In this episode of Industry Focus: Energy, Motley Fool Co-Chairman, Chief Rule Breaker, and host of the Motley Fool's Rule Breaker Investing podcast, David Gardner, joins the show to discuss his approach to investing. He also talks about several energy and industrials themes that host Nick Sciple identified in David's Stock Advisor and Rule Breakers picks.

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 Feb. 11, 2021.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. This week, I'm excited to welcome a special guest, David Gardner. David is The Motley Fool's Co-Chairman, Chief Rule Breaker, and host of The Motley Fool Rule Breaker Investing podcast. He is joining us today to discuss his approach to investing, and how he's used it to select energy and industrial stocks over the years. David, thank you for joining me.

David Gardner: It's a delight, Nick, and I really appreciate your focus on energy and industrials because while I've often done more work picking video game companies [laughs] or Internet plays, the truth is that for years and years now, I have enjoyed looking in your areas and trying to find what are some great companies. They may not all be true Rule Breakers, I know we're going to talk some about that, but I think it's the great companies. These are important areas of our society to say nothing of the stock market. I really appreciate your focus here and thank you for having me on.

Sciple: Yes. I'm excited to have you on here. To David's point, we're all true generalists. Here at The Motley Fool, we're paying attention to things that are going on all over the stock market. I think that helps us be better analysts. So, we've got a great conversation planned. I pulled out four energy and industrial themes that pop up across David's picks in Stock Advisor and Rule Breakers. But before we get into those individual stocks, I just wanted to frame the conversation a little bit and talk about David's approach to investing. Just first off the bat, David, if you had to explain your approach to investing in one sentence, how would you do that?

Gardner: I try to find excellence, buy excellence, and add to excellence over time, I sell mediocrity. That's how I invest.

Sciple: Yeah. Very simple approach. Find the best transformational companies, get there early, hold them for the long-term, hold them longer than just about anybody else. What do you look for in those companies? You put out your six signs of a Rule Breaker. Why are those criteria important to you? What are those criteria?

Gardner: Yeah, we have six traits that we're looking for in the stocks that we buy, or in my case, recommend to Rule Breakers and Stock Advisor members. Real short course. We're going to go through six real fast here, Nick. The first one is top dog and first mover in an important emerging industry. So you think about energy and industrials, while you might think about some older industries that have been around a long time and until you start thinking about solar, for example. You think about what an important and emerging industry that is. If you are fishing in that pond, if you focus all of your investing just on the top dogs and first movers in important emerging industries, you will, by the way, have a fair share of losers because you won't be right every time, but the winners will win so wonderfully, at least that's been my experience that you'll be delighted. That's No. 1, and of the six traits, I think that's the most important one.

No. 2, we're looking for a sustainable competitive advantage. Nick, you've just mentioned I tried to buy stocks before most and hold well after everybody else. If you're going to take that approach, you darn well better have a competitive, sustainable advantage in that company because you are holding it for years, if not decades. We're always looking for companies that have those most, as Warren Buffet has often said around the castle of their profits and possibilities.

No. 3, we love stocks that have excellent past price appreciation. Now, this is something that can bedevil some people because they've heard buy low, sell high. But in my experience, when companies are winning and the stock market is recognizing that, assuming it's not all about to come to our crashing halt. When you're looking at important emerging industries, that's usually not the case. You are really well rewarded for going ahead and hopping on the bandwagon. It doesn't feel great to buy a stock that doubled in the last six weeks. That's exactly what I did when I first recommended Amazon in 1997. It had doubled in the previous six weeks, yet I learned with wiser older eyes, that's actually a great sign of success that will likely persist. But some of the other people would take that as a reason not to buy the stock. They think they've missed it, they anchor to a previous price, etc. That's No. 3.

No. 4 is good management, smart backing. It's about the people. I think a lot of us at the Fool know that. The importance of cultures, you're investing in cultures as much as anything else. They typically outlive products and even people, but the people are the ones that are building the cultures. Who's investing in that company as well? What venture capitalists? That's part of the reason we love founder-led companies at The Motley Fools because it's the people.

No. 5, I love good brands, especially consumer brands. That is the case among some industrials. But others are very much B2B or set well back from the consumer. Brand doesn't make sense in every case, but darn it, when you can find a brand which by definition to me is the promise that a company makes every day and has to fulfill on that promise, Amazon has to deliver you that thing within 48 hours or so, otherwise, you're going to stop trusting them. Starbucks needs to taste kind of the same on the West Coast as it does in the East Coast of any country these days. The companies that do this at scale are really powerful. What's the best biggest brand in the world? Also the best biggest company? That will be Apple. Those things are not random. Those things are directly linked to each other.

