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Answering Investors' Questions

By Motley Fool Staff - Feb 8, 2021 at 8:10PM

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"Rule Breaker Investing" talks to you.

Whether you're a leader in your community or some lucky kid's rich uncle, in this month's Rule Breaker Investing: Mailbag, Motley Fool co-founder David Gardner demonstrates how you can bring someone along on your investing journey. Plus, improvements to the Market Cap Game Show, thoughts on when to sell, 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 January 26, 2021.

David Gardner: Three building blocks of this podcast: a list of six item Rule Breaker principles, five stock samplers and reviewing them, and talking not just about my winners, but my losers too. Those three building blocks were all in evidence this past month. The year kicked off as we do every year with David's Biggest Losers Volume VI. We then reviewed to past winning five stock samplers and I got out my dice to try to create the next winner. Then last week, a new list of six Rule Breaker Principles. This time, six principles of a Rule Breaker portfolio. It was an exceptionally Foolish Rule Breaker-y month. Lots else happened in the world too. Well, a fourth building block of this podcast is what we do on the final Wednesday of every month, mailbag: our shared opportunity together to think one step deeper about what we covered this month, go into open dialogue throughout, your questions, your stories, and thoughts. Chicken soup for the Foolish soul, we can share together during a long cold winter. Well, that Wednesday, is this Wednesday. It's time for your Rule Breaker Investing mailbag, only on this week's Rule Breaker Investing.

Welcome back to Rule Breaker Investing. I'm delighted to have you with me here at the end of January 2021. I already covered it up top, but I will just quickly review David's Biggest Losers to kick-off the month. My six worst stock picks of the last three years, that was January 6th, January 13th, six Rule Breaker principles for how to build and steward your portfolio. Then last week, Five Stocks Rolled Up at Random and a review-a-palooza of two previous five stock samples. Both, I'm happy to say, utterly destroying the market. Those were Five Stocks that Spark Joy and Five Stocks Shrouded in Mystery. That was the month that was. This is the week that is, the final week of January 2021 and let's get started very shortly with your mailbag. One housekeeping item in advance, one of my favorite people in the world of boardgames is my guest on next week's show. Now, if you are a heavy-duty gamer, and I know some of you are and you're out there, you probably will instantly recognize the name Reiner Knizia. However, admittedly, much of the world still has never played a Reiner Knizia boardgame and so wouldn't recognize the name of one of my favorite people in the world of boardgaming and somebody who's become a personal friend over the years. Reiner is our guest next week.

Now, you can imagine we're going to talk about boardgames, but we're going to talk a lot more about that. I'm sure I'll be asking Reiner how he invests, but a lot of it is about the creative process. He is an artist, he is a prolific game designer. Within the world of boardgames, he's like Mozart. He is incredibly prolific at a very high level. I love to hang out with those people and learn from them. Reiner came from the world of business. He was working at a bank before he decided to step away and become a full-time boardgame designer. If you're thinking about a career transition, you'll probably be interested in that too. To these ends then, let me mention that we will take your proposed questions. If you're a Reiner Knizia fan especially, rbi@fool.com is our email address, drop us a line. I will look over your question submissions. If I see some great ones, your question will be included in my interview with Reiner Knizia next week. Now, I rarely issue homework on this podcast. But if you are not yet a Reiner Knizia fan and you're in the market for a simple card game or a family boardgame, let me recommend in advance Lost Cities. One of his older designs, it's a lovely two-player card game. It also plays multiple players as a boardgame. Both of them are available on Amazon. If you want to buy a game, play in advance, and start to discover how Reiner designs for delight for people and families. There's your homework in the week ahead.

Before I start with my hot takes from Twitter, I do want to mention, occasionally, I do this for mailbags. When certain types of questions come in and I don't answer them, I want you to understand how to increase your odds of being included on the mailbags for Rule Breaker Investing. Occasionally, I give out a tip or two. Here's one that came to mind this week. I read at least one note, it was really thoughtful. It was from a college student basically saying, "Hey, how could I start a college Fool's chapter or could the Fool assist us in creating more university presence?" This was somebody who went through and maybe majored in business, but felt as if a lot of his or her friends at Clemson didn't know a lot of the things that you and I know as Rule Breaker investors and people who care about the markets. My new Clemson friend is one of them, but I'm not going to actually include that on this week's podcast, even though I'm mentioning it, because it's an example of a question that is really a Motley Fool question. Sometimes questions are asked of me, but really on behalf of my company, so that's a great example of something that should be asked of the company. I'm here, I'm just a little cogwheel and a machine here focused on Rule Breaker Investing. Typical questions that are really for the Motley Fool, not for me personally or for Rule Breaker Investing, probably have a lesser chance of being read. But anyway, a great topic. One, I sure hope our company will get to and do well at some point.

For our hot takes from Twitter, this week, the first one from [...], on Twitter, "Love those six Rule Breaker investor habits." Now, [...] , based on the rest of your tweet, I think that you are referring, of course, to our six Rule Breaker portfolio principles. The investor habits, another list we use a lot, but not this particular month. Anyway, he goes on from there to say, "Very concise and helpful. The analogy with the horse race makes the podcast stick in your head. I've listened to it twice already. Noted it down for future references. Thanks, @DavidGFool." Well, thank you, [...]. It was truly a delight to bring you six principles of a Rule Breaker portfolio that certainly sparked some of our exchanges this particular week. We'll be getting to those a little bit later, but thank you for that nice note. To the same end, Ian Richards @ian_e_richards on Twitter, "Just listened to the podcast on portfolio management, good stuff as usual. One thing I would add," Ian says, "Before doing anything, think about tax. Very easy to make a withdrawal or reallocation without realizing you'll pay a big tax bill, especially here in Spain," Ian writes. I certainly appreciate that point. I'm not going to add taxes back into the principles of portfolio management for Rule Breakers. I certainly agree that it's important and all this should be thinking about it. But Ian and everybody else, I hope you'll remember that when I said this list of six principles are principles, it's not a comprehensive plan. At least for me, taxes just don't factor in enough into my portfolio management thinking. Certainly, one-click down, they do. If I were writing more about this, of course, I just did this as an oral podcast, but if I were already more about this, I would be speaking to that. But at a high, high level, I don't think I'm going to include the word tax in any of those six principles, but I certainly appreciate you pointing that out and I hope a lot of us are conscious of the tax implications of what we're doing in our portfolios, because that can really count, especially it sounds like if you're in a high tax country like Spain.

