people think they should approach innovators.
And I think, because that puts us in a small corner of the big room of the investment world, there are not many others that have painted themselves into that little corner where we are. We're kind of lonely, there, and that's great news for you and me because most of the rest of the world will not adopt this investment approach and so that's our what and that's our how and when you put those two things together you have, I hope, a market-beating strategy you can use the rest of your life.
And so let's look a little bit more deeply not at the what this week. Nope, this podcast is about the how.
Now I think you know the what. If you bought my 1998 book back in the day written with my brother, Rule Breakers, Rule Makers, you know that I first articulated the Rule Breakers' six traits that we look for in our companies. The whats. The six traits we're looking for that have you fishing in a pond of what I think will be some of the best companies of our time. So that's the what.
And you probably know those. Looking for a top dog and first mover in important. Emerging industries. I hope you know these six traits. If you don't, you definitely just need to keep listening to this podcast longer, or google it, or join us at RuleBreakers.com. You can take a look at our service, but that's the what. That's how we've been investing and I've taught those six traits and I've used them over and over, now, for the 20 years that we've invested together since that book came out in 1998.
But there's a second group that I had never really codified before; traits of you, the investor. Your hows. How we suggest you invest as a Rule Breaker investor. And just as we have six traits for our what -- the six Rule Breaker traits we've already published in the past -- now I'm about to unleash six traits that you should use as your hows. This should be how you invest. This should describe you as an investor.
So if this all comes together well enough in some future publication or future podcasts then I'll be including both of these sets -- your six whats and your six hows -- and I think that investors who follow those 12 principles will do pretty well, even without my help. I hope I'm setting you up to not just pass you a fish but, of course, teach you how to fish through this podcast. So I'm going to unleash them -- The Six Hows of Being a Rule Breaker Investor.
I used to write a lot. I used to write an introduction every month for the Rule Breakers service. A little essay upfront, especially back when we were a print newsletter, and then for Stock Advisor I would write an essay every other month, so six essays a year for Stock Advisor and 12 in Rule Breakers gave me 18 essays a year written over about 10 years, so I had a lot of published material.
And the reason I loved doing that [I'll explain in a sec why I hated doing that and why I no longer do that], but the reason I loved doing that is because if you're a writer like me [and we all are, because darn it, we're writing so many emails, tweets, and texts]. I've read studies that show that this age is a far more literate and writing-inclined age than any other for maybe all of recorded time. We're writing so much.
And part of what we do when we write is I write, anyway, to think. I kind of think out loud on paper. I organize my thoughts as I get my draft together and it's forced me to think. And so I miss the act of writing those regular essays. And in a lot of ways I've used this podcast, instead. I've sublimated that instinct and I've made it happen for this podcast, so now I have to show up once a week in front of this mic and talk to you, which forces me to pick my words and my thoughts more carefully.
And I also really benefit from our Mailbag which, by the way, is going to be next week on this podcast [the last Wednesday of every month], because I'm partly writing to hear what you think of it so I can learn from your thoughts back, and I've had some very faithful correspondents over the months and years, now, and I always look forward to Mailbag.
So we write to think, and in absence of writing we can podcast to think. I will briefly mention why I no longer write those essays. It turns out not that many people clicked on them, especially when we went to electronic. People are just clicking through what the next pick is, or what the next Best Buys Now are.
And so my essays just weren't as much of a draw, and frankly, even though I'm a writer, I pretty much hate writing. I don't write out of any compulsion. I don't keep any regular journal. No internal motivation. I need deadlines. I need people forcing me saying, "You must write this." I'm much happier to sit in front of a microphone and podcast, which is why I do this with joy every week. But that's why I don't do the essays anymore. My team told me people didn't really click on them and I was like, "Great! Because I don't even want to have to write them, really."
So anyway, that's all prelude to my six traits of the Rule Breaker investor, and the reason I mentioned that is because as I put these six down, this is draft form. This is kind of where I am and how I'm thinking about it. I would love your help. If you want to write in on Mailbag -- if you have a better idea than any of my six -- if you can top it, one of The Motley Fool's longtime core values, please do top it. Help me, because I put this forward as kind of a draft to all my fellow Rule Breakers and I will benefit from hearing back some constructive criticism.
