Rule Breaker Investing September Mailbag

It's that time of the month again! In this week's Rule Breaker Investing, David Gardner gathers up some of the most discussable listener questions, comments, and stories for September's mailbag bonanza. What are some companies that used to pass the snap test, only to fade into obscurity with time?

How did the Rule Breaker style of investing come about? Has David's stance on Tesla (TSLA -1.11%) changed at all in the last few months? Did Aaron Bush break The Market Cap Game Show? Plus, some anecdotes -- an analogy for adding to your winners that won over a Boy Scout troop, some spiffy-pop wisdom, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 25, 2019.

David Gardner: Welcome back to Rule Breaker Investing. I'm David Gardner, the host. We're in our fourth year. My producer is Rick Engdahl. And you are our kings and queens. That's right, because here at The Motley Fool, we're the fool. We're the court jester. And you are the kings and queens that we serve. We whisper the truths that we see in your ear for you to hear. We try to mix in some humor along with it. That's been the traditional role of the court jester. And sure enough, that is the role that we've been playing lo these 26 years. Thank you for joining me! I'm here to serve and I'm here listening to you this week especially carefully because it is our mailbag. The final Wednesday of every month on Rule Breaker Investing is my opportunity to read your thoughts, your questions, pull whatever I think is the most interesting to share back, and do it together. And we've done that for years. And welcome to our latest edition of the Rule Breaker Investing mailbag.

At the end of every month, I like to look back and see what we did earlier this month. We kicked off September with Five Stocks with a Tail Wind Blow. I want to thank Paul Knappen for his wonderful suggestion, even his inspiration. Paul, thank you for sharing your story with me. That was a delight, to share my most recent five-stock sampler. If you didn't get to hear them, I'll give you one of those stocks right now: it was Roku. Roku, by the way, not doing great in the last few weeks, but it's a stock I think with the tail wind blow. We'll see how it does over the next three years. So, we kicked it off with a five-stock sampler. 

The second week of September, it was Reviewapalooza. That's right, because if you're going to pick stocks every 10 weeks or so, and then commit to seeing how they've done, to review your results, and you do it enough, you start needing to dedicate whole podcasts just going through back stock picks, update the stories, update the performance, and tell the story of the five-stock samplers. We did three of them on September 11th of this month. If you didn't get a chance, we rocked a new format a little bit with that Reviewapalooza. Something that we've done the past, we'll do a lot more of in the future on this podcast. We loved talking about, in this case, 15 stocks. I love putting company names in play and thinking together, with a friend often, and with you, our listeners, asking which ones are winning, why, and which ones do we think will win? That was Reviewapalooza. 

And then, of course -- and I'll be talking about this a little bit later -- we played The Market Cap Game Show last week with -- I was going to say Aaron Bush -- but I'm going to say the remarkable Aaron Bush. If you didn't get a chance to hear what he did, you should know that, I think it's fair to say he broke the game, leaving me with some existential questions as far as not just the game, but really myself. Thank you, Aaron, for doing what you did last week on The Market Cap Game Show. I know we have some good mailbag items around this. We'll talk about those a little bit later. 

I like to start with hot takes. I have a few hot takes from Twitter to kick the show off. But before I do, I'll just mention -- next week on Rule Breaker Investing, it's one of those once or twice-a-year episodes. It's my pet peeves, and it'll be volume four. That's right. That means three other times, I've aired out pet peeves on the show. Often, they're financially or market-focused, but they also include life. And I want to mention in advance of next week's show that I'm happy to be influenced by your pet peeves. In the end, this is a very self-indulgent show when I do it, so it's going to need to be mine; but, you might be able to convince me that I should share your pet peeve. Our email address is [email protected]. I want to be an increasingly discriminating gentleman with high standards. You can help me by letting me know the things that should annoy me. And if we're both right about that, and I share it out to this podcast, I presume the world will get better even if it sounds like we're complaining one or two weeks a year. I'm going to have fun, as I always do with, Pet Peeves: Volume 4 next week. 

Alright, your hot takes. First up this month, Peter Rogner @Peter_r_aus_h. I'm going to assume, Peter, you're from Austria. Thank you for writing in. You said, "I just listened to Reviewapalooza. Bought the Mm-Mm Good set of stocks for my 16-year-old son a year ago. Great performance. Thanks a lot. Should have bought it for my own accounts." Well, thank you, Peter! And yes, that's referring to five stocks, all of which started with the letter M. I guess that was the letter of the week on this show somewhere in September of last year. But, yes, it has been a spectacular performer. In fact, I keep a live updated list of all of my 21 past five-stock samplers. Even as we speak right now, I can say those stocks are up 30% as a group with the market up 3.3%. Good on you, Peter, for identifying and having the guts to go in there and take some of your 16-year-old's money and get him invested in them. I wish I'd bought them myself. I often feel that way about these five-stock samplers. I hope we all own at least some of these. Of course, the whole purpose of Rule Breaker Investing is to break the rules and invest. That's right, take action, finding great companies and putting our money there. Well done, Peter! 