Tweet No. 3, this is from Jeffrey. Rocking again, I've said this before. One of my favorite Twitter names [inaudible] Jeffrey, you say "I was just talking about a rule specifically for when one of the horses wins the race. Now again, this is going back to our Rule Breaker portfolio principles: "When one of the horses wins the race and comes up with ways to define that," Jeff says, "When the horses in the top 10 of all market caps, that's where we ended up, I think that would have gotten you out of AOL efficiently." Well, let me speak to that in two quick ways. Jeff, first of all, I am going to be speaking to that a little bit later in this podcast. Thank you for that. Second, I want you to know that just because a company has gotten to be one of the 10 largest market caps in the world, by no means would that cause me to think I should now sell the stock. Obviously, Apple did that when across the $1 trillion mark and it's more than doubled and not much time since. I think a lot of us would have regretted having sold Apple. But that concept of the horse race, which does run through my portfolio principles, ultimately was not designed to be an allegory. I'm not shooting for an allegorical high-level view of horse races, but I certainly appreciate the point, because I referred to it a few times. We played the sound effect, which I think stuck in some people's minds. I really liked that approach, and I think it's a fair question. Just sticking with that metaphor for a sec, asking, "What does it mean to end the race, and how do you treat the horses that win?" I'm still going to leave that open-minded. I don't have clear answers yet myself. As I mentioned, the work from earlier this month, that is in draft form. I'm still thinking it through. Jeff, you've helped me think a little bit more about it and I'm hoping to spur some others to think about that more as well.

Then finally, this one from @mdukas, Mark D. writes on Twitter, "Hi David, love the market cap game show, but felt badly when Emily," this happened in December, at the end of December, "but felt badly when Emily gets so close, but still lost. Suggestion, if the guesser is within X-percent of the actual market cap, then they get one point. The other player still guesses it's high or low and gets their point, but then you announce after that the guesser earned a point also. "Maybe if you're within 5% or 10%," Mark says, "Gives both contestants a chance full on." Well, I do like that. I think that is an improvement. Yet, our first mailbag item of the month, which I'm about to do, has I think an even better suggestion, so let's get to that.

Alright, Rule Breaker mailbag item No. 1. This one comes from Adam Nelson, market cap game show suggestion. Let's do it Adam. "Hi, David. I really enjoy these episodes and thought I might suggest that change after listening to the last market cap game show. Try giving the guesser the ability to state a range of market caps, and then their opponent can say, inside or outside that range." Adam goes on, "This is similar to the old card game, Acey Deucey, which is always a good time," and I have to admit, Adam, I never did have that card game, so I haven't played it, but I get the concept, and I really liked this. Adam goes on, "Doing it this way allows the contestants to place more or less pressure on their opponent by changing the width of the range, and it's a fun expression of the confidence level too. With investing, it's never an exact science, as you know, and I think it will be more useful to teach your listeners to use a range rather than guess with false precision. I also think this can make the game very challenging if both analysts have a strong opinion on a market cap and your analysts are often right. P.S., I'm a Stock Advisor member, but love your Rule Breaking mentality and insightful podcasts. Thanks for all you do. Adam Nelson." Well, Adam, I think you have really nailed it with this one. It's a new year, therefore, for new market cap game shows will be coming in 2021, I trust, and the first one, which will happen near the end of March, we will be using the Adam Nelson format. I really liked that. Let's give a quick example.

Let's take Etsy, why wouldn't we? The market cap of Etsy, and realized today, by the way, is $26.2 billion, as we record on Tuesday afternoon, January 26th, $26.2 billion. I might turn to one of my contestants and say, what is your market cap range for Etsy? That smart Fool analyst, whoever he or she is, will think about it and might say something like $18 billion-$30 billion. That's a choice that my contestant has made. They could've said $25 billion-$27 billion. It could be a small or large range as they want, and then all the other contestant does, and you playing at home, all you need to do is say 'inside' or 'outside.' In our example, the examples I gave, both of those, if you'd said inside you'd have it right. So, it puts pressure on the guesser to narrow the range as much as they're comfortable, and it's just a much more thoughtful game. I really liked that suggestion, Adam. I think you've made us smarter, happier and richer. So, we're going to try it out in March, really looking forward to it. Thanks for the great suggestion.

