If it's the last week of the month, then it's time for Motley Fool co-founder David Gardner to respond to his listeners' questions and comments.
In this episode of Rule Breaker Investing, those run the gamut, from how to gauge when a great company's valuation really is too high, to how to tell whether one meets your conscious-capitalism standards. Should you buy more international stocks? Should you ever buy preferred stock? Gardner will address all those topics and more, with the help of a number of special guests.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on July 31, 2019.
David Gardner: We did an episode earlier this month entitled "Where Were They Then?" -- the valuations of so-called overpriced stocks that went on to rise more than any others. Questions back on that. We always talk about investing in allocation and so-called ESG investing. Questions back on that. And should you text from a car at all? Even at a stoplight? A question on that. And more questions, questions and our best answers. It must be the Rule Breaker Investing mailbag. You bet! This week on Rule Breaker Investing.
Welcome back to Rule Breaker Investing! It was quite a month for RBI. This is our fifth podcast. That's right. That means this is one of those rare months where there are five Wednesdays. And in the first four, we did a Reviewapalooza to kick off this month, looking back at 15 stocks, three separate five-stock samplers. Side note: the longest podcast I intend ever to do as part of Rule Breaker Investing. Significantly more than an hour. I hope you loved it! We did talk about more than a dozen stocks. Presuming that's one reason we tune into Rule Breaker Investing every week, I hope you loved that. We went on from there to do the "Where Were They Then" look-back with my friend Jim Mueller, looking at some of our best stock picks ever at The Motley Fool and I hope in your portfolio, too, and seeing just how truly "overpriced" those stocks were when we first picked them, and yet they went on to be the best. We also had Victor Hoskins on here who helped land Amazon's HQ2 in Northern Virginia. We talked about real estate investing with him and Matt Argersinger. And then last week, I got to share some of my thoughts having spent a few weeks in China and Hong Kong. Lots back on all these topics, so a lot to think about this mailbag.
As usual, I'll be joined by a few guest stars at different points through this time together this week. Really looking forward to having them back, including Jim Mueller to talk more about where were they then, which was a significant source of questions we got this month.
Before I go to our very first question, I do like to often lead off with some hot takes from Twitter. I've got some share-backs here. @BrandonVanZ said, "OMG I love this China episode, David. Admittedly, my favorite takeaway was 'buy more Starbucks.' But there were so many joyful moments in this podcast, my brother and I traveled to China for a month back in 2007 so you had me laughing out loud about the personal space and the photo bits. Entertaining." Well, thank you very much @BrandonVanZ!
My friend Jason Newman @JNew4 on Twitter. "Thanks for the awesome China perspective @DavidGFool. Sparked a heightened curiosity for me. Also couldn't help but think that the Chinese would love the Chicago Cubs. Why? Well, the first-ever night game at Wrigley Field was played on 8/8/88, and the pushing and shoving in the building, my goodness." Well, Jason, I don't know if you were there that night. But I did check in with my friend Wikipedia just to double check that fact, and indeed, it does look like August 8th, 1988, after thousands of games over decades, Wrigley Field finally hosted its first night game. So you're right, 8/8/88. And I do note, assuming Wikipedia has this right, that somewhat hilariously given the Cubs in their fortunes, that special first-ever night game was rained out after 3.5 innings. Anyway, thank you for flagging that, Jason! If you are a Chinese national and you're looking for a baseball team, I would suggest to you the Chicago Cubs. Lucky numbers.
This next one from @Akhmed_Awame. My friend Akhmed, good to hear from you again. Akhmed, you said, "I enjoyed your podcast on China. Appreciate the positivity that most Westerners lack. Please go on go to Russia next year." [laughs] Well, we'll see about that. Thanks, Akhmed!
Speaking of our interview with Victor Hoskins, I got a number of notes about that. @NatePurdum sums it up pretty well when he said, "Always great to hear @DavidGFool and a special treat to hear @MArgersinger for the first time since #ILostToMatt. What resonated with me was Victor's approach. Start with what problem you're trying to solve. Good to hear others outside of my org use the same approach."
And finally -- again, among many exchanges on Twitter @RBIPodcast, this podcast's Twitter handle, among many exchanges was this one from my friend Austin Lieberman, @AustinLieb, who at one point in July said, "I never imagined my investments making more dollars in a single day than my wife and I make in a month combined. That's the power of #investing and #compounding, @themotleyfool, @stockadvisor, @rbipodcasts are fantastic places to start." Thank you very much, Austin! Coming from you, that means a lot!
Really happy to close it out on Twitter this week with what you received back from @TheAnimal23, who went on to tell you, that's far from bragging. @TheAnimal23 wrote, "It's inspirational and something for us home gamers to aspire to. The best part is, you show us that we don't have to be a professional or have an MBA to achieve this. That's why your message is so important to us. Please don't stop investing or teaching, whether you're Austin Lieberman or anybody else out there."
I know a lot of our listeners and a lot of Motley Fool members do additional volunteer efforts in their communities, in different contexts, in and outside their families, to spread the awareness of the power of investing and compounding, patience, finding great companies. I know we'll be talking about that a little bit more this hour. But it's such a pleasure just to see the interchange among different Motley Fool members and podcast listeners, and to see how we inspire each other. Thank you for a really fun month!
All right, Rule Breaker mailbag item No. 1. This one comes from one David to another. I am going to mention, we all have unconscious biases. And here at The Motley Fool, part of our culture, if you come to work for us one day, you'll probably go through a workshop about that. And you might be doing that or already have done that in your own place of work or outside of it. It's really good for us to be aware of our unconscious biases. It's also good for us to confess our conscious biases. Here's one of mine: If your first name is David, you probably have a slightly better chance of being featured on mailbag because, because.
This one's from David Laurier writing from Canada. "David G. From one David to another, thanks for the great work you do on the RBI podcast. I'm a regular listener from Ottawa, Canada and a Stock Advisor member. I really enjoyed your recent podcast about China, but wanted to respond to your point about countdown timers for traffic lights. First, no need to go to China to see these. Just pop up from your nation's capital," here in Washington, D.C., "to ours," which of course would be Ottawa, "and you'll see such timers on almost every corner. As you pointed out, this technology provides a great way to know when the light will be changing from green to yellow, allowing you to drive smarter and hopefully safer.
"With safety in mind, I wanted to suggest one thing to you. You pointed out that this knowledge of when the lights will change could be very handy to allow drivers to send text messages when stopped at a red light. Perhaps the laws in your state or the United States in general are different, but in most places in Canada, it's simply against the law to use your cellphone via hands while driving, including when stopped at a light. When all your attention is focusing on your phone, it's not focused on your surroundings."
It goes on from there, but, [record scratch sound] let me and this podcast make it very clear: do not text from your car whether you're in the U.S., Canada, or China, even when you're at a stoplight. Public service announcement triggered by my new friend David Laurier. David, thank you for writing in!
I want to mention, I have been to that beautiful capital city. Took my family there years ago to see Winterlude, which is at the height of the wintry cold season. At the time, I'd understood that Ottawa was the world's second-coldest capital. The undisputed coldest country capital in the world is Mongolia's Ulaanbaatar. I thought that Ottawa was second, but it turns out, at least from theworldatlas.com Google search I made, you're actually seventh. It gets really, really cold in Ottawa in the winter, but I guess they do the coldest capital over the course of the whole year. It's just the average temperature over the whole year. So, Moscow and a few others outrank you. Anyway, Chateau Laurier was a beautiful destination, and I esteem Ottawa and its stoplights and safe driving. Thank you, David Laurier!
