This week, Motley Fool co-founder David Gardner combed through a plethora of podcasts to offer up five of the most-essential cardinal points from Rule Breaker Investing -- lessons that investors can (and should!) apply to their portfolios today.
How many stocks should you have in your portfolio, and how can you possibly keep track of all of them? The Fool hammers on the importance of good leadership, but how do you find quality, Rule Breaking CEOs? Plus, David shares the six "hows" of Rule Breaker Investing: guidelines for evaluating your portfolio, the stocks in them, and your investing mind-set. Click play for all this and more.
A full transcript follows the video.
This video was recorded on Feb. 6, 2019.
David Gardner: Every week, another podcast! Rule Breaker Investing, no reruns, every week since July 2015. New guests, new stocks, new books and games, new businesses and technology trends to share, new thoughts about the world at large. But, is there any downside to always doing a new podcast every time? Always a new trick, another ball in the air, a new flavor of ice cream. Well, if there is any downside, it would be the danger that amid all this new, new, new, some of the most important things that were said that are from old, old, old Rule Breaker Investing podcasts might be forgotten. Turns out, if you don't keep saying some of the eternal verities, they could be forgotten. If you don't keep telling your wife that you love her, well...
That's the reason for Blast From the Past, our series here on Rule Breaker Investing that pulls key cardinal points back out of past podcasts, pulling rabbits out of hats to share with you again if you're a longtime listener or to share with you now for the first time if you're a new one. Because many new listeners are now aboard this ship of Fools that were not around when I talked about, well, dark clouds I can see through back in February 2016, for instance. We're going to talk about those and some of our greatest hits right here, right now, on this week's Rule Breaker Investing.
Happy February! That's right, it's the first podcast of February 2019. I had a lot of fun with our mailbag ending last month, our January 2019 mailbag, thinking back again to that wonderful Fool poem by Ben Goland and all of the other fun of that mailbag. Thank you for all the great stuff!
I'm hoping to bring just as great stuff here to you this week. As I mentioned at the top of the show, we're going to be diving back into some of the most important, key, cardinal points, things that I've said on this podcast over the years. Since I said it on the podcast -- and everything on the internet is permanent, isn't it? It's all out there somewhere, swimming in the internet ether, in the e-ther. But, I would be making the wrong assumption to think that you actually know that. Even if you've listened to every podcast we've done -- and thank you, for those that have -- we can't remember everything. I don't even remember most of the things I said last week. And even if you did have a perfect memory, some things deserve being said again.
Of course, we have many new listeners who weren't around in 2016 when some of the points that I'm going to share with you today I made passionately and emphatically, and I'm just as interested and convicted about them today. Most good politicians -- I'll never be one -- just get up and say the same thing over and over. That's the media training they get. They hit that sound bite and they just do it again and again. I probably need to steal a page out of their songbook because I tend to always try to come up with new things and say them in new ways. But the eternal verities for us here at Rule Breaker Investing, the best ways to invest, the most interesting ways of thinking about the world, the most valuable thoughts you and I can have, those things do bear repeating from time to time.
I've spent a little bit of effort this past week going back and curating for you five of my favorite points made in past podcasts. For each of the ones I'll be sharing with you this week, I'll mention the title of the podcast and give the date when it aired. Most of them were a few years ago. If you're an iTunes fan, for example, and you look at the podcast listings on iTunes, after 100 podcasts, it drops off. You can't find it on iTunes anymore. We've done 189 podcasts. That means there are 89 podcasts that are no longer evident to people who are tapping into iTunes. Maybe that's true of some of the other services, as well -- Google Play, Spotify. But I can tell you one thing -- podcast.fool.com is a place where all Motley Fool podcasts reside. You can always google podcast.fool.com. If you know the title of a past Rule Breaker Investing podcast you want to hear again, you can find it right there at our Podcast Center.
To make it even easier for you, my talented producer, Rick Engdahl, jack of all trades, is going to include a link to each of the five podcasts I'm drawing from in the show notes this week. There's a hyperlink if you'd like to go back and hear the full version of any one of these points. Of course, I do commend those to you because I'm mainly doing a summary of the points in order to fit them all into a single podcast this week. It's kind of the CliffsNotes approach to past Rule Breaker Investing podcasts. But I do, of course, recommend the source material. We put a lot of effort into those. These are some of our classic podcasts, so if you do feel yourself inspired by any of the things I say this week, please know that there's a past podcast that fully explores that point. It's just a click of a link away, right there in the show notes.