So without further ado, then, let's get started with Trait No. 1.
Trait No. 1: So how. How? Trait No. 1. How do you invest? Trait No. 1 is "let your winners run. High." So let your winners run. High.
By the way, each of these I've tried to make kind of a kernel. A shorter form so that they're easy and I've even added a mnemonic system, which I'll be mentioning in just a little while to help make them more memorable for you. But let your winners run. High.
And I kind of think of that as Rule No. 1, because in my experience, the most important thing you can do with your hows [the who you are as an investor] is that you should be holding. You should be buying companies exhibiting the six traits of Rule Breakers -- the whats -- you should be buying those companies, but then you should be buying them to hold. Buy to hold, as we've so often said in my services at The Motley Fool.
After all, if you sell Netflix in its second year or Amazon in its third year, and you didn't get to enjoy the 10th and 15th year, you left almost untold amounts of money on the table. You lose far more when what could have been a 150-bagger -- 150X your money held over 10 years -- when you sell that out for a three-bagger because somebody told you to buy low, sell high.
The amount of money you leave on the table in those situations far exceeds losing 100% in a whole bunch of other positions. Again, just do the math. So Rule No. 1 is let your winners run. High. And you notice I'm saying winners. We don't tend to add to our losers. I'm foreshadowing a future trait that we'll be getting to in a sec, but we really look and ask what is working out there not just in your portfolio, but yes, what's working out there in the marketplace? What are the companies that are introducing winning solutions? Who are the innovators who have real customers using real products? Who are buying more and more with growing topline sales, etc.? So it's the winners that you're going to let run, and you're going to let them run high.
Now for each of my six traits I'll be including maybe one classic quote that has come from me at some point that I like to use over and over, so longtime listeners will recognize some of these. But for my let your winners run high Rule No. 1, on Twitter this week I tweeted out an article I once wrote called The Greatest Secret of All. You can google "Greatest Secret of All," "David Gardner." I'm pretty sure you'll find it. But in that article, I have a couple of quotes which are relevant to this rule.
The first is "Find good companies and hold those positions tenaciously over time to yield multiples upon multiples of your original investment." And I just kind of tweeted that quote out. I like other things in that article. I hope you'll take a moment to read that article if you've not, but that's like, to me, the classic statement that I'm trying to make in that article.
I am happy to say that Gautam Baid on Twitter, @Gautam_Baid [thank you, Gautam]. You included one other from the article and I do love this one, too. It's, "We play an entirely different game -- a game measured by huge percentage points of profit and counted in years." An entirely different game from Wall Street. From fund managers who trade in and out of their whole portfolio for many managed funds in a single year. The constant churning. Trading. The way, in my experience, that a lot of financial television inspires people to think they need to follow the markets really closely and jump in, and jump out, and it just causes all of them [I hope not you] to violate Rule No. 1.
And if this is a new concept for you, I'm really glad you're getting to hear it, because I've seen it work not just in my portfolio, but in my dad's before me and over decades. Find good companies and hold those positions tenaciously over time to yield multiples upon multiples of your original investment and that's not just fantasy. That's fact. And you could just look at any of the great companies of our time. You can just look at the stock market over time. The facts are all there, but it's amazing how obscured they are by the Sturm und Drang of media coverage of the markets and by how people mislearn investing, in many cases early in their careers.
So again Rule No. 1, let your winners run. High.
Trait No. 2: And now I will mention my mnemonic system that's going to help you and me, I hope, remember these six principles. Each of these six has the number of the principle somewhere implicit in the words I'm using. I was just kind of emphasizing Rule No. 1 with that first one and I do like that one rhymes with run. Let Rule No. 1 -- Let your winners run. High.