Finally, No. 6, we're looking for companies that everybody thinks are overvalued. The reason this works is because so much of the world will look at early stage companies and think that's crazy overpriced. They have no profits. People said that for years and years about some of our best stock picks. But if everybody thinks they're overpriced and nobody is really buying the stock, as those companies succeed over the course of time, they're going to end up converting those skeptics, not just in the customers, but often in the shareholders. That's the wall of worry that these kinds of companies climb overtime. Those are the six traits we're looking for in Rule Breaker stocks. If I can find all six, I'm going to feel great about that company's prospect. But even if I just find three or four of those, usually, that's enough for me to seriously consider buying stock or recommending anybody else do the same.

Sciple: Right. David, you mentioned earlier how important is the important emerging industry, a top dog in an industry like that. To a certain extent, you're predicting that this industry is going to become groundbreaking. You mentioned that you're going to have your fair share of predictions that don't come right and you may have your fair share of losers. That comes into how you put together your portfolio. When you buy stocks, how do you size positions? How do you think about inevitability that some of your choices are going to be wrong with how you structure your portfolio and put it together?

Gardner: Well, I think it's really important because that's, in the end, what we're all doing. You can find a winning stock here or there, or you can have a lot of losers, which I certainly had as well. But it's not about those, it's about the portfolio, it's about what you're building. I will just mention for anybody who enjoys podcasts, and I sure do enjoy Industry Focus myself, I dedicated a podcast to this just a few weeks ago, it was the Jan. 13 edition of Rule Breaker Investing. It's entitled Six Principles of a Rule Breaker Portfolio. You might start figuring out that I like lists of six principles. Nick, we're not going to go through that right now, but I'll pick one of them as a preview. That's what your sleep number is.

Some of us know the sleep number company with the mattresses, and you might dial into a different setting than your spouse. You can dial these days, mattresses, to be the right firmness for you. Well, I think the same should be true of portfolios in this regard. Here's what I mean by what's your sleep number. Your sleep number in an investing context is what is the percentage of your overall allocation that you would ever give to a single-stock at the maximum. In other words, if you allow your winners to run, which is a big part of my style of investing, how large, how much of the pie, how large a slice would you like your largest slice ever get? For some of us, those numbers are radically different. Quick examples. The sleep number for most mutual funds today is about one. Most mutual funds owned hundreds, dozens, or hundreds of stocks, and they don't allow their percentage of allocation to go up much above 1%, or in some cases, 5%. Those are very low sleep numbers. The reason I say sleep is because it's all about sleeping at night. What is the largest you let something get to before you start losing sleep? I would suggest you don't let your portfolio get over that.

This principle, I hope, is something that each person's different. Your number is probably different from mine, Nick. I will say my own number is very high. Mine is probably 80. Now, that sounds irresponsible to most people until you start thinking about a lot of people who are entrepreneurs like me and we're all shareholders at our company at The Motley Fool. For me, my own net worth is much more tied up in The Motley Fool's stock and how it does than my portfolio. In a sense, I'm one of those founders. My brother Tom is like this too. I know some of us listening right now can relate directly to us. That's a huge part of our net worth and I'm comfortable with that. But many people wouldn't be. You have a lot of wealth advisors trying to get people to sell off their stock and get those positions down. I've also had in my past stocks run-up, like AOL back in the 1990s and become a large part of my net worth. I'm comfortable with that. It's a little bit more of a venture capital mentality. But anyway, the operative question, what's your sleep number, should help guide your portfolio construction.

Sciple: David, this isn't a question I planned, but your kind of answer made me think about it a little bit is, what's the importance of optimism for you, for investing? When you get a position up really big, it's this idea that, oh gosh, I'm going to lose these gains, they're going to go away, or you talked about are grossly overvalued by the financial media. It's the same idea that it can't get better. It's as good as it's ever going to get. How important is optimism and just belief that it's going to keep getting better to how you think about buying stocks?

Gardner: Well, I think everything is contextual, Nick, so I would say that that is true of many of my favorite things in the world. They keep rising. Let's just think about the stock market. Look at the S&P 500 over the last century, it keeps going up. What do I think is going to happen in the next century? The same thing. Why, there are lots of factors as to why the market goes up over time, but the biggest one is simply human ingenuity. We're all working hard. The majority of our country is in the private sector, not in the public sector. We're all working hard, the businesses trying to deliver a better product or service to make consumers happy, to add joy to their lives, and have them become fans of what we do and grow it. Certainly, we feel that at The Motley Fool and we're so grateful to think that we've got so many people listening to your podcast right now. That's so exciting to me that we're reaching people. A lot of stuff grows, but not everything grows.

Some of the fad stocks of the last few weeks that have unbelievable moves, that's very temporary. I don't think, for example, those kinds of companies are going to keep going up forever. That's a very short-term phenomenon. I think you have to sort out what is persistent and what is sustainable from the things that aren't. But once you find the things that are persistent, and sustainable, and that are growth-oriented, and add value to the world, that's where we want to be hitching our portfolios wagon to those stars. That's what I've tried to do my whole life long. So yeah, I am certainly an optimistic person. You don't have to be an optimist to be hired by The Motley Fool. We have a lot of realists. We probably have few pessimists too, but I think for the most part, the world is to the doers, and the doers are the ones to say, yes, I think we can, and usually, they go on to do it. I think that's a really operative condition for success in business and for the stocks that we buy.