All right, as I warm up my points, just a couple of bookkeeping items to get out of the way before we start. The first is, if you haven't already, I hope you'll subscribe to this podcast on iTunes or Spotify or the aforementioned Google Play. You can follow us on Twitter at @RBIPodcast. You can follow me on Twitter if you like, I'm @DavidGFool. Finally, I hope you'll give us a review. Throw me some stars! Let us know how we're doing! I read every comment.
Second, I want to preview next week on Rule Breaker Investing: I'll tell a brief story about how it all came together. I gave a talk at the University of North Carolina Chapel Hill at the Wilberforce Conference in the fall of last year. A guy came up to me afterward. He said, "I'm a Motley Fool fan. I love finance. I enjoyed the talk. Good to meet you!" We went on. He said, "I'm a blogger. I write a lot about finance and investing. I have my weekly blog at Circle of Competence." I went later and checked his blog, it's really impressive. This new friend of mine does a great job of surveying the financial world and pulling out the most interesting bits and making some personal comments about them. Very smart guy.
I enjoyed that conversation after that conference. I enjoyed meeting my fellow Tar Heel. Then I asked him at the end, "What do you do?" He was about 25 years old. He said, "I'm a professional baseball pitcher." And I thought, "I want to have him on the podcast because we're going to talk about investing and his life in baseball." That's next week. Baseball fans, get ready for Rule Breaker Investing on February the 13th.
But that will be then, and this is now. Let's get started with five Blasts From the Past points.
Alright, Blast From the Past No. 1. The podcast, I already mentioned at the top of the show, was entitled Dark Clouds I Can See Through. It's dated February 17th, 2016, so three years ago this month is when it aired. With each of these Blast From the Past points, I'm going to truncate and share with you the heart and soul of the material. Let's cut right to the quick and look at that phrase, "dark clouds I can see through," and why it's been so helpful for me as an investor. I hope it'll be helpful for you going forward with your investing, finding, in my experience anyway, some of my greatest winners, perhaps some of your greatest winners using this simple framework -- dark clouds I can see through.
Let's break that down into three pieces, that phrase. The first part of that phrase is the two words, "dark clouds." The reason I selected that image is because, well, two things jump out when I think about dark clouds. The first is, they're dark. There's some worry out there. You and I are just sitting on our porch, sitting in our rocking chairs with lemonade, and we look aout, and one of us goes, "Whoa, those are some dark clouds out there on the horizon." We both see them because it's the prevailing view, dark clouds. It's when prevailing view is full of some worry. That's what "dark clouds" means to me.
When we're applying that to the stock market -- let's just take an individual company, let's take a company like, well, back in the day, let's go with Marvel. There were some dark clouds if you were an investor in Marvel or researching the stock back in the day. I'm thinking about 2002, 2003. This is 15 years ago, but it wasn't really that long ago that superhero movies started to become popular, and that first Spider-Man with Tobey Maguire was a big hit. But there was a lot of concern that superhero movies might just "be a fad." Can this really continue? Could a Spider-Man 2 actually do well at the box office after Spider-Man 1? To say nothing of a Hulk movie, let's say, or the Avengers or the X-Men. Could this really continue making money one year after another? Some people, who had more of a historical viewpoint, said, "Hey, what about those Superman movies back in the '80s or '90s? What about some of the Batman movies that didn't do that well?" That looked like a fad, looking backward. So, there were some dark clouds on the horizon for Marvel shareholders as actively, the market questioned, pundits questioned the idea of whether superhero movies could really, year after year, sell tickets.
That's the "dark clouds" part of the phrase. The next part of the phrase I want to break down, part No. 2, is the phrase "I can see." "I can see," for me, refers to the pattern recognition that you or I develop over the course of our lives. Some people call it horse sense, intuition, going with your gut. In my experience, it's not really an emotional state so much as it's a, "I think I've seen something like this before, so I think I'm developing pattern recognition."
In my experience as an investor, to map it right back to investing, once I see dark clouds enough, I start to be able to see, I think, more than just the dark cloud itself. I can relate it to past examples or contexts. It's something that I can see. Now, I've developed pattern recognition, but this isn't about me, this is about you. You have pattern recognition, too. You see different things than I do. I validate and affirm your viewpoint on things. Each of us has developed, over the course of our lives, based on our experiences and our wisdom, we start to see things and we start to think, "I've seen that thing before." I call that pattern recognition.