But Trait No. 2: "Add up instead of double down." I think you heard the two words in there. It's double. And a lot of people use the phrase "double down" or think that they should be adding to the thing that's dropped. After all, four of the most harmful words ever unleashed in front of investors [unfortunately constantly parroted and reparroted] are buy low, sell high. Four of the worst words.
Why? Because that third word, sell, has so many people thinking that that's a natural thing that you need to do shortly after you've bought low. And so you have everybody violating Rule No. 1, because in large part concepts like buy low, sell high are just, frankly, wrong-headed as we've been talking about a couple of decades over in my neck of the woods.
So add up, instead of double down. So I do like to add money to investments. I think you should, too. As fellow Rule Breakers, how No. 2 says, "Yeah, that's a good thing to add money," but add to the ones that are winning. The ones that are going up.
You know, in some ways investing is like a horse race. Here's the trick. You're allowed to invest during the race. And so once Secretariat gets up by about 10 lengths halfway through, in the world of the stock market and how we invest as Rule Breakers, you're allowed to put money in the race right then. And guess who I'm going to bet on? I'm betting on Secretariat. And Secretariat might choke, and you don't always win this way, and when you don't, it does hurt. But in my experience, the guys that are out ahead [the horses, the investors, the companies], they tend to keep on winning.
So let's you and I make sure that if we're going to keep adding money to existing holdings, we're adding them to the winners. How many investors have quit the game [maybe Igor's friend, for example] because they put too much in things that were not doing well, and then they added to that. They threw good money after bad, as the old saw goes. How many people have been burned and how badly? I bet I'm speaking to a few of them now.
I've had experiences like this, too. I used to, as a kid, think that you want to buy low, so I was adding to the ones that weren't doing so well. No! We should be Trait No. 2 of the Rule Breaker investor -- adding up instead of doubling down.
So before we move on to No. 3 I said I'd pull kind of a classic quote for each of these, and the one that feels right for Trait No. 2 of the Rule Breaker investor is this one: "I try to find excellence, buy excellence, and add to excellence over time. I sell mediocrity. That's how I invest." Find excellence, buy excellence, and add to excellence over time. Enough said.
Trait No. 3: The No. 3 how for you -- here it is. "Invest for at least three years." You got that? The three in there with Rule No. 3? Invest for at least three years. Now, if I ever publish this material, invest will be italicized. It's invest.
And it reminds me to share with you, once again, if you're a longtime listener but if you're not, maybe you're hearing this for the first time. The Latin root for the word invest, a word that we toss around all the time, here, at The Motley Fool. Invest. The Latin root is investire. It's from the Latin which means "to put on the clothes of. To wear the garments of." And if you think of a phrase like "priestly vestment," that vestment word comes from that same Latin root.
And I think a great visual, especially if you're a sports fan, is to picture fans wearing the jerseys of their favorite team to their stadium to cheer their team on. And whether their team wins or loses that particular game, and whether their team, if they're a true fan and in my mind a true Fool, whether their team has a good season or a bad season [not just a game -- a season], they're going to stick with their team. And it's that mentality that has you investing. Putting on those clothes.
But it's not, in this case, clothes. It's wearing the garments of those companies that you love. And we do that for real, too. I see people walk around with an Apple logo on their shirt, or they love their Lululemon. Some of these garments are literally being worn by people who are big fans of some of their favorite companies. You might have some of those things in your drawers, as well, so that makes it even easier for you too understand, truly, what to invest, once meant, and for me, will always mean. And for you, too, if you embrace Trait No. 3 of the Rule Breaker investor -- invest for at least three years.
Now the No. 3 is a little bit arbitrary and we've used it for years at The Motley Fool. Sometimes we say, "Hey, have to hold for at least five years." I know one thing. It's more than one year. It's certainly more than a month or a day. But I like three, especially because this is Trait No. 3 and it makes it easier to remember. But this is often when I do my five-stock samplers. Also the length of time that I'm using for the game that we're playing, together, when we do five-stock samplers, is I'll say, "for the next three years." So it's a very consistently used number. It's a little arbitrary. Maybe four was a better number. We're going with three, but don't forget that that word invest is italicized for us as Rule Breaker investors.