Sciple: David, I think that's a great jumping off point to move into some of these themes and energy industrials that we talked about earlier, I said earlier I picked out four of them. The first one I wanted to talk about is railroads. We talked about earlier the importance of an important emerging industry. You couldn't think of an industry that is less emerging than railroads. The 1850s was the railroad bubble. Why does this industry fit into your universe of stocks that you're interested in?

Gardner: Well, first of all, Nick, I want to thank you for looking over all of the different industrials and energy picks I made, and actually grouping them up into a few themes. These are actually your themes that you've come up with. But I certainly agree with them. You put an extra due diligence that I'm not putting in because I'm not thinking about trends or sectors. I never really have cared about sectors as an investor. I'm just really thinking about the companies, like, the company itself that we're looking at. I want to be a part owner of that company, not that other one. But then they start to group up into some themes and you've identified those. The first one, railroads. Yeah, I love railroads. I personally have always enjoyed riding on a train. I remember being a little kid with overnight trains up from Washington DC where we grew up to the Northeast, the Vermonter. I love board games, a lot of board games have trains among their themes. Simple games like Ticket to Ride or much more complicated games.

I've just always been a railroad fan, but I think the reason that this has been a great place to invest is because it is timeless. It's like beer. Railroads have not been around nearly as long as beer, but at this point in time, it's one of those things you can picture staying in place for the rest of our civilization, so I really like those timeless businesses. Certainly, a few of them, we can talk about one or two of these companies, but I just really like their positioning. I'll also mention, these tend to be oligopolies so you've got just a few big players, and so you can own the whole industry with a few stock picks. I just think it's a great industry to be invested in. It's still such a cheap way to move stuff from point A to point B relative to many other ways to do it these days.

Sciple: Yeah, the other thing to think about is energy efficiency. A lot of people were talking about emissions and those things. When you talked about it, just the sheer magnitude of goods that you can ship on the railroad and the energy efficiency you can get, you're not going to find a replacement anytime soon. Not to mention, I don't think anybody's going to be putting it in any new railroad track anytime soon, at least not the incredible scale that we've built all over the country. We have 100 years of building this stuff, a hundred plus years of putting this infrastructure in place.

Gardner: It's a great point, unless Elon starts stinking underground and creates all crazy stuff. But we'll be invested in that too. I really like your point though, Nick, that this is a timeless business. Those tracks have been laid and boy, do we, as a society, every day, benefit from the energy efficiency and the cheapness of transportation that this amazing network has built out, not just for our country but around the world.

Sciple: Yes, so maybe we'll talk about one of those companies. Canadian National Railway is on your scorecard, was first recommended in Stock Advisor, March 2008. I think it's an interesting time because if you think about 2008, the economy at a very low point, railroads can tend to be exposed to what's going on in the economy. They're basically where trade is done, and so they're exposed to trade. Why did this jump out to you as an opportunity for you back at that time where there was a lot of volatility in the market?

Gardner: Well, I'm pretty sure, this is now just about 13 years ago, so I have to admit, I don't exactly remember where my mind was. I will say it was March 2008, things were starting to go down. We were not anywhere near like the nadir of the Great Recession of 2008, '09, it was early days there. But a lot of times, I'm just casting around for what's that company that I'd want to recommend. I don't think I was trying to time in advance of a big drop-off or anything. I was thinking again about what I said earlier, what makes sense, what is timeless and what is good for the world. There's probably something else to be said just about just the ubiquitous branding. I see the CN railroad cars, Canadian National, here across North America. I've looked at the financials, that's always really important. I don't exactly remember what I saw 13 years ago. I'm just really happy to think about this, and Nick, this is thanks to the work you've done, but I'm seeing the stocks up about 462%. Since then, the market's up 286%. Isn't that wonderful that we're up about 175% on the market averages. If you just bought the S&P 500, you'd be well down to buying and owning Canadian Natural, also pays a dividend and I love it for the next 13 years.

Sciple: Yes. What I like about the idea of the railway is this is just one of those things like, I have a railroad, it's right by office and Alexandria, Motley Fool's office. You can watch that railroad go by every single day, carrying just countless amounts of goods. That's one of those companies where if you just look out your window everyday when the railroad goes by or just listen, I think the business is still doing OK. Then there's a few businesses out there that are that way. I wanted to move on to the second theme, a bunch of different industrial niches that I think you could call out of your universe of stocks. But I think the one that was most interesting for me is trash. There's two different companies that have been in the trash category. I want to talk about both of them, but why is trash in the David Gardner Rule Breaker universe? Why is this something that jumps out to you?