Now, the last part of that phrase is a keyword. That's just the word "through." Dark clouds I can see through. The "through" part refers to when something that the vast majority of people believe, you find yourself not believing. You're taking a contrary approach. Dark clouds, a lot of worry on the horizon, a lot of questioning about whether Marvel could really continue to make money. But you've seen this before and you see through it. You think, "I think that they can make money." In fact, at that stage for Marvel Comics, the company had largely heretofore been a comic book company. Part of the magic of what happened to that stock in the 2000s was that the company emerged and transitioned from comic books on paper -- kind of a dying medium, still out there but not an exciting medium -- to, all of a sudden, the silver screen, the cinema, the big picture, telling big superhero stories on big IMAX screens.
As an investor, if you bought Marvel -- I know some of you did -- you have been greatly rewarded. That stock is up dozens of times from our initial recommendation in Motley Fool Stock Advisor in the summer of 2002. In fact, it was acquired by Disney years later. We continue to hold Disney today. We've all done really well. But I'm putting it out there right here with point No. 1, Blast From the Past, that the reason we've done so well is because there were dark clouds on the horizon.
Now, I've used Marvel as a quick example. I need to wrap this up and get to my next point, but I'll just say a few other examples. Amazon for years operated under the assumption, the belief, the prevailing worry, that it would never make money, that it was losing money, that it couldn't possibly make money with its e-commerce business. And as Amazon has become one of the biggest most successful companies in the world, it turns out, I don't think that was right. Do you? Tesla for years has operated under the assumption that the company could not make money with its electric cars, even the idea that electric cars would be out there on the roads in force years ago when Elon Musk first came to Fool HQ in the fall of 2011, it seemed questionable. These days, of course, fast-forward to 2019, it seems every car brand -- I saw some Super Bowl commercials over the last weekend -- is letting you know about their new electric version that's coming out. The big dark cloud that I was able to see through when Musk came through Fool HQ in 2011, he said at the time, "We're the third most shorted stock on the NASDAQ." In other words, it was very popular to bet against Tesla in the fall of 2011. The Model S was only a recent thing. Model 3 hadn't even been discussed or described at that point. But when I saw Musk with all of his success with PayPal, and he was helping run Space X as well, and had a hand in SolarCity, and there he is with his vision and a beautiful car, the Tesla cars that were coming out, and he was the third most shorted stock on the NASDAQ? Haters and doubters out there, questioning ticker symbol TSLA, that was, again, a dark cloud I thought I could see through.
Each of those companies -- Marvel, Amazon, and Tesla -- are not only among my biggest winners, but specifically, I believe they win because so many people doubt them not just at the start, but often for years.
To close it out here, the dynamic that happens is, eventually, those doubters become believers. They finally click on something on Amazon and buy it, and then later find themselves signing up for Prime. Even though they doubted the company a few years before, all of a sudden, they're a big fan of the product. The company itself, we all start to assume that's going to work out. And, in fact, it has. As those doubters, the skeptics, become believers, they become shareholders, and that's really what drives up the price of great stocks over years and years. It's those dark clouds that are on the horizon at the start that you and I can see through. We're willing to be wrong sometimes, by the way. Sometimes we get it wrong. But when we get it right, those are our biggest winners. So, again, from the February 17, 2016, podcast for Rule Breaker Investing, Dark Clouds I Can See Through, that's the heart of the point.
Alright, Blast From the Past No. 2, how to follow any number of stocks. This one comes from the April 5, 2017, podcast, Old, New, Borrowed, Blue. This was the old point that I'd made, because I'd made it before. And yet, it's been a couple of years, so I want to make it again here on Blast From The Past.
A lot of you have gotten interested in buying stocks directly. I'm so glad you have. I'm so glad you've found us and that you understand that. Many of you have benefited materially, in some cases dramatically, from buying stocks directly along with us for 10 or 25 years, as long as The Motley Fool has been around. I know I have a lot of people who are already believers, and they put that belief into action in their own lives and materially benefited. I think it's one of The Motley Fool's dark clouds that we can see through, a lot of people think you can't beat the stock market. And yet, I think we've demonstrated consistently that of course you can beat the stock market. Just like you can beat average in lots of other things in life, whether it's shooting three-pointers on the basketball court or being a better-than-average doctor or lawyer, there are lots of better-than-average stock pickers out there. Welcome to the club!
But, if you are buying stocks directly, often the question -- we get this on mailbag from time to time -- "How many?" How many stocks do you need to own? The Motley Fool will come out with a service and say, "Hey, here are 20 new stocks we love." And people wonder, "Should I buy 20 more stocks? What's the right number of stocks in a portfolio?"