All right, Rule Breaker mailbag item No. 2. Oh, my golly, look, it's Jim Mueller! Jim, welcome!
Jim Mueller: Hi, David! How are you doing?
Gardner: I'm doing really well! Now, Jim, you and I have gotten to know each other over the course of a decade or so working together on Motley Fool Stock Advisor. But a lot of others have gotten to know you as a voice on our different podcasts, including this one just a few weeks ago, when we did "Where Were They Then" together.
Mueller: I was here for that. I was here for a couple of others. I was in a recent MarketFoolery.
Gardner: Yes, indeed. I enjoyed that as well. I listen to pretty much every MarketFoolery. That's my drive over and back to Fool HQ each day.
Jim, we got a number of questions, as we probably would have expected, coming out of our conversation about "Where Were They Then." I did summarize it briefly earlier. But the purpose of that podcast, I hope everybody listening has already heard that one from a few weeks ago, so I'm not going to summarize, but we were asked by our listener Darren Pryor from Australia to look back at some of our earliest great picks and look at the valuation metrics that they had. You and I know that in general, they looked "overpriced" or maybe "insanely overpriced" back then.
Mueller: That is true. I do like to point out that is one of your Rule Breaker metrics, is that Wall Street thinks it's overpriced by traditional metrics.
Gardner: That's absolutely right. That is No. 6 of the six traits of Rule Breaker companies. No. 6, which is the special sauce, is that everyone thinks it's overvalued. That's actually a really important bullish indicator for us. I know that's ironic, especially if you're the Darren Pryors of the world, who were raised thinking differently. And we respect Buffett and Graham and other schools of thought. It's just that this is the Rule Breaker Investing podcast and that's how we roll.
Mueller: Sure. To be fair, most people are introduced to investing by the value side, Buffett's and Graham's and buy $1 for $0.80 if you can do so, and all that. And that's fantastic. But there are many ways of success in investing. The Rule Breaker philosophy is, as you've shown over the past 15, 20 years, is certainly one way for really good investing results.
Gardner: Thank you, Jim! You're reminding me to mention before I share Rule Breaker mailbag item No. 2 that The Motley Fool launched on America Online. We started in 1993 as a newsletter, as I've often said, just for our parents' friends. They were pretty much the only ones willing to pay us $48 to get us started. But about a year later, we launched on AOL, early days for this medium. It was August 4th, 1994. Day one for keyword "Fool" on AOL. We put $50,000 of our own real money in an account and said, "We're going to invest this right out front of America Online at the time. We think you can beat the stock market; we intend to show that." And that anniversary 25 years later is this upcoming week. Fun to think back on The FoolPort, how The Motley Fool launched. It was 25 years ago this week with that Rule Breaker-y thought. In fact, one of our first buys that first day was AOL itself, which went on to become a 150-bagger at its height over the next five to six years, which looked overvalued to many people all the way up.
All right, well, here it is. And Jim, this one comes from our friend Darren Pryor. He writes, "Hi David and the fantastic crew at MF. Just wanted to say how chuffed I was when I heard this week's podcast only to hear you dedicate an entire show to my recent email. I couldn't wait to tell my wife and kids, who were equally excited and who've consigned that episode to our family heirloom. In the unfortunate circumstance of my untimely departure from the earth, they have promised to play that episode at my funeral to promote the kindness of one David Gardner." Now, that is over the top Darren. I'm going to just urge Darren's family, please don't do that. There are so many more important and wonderful things to say.
Mueller: And may that possible passing be long in coming.
Gardner: Thank you very much! Darren goes on, "I very much appreciate the in-depth and thoughtful analysis that went into my question, which helped me immensely on the one hand, but also left me with another question on the other. Many of the examples you highlighted in the podcast -- Trade Desk, Netflix, Intuitive Surgical, MercadoLibre -- were indeed trading at 'nosebleed levels' back then. However, such price-to-sales ratios afforded to those stocks back then would seem today to be darn right cheap in comparison." He cites some cases in point -- companies like Zoom, Slack, Okta. He says his favorite, Beyond Meat, trading recently at 90-plus times sales. So, Darren presses the point a little bit further, Jim, and we're going to have a conversation now about it. At what point do such shares become just too expensive? If he can get 94 times sales for his business, he'd buy David Gardner, he says, his own personal Tesla factory as a thank you for my guidance. "Cheers, David and MF team. Darren Pryor, writing from the Gold Coast of Australia."
Mueller: Especially when value investors like Buffett, and one of my favorites, James Montier of GMO Capital now, say that buying something at more than one or two sales is outrageous. And I can certainly understand that. But a lot of it, I think, depends on what type of business you're buying. If you're buying Ford or GM at 90 times sales, run away!
Gardner: Good luck!
Mueller: I don't think it's ever been priced that high.
Gardner: Yeah, not anywhere ever, ever close.
Mueller: Right. But they're a big manufacturing company, so the price-to-sales ratio is good for that. But when you're a company that isn't asset-heavy, and a lot of the names you mentioned are asset-light and internet-enabled, they can generate a lot of revenue off of just a little bit of work and a few people. So, a higher price-to-sales multiple might be more warranted.
Also remember that the market is forward-looking in that it is expecting more of these companies going forward, and the company is expected to grow its sales at a healthy enough clip to justify such a high price, such a high multiple.
Gardner: Jim, you and I are the first to say, we could be at a market top here in July 2019. It may be that two years from now -- I hope this podcast is still around, and if the market's been really weak, then we'll say, "Yeah, that was a little crazy there. Ninety-four times sales for Beyond Meat," which I think you and I both do think is crazy for Beyond Meat.
Mueller: Yeah. They really haven't proven their model yet. But for longer-standing companies where they've proven their model, such as Netflix, and they can grow their sales 20%, 30% a quarter, year over year, quarter in and quarter out, they probably are justified to have a higher price-to-sales ratio. Then the debate becomes how high or how low.
Gardner: Right. And that's where we are right now. And certainly, when interest rates are very low, that's always going to raise up the price per sales, price per earnings we're willing to pay for stocks, Jim, because if we're getting like 1% from our bank account, or just a few percentage points from our bonds, we're all going to say, "Well, I'd rather buy some stocks," and that's going to press prices up.
Mueller: That is definitely true.
Gardner: So I think part of what you're saying, Jim, is not all companies are created equal. Ford will, alas, never for Ford and its shareholders ever trade at probably even 15 times or 20 times sales, let alone 30 times sales. And yet, asset-light businesses can go very high, even though they might be too high right now.
Mueller: I'd like to mention one other point. Remember, all of these ratios are just shortcuts of the valuation -- price to earnings, price to sales, EV to EBITDA, whatever metric floats your boat. It's just a shorthand to a valuation. An investor should hopefully be looking at the company and understand the company, how it makes money, what levers it can pull, and where it might grow, and what its optionality might be, and thus get a better sense of what is possible with the company, and whether that high multiple might actually be warranted, or a bit on the stretch side, or even blowing-out-the-water overvalued.