Gardner: Yeah. Well, first of all, we need to get rid of it. We need to collect it, we need to process it. One of my biggest pet peeves of all, and I've done full podcasts just around pet peeves. But one of my very biggest is littering, I think that there is zero excuse for anybody to litter. I don't care what culture you're from, what neighborhood you are in, I think there is zero. You are not allowed in my mind to litter. I always loved it seeing the $500 fine if you litter. I'm not sure anybody ever gets charged for that, but I really, really don't like littering and trash. I love that we're cleaning it up for profit out there. The companies that you're mentioning are just great companies. Isn't it awesome to think that we live in a world where people go to work every day cleaning up for others and get paid for it, and actually paid enough that they can pay a dividend and grow great companies over time? I'm really grateful for this. I think, Nick, I realize it doesn't sound that exciting. It's not like biotechnology genomics. We're talking about trash. But I'm all about, what's a better world? What's the world that you and I want to live in? I've often said in the past, make your portfolio reflect your best vision for our future. Well, certainly, an area, a niche you're mentioning that I favor is a cleaner world. These companies do that.

Sciple: Yeah. The first one we'll bring up is Waste Management. The second most recent rec among the companies, we'll talk about recommended in June 2019. One of the largest waste management recycling companies in the world controls about 20% of the market. That may give it away to your right there, 20% of the market in an industry that is absolutely necessary. But what jumps out to you about Waste Management as a stock for folks who invest in?

Gardner: Yes, all of those things are true. That WM logo on trucks in my neighborhood, yours, and lots of other people's too, I really think that the company has been [...] itself in our society, and I think it's really well protected from competition in the sense of doing work people don't generally want to do and it's doing it at scale. I think it has that brand piece. I realize this is slightly all these things, not like an Apple or Netflix brand. But really, waste management isn't my favorite phrase to say either, you bought WM, I think it's worth really respecting what they have done. I think Wayne Huizenga, by the way, was one of the co-founders and this comedy guy ended up owning all the Florida's sports teams and doing a lot of good work besides. He's no longer with us, but part of his legacy, which reminds me that so often, these companies are created by real visionary types of people. To do that decades ago and this company to be thriving today is a great sign. They are a big dog in the steel, and I think we're all well rewarded typically for finding these companies. I will mention, Nick, thanks again to your diligence, that the stock has not been a great performer. It's basically flat with where I recommended it in June of 2019. We're coming up almost two years now and the market is up 35% and we're flat. That's disappointing to me. But you know what? Not everything wins or wins all the time. I like this kind of company for the next couple of decades.

Sciple: I don't think the demand for the services they provide is going down anytime soon, so we'll see what happens next with this company. The other one that they popped out to me in the trash sub-sector was a company I had never heard of, and so I started doing some preparation for this podcast. That's Darling Ingredients, ticker DAR. David, how did you find this company?

Gardner: I'm glad you asked. I found this company in 2012. One of my favorite things about The Motley Fool, something that I helped create, is Motley Fool CAPS. I'm assuming a lot of our podcast listeners would be familiar and a lot of our Motley Fool Live fans will be familiar, but not everybody. I just want to make it clear that is a free site on the Internet, it's part of The Motley Fool, and you can come in and rate stocks. You can thumb up a stock because you think that stock will beat the market, or thumb it down. Sometimes if you have a bad consumer experience, like you waited too long in line somewhere, you can go right on CAPS and thumb it down and it makes me feel better. But you're ultimately making calls about the stock. Do you think it's going to beat the market or lose the market? Either way, we'd love to hear from you. A lot of people have contributed to that over time. You get rated, you get scored against everybody else playing CAPS. It's an addictive game for people who really love the stock market. Well, one of the small features of CAPS, Nick, is you get a Stock of the Day. There's just a new company, a ticker symbol each day if you check your CAPS page, if you sign-up for CAPS.

So I have used that over the years to create a list of companies I hadn't heard of, that I could research further, and I have called those over the course of time. A lot of my research process is to go through my CAPS Stock of the Day Suggestions. Again, this is just the service suggesting a stock that it thinks I might be interested in, and Darling Ingredients, earlier that same year of 2012 popped up on my radar. I looked at it, and I had never heard of it either. But Nick, you've got a little bit about the business to make it clear why maybe we all would have not, because this company has been around for a 100+ years.

Sciple: Yes, it's the nation's leading provider of rendering, recycling, and recovery solutions to the nation's food industry. It processes 10% of the world's inedible meat byproducts and is the largest collector and processor of used cooking oil in North America. Okay.

Gardner: Incredible.

Sciple: You hear that description. Why is that something folks should be excited about investing in and what's the investment case here?