Now, this is a truncated point from my April 5, 2017, podcast, so I'm not going to go over it all again. But I am going to give you my simple framework for how to follow any number of stocks. Regardless of whether your portfolio is, I would hope, 20 stocks at a minimum once you've gotten a maturing portfolio. A lot of people start at zero. When they buy their first stock, they're at one. We'd love for you to get to 15 or 20 as quickly as possible. Once you start going beyond that -- 35, I have about 55 stocks in my family portfolio, some of our members have hundreds of stocks -- here's how to follow any number of them. You put them in three buckets.
Bucket No. 1 are stocks where you have 5% or more of your portfolio in that company. By definition, you could never have more than 20 of these because if you have 20 stocks each allocated to 5% of your portfolio, that would be the maximum number of stocks you could ever have as 5% positions or more. I have a few in my portfolio. Most of us might have a few outsized positions. To those companies, I suggest you give extra time. If you're somebody who enjoys, after a busy work week, settling down on the weekend at some point and doing little stock research or catching up with your portfolio, I suggest you put extra time into looking at those companies. Any time you have serious money invested in a few companies, you should have your feelers up and you should be deeply interested in those companies -- what they're doing, what they're thinking about doing, who's running them, what the industry is like in which they operate, who's the innovator, are they being disrupted. These are the companies that you give extra time to, whatever extra time for you means. Each of us has our own context.
The second category, the second bucket, are stocks that occupy 1.5% up to 5% of your portfolio. Smaller positions than those big 5% or plus, but still, 1.5% to 5% of your portfolio. For those, I call that regular time. The first category was extra time, this is regular time. If you have a bunch of these, I think it's probably worth checking in on the quarterly earnings reports for these kinds of companies. It would be good to be tracking what they're doing. You're probably going to have 10 or more positions like this in a mature portfolio. Whatever regular time means for you, you should be committing regular time.
That, of course, takes me to the third and obvious final category: stocks that you have less than 1.5% of your portfolio in. That might be, for some of you dozens, maybe even 100-plus for some really big portfolios out there. If the first category was extra time, the second was regular time, I call this one downtime. The truth is, if you only have 1% or less of your portfolio in something, you probably don't need to spend much, if any, time tracking them on a regular basis.
Now, for some of those, you might be thinking, "Well, I only have 1.2% of my portfolio in that stock, but I really like that company. I'm trying to build that position." If you aspire to make that a more important company, it might leave the downtime category for you and become a regular time stock. Conversely, if you've had a lot of your portfolio in a stock that's doing poorly, it might drop from the extra time category back to regular time. If you hear me on the framework here, we're talking about how you spend your time and we're just matching the time that you spend to the expected impact, importance, and reward that you're going to get on your portfolio overall.
I think the trap to avoid is, many people get too in the weeds. If they have a lot of time, they spend way too much time looking over relatively inconsequential positions. On the other hand, some people who have a very focused portfolio don't spend enough time looking at those really big positions. So, Blast From the Past point No. 2 just reminds us to suit the time and energy that we have to the expected outcomes.
All right, now, Blast From the Past item No. 3. This podcast was entitled The YODA Method of Measuring Management. Of all of the ones we're covering, this is the oldest. I did this on January 20 of 2016. In it, I use YODA not as the beloved Star Wars hero, but instead, this is an acronym for four letters that I suggest are helpful in assessing management.
Why did I do this podcast three years ago in January 2016? Because a lot of questions were coming in. "If you say," and I do, "if you and your brother and the whole company The Motley Fool says it's really important to see the character and the intelligence among the leadership of each company," like who's the CEO, who's running these companies? "If you guys are really emphasizing the importance of that," it's a natural question we get all the time, "how do you actually know whether these are good managers or not?" What are a few attributes that we look for in successful CEOs, the kind that you and I as Rule Breaker investors particularly might be looking for? So, we get to YODA, the YODA method for measuring management.
It's an acronym, four traits. The letter Y, first one up, is Youthful. Now, I'm the first to say -- and I'm 52 years old, I don't think that qualifies as youthful anymore -- I think at almost any age, you and I can be spectacularly successful and have great input and impact on the world at large. In my own experience, based on my pattern recognition, as I mentioned earlier, a lot of the greatest Rule Breaker companies, stocks that we buy and hold for long periods of time, have been started by youthful people. Think of Bill Gates. Think of Steve Jobs. Think of Mark Zuckerberg. Each of those three gentlemen was either 20 or 21 years old when they started three of the largest companies in the world today, all during my lifetime, probably yours too, unless you're much, much younger than I am. We've all watched those companies -- Microsoft, Apple, and Facebook -- grow up to be behemoths. And in every case, they were started by, actually, college dropouts, but people who were very young.