The second one, this is from John Hoslinder. John, you're @whetstonetkd on Twitter. You said, "About a year ago, I learned there are meteorological seasons versus astronomical. Attached sums it up pretty well. Happy fall." That's right. We were talking briefly about whether fall actually begins with the autumnal equinox on or around September 21st. I was raised, anyway, to think about the position of the Sun dictating the seasons. I think that's the traditional view of things. Autumn kicks off somewhere around September 21st. That's when the Sun is aimed directly at the equator, equidistant between the Tropic of Cancer and Capricorn, or something like that. And then, as the Earth's tilt maximizes itself, either to the north or to the south, we have the solstices. That's what I heard. But, thank you, John, for pointing out that there's maybe a simpler way of thinking about things, and that's the meteorological seasons. You [sent] me a link. Anybody can probably google this. It turns out, for this framework, autumn starts on September 1st. Winter begins -- this is true of us in the Northern Hemisphere -- on December 1st. And it's just the first of each of those months, not the 21st. And it does accord with the temperatures that we all actually experience. As it turns out, the three coldest months of the year for many of us in the Northern Hemisphere are December, January, and February; so, the meteorological seasons go from December 1st through the end of February, etc. Anyway, there are two ways of thinking about when seasons start. 

And finally, a spate of tweets about The Market Cap Game Show last week. @rambhupatiraju said, "I'm beginning to suspect that @aaronbush100," that's Aaron on Twitter, "is actually an AI machine in human disguise. Just awesome." @devault_koteka, "What a star @aaronbush100. Nailing 10 out of 10, with five doinks is a superhuman effort. Many congratulations. #ilosttoaaron, 4 out of 10." @billy_luke86, "I'm losing to Aaron Bush and #willlosetoaaronbush. Currently he's 7 of 7, and I'm learning a heck of a lot at 1 out of 7."

As I've said before, I don't personally have to play this game. I play many other games. I get to be the game show host for this one. I think we were all astonished by Aaron's performance. I'm going to wrap up the hot takes right here. But in fact, Rule Breaker mailbag item No. 1 will be a little bit more about the markets and The Market Cap Game Show. Anyway, thank you! Remember, we're @RBIPodcast on Twitter. You can always tweet us, and sometimes maybe lean on that #ilosttoaaron, because that's broadly felt in the month of September 2019. 

Alright. As I mentioned, Rule Breaker mailbag item No. 1. This comes from Jason Newman, longtime contributor to The Motley Fool. Thanks for your note, Jason! You write, "Hey David and Rick. I hope this finds you well and that you, your families, and all fools at HQ are enjoying the transition to autumn in the Northeast as much as I am." I'm glad that we've already spoken to when autumn actually may or may not start. Thank you, Jason! "During the incredible The Market Cap Game Show, performance by Aaron when discussing Uber, you mentioned you felt it passes the snap test. As a 'little bit is sometimes all you need' share owner of Uber, your comment got me thinking about the stock in a risk rating context. Could it actually disappear? To that end, my question for you this month is whether or not you can think of and share some examples of the most surprising companies that would have passed the snap test at one point, like Uber, only to meet their fate extinction at a later date. Thanks in advance, Jason Newman."

Let me take a shot at Jason's question first, then we're going to talk a little bit about The Market Cap Game Show. 

The first thing that comes to mind, Jason and all of my fellow Fools, is that the only constant is change. We are living through an amazing time of technological growth, Rule Breaking, and opportunity for entrepreneurs and technologies that can do things better than they were once done. Given that the only constant is change, it's not hard for me at all to think of companies that once passed the snap test that no longer do that would have surprised me to think that back in the day. All of us, I think, can look back on something like Kmart, which we grew up with, a lot of us, or Sears, or Radio Shack. I do note, if you're a Stranger Things fan, I love that Bob Newby a character from the second season played by Sean Astin, who strikes me as a great guy, he works at a Radio Shack back then. Those were companies that, if you had snapped your fingers back in the 1980s, or 1950s, and they disappeared, a lot of people would have noticed. A lot of people would have cared. And yet they're all bankruptcies within the last 10 years or so. 