Gardner: Absolutely. Jim, it reminds me to double underline that point about, I think, especially beginning investors, they're taught to look at ratios and then not have much nuance from one industry to the next.
Mueller: Exactly. Different industries will have different ranges of ratios that are appropriate for that.
Gardner: That's right. Here's a helpful thing to look at, Darren Pryor, and I'll add in James Chen, who sent in a similar note when he said, "As the episode played on, I found myself almost shouting out loud, 'That wasn't expensive back then!'" Indeed, a cursory glance at his own portfolio, James Chen says, "will show that many positions are trading in the price to sales of around 30, which was three times higher than Intuitive Surgical," which we featured in that episode a few weeks ago, which was the highest of the price of sales ratios of the ones we featured back then.
A helpful number that I think a lot of us should take a look at is, look at sales divided by number of employees. Jim lightly referenced earlier. Some businesses, to generate a billion dollars in sales -- let's say manufacturing, selling cars -- need tens of thousands of employees to do that. Other businesses can generate $1 billion in sales thanks to the internet and digital with only a few hundred employees. There's a huge difference between those types of businesses and therefore how willing we should be to pay up, Jim, or not for their stocks.
Mueller: Most definitely. And that, again, ties into the different types of industries that you're looking for, and what might be appropriate for one industry or one type of business or one type of business model is not appropriate for another. A SaaS company, a software-as-a-service company, probably is justified with a higher price-to-sales or price-to-earnings ratio than a retailer such as -- I want to say Le Bon Marche, but they're not public anymore -- Nordstrom for instance, or a car manufacturer, or a dam builder, a power plant builder.
Gardner: Yeah, infrastructure.
Mueller: Those all have their own different kinds of ranges. One thing that many people like to do there is compare companies to others in their industry, and see if one is mispriced one way or the other. But there, the assumption is --
Gardner: That they should all be the same.
Mueller: Well, that, and that the market has correctly priced all the rest. Maybe they're not pricing the rest correct and they priced yours correctly. So, be careful with that, too.
Gardner: Good. To close up, then I'll move to No. 3, I just want to say to Darren, to James, and to everybody listening, that I don't spend a lot of time guessing where the market is in its cycles. A lot of people who do have been consistently wrong. I say every year I think the market's going up. Good news -- I'm right two years out of three, which is a much higher batting average than most investment prognosticators. What I will say, though, is that we benefit from investing every paycheck, every month, in good markets and in bad. And often, you'll only figure that out years later. So, dollar-cost averaging with your savings and not guessing market cycles, or, are stocks high right now or not, for me, is not only a stress-free approach, it's actually much more likely to give you success over time as an investor. Jim, I know that you regularly save and invest every single month.
Mueller: Oh, definitely. I put money in my 401(k) every month. I don't put money into my wife's and my IRAs every month. I want to raise one more point, if you don't mind, about behavior. Be aware of hindsight bias. One of your emailers said something about looking back, that wasn't expensive. But at the time, with the knowledge he knew then, it might very well have looked very expensive, and only now that we have more knowledge about what happened can we look back and say, "Oh, of course that's what was going to happen." No, that's not the case. You don't know what the future is going to be until it actually plays out. That ties into your point about investing regularly. If you try to invest when the market is down and sell when the market is high, well the market might surprise you. It might go down further and you should have waited, many people think. Or, you don't [want to] invest when it's high; well, the market continues higher, so you would have gotten a better price buying a "high price" anyway.
Gardner: Yeah. Well put, Jim! Important words.
OK, let's move to Rule Breaker mailbag item No. 3. This comes from Dixon Borne. Dix, you wrote, "Big fan, Mr. Gardner, big fan." Well, thank you! "My question to you for this July mailbag is how to efficiently assess a company's sustainability profile and their social impact." ESG -- environmental, social, governance. "Ratings vary so much. Most data is not very robust. I also try to avoid funds as they're too broad. They can be green-washed. Direct investing in company stocks seems to me the most impactful route." I agree. "I've been looking at board diversity, Glassdoor reviews. Any other tips? I just opened my first individual taxable investing account outside of my IRA and I could use advice before funding."
Well, really quickly, I just want to say to you, sir, you're doing what I do. I don't spend a lot of time looking at ESG ratings because I do find that the assumptions that go behind the data that they collect are different in many cases. It's kind of like trying to figure out how you should eat based on the headlines about studies being done on red wine or ice cream or whatever. It seems like one month, I read that red wine will extend my life; another month, it won't. The list goes on. Gluten-free or not...If you take the same approach to ESG, you're just going to get, I think, tied up into a pretzel trying to figure out what to do. So, rather than guess at data or which fund would be the right one for you, I -- like you, Dix -- prefer to invest directly in companies. I don't lump them all together into one group and say, "They're all socially responsible or not." I think the nuance of how every company acts and what it does is different. The purpose of every company is different. How its employees feel, how all of it stakeholders feel. I have a conscious-capitalism mindset. I would encourage you to take that directly to looking at the companies that you're looking at. I like the path that you're on.
But you go on from there to change the subject. Jim, I want to hear your perspective here. Dixon writes, "My second question, which might go beyond the scope of the Rule Breaker Investing mailbag," by the way, nothing goes beyond the scope of the Rule Breaker Investing mailbag.
He goes on, "Is how a 22-year-old passionate dude such as myself should foray into the world of professional investing? I have recently obtained my bachelor's in economics. I need advice on next steps now that my grandpa has passed -- he opened my first Roth IRA for me. I wouldn't be asking you this question if it wasn't for him." Well, may his soul rest in peace! What a wonderful gift!
Dixon goes on, Jim. "There are CPA, CFA certifications. However, I read, many advisors are not even certified. There are MBA and other master's which can be obtained at a university or online. There's internships, apprenticeships, and of course, there's the question of how to grow one's network. Any thoughts on the future of financial planning, advising, analyzing this industry, and how to enter it maybe around now?"
Mueller: That's a good question! The answer really depends on what he wants to do. My first bit of advice is, think about where you would like to go. I mean, if you want to manage people's money or advise them on how to invest or what insurance they might get, then you probably should go after a CFP, a certified financial planner. The ethics of that certification are very strong. Make sure that you put your clients' outcomes ahead of your own.
Gardner: Jim, is it fair to say that if you're more socially minded, you like one-on-one relationships, you'd really like to connect with people over the course of a financial advisory life, a CFP?
Mueller: A CFP would probably be a good start. But realize that kind of business, managing people's money, also is a sales business -- you're selling yourself and your advice, and you need to be able to convince people to trust you enough to put their money in your hands. If you're interested in more the analysis side, and you want to go to work for a fund or a bank as an analyst, I would probably say go for the CFA, which is chartered financial analyst. That is something awarded by the CFA Institute. I happen to have the charter myself. And what that does is gives you a broad foundation in many different types of investments -- from equities to derivatives to bonds to alternatives to private equity, all kinds of stuff, so that you have as a firm grounding in many different areas. Also, a high level of ethics. The CFA Institute is very big on that. Trying to, by chartering more and more people, to move Wall Street toward a better ethical performance and make more people fiduciaries -- that is, your clients are more important than your own returns -- that so much of Wall Street doesn't have, which you already have seen, that so many people don't have any sort of charter or certification or anything like that.