Just like some of the best talent in sports --his happens every year in college basketball -- often, the top draft pick in the professional draft each year in basketball is a freshman. I think that reminds us that truly talented, like superhuman talented people, those traits show early in life a lot of the time. LeBron James, arguably the best basketball player of our time, who did not even go to college, he went straight from high school to the NBA -- and, oh, lookie there, he's one of the great basketball players of our time, and he skipped college altogether. He entered the NBA at an incredibly youthful age. I already just mentioned some examples of entrepreneurs who've done this with companies. So, yeah, YODA, for me, starts with Youthful.
Again, you don't have to be youthful. I sure hope, at the age of 52, that I have a lot of years ahead of me to help The Motley Fool grow. I hope that I've added some value. I bet that's true of you and your business. But when we're looking at Rule Breaker stocks, companies that come public, I love to find really youthful managers in part because not only did they have the vision to get that young company to the state of being able to go public, which is a hard thing to do anyway, but it also means they'll be around for years and years, which makes people who like to buy to hold stocks for the long-term -- like so many of my fellow Fools -- it makes us very happy to be able to think, "Jeff Bezos is going to be around for quite a while longer, even though it's been a great first 20 years." So, Y for Youthful.
O is for Owner. This one's pretty straightforward. We like managers who own the stock. They probably own a good amount of stock in their own companies, especially if they're the founder of their company, unsurprisingly, they're probably the largest shareholder. That's true of many of these kinds of companies. I've already mentioned some of those types. We like to see that people are owning their stock. It makes me feel much better as a casual mom-and-pop investor -- which is what I am -- when I see that the CEO, somebody like Reed Hastings, owns a significant amount of Netflix even though, as Netflix or a company like it grows over the course of time, they tend to get whittled down and they don't have as big of a position, and big institutions move in and start buying parts of the companies. Then, these managers are told by their financial planners, "You have to sell off some of your Netflix stock, you're way overweighted in that stock," these kinds of things. But for the most part, we want to see these managers, good CEOs of Rule Breaker companies, owning the stock that they are helping manage. So, Y, Youthful; O, Owners.
The D is for Delivers. There's really no substitute, at the end of the day -- a phrase that I've learned to try not to use. In fact, it was one of my fellow listeners' pet peeves. You know who you are. You said, "The phrase 'at the end of the day,'" and you're right, so I'm in some ways embarrassed that I just used it here on this podcast! [laughs] But, I'll just say, after all is said and done, it's the people who deliver real-world results in this world that you and I are going to feel most comfortable investing in, probably have our most successes with. It's one thing to have great ideas. Pie in the sky, build a castle in the sky up in your head as a thinker. But it's the doers, the people who can translate potential energy to kinetic energy and create real profits.
A company like Snap is a really impressive thing, the way it grew like a weed and went public at a pretty high valuation, but it's a stock I've never recommended because I never felt comfortable enough that those managers know how to create profit. And, indeed -- I think the company reported earnings this week, I haven't seen them yet -- it's been a really bad few years on the public markets for Snap. So, in a way, for youthful managers who are delivering, even just bringing a company public is hard enough. That represents a form of delivery. Certainly, people love Snapchat. A lot of people use it, a lot more people than use The Motley Fool, so that's very impressive to me. But at the same point, when all is said and done, you need to deliver profits; otherwise, you're not going to be in business over a long period of time. You're not going to be creating successful stocks, which is what we're looking for on Rule Breaker Investing. So, it's really important for me. I'm happy to look at development-stage companies. I've even done some venture cap investing myself. But our best stocks are always going to be when the CEOs can deliver.
And then finally, the letter A is for Ambitious. I love ambitious people. The word ambition often has a negative connotation associated with it. "Oh, she's ambitious," we say, looking askance. But the truth is, for people who want to make real-world impact -- take Jeff Bezos, to go back to him again, who said early on in Amazon's initial documentation and on their website, he said, "We want to be Earth's most customer-centric company." I think over the last 20 years or so, they've done a pretty good job making a strong argument that Amazon is Earth's most customer-centric company. Whether you agree with that or not, you and I can both agree, that's an ambitious statement.