I can think more recently of a company like Barnes & Noble, which was really at the forefront of the big box bookstore industry back when my brother Tom and I were publishing our Motley Fool Investment Guide, our first several books, in the 1990s. That's where we showed up for book signings. Lots of people in Barnes & Nobles. That's where you would want to do your book signing. We can all remember how important those companies felt. And while I'm happy still to see a Barnes & Noble here or there, often people are just there having coffee or sometimes buying board games, which I'm glad to see Barnes & Noble includes these days, but it's not a company that would pass the snap test anymore. 

How about AOL itself? Jason, since I think you and I were both on AOL using keyword FOOL back in the 1990s, I think we can all remember how critical AOL was. That was the decade that America came online. And yet it's not a relevant brand anymore. 

I think we always need to be prepared to think that those companies today that seem so important, that when we snap our fingers and they disappeared, they would be badly missed, and therefore I like the idea as an investor of owning those shares, we always have to keep our minds alive to the possibilities that the world will change, because surely it will. Is this company going to be benefited by those changes? Is this company driving those changes? Or, is this company threatened by changes? How about tailwind changes? Those are the kinds of companies that we look to shed well before they might one day have to announce bankruptcy. 

There are a few thoughts about things that once would have passed the snap test, but today no longer.

Now, just a little bit about The Market Cap Game Show. I thought Aaron did such a great job. I did ask myself, after he scored a perfect score, and almost made my game look silly, I asked myself, "Should we keep playing this game anymore?" And I've decided that we should keep playing this game. It's something that I personally look forward to every three months. I do note that when IBM's Watson came on, Jeopardy didn't announce after Watson left, undefeated, nearly unscored upon, that there was no longer going to be Jeopardy. I think people like Jeopardy. I hope people enjoy The Market Cap Game Show. There are ways to change up our format. I might not have Aaron in next time. [laughs] But I know one thing -- what he did was spectacular. He is really modeling, for me, anyway, a world of smarter investors, and how much better we will be with the decisions we make about our money and where we're going to allocate our capital if we have a heightened sense of the values of the things that we might be buying or selling. Good on you, @aaronbush100, my friend of several years here at The Fool with such a great career ahead of him. I say the same thing to Emily Flippen, who's done great work on The Market Cap Game Show, and to Matt Argersinger, who kicked us off several years ago. I'll continue to play the game, I think, and bring my friends in to share with you and let you play against them whether you're going to be a #ilostto or #ibeat. 

Rule Breaker mailbag item No. 2. This comes from Michael Hannon. Mike he wrote, "Hi, David. Could you please explain how you came to develop the Rule Breaker criteria, especially not avoiding fast-growing companies because of strong past price appreciation, and the related criteria of grossly overvalued according to the financial media? I do believe you are correct about these, but this thinking goes against a lot of conventional wisdom, such as Ben Graham style value investing. I'm curious about how you came to develop and recommend this type of bold investing style. Any history about the evolution of your thinking that led to the Rule Breaker methods would be greatly appreciated. Thanks, Mike."

Well, thank you, Mike. Like most lessons earned over the course of our lives, especially the ones that we earned and learned ourselves based on our experience, not just book learning from somebody else -- though I greatly respect that -- this one came at a personal price. I think the iconic story that I've told, the moment where I made a decision to shift how I was thinking -- because previously, I had been a "buy low, sell high" investor. I was raised that way. But, I remember picking stocks on America Online. This is even pre-web, back when it was keyword FOOL on AOL. We had a real money portfolio that I was helping to manage. And at the time, I thought, "Yahoo looks like a good stock." And indeed, it really was. This was the golden age of Yahoo, pre-Google, when Yahoo was an early titan. And I calculated, using my valuation approaches at the time, that it was worth $25 and change. And the stock at the time was around $29. So I said, "Well, it's overvalued. Based on what I'm seeing, I think this is worth $25 and change. I'm going to wait for it to get down to $25 and change before I would buy it or recommend buying it," because that's what we were doing over our site, showing people what we were doing with our own real money; follow us along, if you will. 

Here's what happened with Yahoo. From $29, it never went down to $25 and change. It went to the split-adjusted equivalent of $1,000. So, I missed a stock that went up over 30X in value because I thought it was worth a few dollars less than it was trading for at the time. And at that point, I decided, "I am going to unblock my thinking and take away this notion of a target price or a valuation leading me to," I love the ones that are out to a decimal place or two. Nope, I am going to ask myself, "What's going to win over the only term that counts, the long term?" And I felt empowered, then, to go after and by the best companies of our time. And that's helped me ever since. 

Missing Yahoo's 30-bagger because I decided that was worth a few bucks less was not the only time that had happened. That was the straw that broke the camel's back. I'd already seen that and done that before. But that's the one I remember. There's no substitute for having thousands back then, or these days hundreds of thousands, or millions of people watching what you're doing, and drawing conclusions appropriately. I was still a young investor in my 20s. That was very impressionable for me to change my mind and reverse what I was doing so that I could start winning on behalf of my fellow Fools, our subscribers, today our members. That was a really important moment for me. 