Gardner: Well, it's in the same niche that we were talking about, cleaning up the world. Actually, you have a great stat here that you let me know about ahead of time. I'd forgotten this, but basically, for every pound of meat produced, there's one pound of inedible meat produced. What do we do with that? What about all that cooking oil? This is a company that's helping clean up restaurants, kitchens, slaughter houses. It's one of those companies you wouldn't otherwise have heard of, unless you're a stock market fan and maybe a Motley Fool Stock Advisor member, because members have owned the stock if they listen to us nine years ago for nine years and counting. It ended up being a pretty good performer. Very happy. That always makes me feel good when we're beating the market. But from my standpoint, this is one of those companies that most people will never have heard of, Darling Ingredients, ticker symbol DAR. But those are some of my favorite stocks to find, especially when they outperform the market over long periods of time.

Sciple: Yeah, David, I just wanted to give you a couple of numbers. Part of the really exciting thesis for Darling Ingredients is they take all these byproducts and you can use it to produce different ingredients. One of the things that they have is they own a 50% stake in Diamond Green Diesel, which is a partnership with Valero, one of the biggest refiners in the world. They produce renewable diesel here in the United States, the most economic U.S. facility, largest in the U.S., second largest in the world. Back when around the time David first recommended this stock, that additional production capacity of 160 million gallons a year. In 2021, they have plans to expand that production capacity to 675 million gallons a year in 2021, so increasing it another 400 million. They also have looked through 2023, they plan to open a new facility in 2023 where they're going to increase their total annual production to 1.2 billion gallons of renewable diesel. That's almost 10 times from when they first developed that facility almost 10 years ago. It's a really incredible growth. A little over 10 years whenever that facility is done, so just incredible growth. We can only imagine, and obviously, this is a huge push toward more greener fuels, there's going to be lots more demand for that type of renewable diesel going into the future. A company that had a lot of success, a lot of growth, but it looks like even more growth ahead in a niche that I don't think anybody is going to take away the beef tallow market from them.

Gardner: That's part of the beauty of a great industrial company. They're doing something that's hard. It might be lower margin, it is often unattractive, but darn it, if they're doing it and doing it well, they are providing real value of the society. They may be overlooked, they're certainly not in anybody's hot stock list. One other thing I have to say about Darling Ingredients, Nick, is if you and I were having this conversation one year ago, I wouldn't have been that happy about Darling Ingredients, because the stock, after holding it for seven years from 2012 to 2019, it was basically flat with when I first recommended it. With all of the appreciation, it is now a triple. Now more than tripled our money and as beating the market here nine years later. But all of that appreciation that's happened in the last 12 months. I'm always wanting to remind all of my fellow Fools that you have to show tremendous patience often before you get your big return. We saw that with much higher profile companies. Tesla went sideways from 2014 to '19 for five years. Tesla, everybody's hottest stock did nothing, it was way behind the market over that period of time, and then it exploded. Darling has a similar looking chart. It's not as grand as Tesla's, but Darling has tripled in the last eight months, and that's all of our returns nine years later.

Sciple: David, you mentioned Tesla, so I will go out of order on our themes here and talk about innovators in mature industries, and I think Tesla certainly fits that bill. When you first recommended Tesla in November 2011, it was a very, very different company than it was today. The thesis is it's pre Model S. They're going to get us Model S out the door and finally, have a car for a larger number of people than the Roadster. How is your perception of Tesla changed ever since that first recommendation? It's come a long way.

Gardner: All of us have had our perception constantly, probably we've had to revise that about Tesla over the course of almost 10 years that we've had as a recommendation. It is a company that had a few key principles. Earlier, Nick, we went through the six traits of the Rule Breakers stock. One of them was a top dog and first mover in an important emerging industry. Electric cars, when you talk about at scale, and then you talked about that fourth trait, good management, smart backing. You have Elon Musk making an electric car, that seemed like a good prospect to me 10 years ago. It certainly exceeded my wildest dreams. At this point, it's up 127 times in value from our first pick of it. I wish any stock would go up 10 times in value over 10 years, let alone 127. It is, in some ways, a confirmation of the approach that I first heard about in 1998 and our book Rule Breakers, Rule Makers, where I laid out the various six principles that we've shared together in this podcast. When you're looking at companies that are disrupting the status quo, that are bringing amazing innovations to bear, and you have visionary leaders, and Elon is not my favorite type of leader. There are lots of things I deeply admire about him, there are also some things that still have questions about Elon. But the truth is, net-net, he has been a wildly productive, unbelievably valuable, I think, fellow American at this point in his life. To think that Tesla was built on American soil and that the whole world is flipped toward electric cars, and then there are a number of other things Tesla is involved in as well like solar, that is an incredible story and I'm so happy that Motley Fool Rule Breaker members, whether you heard about it from us a year ago or 10 years ago, depending on how long you've been a member, if you've owned this stock for any period of time, you are pleased as punch, and it is in many ways, proof positive of the approach that we've talked about for 20+ years.