Rule Breaker mailbag item No. 2. This is from Jason Smith. Thank you, Jason. "David, Rule Breaker and Stock Advisor member here. I've been investing in some form since I was in high-school. My first stock I bought was Shaw Group, ticker symbol, SHAW, as a senior in high-school. I had summer job money and graduation gift money, saved up and I decided to pay a visit to my parents' stockbroker and I bought $1,000 of Shaw and $1,000 of a mutual fund. After my purchase, Shaw went from around $20 a share to $40 a share and I sold out, and then I bought Nokia. In 2007-ish, as the iPhone came out, Nokia didn't quite work out as well. I've been investing in mutual funds since then. I'm 34 today." I love that back story. Thank you for sharing that, Jason. "While I feel I have a decent background in investing, it was something I've had to attempt to learn on my own. I'm the son of two doctors. My parents understood the value of investing, but that was about it. They invested heavily in mutual funds. Now I'm a lawyer by trade, so like my parents, I had no exposure to investing or business in my professional training. But I decided four to five years ago, I needed a productive hobby. So, I started buying individual stocks, listening to various podcasts, and subscribing to various stock-picking services. Rule Breakers was one service I subscribed to. I've always had an eye toward buy-and-hold investing, but I tried my hand at shorter-term bets as well. Investing has changed the way I look at the world. I've learned more about business and markets than I ever thought I would. There is simply so much to learn about the world. The study of a business is the perfect way to do it." Music to my ears, Jason, let me keep going. "Motley Fool and specifically Rule Breakers has helped me immensely along the way. Now, I struggle though, with the conflicting advice I got from various sources and financial media. Buy this, sell that, OMG, you're crazy for even considering that stock. Things get mind bending, especially when facing questions related to portfolio allocation or when to sell." This brings me to my point. "The six principles of a Rule Breaker portfolio brought everything together, particularly points No. 2, know the portfolio purpose, and No. 4, know your sleep number. For example, in my IRA, I think my sleep number is 50, but in my individual account, it is 20. This podcast brought it altogether for me, addressing nagging questions of mine, and now all the principles of Rule Breaker Investing create a total package that allows me to invest with 100% confidence, knowing that my stock purchases may not always be right, but that my approach is. Thank you. Jason Smith."

Well, thank you back, Jason, and I'm just delighted. The reason I wanted to share that note is because sometimes it's helpful for all of us to hear somebody else reacting to things and saying, here's what works for me, here's what jumped out to me. For example, Jason, you mentioned the sleep number jumping out to you. I think that worked for a lot of other people too. But for all of us, as fellow Fools, to hear somebody else and their reactions can steal our confidence often or give us some encouragement. So, that's the spirit of your note. Now, there will be a few other mailbag items that explore deeper or question some of the principles, which I'm fine with too. As I mentioned, it's all a draft, but I did want to just share Jason's note to lock down for at least one very well educated person who's made the move from mutual funds to stocks, and is having a great time that it brought it altogether for him, and that put a big smile on my face. So thank you, Jason Smith.

Rule Breaker mailbag item No. 3. "Hi David." This is from Simon Barker by the way, and a couple of people wrote in on this topic, so that's why I wanted to address it. We're talking about sleep numbers here with Rule Breaker mailbag item No. 3. "Hi, David. New investor here and member of the Stock Advisor service. I'm loving the RBI podcast. I've recently transitioned from eight years running my own company to now working as an employee, and so I've also transitioned from simply investing in a managed portfolio to individual stocks. Now, I don't have my own company anymore to see potentially market beating returns, so my mentality has shifted to wanting my salary to work harder for me. It's been an interesting mindset shift, and one that has taken 18 months to realize since shutting down the company. In your six principles this month, you mentioned how your sleep number is still at 80, because most of your wealth is in your Motley Fool company. I wonder if this is really your true sleep number though. When I owned Redfin, I could say that my sleep number was similar, probably higher, but in reality that wealth wasn't easily liquidated, much as I imagine yours isn't, unless you wanted to sell a large stake in the Motley Fool. I think for entrepreneurs and company owners, it's probably worth having a distinction between stocks you could easily sell and applying your sleep number there, versus those that you cannot." You even highlight the issue someone like Jeff Bezos has, "If he wants to sell his Amazon's stock, he can't do it in one go because he would tank the share price. His sleep number here is being held high by external forces. Hope this thought is of some use. Keep up the great stock picks. I've got 32 years to the typical retirement age, hoping to get there sooner following your advice, Simon Barker." Well, from all of us here at the Motley Fool, Simon, thank you for that note, and for me personally, I appreciate you pushing back a little bit on the idea of a sleep number being contextual, because I put it out there, just to remind, especially any new listeners this week, the sleep number, in my context, is the number of a percentage that you'd allow your highest allocated stock ever to grow into.

For example, if your sleep number is 40, and that's a big number, you're saying you would allow a single holding in your portfolio to take over 40% of your net worth, of your portfolio, if you will. Now that's a really big number, and I have a number bigger than that, and we're going to talk about that in a second. But I just want to make sure everybody understands the basic concept of a sleep number, and for a lot of people, theirs would be closer to five or 10. In very evenly allocated portfolios or more conservative, portfolio rebalancing approaches, people have low Sleep Numbers. They don't want a single stock to become more than five or 10% of their portfolio, and that's the way mutual funds are managed today. Most managed mutual funds have requirements that they can't have a holding that is a substantial size, because it's considered to be too unsafe for the rest of the fund and to make the fund unsafe for many and investors. So the concept of the Sleep Number was for me, the innovative breakthrough that I made, and I hope I gave words and new language to something that helps people think through their own portfolios.

Now, just to speak to highly illiquid situations, and anybody who's an entrepreneur who owns company shares, whether you're private or public market entrepreneur, you can understand this. I stand by my position that, if that is the majority of your net worth, that you probably have a very large Sleep Number because, in the end, the whole context is important to me. If you or I have the majority, +50% of our net worth in our company, I really do think you should think of it that way as a sleep number. You should just recognize that. Now, again, a lot of wealth managers will take you aside, twist your arm a little and say, "Hey, I think you should be systematically pairing down the allocation that you have toward that big, imbalanced position." For a lot of entrepreneurs, they do that. I've mentioned this before, but somebody like Reed Hastings of Netflix fame, Reed Hastings has consistently been selling off little mechanical bits of his Netflix holdings over the years. It's still a huge amount of wealth, but he has been pairing it back. A lot of people, again, listening to their wealth managers will do just that. I'd like to share my personal approach to life through this podcast to be authentic and real for people, but also, when I say that my own sleep number has been 80, I don't really want to say everything as an exemplar to most people who are listening to me right now. It's a unique situation, I'm just being true to my own situation and telling you what I do. But I'm the first to say that you need to pick a number that makes sense for you.