I want to highlight two other quick things before we move onto the next one. The first is that even just being in and around AOL in the early days was so helpful for me, not just as an investor, but also as a businessperson, as an entrepreneur. I'll always remember, in the early days, AOL decided at one point raise its rates. You'll remember, back then, you had to pay an hourly fee to be online. This is really early days of the internet, like $3 an hour. And at one point, AOL raised its rates. And I was at a partner conference for AOL Partners, and I saw the CEO, Steve Case, that evening. And I was reading all the headlines coming out of The New York Times and others the next day, "AOL makes a horrible decision, it's raising rates." Steve Case very calmly explained to me, he said something to the effect of, "Don't you think we've already market tested this for the last six months or so? Don't you think we already know exactly what's going to happen with these numbers? Do you think this is a bad decision we're making?" Again, this was early days of AOL, but, it was so impressionable for me to see the entrepreneur himself and the whole team that's working on the business and their perspective versus the journalists criticizing the company that ended up being a great move for AOL. Again, things didn't end great for AOL years later, but not before the stock returned 150X its value from our original recommendation. That was a very impressionable thing for me, to realize that sometimes, great companies and winners -- you've heard this before -- win, and if you just stick with them, you can win wildly well, too. That was also very helpful for me. 

The last thing I'd like to mention is William O'Neil's book, How To Make Money in Stocks. I've mentioned it before in the same context on Rule Breaker Investing. It's in some ways the worst investment book ever written, because it talks about market timing and reading graphs and it's very short-term oriented; and it's in some ways the best investment book ever written, because William O'Neil is looking at what wins empirically over time. He identifies traits of those companies. And usually, it's the ones hitting new 52-week highs, which made it easier for me to be, in your words, Mike, bold, as I changed my investing style and started to realize that we should be looking for a strong past price appreciation, not afraid of it. 

My own special sauce, my own contribution to the oeuvre, if you will, is this idea that when the media calls something grossly overvalued, that is our ultimate Rule Breaker buy sign. Again, if your company is a top dog and first mover in an important, emerging industry with excellent management, smart backing, a good brand, and a number of other attributes, and somebody in the media is telling you it's dramatically overvalued and puts that on the cover of Barron's, that's actually a great sign, not a bad one. 

Thank you, Mike, for encouraging me to look back into history and see where these ideas came from and how they were formed. It's something I enjoy doing myself. I also want to make it clear, before we go to No. 3 here, that I'm continuing to learn every year. It's not like Rule Breaker Investing hasn't changed or never will change again. I'm always trying to be guided by my best ideas and whatever I'm learning. We'll change our thinking whenever we feel like we need to win. 

Alright, Rule Breaker mailbag item No. 3. This one comes from Jared Preston. Jared, you wrote, "Dear RBI, thank you for your outstanding services. I've been a Rule Breaker member for about six months. I'm also coming on my first anniversary as a Stock Advisor member. I've invested in about 10 of your recommendations thus far and have my kids also reading your buy recommendations and investing their own money in the market. Thanks for the great work." Well, thank you very much, Jared. I appreciate you saying that. I especially love that you're sharing it out with the next generation. Boy, could we use more of that. That's a world that smarter, happier and richer. 

Jared goes on. "My question is around Tesla. Tesla is an active Rule Breakers recommendation. I bought shares albeit well after the recommendation was made and at a pretty high price. Price aside, I'm trying to figure out if Tesla is a company we should still have faith in. On the one hand, they have an amazing product with market leadership in the e-vehicle space, and their brand name has come to define the electric vehicle. On the other hand, their financials are a mess. Elon's behavior has been quite erratic. And I'm not certain any longer on whether or not they'll be able to fully scale up operations to a point where the Model 3 becomes the profit-maker we'd hoped. Obviously, I've over-simplified the problem, but I can't help wonder, what is Rule Breakers' take on Tesla today? Does David and team still have confidence in the business? With appreciation, Jared."

Well, I'm really glad that you've asked about this company, because it's one of the most talked about companies of our time. That is, in itself, a sign that it's a Rule Breaker. When you find something do something so disruptive, a for-profit company with a product or service so disruptive that people can't not talk about it, and the rest of its industry both criticizes it and then tries to copy it. You have a magnetic, and, as you say, erratic person running the company. How could we not want to talk about Tesla? Which we do on Rule Breaker Investing from time to time.