If you put our four letters together -- Youthful, Owner, Delivers, Ambitious -- especially when you take that D and A, people who are ambitious and deliver, no surprise, those end up being some of the best CEOs of our time, the stocks that you and I want to buy and own together for long periods of time as Rule Breaker investors. So, there in a nutshell is my YODA method for measuring management.
I should mention, of course, that any time we use an acronym or I truncate a point on a Blast From The Past podcast, it risks over-simplification. Of course, there are many other traits or factors. Some of the ones I just shared with you can run amok in other situations. Sometimes youthfulness isn't a benefit, it implies lack of experience. That can show up in corporate results, as well. Almost any one of the things that I say here, there are some good examples that might disprove this point. But I'm giving you a framework that I've used and I think you can use, even though it is over-simple.
All right, I've got two more Blast From the Past points. Of course, I tend to always save my best for last.
Blast From the Past No. 4. This one first came to you in October of 2016, a month or so before the elections of 2016, the U.S. presidential elections here in the good old U.S. of A. I was talking on that podcast about the importance of bringing people together. Bringing people together. What does that at so many organizations across not just this country, but the world? Whether you're for profit or not for profit? A lot of us go through this exercise: you decide, what are our core values? What are the core values of The Motley Fool? Most Motley Fool employees could tell you, most of them -- we might even change them up a little bit in the year ahead. We're always taking a look, trying to refresh things when they deserve it. So, occasionally, your core values can evolve over time. But for the most part, that core values exercise, which I know so many of you have been through if you serve on a board or if you've started an organization, you go through that process. It unites and aligns your team around the values that will drive your behaviors and get you the success that you're hoping for.
I was saying back in October 2016 -- I feel just as strongly about that here in February of 2019 -- that there's a wonderful exercise we all can do as fellow patriots, in this case of the U.S.A., but this applies to whatever country you live in. I think it's to ask yourself, what are the core values of our country? We live at a time here, at least in the U.S., where people are constantly talking about it. In fact, I want to make a quick point about this in a sec. People are constant saying, "We're so divided. We're a nation divided. Not only can we not say things to each other anymore, if we're opposed, we can't even look people in the eye." I'm going to say at this point, I'm calling it right here on this podcast, I'm saying we're at peak that. I believe that we've reached peak everybody saying, "We're all so divided." We'll see if, a year from now or so, the pendulum swung back a little. I predict that it will, just because in so many contexts, I'm constantly hearing my fellow Americans say, "We're so divided."
Now, the truth is, we're so united. Every day here in the U.S., we make this country work and work pretty well. In fact, one of the great countries in all of history. And especially in the business world, every day, we're buying and selling from each other. We're co-creating value. And the only reason the stock market keeps going up year after year -- and I'm not just talking about an eight-year bull run, I'm looking at the last century, and then I'm looking forward at the next century -- is because we continue to work together really well. We may have different viewpoints, we may have different attitudes about what the price of that thing should or should not be. It's not that we all think the same thing. No, in fact, it is the pluralism, it is the pluralistic nature, especially, of the United States that makes it work so well.
That's why I think it's important to think about what are our core values. I'm going to really briefly, as I close down this point, I'm going to give you what I think are the five core values of the United States of America. But I'm the first to say, as I said on that podcast on October 26, 2016, I'm the first to say the important thing is the exercise itself. It's asking somebody, as you sit next to them at the theater or in a sports stadium or at a bar, you could just ask them, "Hey, what do you think are the core values of the United States of America?" It gets us talking together about what we value together. We might not even agree on those things, but at least it's a productive conversation and it's an aligning conversation.
I felt it was important three years ago, at a time of some divide -- again, now apparently, we're so divided that it seems even more important, even though I'm calling peak divide on this podcast this week -- but let me just go over quickly the five values that I saw.
At some point in the summer of 2016, I went up to the mountaintop, I thought hard about it. Then I came back down, I started kicking it around with my friends. I was like, "Do you like this one?" "No, I think there could be a better one." So I co-created this with some of our community. But here are five values that I believe stand strong and tell the story of America. Please go through the exercise yourself for your country, the U.S. or the United Arab Emirates or Australia or wherever you are. What do you stand for in your country?
