200 Stock Advisor Picks, 6 Conclusions, No. 6: "The Best Lesson Is the Math of Losing to Win"

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, he unpacks the most interesting and important of those conclusions, which he describes as "the math of losing to win." Because, as he explains, when you pick any number of stocks -- even with the best of intentions, and strong reasons to believe in them -- you're bound to get some absolute stinkers, the kind that'll lose half or more of their value while you hold on patiently. (And he has.) David shares why that's not the problem you might think it is.

A full transcript follows the video.

This video was recorded on Oct. 17, 2018.

David Gardner: Conclusion No. 6: Which brings me to my grand conclusion to "200 Stock Advisor Picks Later," and that's Conclusion No. 6. Stated simply the conclusion is maybe the best lesson of all: "the math of losing to win."

Let me throw a little bit more math at you this week. It's been a more math-heavy conversation, but that's appropriate when we're talking about 16-plus years of performance of a portfolio's annualized numbers and stock picks.

I want to share with you [that] this kind of rechannels Conclusion No. 2, which is "understand your real biggest losers." And ARM Holdings' sell was a far bigger loser than Satyam Computer Services. This kind of gets back in there, but we're going to look at losing to win and the math of it through my side of Stock Advisor. And here's how I do it. And by the way, the same thing applies to Motley Fool Rule Breakers, as well. The numbers are a little bit different, but the concept is timeless and really important.

Over the course of 200 monthly stock picks, I am embarrassed [I already shared with you my 10 worst ones] to say that I have picked a bunch of stocks that have lost 50% or more. And since I took the time to count down through our scorecard, which has been transparently up there for members from day one of our service, so anybody who uses Motley Fool Stock Advisor or really any Motley Fool service can transparently see the scorecard of every good and bad thing we've ever done, and I think that's a great exemplar to the investment world at large and something that we take a lot of pride in here at Fool HQ.

So how many 50% or worse losers have I picked over 200 picks? The answer is 21. More than 10% of the time [and that sounds horrible, and I've never wanted any of them to go down], I have selected a stock that would lose 50% or more of its value. And that's not even against the market. The market will go up, let's say, 50% itself, so we're 100% or more behind the market with each of these.

Before I share with you the win part of the math of "losing to win," let me just restate that every one of the monthly picks that Tom and I make in Stock Advisor we think is going to be a winner. I put it out there. It's kind of like when you swing a bat and baseball. You're not really sure if you're going to hit the ball or not. You're definitely swinging for the fences, or you'd at least like to get on base, but you're not sure what's going to happen.

And circumstances play out from there, and it takes a lot longer in the markets than it does in a baseball game to see exactly where the ball winds up after every swing we've taken. It takes years for us to figure out whether that was a good decision that I made that month or next month. It takes years. But do know that every time we're doing our best and we think we're going to do well, and the bad news is about 10% of the time or so I do very poorly. But here's the win part of the math of losing to win.

21 50%+ losers. I've already read a bunch of their names off earlier. But how has the 21st best pick done out of those 200? 21 50% losers. What has been the 21st best performer? It just so happens to be [I looked it up earlier today] when I picked Pixar in July of 2003. Today it's no longer Pixar. I think most of you know that Pixar was bought by Nvidia.

And when that happened in Motley Fool Stock Advisor we said, "Great! We'll just roll our Pixar shares right over into Disney, because it wasn't a cash deal." Disney said, "We're going to buy Pixar shares and you're now Disney shareholders," and that happens to have been my 21st best pick historically. And as of this week, that pick is up 824%. 824%. 500 plus points ahead of the market and that's our 21st best pick.

So if you've heard me say we've had 21 50% or worse losers, you can see that a single winner, almost on its own, wipes out all of those losers and that's my 21st best pick. I'm possibly guilty of bragging a little bit this week on the podcast. I apologize if it sounds like that, but I'll just give you the facts.

That doesn't include picks like Nvidia, which is now up 3,473%. That's right. That's the 10th best pick I've ever made on my side. It's up 35x in value. There are nine that are doing better than that. The best ever -- is it Amazon? Well, close. Amazon is up 113x in value since I picked it in September of 2002, but that's just the third-best pick.

The very best pick was Netflix, which I selected in December of 2004. It's up 17,865% for members who bought and have held; and while not everybody found Motley Fool Stock Advisor back in that month of December 2004, a lot of you have discovered it since and that's been a tremendous performer no matter how you slice it.

So the math of losing to win reminds us that you can take your biggest losers, you can put them all together, and if you're investing Foolishly, and if you're a Rule Breaker along with me, you can take your 21st best pick and almost wipe out all of those losers [this is using real math; imagine $1,000 or $10,000 in each] and you can almost wipe all of them out with just your 21st best winner.

So there's a little bit of math -- losing to win. I think it's a natural question to wonder, "Hey, if I had invested $10,000 at the start of Motley Fool Stock Advisor and I got those 20.7% annualized returns, how much money would that $10,000 at the start of Motley Fool Stock Advisor be worth today?" And, well, as of last Friday, October 12th, $10,000 invested on my side of Motley Fool Stock Advisor would have been worth $228,184. And please note, to close, that every one of those bad losers is implicit in that number, as well.