The first thing I want to say, Jared, is that no one has to be right about this stock. In fact, nobody has to be right about any single stock. Sometimes I think I'm right. That's usually when I buy shares of a company. But there's no requirement that I get Tesla right or that you get it right. The first thing most investors can do is put that one in the "too hard to understand" category. I think that's the Warren Buffett metaphor. Just throw it on the "too hard to understand" pile and not have to be right about Tesla. There are so many other great businesses and stocks out there. Nobody has to be right about their predictions about Tesla. 

Now, I want to mention that this is a stock that we've held for a long time. In fact, it was November 23rd, 2011. We're coming up on our eighth anniversary of Tesla. We recommended it to members at $31.45. Today, it's at $242, so it's up more than 7X in value. But, as you well know, the stock's been flat for several years now and has been weak. Elon Musk and his dream have been compromised at different points. A lot of questions about Elon. 

I do want to say, from the standpoint of somebody who was there early days, I am admittedly biased. I have a long-term position the stock. I usually don't give up long-term positions readily. And, I feel like I've gotten to know the company pretty well. My view of Tesla is that it started as a Rule Breaker, and it's right now in that phase where we're going to see, can it become a rule maker? The dream of every Rule Breaker, to become the maker of rules in its industry. Or, will it not get there? Potentially, will it fade off into obscurity over time? We can all see, maybe, a future of electric vehicles. I believe that Daimler just announced that it's scrapping the internal combustion engine this week in order to focus wholly on electric vehicles. That is an amazing change for a big longtime company. So, you see the pioneer here. But sometimes, the pioneers end up with arrows in their backs, as the old cliché goes. Tesla could certainly be one of them. But my default is to hold. Whether you have it at a high price or a low price, when you see a company with these attributes -- they have a great recognized brand, they are the top dog in their category, does it sound like this is a Rule Breaker? A lot of people think it's overvalued. Those are the reasons I usually continue to hold stocks.

The final thing I want to say is, there are lots of other analogues I have here for seeing how things could play out for Tesla. I'll give a silly one. Longtime Rule Breaker members might remember a company called MAKO Surgical, a company that did a robotic arm to help with knee and hip replacements. It was a disruptive approach. If you know Intuitive Surgical, MAKO Surgical was in that vein. It came out looking like a Rule Breaker, but it started acting erratically. It ended up turning from a big winner to a loser, but eventually got bought out by another company at a significant premium, giving us a win on the investment overall. I'm not saying that happens here, but I've seen other cases where a company looks like a Rule Breaker, then trips up, stubs its toe, and gets caught by other companies, but ultimately, a big player -- in this case, it was this case he was Stryker, the medical products company that bought MAKO Surgical. But, you can see how, even if Elon screws it up, how valuable the Tesla brand is, the footprint, all of their superchargers. I think there's a ton of value there for an acquisitor eventually, if it ever came to that.

I think people think that a company like Tesla is far more fragile than it actually is. They treat it as if it's just Elon and it's all coming down to the Model 3, when actually, these roots run deep. Tesla really has dominated the luxury car market, cars that cost $100,000 or more. That's really what Tesla's taken over in the last decade or so. Happens to be electric, and the world seems to be agreeing with Tesla. We'll see how it plays out.

But, Jared, as I move on here, remember -- you don't have to be right about this stock. I might be wrong about this stock. The main thing is, let's put our money in the things that we believe in. Let's be patient and watch them play out. We certainly have been rewarded as eight-year holders of TSLA. 

Alright, Rule Breaker mailbag item No. 4. This comes from Mike Ensisca in Columbus, Ohio. Mainly just a story. I love these. I enjoy sharing these. Thank you for writing in, Mike, with your metaphor that you've used to help your Boy Scouts. We're going to use it here on this podcast to help a lot of people listening. Thank you, Mike!

You write, "Hello RBI team. I'm a longtime Fool subscriber to both Stock Advisor and Rule Breakers services. Like many Fools, I've struggled with my strategy for adding to my stocks, and took to heart the Foolish philosophy of adding to your winners. Alas, when my cash reserves get to a point, I add to my highest performing stock that is under 10% of my portfolio. It has caused quite a good positive float from my account." That's very interesting. This is your strategy, Mike, not necessarily ours. Everybody has a different approach. But what you're saying is, when you have your cash reserves hit a certain level, like you're ready to invest them, you specifically look at what stock's doing best for you that is less than 10% of your portfolio. It sounds like that's the one you've been buying, and you've been doing well with it.

You go on. "I'm also a Scoutmaster of my son's Boy Scout troop. Besides outdoor and leadership skills, I try to teach the boys life skills, like time and money management. The topic of stocks and investing came up at one of our meetings, and I saw my young Patrol leader struggling with the subject, so I stepped in and provided this analogy based on the adding to your winners idea. After the meeting, several adults commented they never thought of using this method before, and they found my analogy interesting, so I thought I'd share it with you. I hope you find an opportunity to share it with other Fools.