Here in the U.S., in no particular order, I go with liberty, because I think freedom was the very start of our country, a desire for freedom. The U.S. has done a great job preserving our freedoms for a few centuries now. I think that's a really important underlying cultural trait of the U.S., liberty. The second is enterprise, because after all, it is business that more than anything has brought America to great prosperity and continues worldwide to get people out of extreme poverty. It is microcredit and lending. It is getting a little bit of capital, it's starting businesses. Businesses are what create jobs, so enterprise is a big part of America. Even though we hear a lot these days about questions about whether Facebook is a good company or not, or whether people really appreciate capitalism as much as they should today, I think it's so evident that enterprise is all around us, and it's a wildly, wonderfully good thing. Most other countries in the world aspire to be the enterprising country that America is.
No. 3 is justice. I view justice as everybody being treated fairly. That means different things in different contexts. I think it is a strong court system, it's good laws, and it's things that recur over time, that don't change radically from one decade or administration to the next. Justice, a big part of America. No. 4 and No. 5 are resilience and kindness. Those are my last two. I think resilience is the story of any democracy that survives 200-plus years and has been through as many wars as America has. I think we prize, whether it's in our military or in our sports, we love resilience. I love resilience as an investor. I love stocks that I can buy that evolve, sometimes they get hit in the face, get a bloody nose, but over the course of time, they're resilient and they keep growing. They're anti-fragile, resilient companies.
Then, that last word, I think, is really important, and it's kindness. I think that's always been a part of the American story. Americans, especially, are one of the most generous nations in the world. The amount of charity that's available in United States of America is the envy of the world. And yet, I still feel a lot of us could be even more generous than we've been. It's kindness toward immigrants to our country, it's kindness toward each other, it's shaking hands even when we disagree.
So, as I put those five together -- liberty, enterprise, justice, resilience, kindness, -- that's my best shot at describing what I believe are the core values of our nation. You might have a better one or a different one. In the end, as I said at the start, it's about the conversation and the aligning aspects of that conversation. You know, we had a great interview on this podcast in May of 2017 with Nick Epley, the author of the book, Mindwise. Nick was saying, "Here's a great thing. Anytime you're starting into a political or dicey conversation, or somebody who has a very different viewpoint from you, rather than question them, or God forbid, attack them in some way, shape, or form, how about ask them this question," Nick Epley said. "Ask them, how did you arrive at the conclusion that you've reached? What are the steps or experiences by which you've arrived at the conclusion that you have?" That's a very productive and interesting question. Sometimes you'll discover amazing stories that people have been through or had that explain their viewpoint. Sometimes you discovered they don't have much behind that viewpoint. It can be a really unlocking mechanism for other people, when you ask them that question.
All right, there you go, America's core values.
Now, finally, Blast From the Past No. 5. I said best for last. I think this is the best, I've saved it for last. This one is straight-up about investing. In fact, maybe my favorite podcast or the most impactful one I intended all last year, 2018, occurred on September 19, when I introduced six ways to invest, six hows of being a Rule Breaker.
For years -- in fact, now a couple of decades -- I think our book was 1998, Rule Breakers Rule Makers, I put out six traits that we look for in our stocks. If you're a longtime listener of this podcast, you know it's things like top dog and first mover in an important emerging industry. That's trait No. 1 of the six traits of Rule Breaker stocks and companies we're looking for. But last year, I decided, that's not enough, is it? If you or I find a great company like Netflix or Marvel, but you decide after you've made a 20% gain to flip it and trade it into something else, then great stock picks won't translate into great results unless you and I are guided by a few bedrock principles of how we invest. So, again, the six traits of Rule Breakers are the six what's -- what we're looking for in companies. These six traits are the how's of how I think you should invest as a Rule Breaker investor.
I can go through them pretty quickly right off the top of my head because part of the way I made this list was to make it a mnemonic. Each of these six traits that I'm hoping you as an investor share, each of them has the number of the trait, that word is somewhere within the trait. It makes it easier to remember. Let me now demonstrate that for you.
Rule No. 1: let your winners run high. That's the first thing we look for. If you really want to be a big-time successful long term -- the only term that counts, the long term -- player in the markets, you're going to let your winners run and you're going to let them run high. That's in a world where so many people, once the stock doubles, they'll say, "I'm selling half and keeping the rest. It's the house's money," which it isn't, by the way. It's your money. But there are lots of silly reasons people create to not let their winners run and they're really hurting their long-term returns by not letting their winners run high.
No. 2: add up, don't double down. That's our way of saying, if you have new money, tend to add it to existing positions or stocks, companies that are thriving, that are going up, that are doing well; not the ones that are nose-diving. Don't double down. In my experience, you're often not rewarded for, as we say, throwing good money after bad. I like to add to my winners, not my losers. That's No. 2.