To those like Simon, who wrote in about the illiquidity of a big position when it is your own company, and you can't just sell the company the next day or sell the stock, I think that probably suggests that with the rest of your money that isn't invested in that one big position, you probably should be spreading that out more than usual. You probably shouldn't have a second stock where a lot of your wealth is concentrated in. But again, mine is not to determine with your financial planner in you, how you should manage your money. This is a podcast where I'm giving you how principles are trying to help people think smarter, become smarter, happier, and richer. I hope it's helped there. The illiquidity of a position certainly matters in the greater context of your net worth or mine.

Rule Breaker mailbag item No. 4. Yes, I did very intentionally put this one right after the previous one, which reminds me to say that I have a whole process by which I put together these podcasts, these mailbags every month, Rick Engdahl, through Trello, which by the way is a property of Atlassian, ticker symbol TEAM, which has been a wonderful Rule Breaker stock for many of us. We used Trello and this month, we got 31 pages of write-ups and comments. I read through them all, and then I start to go, here's the yes pile, here's the maybe pile, here's the no pile. Usually, the yes pile is large enough that I don't even go to the 'maybes.' But then I take the yeses and I start to categorize them by different types. In fact, if you want to see a screenshot of that, I tweeted that out earlier today, Wednesday, January 27th, I'm @DavidGFool on Twitter, but I will show you just a little bit of the visual of my process. But after organizing them all, I then think about the sequencing. What makes sense to come when. I'm not going to belabor this point further here, the point of this podcast is not to go through the process of building a podcast, but I do want you to know, I think very much about what is point No. 1? What is point No. 11? Yeah, we have 11 this week. After I've done three, what makes sense for four, so to me, this one made sense next, this comes from Brett Wyman. Thank you for the note.

"Dear David, I'm writing to you as a 20-year-old investor and a Stock Advisor member of just a few months. First of all, thank you so much for all that you, Tom, and The Motley Fool team do each and every day. The honest, transparent nature of your services is so refreshing. I hope that more companies follow in your footsteps as I think it will make our world a much better place. As I look back at the history of investing," Brett writes, "I see companies like IBM, General Electric, GM, Exxon. They were the one sitting at the top of the S&P 500 in the 1980s and '90s, or maybe we'd even go '50s, '60s, '70s in some cases, if you will. I have now left wondering," Brett says, "What happened? What went wrong? None of these companies is anywhere near the top of the S&P 500 today." This brings me to my main point, which is that today, I see the likes of Apple, Amazon, Microsoft, Google [Alphabet], and Facebook sitting strongly atop the S&P 500." By a top, pretty sure Brett just means that they are the largest market caps today, which indeed Apple is. "Many of these big companies or Motley Fool recommendations which have performed very well over time. However, I wonder whether or not I will be sitting here in 20 years thinking to myself what went wrong? What happened to those companies that were the leaders in 2021? You often advise to let your winners run, but how can we avoid sitting on our winners so long that they start to decline as new businesses take over? How do we know when it's time to sell our big winners? I'm hoping to start getting a grasp for some of these major investing questions early on in my career, so that I'm better set up for success later on. Thank you again for all that you do. Fool on, Brett."

Well, Brett Wyman, I think that you were wise beyond your years. At the age of 20, you're already getting started investing, and you're already asking great questions that you're right. This is going to stead you well, as you get to be my age, which I'm 54 these days, so 34 years hence, that you were asking this question before you even turned 21, means some really good things for your future. Yes, I think a lot of us are aware that the companies that were the big winners decades ago aren't still big winners today. It's very natural to think, OK, well, that's true. But then David and the whole Rule Breaker approach, the way to manage a portfolio, the habits we develop as Rule Breaker investors, these often suggest never sell. Do you end up holding General Motors all the way into other mediocrity, or General Electric the same? The list goes on. Two quick thoughts on this. It certainly deserves more thinking that I can do in a mailbag item, but two quick thoughts to you, Brett. First of all, it certainly is true that that does happen over time. What I do as an investor is I continue to scrutinize my General Motors, which by the way, I never owned. My General Motors, if you will, let's say my Apple or my Amazon, and I ask some important questions. Questions like, is that company is still a leader today? Is that company still innovating? Is it the lead innovator in its field today? Those are the things that really keep companies great. By the way, some of these companies have been leaders for a few decades. It's not like they all peaked in the 2000s, and you shouldn't have owned Apple or Amazon the last 10 years or so. Nope, they've remained great investments over the last 10 years, and I trust that they'll beat the market in the next 10 years. My money's where my mouth is. Point No. 1, I think you'd have to ask important questions about whether that company is still relevant, whether it's treating all of its stakeholders, including its customers, really well, and whether there are any upstarts coming along that might unseat it?

I think some of the companies you mentioned past winners, yes, it was very evident that those companies were being unseated and undone by various factors. That really occurred in slow motion over years. Point No. 1, this does happen, that's why we have to ask important questions to separate the true long-term winners from the medium-term winters that won't keep winning. The second thing I would say to you is, that we're all about investing in the upstarts, the ones that come along and disrupt those very companies. If you have a big concentrated position in Apple, you could also consider selling off a portion of that, and reinvesting in some of our new Rule Breaker picks, maybe one of them will itself disrupt and unseat Apple overtime. We have a pretty good history for being invested in the very companies that come along and make IBM, GE, GM, and Exxon irrelevant in time. I'm never going to say we're going to have a 100% hit rate, but you should feel pretty good confidence that if you're asking the right questions of your big winners, and watching the skies for what might come along, the new shooting stars, I think you're going to do pretty well as an investor. To close before we go to point No. 5, the reason I positioned this right after Rule Breaker mailbag item No. 3, which was all about having a big sleep number, it's a reminder for some of us who have big sleep numbers that maybe we shouldn't have as big a number as we're thinking of. Maybe one of the things you should do if you have a concentrated position in your portfolio is just sell off little bits of it mechanically, to start to reduce the emphasis on that company for your net worth. Use all the wonderful services that we have, like Motley Fool Stock Advisor, Rule Breakers, and all the rest, to continue to find new upstarts, new ideas, and additional leaders that are leading in other industries beyond the ones that you are so well focused on.