"Imagine your portfolio is a basket of a hot air balloon. To keep you afloat, you need a balloon and hot air. Typically, a hot air balloon has counterweights that hang off the basket so you don't float out of the atmosphere or so high you could put yourself in danger. For this example, though, imagine the air you're floating in has no limit. There is no end to atmosphere above you, but there is ground below you. You're safe to travel as high as you want, but there's a finite amount of space below you. Your winning stocks are the hot air you put in your balloon. They make you rise higher. Your losing stocks are the sandbags hanging off the bottom of your basket, drawing you closer to the ground. So I ask you, why would you add sand to the bags below you? Why would you add weight to what is drawing you nearer to the ground? Add hot air. Go higher. There is no limit in how high you can go.

I know there might be the cynics out there that would like to throw sand on my idea and ask, 'What happens when your hot air turns to sand, i.e. the stock drops?' My answer to them is, hopefully, using this method, you have more hot air than you need, and hopefully you get invested in good hot air. I could go on and on and on. I think you get the point. Keep on doing what you're doing. You and the Foolish team are more helpful for us than you could ever imagine. More than just saving and investing our money, you've helped me succeed in a lot of areas of my life using Foolish ideas. Mike Ensisca."

Mike, I really appreciate you taking the time not just to share your story -- it was my pleasure to share it with a lot of other Fools -- but also, again, to think that you are there not just with your son, although that's great, too -- getting our kids invested is important -- but with the whole Scout troop. Turns out, even the other dads all learning from you. The more you and I can find platforms in this life where we can use those platforms to add value, the better. Certainly, Boy Scout leaders, and really adults, parents, have one of the ultimate platforms. But I often think of fool.com and what we do hear The Fool as a wonderful platform for us to try to add value. Here we are together on Rule Breaker Investing, and we're helping each other tell the story of how to succeed in the future, trying to influence as many people as possible.

I'll share one final analogy before we move on. I often think about investing in a good portfolio this way. It's like the start of the Kentucky Derby. If you've seen it before, there's usually like 20 horses. There are so many horses in the Kentucky Derby that you can take a bet on 19A and 19B, they're part of the same ticket. That's how many horses there are. At the start of the race, I think it's smart to put a little bet, an even bet, on every single one of those horses. But then, when the bell rings, all of a sudden, they're not even anymore. And that hot air that you're talking about, Mike, is how I think about the horses that I want to invest. You and I can't do this in the Kentucky Derby, but we can do it with our portfolio in life -- we can add money to the ones that are winning. At furlong 6 or around the final bend, we can keep adding money, and usually, we're going to do a lot better. Sometimes, some horses make it around the track 100 times before some others even finish the race.

Alright, Rule Breaker mailbag item No. 5. This is from Billy Fallon. "Hello! I just started investing in individual stocks this year. I've used both Stock Advisor and Rule Breakers to put together a portfolio of 40 companies already." I'm going to hard stop it there for a sec, Billy.

First of all, this is yet another person who's written in this month saying, "I'm a member of both Stock Advisor and Rule Breakers." We really appreciate that. Those are our two biggest services here at The Motley Fool. If you're a listener and you haven't joined either one, my suggestion is to get started. Pick your poison. For a lot of us Stock Advisor -- which is our largest service -- is a little bit safer, a little bit more vanilla ice cream, mom and, pop successful investing. In fact, it is our best-performing scorecard. It has a real mix of large and small companies of all types. My brother Tom pick stocks there, too. Rule Breakers, for those who use it and love it, you're going to know that these are stocks that are a little bit more high-flyers, more edgy sometimes, their technologies unproven in some cases. If that's the style that you want to pursue as an investor, I would suggest you own Rule Breakers. I'm really happy to say, I'm reading from a lot of corresponds this week who have both.

Alright, back to your note, Billy. "My question is, with the long-term investment strategy and all of the new picks that come out each week, how do I decide which stocks to sell so I have room for fresh picks in the future and not spread my funds too thin? It's really hard to keep my portfolio from expanding to too many different companies because the Motley Picks each week make these companies sounds so great." Those are new ideas that we keep coming out with. "When a company in my current portfolio seems to be trending down after a couple of quarters, it's so tempting to cut my losses and either add to my winners or invest in a new company. Thanks for any help, Billy Fallon!"

Well, let me just first of all say, congratulations. You have built, with the help of our services, a 40-stock portfolio. That is spectacular. I'm guessing you were able to do it fairly rapidly. It didn't take you 40 years. We weren't around 40 years ago. It didn't take you 20 years to do that. You may have done that in a year or less.