Gardner: Right. So, I like the way you're approaching this. What are you solving for, Dixon, and anybody else listening? Do you want to manage clients? Do you want to manage money? Do you want to become an expert at an industry? Or, if you want to come work for The Motley Fool one day, maybe, do you want to be a generalist or bring a separate professional background into our arena? I would say we've distinguished ourselves as a small company in a big world, financial services. We're the company that brings people that didn't get a CFA or CFP, necessarily, but have really interesting backgrounds, and they bring those and that experience and perspective in to make them really good stock market watchers. Jim, what is your own highest degree in?
Mueller: My own highest degree is a Ph.D. in molecular biology and biochemistry. I studied DNA repair in yeast as a model for humans, and that ties into cancer. OK? That's what I did.
Gardner: How does that help Motley Fool Stock Advisor?
Mueller: Well, it helps The Motley Fool and my career as a financial analyst now in that I was trained as a scientist, and scientists analyze data. And the stock market is full of data. So I spend a good portion of my time trying to figure out what is good data, what's bad data, and then looking for patterns in the data. Why did the inventory go down? Why did accounts receivable go up or down? And so on and so forth. I really agree with what Charlie Munger has written about and spoken about so much, in that you should read widely. Don't focus just on the financial media. Don't focus just on economics, or something like that. Read history, read fiction, read mysteries, read biographies. Read widely. Be interested in many different things. You'd be surprised how often something you saw over there in some other field can come back and give you an insight into something today in whatever company you're looking at.
Gardner: We'll close it off right there. Jim, thank you for that answer! It does remind me, speaking of reading, to mention that this podcast every August does "Authors in August." In the next couple of weeks, we're going to have two books featured. The first is A More Beautiful Question by Warren Berger, a wide-ranging analysis by a so-called "questionologist," the power of questions, and how to be better at business or analyzing data or life. I'm excited about that! That's probably a book Charlie Munger might have enjoyed. And then in our second week, Natural Born Heroes by Christopher McDougall, a remarkable story of how the natives on Crete, with some of the help of British intelligence, some of the geekiest spies you've ever heard about, kidnapped the Nazi general who was overseeing the logistics buildout as Crete got ready for Operation Barbarossa, which was, of course, the effort the Germans made to overrun Russia, which ultimately didn't work. But, the story of physical fitness and Greek heroism and Crete will be shared with our new friend, Chris McDougall, in mid-August. There's a short reading list. Get on your horse if you haven't read both books, because we'll be featuring both of those authors to start August.
All right, Rule Breaker mailbag item No. 4. Jim, will you hang around for one more?
Gardner: Shall we welcome The Motley Fool's Chief Investment Officer Andy Cross into this group?
Andy Cross: Very kind! Very, very honored to be sitting between you two here in the studio! Thanks for having me!
Gardner: Thank you, Andy! It's always a surprise when I find guest personalities like both of you guys here, in mid-July, when other people might be at the beach. Let me just quickly ask you -- Andy, do you have any summer in your summer? Has it already happened?
Cross: You caught me in a good week. Next week, we're heading to Northern Michigan for our annual vacation. I'll be out for a couple of weeks.
Gardner: Spectacular! We are taping this, by the way, last Friday, so Andy is already in Michigan. Now, Andy, you are a Wolverine, are you not?
Cross: I am. I am, David! By the way, that is my only degree. It's just from the University of Michigan. I lack any of the great honors that Jim has earned.
Gardner: Like you, I'm just an undergraduate of another really big state university. Our universities are some of the oldest and some of the best among all the state universities. Would you not agree?
Cross: I would definitely agree.
Mueller: I would like to point out that, based on both of your own success, number of degrees does not correlate with massive success.
Gardner: [laughs] Kind of you just say, but we respect learning, Jim. So, all right, here we are, guys. Speaking of learning, let's learn a little bit with John Felipe Levesque. John Felipe writes in, "Hi, David. I've been listening to the RBI podcast for the last year and I love it." Well, thank you, John Felipe! "I'm on my way to listening to all available podcasts." Now, I think he means all available Motley Fool podcasts, but he might mean all.
Cross: Oh, that is an undertaking.
Mueller: That's Mount Everest.
Cross: That's a graduate degree in itself.
Gardner: So, John Felipe, we may be misunderstanding. If you are, in fact, purposing to listen to all available podcasts, write us a year or two from now. I want to share your journey. That's amazing. He goes on to say, slightly more seriously, "I am now a Motley Fool U.S. and Canadian Stock Advisor member. I'm glad to say I'm beating both indices in the last year. Here's a question. I live in Quebec, Canada." I spent a little time in Quebec City within the last year and it's so beautiful, that historic part of your hometown, John Felipe. Thank you very much! "Typical recommendation for a stock portfolio is roughly one-third Canadian, one-third U.S., and one-third international to minimize foreign exchange risk and tax treatment of foreign investment. However, the Canadian market is less than 4% of the world market, and mostly made up of energy, finance, and materials. These are not my favorite investment sectors. At least we have Shopify! Also, a lot of U.S. companies or U.S.-listed companies -- like, for example, MercadoLibre -- are international. Do you care," gentlemen, Fools all, "about geographical diversification in our portfolios?" For his individual stocks portfolio, he's two-thirds U.S., he says, and one-third Canadian.
Mueller: There is a behavioral bias that's involved in his question, too. So many people invest much more -- maybe not John Felipe -- in their home country than in external countries. I'm one of them. I think every company I own is listed on a U.S. exchange.
Cross: It's actually called the home country bias.
Mueller: Exactly. That's not that damaging if the home country's exchange offers a wide range of selections.
Gardner: That is true.
Mueller: But France, for instance, is similarly a very small portion. Australia, very small portion of the world market. So, that can hurt you. It can get you into too narrow a range. So, with you, diversifying yourself outside like that, U.S. gives you a lot of variety, international gives you more variety -- I think you're doing all right here.
Cross: John Felipe said he's a member of Stock Advisor Canada, in which we offer a U.S.-listed and Canadian-listed recommendations every month. So I think Jim is right. While we do have a home country bias, the Canadian market is so small and tends to be very focused in those markets, as John Felipe mentioned, which in our minds are not the most exciting, greatest wealth-creating opportunities for any person in the world. Over the last 10, 20 years, those have really been focused in the U.S. markets. That's why we tend to concentrate mostly in there, besides the fact that most of us live here. But we have a lot of global members who invest -- and you can now invest much easier in the U.S. markets than it used to be. So, I would say in general, the U.S. market continues to be one of the most exciting places to invest because it has the best companies, and I think that's not going to change, in my mind, anytime soon.
Gardner: So, having just got back from China myself, I recognize the importance of that economy, the No. 2 GDP economy in the world. There are some great Chinese companies as well. And we've had them in our services. I think in particular of Baidu, which has been a wonderful long-term performer, even though more recently it hasn't been great. Or, think about Tencent or Alibaba, these are really big, world-shaping companies as well.
Is it fair to say, as we conclude this one, gentlemen, that we tend to be go-anywhere investors here at The Motley Fool? Show me the best company I can buy, and I'm going to buy it?
Cross: I think so, Jim. I would say that. We are looking for excellence wherever we go and wherever we can find that. MercadoLibre is another one that is not located here in the U.S. has been an exceptional recommendation of ours. That is not focused primarily here in the U.S. We're looking for excellence, and we will go where we can find that. That's been predominantly in the U.S. over the last 20 years.