In conclusion, one of my favorite words is 'context' in life. You can't go with broad brush approaches and say, this will work every time, all the time. Nope, you need to look at the situation, ask what makes the most sense in this context. Out of a rich assortment of tools in our toolbox, you need to pull out the right tool for the right situation, and that's where wisdom lies. Brett, I think you're already on the path right now because you're asking the right question. I hope that was helpful.

Rule Breaker mailbag item No. 5. This one comes from Simon Roten. Simon says, "Hi David. I'm a fellow Fool from Belgium for a few years now. I'm very happy with your services and have already recommended it to many of my friends." Well, thank you, Simon. "Thanks for all those years of wisdom. Now, I've listened to the David's Biggest Losers episode and I was very surprised to notice that Luckin Coffee wasn't mentioned. I bought that stock in March after your recommendation at around $27 or $28 a share. Now it's down to around $8 a share." By the way, that's a bounce-back softer for that stock. It was well lower than that. Simon goes on. "I know that happens. Luckily, I do have a well diversified portfolio with plenty of quality stocks, so no worries there, but I do wonder why it wasn't mentioned as one of the biggest losers. Thanks for your feedback. Best regards, Simon Roten." Well, Simon and all Fools, you should know that I don't pick all the stocks that are picked at The Motley Fool. In fact, I just pick all the stocks in Motley Fool Rule Breakers, and I pick half of the stocks, my side, of Motley Fool Stock Advisor. By the way, those are just two of our services. The Motley Fool has many services with lots of different people making picks.

In the case of Luckin Coffee, that was not my pick. I actually know very little about the company. I don't follow a lot of the other picks that are happening in The Motley Fool. I have enough time keeping track of the 230 or so active recommendations of companies that I oversee. I regret to say Luckin Coffee was a loser for many Stock Advisor members, in this case, wasn't my pick, but I do want you know, I have made some real losing picks in Motley Fool Stock Advisor, that was the point of the David's Biggest Losers podcast. But you also should always check who are the advisors making picks, not just in Motley Fool services, but in anyone else's service, whether you look at Morningstar, or people saying things on Bloomberg, or the Street, or wherever it is, I would encourage you to say, who is actually making this pick? I hope that was helpful and I hope that Motley Fool Stock Advisor continues to help you and others invest better. I'm again, always happy to call myself out with bad topics. I won't call anybody else out at our company. I'll call myself out again though. Alkermes has been a real dog in Motley Fool Stock Advisor. That's the last stock I picked for Stock Advisor members that's lost 50% or more. It was my September 2016 pick, a real disappointment. A company doing important things in this world. A biotechnology company that develops innovative medicines, designed specially around people with serious diseases, often mental health and addiction. So, I really want this company to do well because it's going to help our world out, but boy, has that been a bad stock pick of mine, down more than 50%, and we're still holding more than four years later. So yeah, this happens. It will always happen. It will continue to happen and it's happened many times in the past, but anybody who's a Rule Breaker investor by now knows the importance of losing to win.

Rule Breaker mailbag item No. 6. Love this one, Andy Bardis. Thank you. Writing in from Minneapolis, Minnesota. Go twins. "Hi, David. My three year old son asks unsolicited to listen to the Rule Breakers podcast in our car. I asked him to repeat this, only to catch it on video. He has a GKC of 1.67 and his three month old brother has a GKC of eight." I will explain what those mean in a second. Andy concludes, "I'm planning on continuing to add Foolish recommendations to their portfolios, and getting them involved in investment decisions once they can understand. This may be sooner than I expected, due to the interest I'm receiving. I hope you're well and keep up the great work, Fool on. Andy Bardis." Well, of course, I was going to include that on this mailbag, because I love stories of little kids investing, and I especially love a particularly precocious three-year-old somewhere in and around Minneapolis, Minnesota, who requests listening to this podcast at the age of three. Now, just concluding on this, I think a lot of us recognize the GKC is the Gardner Kretzmann Continuum, and what Andy is saying is that his three-month-old has at GKC of eight. That specifically means, I hope I'm doing my math right here, that he is one-quarter of a year old, therefore, I believe he has two stocks in his starting portfolio, which means the number of stocks is eight times the years of his age. Now, I think most of us are aspiring to what I often hold up as a standard is a 1.0 ratio, that is, whatever your age, Brett Wyman, we talked about earlier, Brett, you're 20. So I'd love to think you have or are working toward 20 stocks. That feels like a good balanced approach in a portfolio approach to life. So, you know, Andy, I love hearing about three month old kids with GKCs of eight. Keep up the great work dad.

Let's keep it in the family and another fun one. This one all the way from Stockholm, Sweden. Thank you, Pare Democrans for this note. "Hi David. I'm a listener from Stockholm, Sweden, and really enjoy the RBI Podcast. I'm also a fan of the Fool and your purpose to educate, amuse, and enrich." He says, "I'm sticking with the old motto." You're welcome too, Pare. "Keep up the good work. Now, inspired by Fool school," Pare goes on "and to give something that will keep on giving, I've decided to give my nephew a homemade boardgame. The concept is an 'investment journey,' where I will give him a sum of money for his birthday and Christmas, which we will then invest together. For every investment, we will keep score and collect increased percentage points. Fingers crossed," Pare says. This will hopefully be a fun way to learn about investing," Pare says. "He's eight years old now and the day he turns 18, I will then hand over the portfolio to him." Sounds like, Pare, it will be game over at that point. "He can then continue to invest and hopefully hand it over to his kids, because really, that's why we invest. All the best. Have a great holiday, Fool on. Pare Democrans."