Sciple: Yeah, when Tesla came public, I want to say it was the first automaker to come public in the U.S. in decades, going back maybe 50 plus years at the time, which ties into your earlier you talked about maybe maybe FADS and things like that. Now, there's all kinds of companies coming public in the electric vehicle market. What do you make of all these upstarts coming in to maybe challenge Tesla, a lot of people are excited about investing in those companies. Where do those stand up relative to you're excited about investments --

Gardner: That's a great question, Nick. A company like Nikola for example, I don't have much interest in. I like companies that actually have products out there in the world. You are right, we did recommend Tesla before the Model S was out in force, so it was a little bit of hope for the future there. But they had already produced a wonderful sports car and it was clear that the technology was working and Elon Musk himself, to me, gives me a lot of confidence that special things are going to happen. I don't necessarily see that in a lot of the new car start-ups, there's a lot of 'me too.' Who is going to be the ultimate winner here? I'm pretty sure Tesla is going to be the ultimate winner. Will BMW, Mercedes [Daimler] and GM manage to flip their models and become ultimate winners? We'll see, I hope so, for their sake. Then what about the third and fourth tier? Sometimes, Warren Buffett talks about the three Is of every cycle, one of my favorite Buffet [...], the three Is of every cycle. First, there's the innovator, that's I No. 1. The second is, this one comes along next, the imitator. Of course, imitating the innovation. Then the third I of every cycle is the idiot. While that's [laughs] a pejorative term and a little bit of I'm having fun with that, but a lot of me too people show up in the later stages of rallies. Especially if they use SPACs to fund what they're doing, I actively question whether those will materialize into something of real meaning.

But I know one thing, I'm just going to stay focused, I hope you will too, on finding excellence, buying excellence, and adding to excellence overtime, and selling mediocrity. I can't speak to who is ultimately going to win or lose. But the ones I'm invested in, I'm confident in their wins. Also, I do want to say that I love innovation, and I love it when companies come along and challenge and invent something even better. By no means I'm trying to talk down anybody who wants to compete head-to-head with Tesla. If you can compete head-to-head with Tesla and make inroads, I celebrate that, and that's a better world, and I hope I'm invested in you too.

Sciple: Yes, I mentioned this theme is innovators and mature industries, Another company that fits that bill is Protolabs, that's PRLB, it is the ticker In this. It fits into this discussion we're having about FADS because I think well-documented in 2014, the hype cycle in the 3D printing additive manufacturing space peaked. Why does Protolabs standout for you among that space? Because Protolabs is, I think in the past maybe some other three printing companies have been recommended, Protolabs is the lone remaining standing company.

Gardner: Well, it's really the one that succeeded most. I think it's fair to say that I tend over the course of time, when I do sell, which is very rarely and very infrequently, I'd typically sell off my losers, and I'll conclude that they are losers well after most of the rest of the world. In my strength is my weakness, as I said earlier, I think a big part of Rule Breaker investing, Nick and all my fellow Fools, is that you keep holding and holding and holding. We just told the story of Darling Ingredients and you now have a triple, but you had to wait eight years before you got that. I'm instructed by that, but I do think that ultimately, if I decide the company is not going to win, then I will finally sell. Again, everybody else has already sold by that point. But that's OK, because you're going to be rewarded far more often holding winners than failing to sell losers. If you play the math out, and I have in real time in front of Motley Fool members for 27 years now, you're going to see the math work wildly to your favor to overhold everything. I overhold my losers.

But in this case, if I start deciding the industry or the world has changed, Nick, and I get this consulate about one or another company, I will sell them. We've done that certainly before in Rule Breakers and Stock Advisor. Protolabs has ended up being the company that kept thriving. In a world where lots of people are competing to make a 3D printer, these guys were using 3D printers in order to make rapid overnight prototypes of things and send you a 3D version of it through the mail so that you could, as a marketing person at your corporate meeting, the next morning show what the packaging is that you've intended for this product. You could have a 3D printed prototyped rapid delivery overnight business, like FedExing your idea in tangible form to show off. That's been in a world of innovation, the last 10 years have seen more innovation than probably the last 100 years combined. You can see how this company has thrived, and indeed it has. So that's why Protolabs was a Rule Breaker and continues to be a Rule Breaker, and it's been a winning stock too.

Sciple: It's been able to stand out from the crowd. If you just look at a chart, it's been able to massively outperform many of those other companies. In the space though, there has been a little bit of renewed excitement around 3D printing. I know Cathie Wood in her ARK Investment fund that has had some heavy investment in 3D printing. What's your excitement level on this subsector today going forward?