No. 3, simple: invest for at least three years. Anytime I'm talking about stocks on this podcast, most of our work here at The Motley Fool for a few decades now, is premised on the idea that any stock pick that we're making or stock we're talking about, we're thinking about it at least three-plus years from now. Again, the average mutual fund, the managed mutual funds of our day, tend to fully flip over their positions in a single year. Whatever your favorite managed fund started with this year on January 1, chances are, 100% of those positions will have turned over by the end of this year. Churning, it's really bad behavior by fund managers. It creates lots of capital gains taxes if they succeed for the investors who own the funds. Each year, you're having to pay a lot just in capital gains taxes when that works. But most funds tend to underperform the averages in part because they trade in and out so much. That's why No. 3 here is invest for at least three years.
No. 4: remember the four tenets of conscious capitalism. I don't have time to summarize them here right now. We're running out of time. I'll just say Google "conscious capitalism" and read about the four tenants, the bedrock foundational points, that make for great business. Companies that practice conscious capitalism -- and full disclosure, I'm on the board of Conscious Capitalism Inc -- companies that practice conscious capitalism are among the most resilient, strongest, most successful companies in the world today, in large part because they're succeeding for all their stakeholders. They're not just doing well by their shareholders, not just doing well by their customers. They're treating their employees well, their partners and suppliers love them, they're probably really good for the environment and/or their local community. They're creating win-win-win-win-win among all their stakeholders. That's at the heart of conscious capitalism.
Points No. 5 and No. 6 to close. No. 5: max 5% allocation. That means, if you're going to buy a new position in your portfolio, never put more than 5% of all of your money in that one stock. In our experience, too many people load up, especially early on as investors. They put way too much in one stock and they end up creating a lot of stress for themselves. Even if they succeed, they create a lot of stress for themselves because now you've succeeded and you have a whole bunch of money in a single stock. That's why we like those diversified portfolios. This Blast From the Past hails back to something I said earlier when I talked about point No. 2 earlier, how to follow any number of stocks. We looked at that 5% number. That helps you remember point No. 5.
Finally, No. 6 is, aim for 60% accuracy. What we mean by that at The Motley Fool, we use the term accuracy to describe when you pick a stock that beats the market averages over the period of time that you hold that stock. For example, if you picked a stock and it's up 25% in the next three years and the market's up 22%, we would say you were accurate because you accurately forecast that stock would beat the market. Why is that important? Well, you could have just bought the market through an index fund. If you're going to invest directly in stocks, you should be trying to beat the market. Our aspirational aim is a 60% hit rate. 60% of the time, it'd be nice to think you and I could be beating the market. That also has you focused on trying to be right more often than not, not doing crazy stuff or taking crazy risk but trying to be smart as you pick and add each stock to your portfolio. So, aim for 60% accuracy.
What I want to say in closing is, I'm not sure that I myself have consistently hit 60% accuracy over the course of my investing career, but it's the act of going for it that helps us do even better. We've proven at The Motley Fool that you can have accuracy of about 50%, which might sound like a coin flip, except that the winners do so well, and the losers, by contrast, are such a small part of it -- since a winner can go up 50X or 100X in value and the biggest loser you could ever lose would just be all of your money, losing 1X, when you can make 50X. You can see why the math works out wildly in our favor, even if we're only right about half the time. But, we should be trying to do better than that.
So, one to six really quick in closing. I'm going to double-underline this because this is the most important thing you heard this week on this week's podcast. By the way, if you heard it before in September, I'm really happy to say it again because I want the whole world to know. Rule No. 1: let your winners run high. No. 2: add up, don't double down. No. 3: invest for at least three years. No. 4: remember the four tenets of conscious capitalism. No. 5: max 5% allocation into new stocks. No. 6: aim for 60% accuracy.
Well, thanks a lot for joining me this week on this year's Blast From the Past. The last time I did this was January of last year. This is probably a once-a-year thing where I like to hit back at the eternal verities, put them back out right in front of our audience, new and old.
Quick reminder in closing: all five of the points I made are from five past podcasts. Each of those is linked in our show notes if you want to go back and drink it all in.
Next week, you already know, we're going to be talking baseball and investing. I know not everybody likes baseball. I certainly hope to make it interesting to you whether or not you like baseball. With my new friend, I'll be sharing with you next week, we'll be talking about the life of a pitcher and the life of an investor, and that can be the same life.
In the meantime, have a great life! And 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.