Mueller: That's a fair point. Also, there's been a shift in companies themselves over the last 15, 20 years that might not have been taken into account by this kind of question, in that in your own country, the idea was, the company gets most of its revenue from that country. Now, with companies like Alphabet, Netflix, Amazon, GM, Toyota, all those --
Mueller: Uber and so forth, their revenue is a much more international, so they're not exposed as much to the risk of a recession in their own country.
Gardner: Really true. So, if you're really looking to diversify geographically, which I don't think we three purpose as a primary goal as investors, but if you are, maybe take a look at where their revenues are coming from, not just the market cap of where that company's based. All right, thank you!
Jim Mueller, thank you for joining us this week on Rule Breaker Investing!
Mueller: My pleasure!
Gardner: I really appreciate your insights!
Andy, will you stick with me for a few more?
Cross: Of course! I'd love to!
Gardner: Thank you! All right, Rule Breaker mailbag item No. 5. And now for something completely different. Yeah, we like to mix it up here. Anything goes at Rule Breaker Investing, especially our mailbags. This one goes to an area of the investment world, Andy, that we don't often talk about on this podcast, which is maybe why P.T. Lathrop wrote, "Hey, Fools, anyone want to help us understand preferred stocks? What role might they play? What pitfalls should anyone look for? Are they worth diversifying into at all?"
Andy, let's first define our term. Can you just, as our chief investment officer, knowledgeable about everything, encyclopedically aware of everything in the investment world...
Cross: [laughs] Well, that's very kind of you to say! There's a lot to this question, but the definition of preferred shares, they're kind of like a hybrid between the common stock, the stock that we typically know, and a bond. They are shares that are issued by a company as part of an allocation strategy that offer a dividend payment, a consistent dividend payment. They tend to be shorter-term than bonds. And they have preference to the claim on the assets, both the income ahead of the common as well as if something happens to the company, the company files bankruptcy, they have a claim on the assets.
Gardner: So, that's the preferred part of this, Andy. If things get really rough, and we sure hope this doesn't happen with stock recommendations we make, and we usually look at the balance sheets to make sure this wouldn't happen, but if things got really rough, preferred stockholders get paid off first in a bankruptcy situation ahead of the rest of us poor lunks listening to Rule Breaker Investing and buying common stock.
Cross: That's right. Another key difference is that the preferred stock, the shareholders tend not to have voting rights. Most of them do not have voting rights like you do as a common shareholder, have a voting say in the company's board directors and their decisions. The preferred doesn't have voting stock, but they have that claim on the assets. But the key thing is, they pay the dividend, hence they're considered more like a bond. They're offered by banks, real estate investment trusts, utility, shipping companies, those kinds of companies that tend to issue a lot more debt.
Gardner: Andy, have you ever owned a preferred stock?
Cross: I have not.
Gardner: Nor have I. For whom are preferred stocks appropriate?
Cross: A lot of institutions will buy them to help them get exposure to dividend payments, but without the long terms like they're doing typical for a bond. I would say, they are very popular with yield-seeking, dividend-seeking people who want to have the potential for a little bit of growth in the security like a stock, a little bit of upside in the stock, but they really want, and they really rely on those dividend payments. So, really, if you're an income-seeker, a yield-hunter, preferred shares are potentially one investment vehicle for you.
Gardner: So, some of the higher dividend yields that are paid are these preferred stocks. Usually we're looking at higher-yield, lower-returning kinds of devices.
Cross: That's right, David. I was just looking at some of the yields. We're talking, some are 5%, 6%, 7%, 8%.
Gardner: Yeah. I'm not getting that with my Ford stock, for example.
Cross: That's correct. Yeah. They tend to yield much more than common. And, obviously, as we said, they have the right to the earnings stream before the common as well, too.
Gardner: All right. This is probably the only preferred stock talk we're going to have on this podcast in 2019. It's not really how we roll. But Andy, for P.T. Lathrop and others of his or her ilk, what's a good resource to find out more about preferred stock?
Cross: David, I'll just go to the Fool. So if you just search on Google, "site:fool.com preferred shares," you will find a number of articles written about preferred shares, what they are, how to think of them, with other links to other sites. So I would just go there.
Gardner: Awesome! All right, Rule Breaker mailbag item No. 6. This one comes from Andrew, another Australian. In this case, Andy, I'm looking at like three separate notes that we got to our email@example.com mailbag address -- anybody who wants to be featured on this next month, if you want to drop us a note, story, etc., firstname.lastname@example.org. Andrew really availed himself of this. And we're going to respect that effort by going over a few of the quick questions he asked.
The first one, Andy, he says, "Hi, I'm Andrew. As my watch list grows, I see these stocks continue to outperform." Well, that's nice!
Gardner: I mean, if you're going to have a watch list, better that it outperforms, even though you're just watching, probably, than underperforms. He goes on. "I currently have around 40 companies," and that's in his stock portfolio, "and I have around 40 more on my watch/buy list." So, already invested in 40, 40 more he's looking at. "My question is, do I, A, sell down current investments, make the purchases and have smaller positions on all companies; or B, wait until new capital is available and then slowly buy the additional 40?"
Now, as you think about your answer, Andy, he closes this short note, No. 1 of three, with, "You've entrenched me," which I think means we've brainwashed him. Maybe this is an Australian term. But, in a good way.
Cross: In a good way.
Gardner: "You've been entrenched me, and I resent selling." He doesn't like selling! So, what are our thoughts on his conundrum?
Cross: Andrew, congratulations on being brainwashed by The Motley Fool --
Cross: -- on a brilliant principle! We tend to sell our winners much too soon --
Gardner: You mean "we" as non-Foolish investors.
Cross: Yes. Non-Foolish investors.
Gardner: The outside world.
Cross: Right. The outside world has brainwashed most investors to be more traders than investors. So, congratulations on that!
Of the two options, I certainly would prefer the second one. If you really feel good about those 40 companies, and they match what you're looking for in a portfolio, I would encourage you not to think about selling them. Wait until you have capital that comes in. If you are trading and balancing one company for another, that tends to just not work out historically. We've just talked to other members and learned that personally. I have learned that personally. So I would prefer the second option, which is, wait for new capital to come along.
Gardner: Awesome! Well, Drew had other questions. Here's the second one, Andy. In a separate email, he asks, "What percentage of a salary should one aim to invest in the market?"
Cross: I think in general, 10% of a salary to put in savings for a long-term nest egg is a good goal to have. Whether that goes into the stock market or into other investment vehicles is more up to your personal preference for risk tolerance, your growth perspective, how you think about investing your savings. All of my savings do go into the stock market, one way or the other. So for me, it's 100%, but that's not for everybody. It depends on how you want to build that nest egg. But I think, if you can get, as a starting point, 10% of your salary into investing, you're going to be doing well off, especially if you're starting young.
Gardner: Tithe yourself. Tithe your future. Make your future self happy, looking back to now, saying, "You know, he or she managed to save 10% of every salary check." Your future self will be really grateful for that. What I like about that answer, Andy, is it's so simple. It's like $1 in $10. And it's universal. Here we are, speaking to Drew, he's halfway across the world in Australia. It's just as true in Zimbabwe as it is in Ottawa, and it's certainly true for us as Fools. Now, if you or I could save more than 10% of our salary, no one's going to stop you from doing that.