Gardner: Well, I like it very much, sure. It makes a lot of additive manufacturing, which is another phrase that people use to describe 3D printing. Basically, using a printer and not just to print a laser printed piece of paper with your words on it, which is what most of us thought, where we thought of a cool package in our printers. But instead, printers are printing things that might be literally the wing of an airplane. It can be printed in metal, it could be printed in plastic, and can take lots of other forms. The human race is so inventive that we will continue to dream up new, more efficient ways to make stuff, and to make new stuff. I really loved the idea that you can not just print your book report, but print almost anything in the future if it's efficient enough. Certainly, not everything can be printed. Zoom does not solve all human connection problems. I love that we have Zoom in Motley Fool Live, I love that we have our podcast reaching out to people. There are also real benefits of face-to-face as well. I don't want to overstate the case for additive manufacturing, but I've always been a fan. We've had these investments in place for a long time, and sure, I love it over the next 10 years.

Sciple: Absolutely. The last thing I wanted to talk about is renewable energy and two very different picks again here, I think a lot of people would see how renewal energy fits under this Rule Breaker universe, an important emerging industry. We've got NextEra Energy and SolarEdge, a utility and a component manufacturer. What do you think about renewable energy as an investment theme? Then, talk about the differences between these two companies and the way they are playing into that theme.

Gardner: Well, thank you for taking it up that way, Nick, I mean, what you're showing us is that there is a wide disparity. It's such a big industry and a big opportunity, that you have totally different players doing totally different things. All still in the early stage. I mean, most of the world's energy continues to come from fossil fuels. But looking backward from the future, how can you and I not conclude that most of the world's energy in the future will come from the sun, which is the most powerful source in our solar system? Energy always was, but only now are we starting to develop the technology that can harness that along with a human consciousness and an appreciation for how to make that work when we're used to digging stuff up in the earth. I mean, it's such an obvious, to me, place that the world's energy is headed. It can't get there all at once. It's still inefficient in a lot of ways. It needed some government backing in order to make -- Germany spent a lot of its own money to make solar work or to make wind work.

There are a lot of forward thinking forces that are going to make this real. But yeah, the two companies you mentioned, NextEra Energy, a U.S. company started out as Florida Power & Light. That's still a big part of the business, but they used that big utility, that big Florida utility. They started peeling off some of their funds and investing in wind and investing in solar. It took on the name NextEra Energy, and the ticker symbol is NEE. I first recommended it in January of two years ago. We've had it for a couple of years. It's about a double, which considering it's largely a utility, that's not a bad move at all, we've well across the market with that company. Today, NextEra Energy is literally the No. 1 player worldwide for profit in wind and solar. How can you not love that? What's not to love there, and so love it.

Then on the other hand, we have an Israeli company that makes a component of solar panels, and the stock has been even better than NextEra Energy. The company's name is SolarEdge, the ticker symbol is SEDG. If you are a Motley Fool Stock Advisor member, you are probably pretty happy with this one because we've recommended and re-recommended it a number of times and the stock has basically gone up. It's tripled in just a brief time it had since September 2019. Really briefly, when you have a solar panel, which one day I look forward to having, I don't have this in my life yet, but I look forward to this. When you have a solar panel, it gathers the direct current from the sun that needs to be converted into AC from DC to AC to work, to power your home. You need to have inverters that can change over that direct current to alternating current. That's what SolarEdge's products do. There are only a few companies, it's again, sort of an oligopoly in the world. This is still early days for this industry, but they are at huge volume, a real player here. Here we are, two totally different companies, NextEra Energy and SolarEdge. Both of them are well beating the stock market and beautifully positioned, not just looking two years ago, but I think the next two decades.

Sciple: Right, yes, so both of these in their particular niches are oligopoly, very highly concentrated markets with this opportunity for an incredible growth. We want to look for those places where the market is concentrated, where you have clear beneficiaries of that growth into the future where at first maybe solar panels, historically, we've had a little bit more challenges because those are a little bit more of a commodified market with many more competitors.

Gardner: Yes, no question. There is something to be said about it's harder to make hardware than it is to make software. I think everybody recognizes that these days, software is higher-margin, et cetera. But it turns out we still need to have a desktop computer that I'm speaking to you from today. I like hard goods around me, and somebody has got to make them, and those that do usually do sell it real scale and those are good businesses. I realize it can be commoditized, that's true.

By the way, quick side note, just days before we recommended SolarEdge in the summer of 2019, the CEO tragically died. He had colon cancer and it had been pre-announced a couple of years earlier, he stepped down and then the next day, he died of colon cancer. Which is really sad, Guy Sella, a true visionary, never will be as well-known as Elon Musk, but just a really good person and a reminder that a business is always going to be human. A quick shout out to Guy Sella, his vision, and the company that he created. We saw that we lost our CEO as we were writing up that stock recommendation. I'm so glad we went through with it. We weren't scared about that situation. You can see how great companies have great leaders who can step up and have great cultures that allow them to continue to innovate. Sometimes, there's a little bit too much of a cult of the CEO and this world. People are too focused on the Elon Musk's or Steve Jobs when they should be thinking about the culture that surrounds them. That probably like good soil has a lot of other really good stuff growing and we should tend to be a little bit more forgiving of losing Lebron James. There are a lot of other good basketball players. So, to me, SolarEdge, part of its story is that reminder.