Well, this was truly a delight to read. You know I love games, Pare. You know I love investing. You know I love family games and family investing. You, as a wonderful uncle, we'll call you the rich old uncle here for our purposes. The rich old uncle is hanging out with his nephew and creating a game of your own design to get him invested in the real world and game over at the age of 18 as he takes it over. Boy, what a wonderful family member you are, and I'm just delighted to share that story out. Part of the reason I enjoy sharing these kinds of stories on the Rule Breaker Investing mailbag is to inspire you. Yes. You, dear listener, whoever you are. In case you haven't thought to do something like this, to use your creativity to say, what makes sense for me in my life? What would I enjoy doing, and how do I make it count for others? This is going to be alluding to a future mailbag item a little bit later. How can I bring everyone else along with me, me the successful investor, the rich uncle, if you will, Pare? What a wonderful way to extend your love of investing and bring somebody else along with you, and make it a game of it, Fool on to you, sir.

Rule Breaker mailbag item No. 8, and this one comes from Luke Crum. "What is the difference between Kodak and Amazon?" That's the question Luke starts his note with this week. Story: "I discovered The Motley Fool when I was starting a family. I remembered my dad saying something about respecting The Motley Fool a long time ago. My job at the time had a very long commute, giving me plenty of time to consume The Fool's podcasts, which started me on my financial journey. I went on to get a Stock Advisor membership and now, five years later, my wife and I have saved three times my yearly salary at the ages of 30 and 31. Wow! And we're just now reaching escape velocity." Love that phrase, love that concept. Luke goes on, "I'm very grateful for The Motley Fools' free content which allowed me to get started on the right path before we could afford anything. Issue, personal finance and stock-picking has become a passion of mine and I discuss the topic with friends and co-workers. Now, one common point of contention with initiating positions in great companies is the old, but it's run up so much already or recently." Luke goes on, "I've found these stems from a mathematical misunderstanding. Now, if you look at the company like Monster, talk about Monster stock," Luke says, "It looks like the company is hockey stick up in the last few years. In reality, it has been a very consistent, outstanding performer. But because the stock chart measures price movement rather than percent movement, later gains distort the perspective of past gains. This leads potential investors to think they just missed a recent sharp run-up, when in reality it might be the same 20% average return as ever. But 20% of $1 is just $0.20, while 20% of $100 is $20 and produces a spike that drowns out past performance."

Now, Luke is about to give his solution, but I just want to say one thing here, which is, you're right, Luke, this really is how those linear graphs that we're used to seeing, not just for the stock market, but in many other infographics and contexts in life. If something has a compounding gain over time, and you just look at the linear, not the logarithmic view of the graph, it'll look like all of the big gains have been made just in the most recent era. Whatever that is, whether it's a year or 10 years, or whatever we're looking at, when in reality, as you say, the percentages were around that all the way through, but the numbers just compounded upon each other. Again, so many of us already know this, Fool investors know all of this. But you are absolutely right, so many people who don't invest or don't know this, look at the graphs, they get fixated on that picture that makes it look like the Nasdaq, or the S&P 500, or Amazon stock, or Monster Energy, a great Rule Breaker, by the way, it looks like they may be huge gains in just the last couple of years, so you feel like you've missed it and you shouldn't invest in it. Now, before I continue, I do want to say those stocks have made huge gains very recently. We talked about this on last week's podcast, Five Stocks Rolled Up at Random. One of them, spoiler alert, is Apple. Apple, the largest company in the world by market cap today as a public company, Apple is up 60% in the last year or so. We also do need to say that there have been some remarkable recent moves. But you know that I never let that faze me and I'm always focused on the future, on the price, on winning the race, not where we happen to be, which furlong and who's winning right now, or how well we've done in the last year or two or three. It certainly is true that the market could have a bad year in 2021, or a really bad period over the next couple of years. I sure hope not. But I'm not focused on that ,and I would hope that you're not either.

Let's go onto Luke's solution. Picking it back up. "I work in data analytics," he says, "and a part of the job is working within collecting the data, but the most important part is making sure that data is communicated in a way that can be understood and acted on. I believe The Fool would benefit from modifying the communication of stock charts in this way: point No. 1, show a percent gain chart. This shows the year-over-year stock percent gains and losses. This would allow investors to see the constancy and track record of that company. Winners keep on winning." Luke says, "Without getting distracted by the mathematical noise of compounding return." Just reacting to what you've said here, Luke. I've often thought of it in terms of looking at logarithmic charts instead of linear charts, as I mentioned earlier. If a stock doubles and doubles again, the logarithmic chart shows a fairly smooth move from one double to the next, whereas the linear chart makes it all of a sudden look like it's swooped up four times in value, and that's just four times. Think about the 100-baggers, or think about the S&P 500 over the last 50 years, you could see how the linear numbers would look crazy in those contexts. I very much hear you on data analytics and how important it is to present something that's understandable to people. Then the second and final solution Luke offers is, he says, "Use the noise." He says "That hockey stick is dangerous when an investor misinterprets it as a massive short-term gain. However, what it really demonstrates is compounding." Luke says, "I would try to show, look, the percent gain has been consistent, but thanks to the power of compounding, you made more money in a single day than you spent buying the stock in the first place." He says, "Isn't that a spiffy way to learn a lesson? To conclude, I believe you have a powerful opportunity to use our analytics not just to inform, but to teach. Please keep making everyone smarter, happier, and richer. I know I'm smarter." Luke Crumb concludes, "I've learned more than I ever thought I would. Without finance being my job, you made me happier. Investing has been the best game against the best players I could've hoped for. Finally, richer, our timelines have all accelerated by at least a decade. Have a great day, and keep being awesome, Luke Crumb."