Cross: That's right.
Gardner: The more we save, the better we invest, the more we'll have, the more opportunities we'll have on this planet for ourselves, our families, our friends, and our causes. Ten percent for a lot of people is aspirational. We have people with student debt, we have a lot of people who have credit card debt. Always pay off high-interest rate debt first. Those are the bad debts, especially credit card debt. But we respect and understand that people are coming from all over the map in terms of their individual financial situations.
As we think about answering question No. 3, I want to welcome in Mark Reagan to join in this conversation. Mark, welcome!
Mark Reagan: Thank you for having me!
Cross: Hi, Mark!
Gardner: Mark, we're going to talk spiffy pops in a sec, but I'm thinking in particular, Mark, of what you've done for the first eight of your first nine months at The Motley Fool, which was answering questions right from callers like Drew with these kinds of questions.
Reagan: Exactly. I spent my first eight months in the member services department fielding any and all the questions I could.
Gardner: It's kind of like Rule Breaker Investing mailbag 24/7.
Gardner: You actually know the answers. We're just kind of making it up on this podcast. That's remarkable. Mark, could you briefly give us a little bit about your background? How'd you find out about the Fool?
Reagan: Sure. Funny enough, I found out about The Motley Fool 8th grade, middle school. My dad is a Motley Fool member, so I would log onto his account and just check it out because my mom told me, "You make money with your hands, your mind, and your money." And I was like, "How do you make money with your money?"
Gardner: That's a good line! You make money with your hands, your mind, and your money.
Gardner: Love that line! Very true! Mark, did you ever listen to Motley Fool podcasts?
Reagan: Listened to a lot of Motley Fool Money in college. Going on a run, going to the gym. I'd hear Chris Hill's voice and the "ding ding ding ding ding." [laughs]
Gardner: Awesome! Does that mean that Chris Hill has, like, this tiny little halo whenever you look at him? Is there a glow around someone like Chris Hill?
Reagan: When I came here to interview, I was like, "If I see Chris Hill, I'm going to fanboy." Lo and behold, he comes off the elevator, and I go, "Oh, my gosh, it is so cool to finally meet you! I love your voice!" And he goes, "Tell that to my kids."
Gardner: [laughs] Great line! So, Mark, 10% of your salary, does that sound about right? It sounds aspirational. I know you're at an earlier stage of life than I am. It's not easy for a lot of people coming out of college to be saving 10%.
Reagan: No, it's not, especially living somewhere in Virginia. Cost of living is a little higher. But, anything you can, really.
Gardner: Awesome! And let me double check, because I'm pretty sure -- Andy and I earlier mentioned that we went to large state universities. Mark, where did you go to university?
Reagan: I am a graduate of the University of South Carolina.
Gardner: Go Gamecocks!
Reagan: Go Cocks!
Gardner: There is a debate between North Carolina and South Carolina as to who's the Carolina. You'll see people with a shirt that says Carolina. I realize, this is very backyard, irrelevant to most of the rest of the world. But at least within that small area of the country, there's a little debate. I have no real dog in the fight. I love them both!
Reagan: There is. It is a bubble in and of its own, especially South Carolina. It's either Clemson or South Carolina. It's pretty polarizing.
Cross: Do you think that happens at the Dakotas and the Virginias? West Virginia, Virginia. North Dakota, South Dakota.
Gardner: I'd think there has to be a spitting match between the Dakotas. Don't you think?
Reagan: Must be.
Gardner: I don't hear it that much, but we're all in our different bubbles in this world. OK. Now, before we go further with Mark, I need to mention, Mark Reagan is an operations and investor relations associate for 1623 Capital. That's a separate sister company of The Motley Fool LLC. He does not provide advisory services on behalf of 1623 Capital. The views expressed are Mark's and do not necessarily reflect the views of 1623 Capital or any of its affiliates. These comments, including commentary or opinions on securities, should not be relied upon as recommendations or investment advice. Nothing in this podcast or in Mark's statements should be construed as an offer for sale of securities.
Mark, question No. 3 from Joe. I wanted to have you in for this. He says, "Hi, David. I've been investing in the market for around three years." This is still Drew. This is the third note from Drew. He even says hi again to me a third time. "Hi, David. I've been investing in the market for around three years. During this time, I'm yet to have had a spiffy pop." Now, briefly we'll define this term. I think many of our listeners know it. A spiffy pop is when you make more money in a single day with a stock than you paid for that stock when you first bought it. For example, if you bought a $10 stock, and you put $1,000 in it, and one future day, that stock in a single day goes up $11 -- let's say it goes from $90 to $101, it was up $11 per share that day -- you paid $10 per share way back when, you just had a spiffy pop. Not a pop. Other stocks pop. Especially this month, stocks pop up or down on earnings. This is a spiffy pop. This is a horse of a different color.
Mark, the reason I wanted to have you in, in addition to getting to share just a little bit your own Foolish journey -- it's so great to have you with us -- is because you recently conducted an informal, but still efforted study, just on your part, probably thinking about people calling in, and do you have data for them, about our spiffy pops, and some data around that.
Reagan: I did. I was listening to last month's mailbag, and someone emailed in saying, "Hey, I don't have any real data on spiffy pops. Do you guys?" And the answer was no. And I was like, "Interesting. I think I can probably corral something very basic." So, I did. I went onto the spiffy pop page on our website.
Gardner: Yep, you can just google "spiffy pop" and you'll find out there on the internet the landing page, which is a Motley Fool page, of course, but it defines spiffy pop, and then it lists all of our historical spiffy pops. So, that was some data, but nobody had the initiative or "work hard" mentality until you, Mark, to actually start crunching some numbers around this.
Reagan: Sure. And very basic crunching. Pulled a couple of the stocks. Some of them didn't have the data. I will preface this with saying it is --
Reagan: -- not 100% kosher. So, I pulled it, it was a lot of data to run through because multiple spiffy pops between the stocks. So I said, all right, what was the time frame between the initial recommendation first time it was and the first time it did spiffy pop? A lot less data to crunch there. I was pulling those. What I was interested in was really just the average price when they were first recommended. That came out to about $14.90. And then I was interested in, which one has done the most? Netflix. I don't think that comes as a shock to anybody. Also, the piece of data I found the most validating --
Gardner: And this is the key for Drew. Drew, everyone else, listen up.
Reagan: This is the punchline. It took each of them about 6.2 years to spiffy pop for the first time. That was really validating for me. We preach here at The Motley Fool that this is not a get-rich-quick game. It is in for the long haul. We love the three to five-year minimum holding period. Even further out than that...it's a waiting game. You can't expect a spiffy pop in a day, a month, three years. It just takes time. And it's nice to be reassured of that. Just buy stocks that you like, good stocks, good companies, and just be along for the ride.
Gardner: You bet! I want to hasten to add that Mark's data there is looking at stocks that have spiffy popped. For anybody who would be at all confused about this, I want to make it really clear: Not every stock in the market will make you more money in a single day 6.2 years after you bought it. This is for the ones that have. And I'm happy to say, I think last year for our members in our services as an organization, we had over 50 spiffy pops. So this is something that we have brought to the world, and we've, I hope, made happen in your portfolio. But really clear, these are really special companies. These are the great performers that have spiffy popped, and on average, Mark's pointing out, Drew and everybody else, 6.2 years.