Sciple: I guess, what advice do you have for folks? I mean, in this case, you proceeded forward with the recommendation, because you're going to see these types of things in all types of investments, not just in SolarEdge or others. What advice do you have for folks when something like this does happen for a stock that they own?

Gardner: Yes, I would say in most cases, you've probably pre-thought about it. How many years have people talked about what is Berkshire going to do when Warren has gone, Buffett and Munger? Well, the answer is, Berkshire is probably going to thrive. I mean, there are a lot of great businesses. It's an unusual situation because it's kind of a holding company. But let's go with a very recent example: how about, Nick, what would happen if Jeff Bezos eventually stepped down from Amazon? Wait, but he just did, Jeff Bezos just stepped down, he announced in Q3 this year he will be stepping down. The stock didn't move the next day, that announcement. Now, a lot of people were worried, when Steve Jobs is gone, will Apple be the same? Well look what Tim Cook has done. I believe that if you believe, together our belief will be rewarded. Not every company has great leadership, not every culture is that sustainable. But if you're looking one click down and you're thinking about that company and who is set up for succession, have they thought about it, talked about it, et cetera. I mean, in the case of SolarEdge, they were all set to announce their new CEO and so was Amazon, as we saw. So I think it's instructive that typically we're overrating losing the big visionary leaders. Turns out, there are lots of other good people too, and if we stay invested, we will benefit from that. Wow, has Apple done amazingly since Steve Jobs sadly left the earth, it's been an unbelievable performance as a whole, has grown to a size Steve maybe himself could have dreamed of.

Sciple: David, this has been a great conversation. I want to remind everybody what the themes are and then wrap things up. We discussed railroads, trashes as industrial niches. We discussed renewable energy. We discussed innovators in mature industries, and we talked about Protolabs and Tesla. Before we go away, David, I know a lot of people are talking about this energy transition, the growth of renewable energy. This idea concerns around climate change. Folks are wanting to know how I can invest in this coming energy transition. What advice do you have for anyone looking to invest in the energy and transition upcoming over the next several decades?

Gardner: I mean, haven't we already provided that, Nick, and hasn't your good work in identifying these themes already nudged us toward that answer? I would continue to ask who are the top dogs and first movers in the important emerging industries. What I'm trying to say is, when we say alternative energy or the future of energy, that is, like, 23 different industries. Inside each of those industries, there are players that are winners, and there are companies that have great stories and are doing important work in this world. The world of technology is the world that we live in today. Everything is a tech stock. You'll never hear me say tech stock, except when I'm making jokes about it, because I've never used that phrase. I think that technology is what's driving every company. From my standpoint, let's just keep our eyes open and ask, who's popping up with the next great invention? It's not that it's been announced. I'm not going to buy your stock just because you say your R&D has come up with this. I'm talking about who's actually out there in the marketplace with real products and services or the prospect of immediate launch of rail products and services. We can be a little bit conservative relative to the rapscallions who get in really early days. We can wait for those things to come public, to be deployed at scale, then we can buy the stock. We will do really well in the coming decades with that approach.

Sciple: My last question for you, David, you always say you want to make your investments represent your best vision for the future. What is your best vision for our future in energy and manufacturing?

Gardner: Well, I think, first of all, that it's got to be a great product. If it's just going to be a lame 3D printed model, it was still impressive that they invented it, but if it's not solving real-world problems, then it's not going to be sustainable. For us, focused on industrials and energy, I would say, what's real? To me, the sun is very real. Figuring out how to harness that and make that answer far more human problems than we ever had before. We now have the technology to start doing that. I'm excited by those prospects. A reminder again, trait No. 4 of Rule Breakers, it's the people. Beyond just the industry of technology, ask yourself, who's the founder of that company? Who is the chief science officer? What's the culture of that company? Those things really matter in terms of who is going to win and who's going to lose on the stock market in the future. I think you're trying to integrate your right side of your brain and your left side of your brain as you come up with new answers. By the way, in conclusion, always be open to new answers. Tesla could be disrupted one day, it probably will happen at some point. Let's not fear that. Let's try to be invested in any company that does that. I love this space and I think it's really fun that we had this conversation, Nick. Thank you for the invitation, Nick, all your good work, and the great work happening for Industry Focus.

Sciple: Thank you, David, for joining me. I hope we can do it again sometime. If listeners enjoyed this podcast and haven't listened to David's Rule Breaker Investing podcast, I highly recommend checking out wherever podcasts are available. David, until next time, thank you for joining me.

Gardner: Fool on!

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing this show. For David Gardner, I'm Nick Sciple. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.