Now, each of us should size our portfolio according to some calculation in our minds of how much time and interest we have to really follow our portfolios. If you have less time and interest -- hint, hint -- have fewer stocks. Also, how much money we have. if we're near the end of our lives and we have more money than we've ever had before, it makes a lot of sense for me to have that broadly diversified. Some of our members own hundreds of stocks. On the other hand, if you're just starting out as a young investor, or even as a middle-aged investor just starting out, probably makes sense not to go to 100 right away. There is a process. Each of us needs to ask ourselves, "What feels right for me?" And then we need to go through that process. Billy, great job! 40 companies, that's a strong portfolio.

I'm the first to say, I don't think you need any more companies. I do want to ask you, rhetorically, I ask each of us, which is the situation you are in: either A. you have more money coming in, or B. you do not have more money coming in. A lot of the work that I do assumes, and it is aimed at those who do have more money coming in, you have a salary, you're getting paid twice a month, you have a regular stream of money, you're taking a portion of that, saving it. God bless you, great job, you're saving the money! And then, you are investing that money in one or more stocks. Which is spectacular, that's true of a lot of us. There are also a lot of people listening to me today, who have finished that portion of their life, and they are just investing, their [...], as we say, it's all they're gonna have, they want to grow it, and I think it's a great idea to keep growing it. But to buy a new stock you'd have to sell existing stocks. So, to that first group I would say, just keep buying stocks, that make your portfolio reflect your best vision for our future. So, whether it's a stock that my brother picks next month, or I picked three months ago, maybe an industry you know something about, I would say, add that. But at the same time, realize that if you have dozens and dozens of stocks, the time that you spend gets stretched and you should focus your research time on your larger holdings. It's usually the companies that are winning for you that you might be adding to over time. Now, finally, for that second group of people, where they don't have any new money coming in, I would just say you have to think it through. What is the right number of stocks for you to have? You probably have things outside of stocks. You might have fixed income, real estate, other properties. A lot of financial advisors will want you to be diversified, and I bet many of you are. So I think you have to decide, but there's no single correct number for the stocks in your portfolio in either of those situations.

To close, you should be focusing your time in three places -- for stocks or holdings that represent 5% or more of what you have, spend a lot of time looking at those. For ones that represent, let's say, 1.5% to 5% allocation for you, spend medium time with those. Finally, with stocks -- and if you own 100 stocks, this is going to be true of most of them -- that represent less than 1.5% of your overall net worth, you don't have to spend a lot of time. They don't count for as much as some of the others. It's not just always about the number of stocks that you're invested in. It's the actual percentage allocations, especially if you're adding to your winners, focusing on the ones that really count for you.

Alright, Rule Breaker mailbag item No. 6. Ram, I included you in the hot takes this month. I also wanted to, for No. 6, share some of your observations about spiffy pops. This comes from @rambhupatiraju. Ram, earlier this month on Twitter, shared some of his thoughts, having looked over our spiffy pop page here at The Motley Fool. By the way, you can always Google spiffy-pop, and you will find this page -- as Ram says, an aspirational page for individual investors to learn, invest, and achieve those mega-baggers, companies that make many times your initial investment over the long term. Ram shared his learnings in a thread. I'm just going to read this right out. I really appreciate your insights.

First, you say, "My investing dollars would rather be in the companies driving positive change and innovation than in companies resisting change and coasting on legacy products." I certainly agree with that. You also say, "Winners win. Add to your winners over time up to a comfortable limit, and not averaging down into weakening companies for cheap valuation reasons." Another observation. "Some of those companies will fail. That's OK. Part of capitalism. Course correct if you can. If not, one more lesson learned."

A few more here. Ram says, "Be comfortable with huge swings toward over and under valuations through the long journey. As long as the business thesis is being proven right, or getting even better, no one knows how long one might have to wait for the spiffy pop. Starting in a market like 2009 and having a 10-year bull market expedites things a lot, but you can't wait for or time these things perfectly." And then, as he begins to conclude, "Identifying the most secular growth trends and the winners within helps. Vision, patience, discipline, and conviction are the price you have to pay to achieve these spiffy pops, but once you get your first, the feeling is just magical."