Well, you're awesome, Luke Crumb, I really appreciate a data analytics professional talking about the importance of how to present data in a picture that'll tell a story that cannot just inspire people, but also give them the truth. Now, everything is contextual. There are reasons to show linear graphs. There are reasons to show logarithmic graphs. For a lot of us, especially if you're not mathematically inclined, find your math friend and ask them to explain that, and be able to see both sides of it. I do think that both are important. Finally, in terms of how The Motley Fool at Fool.com could do a better job here, free to [...]. I'm not overseeing our stock pages. I do know we have a few different ways of looking at stocks and charts at the Fool site. But I sure hope my data analytics team is listening and that we'll continue to try to make the site tell the right story in the best way for as many people as possible. Luke, Fool on.

Rule Breaker mailback item No. 9, and oh my golly, Brad Wyman, you have made a return appearance on this one episode. Yes, you were Rule Breaker mailback item No. 4, as we talked about selling off those winners, how to avoid the GEs and GMs of your portfolio over time at the age of 20, and here you are back at No. 9 because I just loved the story. Thank you for sharing it. "Hi David, just like you are a fan of games, I am too. During last week's podcast, you revealed your newest five stock samplers when you listed out the 10 Rule Breaker companies that you were going to be choosing from. I paused the podcast. I wrote down the 10 ticker symbols and I tried to put myself into your shoes. I did my best to pick the companies that I thought would be the best performers over the next three to five years." Well, that is exactly the game that we're playing, and I love that you paused it and played the game in real-time with me, Brad. "I found myself with a list of incredible companies. As you read each of their names out loud, a big grin came across my face. Apple, check; Atlassian, check; SolarEdge, check; Starbucks, check; TELADOC!!! check." I was thrilled to have picked this one with 100% accuracy. Now, I've been a Motley Fool member for less than a year, but it fills me with joy that I've already learned enough from you and Tom to look at a group of companies, and be able to select some of the best from that list. I'm looking forward to seeing how this sampler performs, and excited for countless years to come with The Fool. Best regards. Brett Wyman." Well again, Brett, thank you for that delicious story. Love that you played the game along with me, let's hope that we're both right. Great minds sometimes think alike, but there's always a chance we might have gotten it wrong. I hope that you've learned about my mentality through this podcast over the months and years, I am always fully prepared to find out that I was completely wrong about anything, not just the stock market, but any company, any idea I had, any development in the world at large. I have an open mind. I'm trying to learn, not a lot of pride of authorship of these kinds of things. So, let's hope that the 5-Stock-Sampler goes out and knocks the cover off the ball, beating the S&P 500 as indeed almost all of our 28 miraculously have done. I will give you a quick update. Five Stocks Rolled Up at Random one week ago, as of market close yesterday, Tuesday, January 26th. Now, who's only playing the one-week game? But the stock market is exactly flat, up 0.05%, Five Stocks Rolled Up at Random, the five you just picked, up 4% as a group. So yeah, we are beating the market, so far anyway, once again with the 5-Stock-Sampler. Let's keep our fingers crossed here over the next few years, and hope that you and I got it right. This was pointed out by another of our members, I also liked that we said 'no' to these other five. So you can see how our five did, Brett, against the five I didn't pick. I'm not going to track that, but anybody is welcome to see whether we made the right calls there. Final note, that's probably the only 5-Stock-Sampler I will roll up and do in real-time, but it was an awfully fun way to do it, more dynamic, and it sounds like you really took advantage of that and played it in real-time yourself. Fool on.

Now, for a horse of a different color, really appreciate this note, Brian Anderson. I'm just going to largely read this without commenting. I think it stands on its own. I think a lot of us will appreciate this perspective, but probably not everybody. We all have different thoughts out there. Brian, I loved how you articulated this, so here we go. "Hello, David. On my run today I was listening to your Rule Breaker Investing podcast, specifically the Gratitude: 2020 episode." That was near the end of last year. I really enjoy doing that one. Brian said, "I felt compelled to reach out to you. I'm so inspired by the Motley Fool way of life. I've been a subscriber to your services for around a decade now, but it truly has taken this year for me to understand the meaning of being a Fool. I haven't listened to your podcasts until late spring this past year, when I decided I needed to get back into running. This year has presented some incredible personal challenges to myself and my family, as it has to many. But I found true comfort in both my church's podcast, as well as Rule Breaker Investing. I realized that both these podcasts share many of the same themes. A few references you made in this most recent podcast showed some insights to me that you are a man of faith. I had a moment where I realized how interconnected The Motley Fool way of investing is to faith. 2020 has truly been a year unlike any other, and has presented a storm that could shake the strongest of ships. However," Brian goes on, "God provides us an anchor to stabilize ourselves in the midst of the greatest storms. A firm foundation to build our home, even if storms batter its walls. The Motley Fool investing approach shares many of those same tenets, holding true like an anchor to what we know is right, and standing firm when the flaming arrows come our way. I also believe that faith," Brian goes on, "much like investing, is a team sport. We need to bring others along with us. They make us stronger, wiser, calmer, and more vigilant. After all, iron sharpens iron. I had a friend that I lost touch with," Brian goes on, "this year, we reconnected five years later, and I've discovered that he has become enamored with investing. He now is also a listener of your podcast, and we spend time discussing many of your recommendations. We also talk about many other topics, as old friends do, and we picked up where we left off, but it was that connection of your podcast and recommendations that brought us back together." Wow. "These are challenging times," Brian concludes, "and in those times we must look for the helpers. We must look for those who are different from the crowd. You and your brother have had such great success in your life, yet you speak in a different way. I get a sense that it's not about the money for you, but it's about the way of life. I feel very much the same. Granted with your guidance, my portfolio has made gains I could never have dreamed of over the last few years. However, while I do continue to seek long-term generational winners, I see more value in seeking others to bring along for the ride. I feel very passionately that there are many people who've been marginalized to believe that they can never invest. That could either be because they don't have enough education, or they don't have enough money. I know that, like many things in this world, that's a lie. They just haven't had someone take the time yet to help them understand what they need to look for. That essentially is what you spend all your time doing. I personally couldn't be more grateful and will continue to spend time finding others to bring along for the ride. There's truly so much good in this world, and we just need to win it one heart and one investment at a time. I hope it brings you joy to know that each week your words bring me peace in the midst of chaos. Fool on, David. Brian Anderson." Well, as I mentioned earlier, I don't think I need to add a lot to that. In fact, I'm just going to give that one a mic drop. That's not my mic drop. That's Brian Anderson's.