And the classic quote I want to lay down for this one. I've already used it this podcast, but I'll say it again. The two keys to my investment approach, stock by stock, "In before the vast majority of others and out after the vast majority of others."
All right, you now know the first three traits of the Rule Breaker investor; the how we do what we do when we win over time, which we surely have and I do believe will continue to do so, especially if we adhere to these principles. It feels like half-time of this podcast.
[...]
Trait No. 1 -- Let your winners run. High.
Trait No. 2 -- Add up instead of double down.
Trait No. 3 -- Invest for at least three years.
And now Trait No. 4.
Trait No. 4: It reads very simply to "remember the four tenets of Conscious Capitalism." I know we've got some Conscious Capitalism fans who listen to this podcast and we might have made some new ones when I dedicated the entire month of May for this podcast this year to Conscious Capitalism. Now if that phrase is new for you, I would suggest you listen to our May 2nd podcast just some months back. It was entitled, Conscious Capitalism. You'll learn a lot more, right there.
Mine is not to summarize the whole approach, here, but it is with this Trait No. 4 to cement in your mind the four principles that form its foundation and to have you think about those as you go about the job of investing. The how of how you invest.
And so very simply, those four tenets summarized.
Tenet No. 1: Look for purpose-driven businesses.
Tenet No. 2: Look for businesses that value all their stakeholders. That are oriented to causing everybody to win. The customers, certainly. I think customers always come first for businesses. Their employees. Their partners and suppliers. Yes, their shareholders, too. Yup, little me and little you are the public market shareholders of those companies. We want them to do well, too, otherwise the system doesn't work too well. Also maybe the environment for some companies, or communities for others. Who are the stakeholders, and which are the businesses that are winning or trying hard to win for all of them. That's Tenet No. 2.
Tenet No. 3: Conscious or servant leadership. You should be able to detect that among the executive ranks of the company. You'd love to hear that backed up, maybe on a site like Glassdoor or on LinkedIn reviews.
Or if you have friends who work at that company, you'd love to hear that they love the culture of their company. That they love the leaders of their company. They admire them. And the people who are running the place probably may not have the best parking spot in the garage or the big corner office. In some businesses it's appropriate that they might. But are they servants? Are they conscious leaders?
Tenet No. 4: And then finally No. 4 is conscious culture. The culture of the companies that we're investing in. Those should be really good. Yes, employees should love working there.
And why is culture so important to me? Well, to me and you, since we are investors, acting therefore by definition for the long term, when you buy a new company, you're probably buying the culture as much as anything else because the CEO might change while we hold these stocks for five, 10, or 15 years. The products and services certainly will, and the world around those companies [their industries] they will change.
But what often doesn't change that much, whether we're talking about civilizations or just for-profit public companies, are the cultures. That's in large part the soil, the fertilizer that's going to cause everything to grow or to die. The cultures of your companies. So again, Tenet No. 4, here, for Rule Breaker investors [the how of what we do] we remember the four tenets of Conscious Capitalism.
And the quote that I want to bring into this one might be the favorite one that I've come up with so far. I use it all the time. It's to "make your portfolio reflect your best vision for our future." So you're thinking about the implications of investing in these companies. Are you picking things that are going to make our world better, or are you contemplating investments that might make the world worse, for some people or a lot of people?
In my experience, when you're finding things that are going to make the world better, that's one of the best reasons to keep holding something and expect that they'll do well over time, because the universe often conspires to make the things that should win, win to make things better for all of us, so be thinking and actively asking, "What is my best vision for our future and is my money lined up with that?" No. 4.
Trait No. 5: Remember, we've got the mnemonic going on. There's going to be a five somewhere in this one. Listen for it. "5% max initial position."
That's right. When I start investing, and when I build a portfolio, whether I'm building one for myself or somebody else, I never start a position with more than 5% of the overall money we have to invest. What that means is when you build a well-constructed portfolio as a Rule Breaker investor, you're going to be diversified across at least 20 companies, because simple math suggests that if you max it out with that initial 5% position, then you would have 20 of those, and that would be your portfolio.