Cross: It's pretty impressive, especially, David and Mark, when you think of the average holding period of investors, certainly institutional mutual funds well, is less than a year. They tend just not to experience this. And they just don't see the benefits of holding because they're so worried about trading, trying to lock in little gains here and there. But the way that we think about investing, and the beauty of the spiffy pop, is that you see that really come through -- not for every company -- over the years. And it takes those years, 6.2. Thank you for pulling that data, it's great. Fascinating!
Gardner: Mark, thank you! I especially want to praise the initiative that you took because I'm the lazy bum who was just talking about spiffy pops. We celebrate them, and I love to tweet out when it happens. But I hadn't taken the time, really, to look at it. No one had. And I was the guy who answered, "No, I'm not really sure," to that mailbag question last month. But you took the time on your own to crunch the numbers, run it. That's why I wanted to have you on. Mark, were you surprised by any of the companies? Had you heard of all of the ones that spiffy popped? Throw us some color there.
Reagan: I had not. Some of the ones that stand out that I didn't know about -- Vertex Pharmaceuticals, Monster Beverage. At the time, I didn't even know that was public, to be honest. And then, one that really interests me, everybody loves Chipotle. They've had their ups and downs. That one, I found, was the highest initial recommendation, at $60.60. So, that's pretty sweet.
Cross: Of all the ones you looked through, that was the highest-priced one at the initial recommendation?
Gardner: Yes, although I suspect, some of this may factor in some splits, probably, that you might be averaging. So Netflix might be looking like it's a $3 stock when, at the time, of course it was more like a $25 or $30 stock. So, maybe you have to factor that in with the price per share. But, yeah, Chipotle, cost basis of $60.
Reagan: That was Rule Breakers, October 18th of 2013.
Gardner: Awesome! Mark, thank you again! Good luck on your new journey! I know you're working -- the disclaimer I read earlier -- at 1623 Capital. That is kind of a hedge fund that longtime Motley Fool advisor Jeff Fischer is working on. I know you're part of his team. It's a sister company. Chinese firewall between what I do and what you do. So, Mark, I may not see you for another nine months or so.
Reagan: Wave at the fishbowl, just don't knock on the glass.
Gardner: [laughs] Thank you, Mark Reagan!
Reagan: Thank you! Thank you for having me!
Gardner: All right, Rule Breaker mailbag item No. 7. Oh, my gosh, it's David Hanson, a returning guest to this podcast! David, welcome!
David Hanson: It's good to be back!
Gardner: David, your role, briefly stated for our listenership to get acquainted with David Hanson once again.
Hanson: Sure. Well, David here, and Andy, who's sitting next to me, Andy Cross, they work very closely with our investing team. I sit behind the scenes, working on the mechanics of our membership business, making sure our members can get into the services that are right for them, and can succeed on their terms.
Gardner: Thank you! David, how long have you been at the Fool now?
Hanson: Six years.
Gardner: What's been a highlight of your six years? And then, because we're all about both sides of the coin, what's been a lowlight of your six years?
Hanson: The highlight is -- not to blow smoke at you guys, but -- really getting access to incredible investing advice. My portfolio, if I go through it, is probably 92% Fool stocks. It's been, obviously, very rewarding for me. It's been a great six years for the market. Been an even better six years for our Motley Fool investing universe.
Gardner: Awesome! Thank you!
Hanson: That's obviously the highlight, when you can do well and also help so many members come in and find our services and succeed as well. Lowlight, geez, I don't know. I mean, when our free food fridge is low on yogurt? There's not a lot of lowlights here.
Cross: That is true!
Hanson: We keep it pretty light here. It's a good place to work. If anyone's listening and is looking for a job, we have a lot of openings right now. If you're interested in working for The Fool, go to career.fool.com, for a small plug there. We have probably have 50 jobs open right now. Come join us!
Gardner: We do. I think we've hired 79 people so far in 2018, which is a new recent high. It's exciting! A lot of growth. It seems like we started growing when David Hanson showed up six years ago. That's when the growth really started.
Gardner: Well, we have a question from Greg Sable. Now, in the interest of time, I'm actually going to skip his whole question. Sorry, Greg! I'll go to his postscript where he wrote, "Bonus question: Have you ever thought about making a student discount for the Fool's services? I would love to subscribe, more to learn about the stocks you recommend and why you recommend them rather than actually invest yet based on it because I simply don't have enough income to cover all the stocks I already want to buy." I should mention, the wonderful question that I skipped included the description of Greg as a great saver. He started when he was 16, and he listened to our podcasts. He puts away money through Schwab and Robinhood. He basically he has so much invested, guys -- I guess this is a good problem to have -- that he doesn't even have enough to spend. He's like, should he use his dividends? Maybe that's a way he would spend a little bit more money? He's saving and investing so much.
Cross: Wow, impressive!
Gardner: This is a great problem to have. Anyway, understandably, Greg's like, "Hey, what about a student discount? I simply don't have enough income right now to cover all the stocks that I already want to buy. Unfortunately, this lack of income means justifying the cost of a subscription is rather challenging for me, at least at the prices that they are."
Now, David, I'm not a student. I know some of them. Most of the students I know don't necessarily have that much, sadly, interest or knowledge about the stock market. This company is trying to change that worldwide, every day. Do we have any student discount?
Hanson: We don't have any now. But, I mean, from my perspective, I think our services are an amazing value. Call it, the average price to get into Stock Advisor or Rule Breakers is going to be around $100. Sure, that's not chump change that someone's got lying around between the couch cushions there. But for the value that you can get, you're going to be hard-pressed to find a comparable service out there that has -- again, we've got full-time investing analysts on Andy's team here. What, 44 of them? How many are on the investing team?
Cross: Yeah, if you go globally and around the world, it's probably north of 50.
Hanson: So, you're getting extremely high-level investing advice in our paid services. I'll also make a plug for our website, fool.com. The people who write for fool.com are often contractors, they may not be full-time employees, but these are people who have been investing for sometimes 40 years. We have incredible resources that are completely free. If you go through our website and find articles that you like, you can start to follow authors or people that you might say, "Oh, this was actually really good. I learned a lot from this article." You can start kind of tracking, "Hey, I want to follow this person." And when they like a stock, maybe that gets you close. Maybe it's not, "This is a stock that Andy Cross or David Gardner picked." But, hey, it's free advice, and you're learning. So, I think, whether you can spend $0 or $100, I like to think we have something for students, or really anybody.
Cross: That's exactly what I was going to say, David. Our analysts and writers at fool.com, lots of different disciplines, not just stock investing, but savings, investing. We talked about preferred shares earlier. There's information out there. But it is getting better and better, and richer and richer, with really good writing, analysis, around stocks and investing. And the investing team that David and I work on has a very good relationship with so many of those writers and analysts that help us as well, too. There is a lot of information for anyone who doesn't want to or have the capital to make an investment in our services -- which are great, and I agree with the value prop point David made -- fool.com is a great wealth of information for a person looking to invest better.