Finally, Rule Breaker mailbag Item No. 11, this is from Zach Kennely. Zach is writing in after having been featured in last month's mailbag, which was entitled December Mailbag: Post-Traumatic Growth. I mention this from time-to-time, but each of my podcasts is generally named by my producer Rick Engdahl, so if you like our titles, and I sure do, I just license him to figure out what it should be called each time, and he called the December Mailbag: Post-Traumatic Growth, and he was specifically alluding to Zach Kennely's note in that mailbag. So, here's Zach writing back a month later. "Happy New Year, David. Thank you so much for your well wishes, kind words, deeply thoughtful response. Most importantly, for being such an inspirational and conscious leader. I was very excited when I saw the episode named Post-Traumatic Growth, and I instantly regretted not including my excitement about experiencing our first spiffy-pops in 2020. One of our new year's goals at the start of last year, 2020, was to have our first spiffy-pop. Well, in 2020 we had three. Your focus on conscious leadership and conscious capitalism," I'll just depart briefly from the note and just say, if these are new phrases for you, dear listener, if you're new to Rule Breaker Investing, please go back and listen to my interview with Whole Foods Market founder, John Mackey, who wrote the book Conscious Leadership, which came out this most recent fall. I did a full hour long interview with him about it, and I think it's a really important interview for anybody who wants to be a great leader in this world. Conscious leadership and conscious capitalism, recurring themes, certainly for me in life and on this podcast. So, that's what Zach is referring to, if these phrases are new to you.

Now, we'll return to his note, "Your focus on conscious leadership and conscious capitalism was enlightening. I did not expect that answer, nor was it aligned to my own thinking, which is one of the reasons I found it so delightful. Your mention of making lemonade out of lemons really sparked my curiosity about the company Lemonade," ticker symbol LMND, one of my brother's picks in Motley Fool Stock Advisor. Zach says, "I was already interested in buying shares of the company, but after hearing more on Motley Fool Money, and learning about Dan Ariali's role in structuring the company and the purpose behind its fee structure, I'm even more interested. Lemonade is certainly on our shortlist for our next buy." Again, Zach concludes, "Thank you very much, writing my mailbag, and having you respond was fun, healing, and informative. I shared the episode with many family and friends, and it has sparked the most wonderful conversations. A few hours after listening to the podcast, my wife and I capped off the evening with a round of the boardgame Innovation, which I received as a Christmas gift after a recommendation in your Games, Games, Games episode of the Rule Breaker Investing podcast. Please let me know if there's ever anything I could do to help or support you, The Motley Fool, or the podcast. It would be my pleasure to help in any way I can. Grateful, Zach Kennely."

 Well, I'm reminded, as we close out this week and this month, that gratitude and the practice of gratitude, which I highlighted in my December 9th podcast some weeks ago, it was called Gratitude: 2020, gratitude is one of the few ways to raise our own happiness and appreciation levels of this world in a permanent way. So, in a way then, I see what you did there, Zach Kennely, and in addition to sharing out at close such a kind and Foolish and encouraging note of gratitude, I want to make sure I say thank you back to you, and to my other dozen correspondents featured this week, to the insights you all give all of us, to the joy you bring me, and for helping this podcast make the world smarter, happier, and richer.

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Stocks Mentioned

Morningstar, Inc. Stock Quote
Morningstar, Inc.
MORN
$247.46 (2.44%) $5.90
Apple Inc. Stock Quote
Apple Inc.
AAPL
$140.52 (0.11%) $0.16
Nokia Corporation Stock Quote
Nokia Corporation
NOK
$4.93 (0.61%) $0.03
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$134.39 (0.44%) $0.59
General Electric Company Stock Quote
General Electric Company
GE
$74.53 (0.01%) $0.01
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$262.52 (1.12%) $2.90
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,116.10 (-0.16%) $-3.30
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$187.83 (4.15%) $7.49
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,135.50 (2.57%) $53.50
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$96.30 (2.01%) $1.90
General Motors Company Stock Quote
General Motors Company
GM
$35.98 (2.19%) $0.77
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$183.83 (1.41%) $2.55
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$72.48 (-0.33%) $0.24
Monster Beverage Corporation Stock Quote
Monster Beverage Corporation
MNST
$87.73 (0.27%) $0.24
Eastman Kodak Stock Quote
Eastman Kodak
KODK
$4.17 (0.48%) $0.02
Alkermes plc Stock Quote
Alkermes plc
ALKS
$28.85 (1.76%) $0.50
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,116.79 (-0.08%) $-1.73
Etsy, Inc. Stock Quote
Etsy, Inc.
ETSY
$71.59 (1.97%) $1.38
SolarEdge Technologies, Inc. Stock Quote
SolarEdge Technologies, Inc.
SEDG
$253.45 (2.10%) $5.22
Atlassian Corporation Plc Stock Quote
Atlassian Corporation Plc
TEAM
$170.75 (4.01%) $6.58
Redfin Corporation Stock Quote
Redfin Corporation
RDFN
$9.97 (6.18%) $0.58
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
LKNC.Y
$9.08 (6.32%) $0.54
Lemonade, Inc. Stock Quote
Lemonade, Inc.
LMND
$20.66 (4.40%) $0.87

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