200 Stock Advisor Picks, 6 Conclusions, No. 5: "Using This Service, You Should Beat Your Mutual Funds"

Journey in your mind back to March 2002. The stock market was still stumbling around in the aftermath of the dot-com crash, and retail investors were running scared. It was in that environment that Tom and David Gardner launched a monthly newsletter featuring one stock pick from each brother, with detailed explanations about why they'd been chosen -- a friendly fraternal competition that became the foundation of the Stock Advisor portfolio. The returns on those investments have well outpaced the broader market's gains in the ensuing 16 years. Had you acted on all of their recommendations, you'd have reaped a market-smashing 1,955% return overall.

Profit, however, isn't the only thing the Gardners have accrued in the intervening years. They've also figured a few things out along the way. So in this Rule Breaker Investing podcast, David shares six interesting conclusions from his 200 months selecting recommendations for Stock Advisor.

In this segment, the conclusion is absolutely fundamental -- so much so, that if it weren't true, the Gardners would probably have hung it up on this game ages ago. Self-directed investing though Stock Advisor should beat, maybe crush, the gains you'd make investing in mutual funds. But don't just take his word for it. Let him walk you through the math.

A full transcript follows the video.

This video was recorded on Oct. 17, 2018.

David Gardner: Conclusion No. 5: Reads simply "self-directed investing though Stock Advisor should beat, maybe crush, your funds." Now that's not going to be as fun to talk about. I'm not going to be relating Bezos or Sulzberger stories now. I'm just going to tell you really great news, I think. Having observed how Stock Advisor works and thinking about the math of all of this, there are a couple of key points I really want to make here. Why does Stock Advisor really beat up on funds? I have two things to tell you, here.

The first is think about the cost of a service like Motley Fool Stock Advisor vs. what you pay even for your cheap index funds. So let's just pretend that you've done well and you have a six-figure portfolio. I'm not even going to say seven or eight figures, though I know some of our listeners do, indeed, have portfolios like that. If you think about the cost of Motley Fool Stock Advisor, which ranges depending on when you buy it from us and how long you've been us, somewhere between $100 and $200, but we'll just say $200 for the sake of a good example,.

So you've been paying how much to Motley Fool Stock Advisor over the last 16 years? The answer is [and you've actually paid less than this], but the answer is 16 x $200. That's $3,200. It really hasn't gone up. In fact, it's stayed the same for the most part over those 16 years. So Point No. 1 here, of Conclusion No. 5 [if you're outlining along with me, that's where we are] is cost. Now compare that to your index fund.

Now a lot of people have index funds from firms like Vanguard and if you'd started 16 years ago or so, I'm just going to round, here, without being too hardcore. But typically you'd be paying about 0.25% in terms of your annual fee. These days they've actually come down, some, and I certainly laud that, especially because index funds will never beat the market. You're always just going to do what the market does minus costs, so it's good to see them have lower costs. That's a good thing.

But, you know, 0.25% on a $100,000 portfolio 16 years ago was [do the math with me] $250. You were paying $250 a year and as your portfolio grew from $100,000 [let's hope it's doubled, at least over these last 16 years], that means if you have a $200,000 portfolio at 0.25% these days you're paying $500. In fact, you keep paying more to your mutual funds, and I'm giving you a fairly rock-bottom example of an index fund that's very cheap. Many people are paying 1% each year to have their money managed for them by a wealth manager or a set of mutual funds. That amount constantly goes up over time.

That is such a strong and direct contrast with the people who were brave enough to join Motley Fool Stock Advisor 16, 10, six years ago or six months ago who are paying out of pocket but paying a flat fee. And as your portfolio has grown along with us, your costs have dramatically come down and they've never been high to start with. So Reason No. 1 that self-directed investing through Stock Advisor should beat, maybe crush your funds is flat out the costs and the two different cost models and I hope you can see that.

And by the way, I have no gripe with a lot of mutual fund fees. We have some mutual funds at The Motley Fool. Some of you love them and if so, God bless you! I hope we're doing well by you. And in fact, we're always looking at our funds saying, "After fees did we help you beat the market?" I'm really happy to say we have some real examples of that for our fundholders.

So everybody makes their own decisions in terms of how they want to be invested, but whatever the fund is that you're looking at, I think it's fine for them to take a percent, whatever it is, a small percentage of your money each year. Just realize that that's constantly increasing if your portfolio is going up over time.

So, wow! What a difference in the costs of these two services when you look at Stock Advisor vs. mutual funds, but here's the even better news, and that is we've been winning. We've been beating the market averages. We're way ahead, as I talked about in Conclusion No. 1 earlier of the stock market's performance. And so you are really winning.

And one of the things I learned from Peter Lynch is that you and I, as self-directed individual investors, have a lot of advantages over the fund managers. One of them is we can let our winners win in a way that most mutual funds never can. So if you have a stock that goes up 10-50x in value over 10 or 15 years, you can hold onto that and let that grow and become a bigger percentage of your assets than any mutual fund would ever let happen.

So mutual funds are constantly having to sell off their biggest winners in order to keep the percentage influence of that one stock over the overall fund down in a way that investors who really know their stuff and buy Amazon, or Netflix, or Booking, or Disney [all of these great companies] don't have to.

So just realize [I'm tapping a little bit back into our recent mailbag which we entitled, "Winners Win,"] winners win. What do they do? Winners win, and you've been winning with this service both because of its much better cost structure, but also because you are self-directed and you can make smarter decisions about your portfolio of stocks than fund managers who have their hands tied, in some cases, by regulations could ever do for you when they invest for you.

So yes, Point No. 5, and then we're going to get to my very favorite point right now, was self-directed investing through Stock Advisor should beat, maybe crush your funds.