Now, you don't have to be as hardcore as I am on this. A lot of us start investing with smaller amounts of money and we have to put in one-third of that just to buy one stock when we have our first three stocks. So realize that of course I'm talking about a slightly more mature portfolio.
But these days since it's possible to buy fractional shares and it's easier than ever before to invest without commissions, I think you owe it to yourself to think diversified from the get-go. And especially as you grow that portfolio over time, even if you have a really strong conviction; even if the next pick coming out of Motley Fool Stock Advisor sounds really great to you, I do not think that you should put any more than about 5% or less of your full portfolio into that stock or any other.
To go back to Igor's friend [I'm glad we don't even know his name, and I don't mean to be picking on him, and I'm pretty sure I'll never meet him], but he wasn't able to keep investing because he overloaded into stocks. And I frequently have come across Fools. I've signed some books at book signings over the years. Given talks lots of different places and people come and say, "You know, I put too much in this one or that one." I see it on our discussion boards at The Motley Fool at Fool.com. People will talk about how they made that mistake.
The good news is they're talking about it which means [a] they've acknowledged it and realized it and [b] often they're looking back to an earlier stage of their investment lives when they realized they just put too much in something that sounded too good and they learned a hard lesson that way. So the best way to escape that very common trap, that truly can sink people's fortunes, is not to overload in any one stock.
Now, I will say this. A corollary to our Rule No. 5, 5% max initial position, is that if the stock starts doing well, we've said Rule No. 2, you can add to it. Add up instead of double down. And if you're doing the math with me, well if this thing started at 5% and then it started gaining in value and we added some more, it could end up being a large position; far larger than 5% in the portfolio.
And there's some nuances to this and it's very contextual [one person's portfolio to the next]. Where they are in life and how else they're invested, so I can't give any kind of all-encompassing answer to this other than to say that as a Rule Breaker I am comfortable with an unbalanced portfolio.
I've lived long stretches of my own adult life with unbalanced portfolios overloaded in a few stocks, but the only way that ever happened was because they won their way to that share of my portfolio. They earned their market share within your portfolio or mine. And since the winners tend to keep on winning, it's not always true, which is why if you have an uncomfortably large position, I would be the first to suggest you sell it off, a little bit intermittently, and get it down to where you're comfortable.
But more often than not, you should be letting your winners win, and if you have more than one of them, they won't overtake your portfolio because they'll start hitting shoulders against each other because they're all big dogs for you. And that's kind of how Rule Breaker portfolios that I've managed, for example for my kids that I built up over the years; that's kind of what they look like.
And it's a really great feeling. It's not just all about one stock. It's some big-shouldered, for-profit public companies doing great work in this world that are just growing and dominating. And when you have new money to add, I probably don't add to those anymore. I find new stocks. That's why we keep coming up with a stream of new ideas in Rule Breakers, Stock Advisor, or Best Buys Now for members so they can hear about new stocks. So to close this one out then, Trait No. 5, 5% max initial position.
And the quote I want to append here, to No. 5, is this one. "Stocks always go down faster than they go up, but they always go up more than they go down." So do remember that first part, in particular; that stocks always go down faster than they go up, and people who have overloaded in a position that starts going down fast [which never feels good, but that's always how it does feel, especially in bear markets], that can scare people out of that stock or out of investing altogether.
So part of being able to accept, psychologically, watching something go down fast, even though over time it will go up more than it goes down, is being diversified.
Well, thanks for listening with me all the way to the end of this important list, which I'm pretty sure I'll have cause to reference possibly many times in the future. It's been really fun to have dreamt this up and to be sharing this with you this week and have a little mnemonic running through it, so let's close it out with No. 6.
Trait No. 6: No. 6 is "aim for 60% accuracy." So what does that mean, because accuracy is a term that we've brought into the lexicon, here, within Fool HQ, but many other people wouldn't use that term in the investment world.