Thank you very much for sharing your observations, Ram. I, of course, agree with you. I think you've done a nice job summarizing them. I do want to make sure we define our terms here. As I said at the very top of this week's podcast, not everybody listening right now knows what a spiffy pop is. Let's be really clear -- a spiffy pop is a stock that, in a single day, makes more money than you invested in it initially. For example, if you buy a stock that's at $17 a share, and three years from now, after a great earnings report, it goes from $100 to $117 a share -- it just went up $17 a share in one day, your cost basis was $17, you just got a spiffy pop. Some stocks pop. We hear about that all the time. CNBC talks about, this or that stock pops. But we as fellow Fools know of a much more -- I'll use Ram's word -- magical pop, and that is the spiffy pop. Spiffy pops only are going to come to investors who have the patience to hold stocks overtime; to actually invest, not trade, which is what the rest of the world is doing. And, of course, not every stock that you hold is going to spiffy pop, so you need to be finding companies that are truly growing and changing the world and the future, making the world better. When you do, you can surprise yourself with spiffy pops popping like flowers on the first day of spring. We have seen those times. In fact, we have over 15 spiffy pops we've had in our services this year. I think we had over 50 last year. A lot of people don't even realize this could ever happen. It hasn't even occurred to them that they could one day make more money with their investment in a single day than they paid for it way back when. But our services are exemplifying how to do this dozens of times over.

Ram, I think you know this, but not everybody listening does -- we even stop counting spiffy pops once a stock does it for its 13th time. Once a stock for the 13th time spiffy pops, we call that a baker's dozen, and we call that the forget me pop. We will no longer even count them. At that point, sometimes it's just the movement of a few percentage points a day which causes the spiffy pop. We don't count those. So, when I said we had 50 or so last year, none of those were Netflix, even though Netflix probably spiffy popped 38 times last year on its own. We're only counting stocks that are doing it for the first 13 times.

If you heard me say at the start of the show "spiffy pop" and you were wondering right up until now, "What is that, exactly?" Now you know. I hope you'll spread the awareness of that concept. It's probably my favorite thing when I think about investing. In fact, my screen name on The Motley Fool website is tmfspiffypop. This means quite a lot to me. I think it can mean a lot for you, as well.

Finally this week, Rule Breaker mailbag item No. 7. Nicholas, thank you for this lovely note.

"Hi, David. It's been a true pleasure to listen to your Rule Breaker Investing podcasts, your enthusiasm around stocks. A smarter, happier, richer world has been inspiring for me. I hope that one day, I can positively influence the people around me in the way that you have toward me. As recent as last January I had some unfortunate life events, and had made some uneducated money decisions that had led me into homelessness. With no family or friends for support, I turned toward the internet to help educate myself and found your content, which has helped me turn my financial situation around. As of this moment, I am working two jobs and saving about 50% of my post-tax income. Over time, I plan to put an even greater percentage toward investing and holding for a secure retirement. I would not have been able to organize my finances and put my money to work if it was not for your impactful lessons about financial independence and retirement. For all of this, I must thank you. I'm very excited to become a Fool and get started with your stock-picking services. It's such a small price to pay for the lifetime of knowledge you have given me."

Don't you think I saved the best for last? Nicholas, thank you very much for that note. As much time as I spend talking about investing, and how to pick a better stock, and how to do the work of investing better -- it's one thing to find a great company; it's another to invest well and properly with that company and build a portfolio -- yes, we are preoccupied with that here on Rule Breaker Investing. It's a big calling that I have and something I love talking about. But frankly, what you did is far harder than anything I've ever done in my life. I particularly want to highlight the amount of money that you are saving, 50% of your post-tax income, that is astonishing. That is much more impressive, I think, than making a 10-bagger. In fact, most of the world would be so well served if it could just save anything like that much. The multi-baggers come much easier from that point. For most of us, it is the saving that really enables everything else.

Nicholas, I'm so glad that you found that in your life. You did that on your own. If we've inspired you some, I'm glad to know that, but the truth is, every one of us who's a net saver is doing something that a lot of the world finds pretty hard to do, and sometimes understandably so.

Thank you for these mailbag items, and, of course, all the ones I couldn't read this time. It was a delight to spend this September with you, picking some stocks, reviewing some, too, playing a game and doing a mailbag. Yep, I already highlighted it -- we will be doing my Pet Peeves: Volume 4 episode next week. If you have one for me, remember, [email protected].

Two final notes before we go. Have you entered our Smarter, Happier, and Richer contest yet? If not, head over to our Motley Fool official Instagram account @MotleyFoolOfficial. Look for a photo of Foolish swag. To enter, you have to answer the question correctly and tag a friend in the comments of the post. If you win, your friend wins, too. We've got 10 Foolish caps, T-shirts, and our Motley Fool Investment Guides. I think Tom and I are signing those as prizes. Ready, set, go. That's right. We don't talk about Instagram as much here. I don't use it personally. But we sure have a wonderful and growing following on Instagram. Thank you to my friend Ana, who dreamed up that contest. I hope you'll head right over to @MotleyFoolOfficial on Instagram and play along with us.

Finally, if you haven't already, please subscribe to this podcast on iTunes or Spotify or Google Play, wherever you find podcasts. You can follow us, as I've mentioned, on Twitter @RBIPodcast. 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. Have a great week. Fool on!