Gardner: Yeah, and let me underline at least one resource that comes quickly to mind. That's our "13 Steps to Investing Foolishly." This is a document we first pinned up on our site not long after we launched on AOL in August of 1994. It probably needs some updating here and there from time to time, but it remains a tremendous short course. We'll get notes from somebody saying, "I just finished my MBA last year. I learned more about investing and money in the three hours I just spent late last night reading through the '13 Steps' than I did in my MBA." Well, in part that's because an MBA is not necessarily designed to teach you about investing; it's designed to teach about business. But, the "13 Steps to Investing Foolishly" is a spectacular free resource on the internet.
Before we move our next one, I guess I also want to just double-underline our podcasts! Like this one! And all of them! They are free.
I believe that The Motley Fool does more for investors for free worldwide than any other company that I can think of. And yet, I still think we have a lot more that we can do and do better. Good news is, we do get paid. We like to be paid. That's in part why we can offer a lot of free stuff. So that $100 base price, David Hanson, for Stock Advisor, I think has to be one of the great values in the investing world today. It's a market-beating scorecard. You've got picks from the brothers. It's just $100. A lot of people say, "I made more than that in my first year. It's like you guys paid me to join Stock Advisor." So, there's a plug, sure from the home team. Thank you, Greg!
Before we move onto No. 8, special offer just for Greg. Greg, you know your last name. You know how to reach out to us. David Hanson, you have graciously offered your own email address.
Gardner: Because you took the time -- and we love your story, Greg; sorry to give it short shrift here --- we'd love to offer you a complimentary first year of Motley Fool Stock Advisor. Again, this is just for Greg S. this time around. But in support of getting as many young people, and rewarding good behavior, and getting them smarter, happier, and richer, Greg, we'd love to give you a one-year subscription to Motley Fool Stock Advisor.
All right, we're just about to hit No. 8. David, I want you to hang with me for this one. Andy Cross, thank you for joining us this week on Rule Breaker Investing!
Cross: David, always a pleasure! Enjoyed it! Thank you so much!
Gardner: I know you're having a great time right now in northern Michigan. It's not even clear to me how you did this podcast this week.
Cross: It's amazing how I did this. I'll tell you when I get back.
Gardner: Remarkable! All right, Rule Breaker mailbag item No. 8. David Hanson. This one comes from Steve B. His screen name on fool.com is daisydad, Steven Brodure. Thank you, Steven, for this question! He writes, "Recently I called into Fool headquarters when I was debating signing up for Navigator 2019." That's a product that we offered for sale this summer. "The Fool at the other end of the line was not too informative about how I might judge the appropriateness of Navigator in my circumstances. I understand that you're not in the business of giving individual advice. However, having an idea of the appropriate target audience -- say, experience, say, available capital -- seems like something you would be experts at discussing. After all, these are your services. I tried to walk through my reasoning and considerations about Navigator 2019 to try to come up with a value for a 'minimum portfolio' that would make sense for enrolling in the service."
This is the general thrust of the question and comments, David. He does say he had a similar issue with consideration of our Options service during a previous marketing campaign. Can't figure out, based on how much somebody has and how much it costs, whether they should join this or that service.
Hanson: Sure. He mentioned not giving personalized advice. But as a general guideline, we like to try to keep it between no more than 2% of the amount that you're going to be investing with us, your cost as a percentage of that overall amount. If you think about $100,000, we don't want you paying more than a couple of thousand dollars with us, and even that's on the high end. But I would also underline that, ideally, we want people to judge their costs associated with getting our research over a longer time frame than just one year. I think one thing that's important to note with our services, if it's a flat fee each year and not a percentage of your assets, hopefully we're helping you grow that portfolio over a three- to five-year time frame. So, when you look back, as a percentage of your overall portfolio, we want that to be well under 1% ideally if we're doing our job, and along the way, hopefully you're being satisfied with the returns that we're helping you achieve.
So, I think up front, you want to stay well under that 2%. We don't want anyone overextending unless they have a circumstance where they know, "Hey, I've got this money today but I'm expecting to sell my house in a year, and I'll have a large amount of money coming in." It might make sense if you have more inflows coming in, versus if you're someone who's retired and just has a fixed portfolio there. Definitely want to underline the point of, maybe get a spreadsheet out, map it out over five years. With some rough ranges -- obviously, we never know what the market's going to do -- start to map out, what could my returns be? What does that start to look like as a percentage of the portfolio?
Gardner: I really appreciate you pointing that out. In fact, I think one of the reasons that I'm proud of the services that we offer through The Motley Fool is, sadly, for whatever reason, we've tended not to raise prices too much over the years. In some cases, not really at all. In some cases, it seems like they go down. This is in direct contrast to the mutual fund industry, where if you're paying a percentage, let's say 1% of assets, every single year that fund rises, you are paying them more and more. If you do the math on what Stock Advisor has done over the years, a lot of the time -- as you said, David -- you're paying something, and then five years later, if you look at the returns that you got, you'll see that was a pretty good return.
I do like your emphasis on 2% or less, the amount you're paying in investment fees and advice fees for your overall portfolio. That does imply, if you're paying us $100 for Stock Advisor, $5,000 might be a nice initial amount to have for a starter portfolio. That said, some people start with their first thousand and they pay us $100. It's each person's decision.
One final consideration is that a lot of us pay money in the form of tuition to things like universities in order to get smarter and advance us in life. Now, people are paying a lot of money, in my experience, whether it's a state or private university these days, David, and they're just paying that with no immediate return. So, it does seem to me that sometimes, even if you're overpaying us a little bit -- and this is no special pleading on my part. I want each person to make the best decision for them. But, just think about how much you're paying in tuition for other things. Here, I think, if it means that you're paying a little bit extra that first year or two, I sure hope you're accelerating your learning in a way that will reward you the rest of your life.
Hanson: Yeah. He mentioned the level of experience needed for many of our services. He called out our Options service, which probably is the most complex. Even then, the team that works on our Options service, they really take the time to break down the methodologies of what they're doing. It's not a swing trading service that's got new trades coming in every other day. We do try to make everything we do very approachable for all levels of investors. Something like Navigator 2019, I think I can confidently say you can go into that service with almost no investing experience and you can follow the guidance and the advice pretty closely, and you won't feel like you're out in the woods and trying to find your way out there. We have great advisors and analysts -- as you know; you work with them. They're on the boards, they're helping people understand what's out there. So, I would say, none of our stuff is geared toward someone who's an expert investor. We're trying to make this accessible to everyone.
Gardner: Well put, and food for thought not just for our new friend Steven Brodure. I hope that was helpful, Steve. But for anybody who's thinking, not just about Motley Fool services, about any financial advice that you're paying for. What's your expected return? What percent of your assets does it represent? And does it feel good? Does it feel right? Is it rewarding for you from one year to the next?
David Hanson, thank you once again for your time on this week's Rule Breaker Investing!
Hanson: Thanks for having me!
Gardner: This was a vigorous discussion across many different investing topics. It felt really investor-heavy this particular mailbag. Thanks to my guests Jim Mueller, Andy Cross, Mark Reagan, and David Hanson!
A reminder, August is upon us, and that means "Authors in August." This coming week, A More Beautiful Question by the author Warren Berger. It is a wonderful book. If you have already read it and didn't know he followed up with The Book of Beautiful Questions, closely related, we'll be talking about questions, the power of questions, with one of the world's foremost questionologists, next week on Rule Breaker Investing. Then, Natural Born Heroes coming the week after that. There are a couple of titles for your summer reading, so read up 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.