So for me, accuracy is what percentage of the time you are beating the market. For example, if you have 10 stocks and eight of them are beating the market, or ahead of where the market is, and two are losing to the market, then I would say that's an outstanding 80% accuracy [eight in 10 of the companies you're overseeing].
By the way, if you're only in 10, I want you to be in 20 stocks, but if you're just starting out, that's great accuracy of 80%. That is unsustainably great, at least for my approach, and my what and my how. I've never been able to maintain, nor do I even think I want to maintain, that high an accuracy. In order to have a really high accuracy, in my experience, you take less risk. You go with more certain, bigger things and for a lot of us, that's the right approach. But for me, I like to take shots and I'm willing to airball it from time to time. It turns out, over the course of my investment record in Stock Advisor and Rule Breakers, my own accuracy isn't that much more than 50%.
And that's why I say, with this Trait No. 6, aim for 60% accuracy. In my experience, even if you don't hit that, the good news is you can still whomp on the stock market averages. You can still prosper mightily as an investor, because the kinds of stocks that we're using these rules to invest in [the traits that I put out there like top dog, and first mover, and in an important, emerging industry] combined with what I've shared with you this week [let your winners run high, add up instead of double down], you're going to end up with great performance even without great accuracy.
In fact, a lot of studies show [and I don't have one to quote right now], but ["You Could Look It Up"]. As baseball manager Casey Stengel used to say [I also see this as a short story by James Thurber, the very humorous American writer written in 1941], but ["You Could Look It Up"] it up and I think you're going to find studies will show that over time, a majority of companies in the market lose to the market's average. Lose to the S&P 500. So if, in fact, you are hitting on 50% accuracy, you're probably exceeding many fund managers with that number right there but aim [because we want to aim high and we always want to try to do better] for 60% accuracy.
Now the other side of that coin, which I have to point out, is that means you're going to lose 4X out of 10, and some of those times you're going to lose really badly. And anybody who's spent any time listening to this podcast, or joined us at Stock Advisor or Rule Breakers, will certainly know that I talk a lot about needing to lose to win, and being comfortable looking silly and being OK with losing. And one of the reasons that I'm OK with losing, and I think you just heard it in Trait No. 5, is that we don't take big positions in things; so if things do poorly, we're not going to get that badly hurt. So aim for 60% accuracy.
And I've been appending a quote to each of these, so I guess I might as well just repeat it. I already used it, but, "You have to be willing to lose to win." It's a very important concept, especially applicable to the approach that we take, here, at Rule Breaker Investing.
There are other approaches out there. You could just mail it in with the index fund and not even open up your statements. Just keep saving every two weeks from your paycheck. I think that's a great way to go. There are also some hyper safe approaches. You could hedge yourself. You could only buy stocks that have great balance sheets and pay a nice dividend. There are certainly less risky approaches to take. But since you're listening to my podcast, you're going to know that we intentionally take risks and that's the nature of Rule Breaker Investing and how I think we maximize our returns.
Then let's bring it all together to close. I like to summarize what we've done this time together because we're going to be using this, again, in the future. Say it along with me if you're already started to memorize. If the mnemonics [always spelled with a silent "m" upfront], are working for you, say it along with me. Amen, brother. Here we go!
Trait No. 1: Let your winners run. High.
Trait No. 2: Add up instead of double down.
Trait No. 3: Invest for at least three years.
Trait No. 4: Remember the four tenets of Conscious Capitalism.
Trait No. 5: 5% max initial position.
Trait No. 6: Aim for 60% accuracy.
Well, thank you for suffering a fool gladly once again, this week. As I mentioned, this is a draft. If you've got feedback for me, [email protected] is our email address. You can also tweet us out @RBIPodcast on Twitter. And, yes, Mailbag is this coming week, so I'm sure I'll be featuring some Mailbag items reflecting on these six principles. Maybe you have a story to tell that one of these reminded you of. I love to share stories, as well. So next week is Mailbag.
In the meantime, 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.
