"Rule Breaker Investing" Blast From the Past, Vol. 7

Motley Fool co-founder David Gardner looks back at some memorable broadcasts.

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This video was recorded on February 08, 2023.

David Gardner: I never say never for just about anything, but I'm as close as can be to never on some things. One of them is that I never think I'm going to enter the government or run for public office. First, I'm not particularly interested in it. Pretty sure my brother Tom and I both believe that we can affect far more positive change in this world through the vehicle of our company, The Motley Fool, through the platform of hundreds of Fools working every day to make the world smarter, happier, and richer and thousands alongside us, including every one of you, my dear listeners being part of that community, smarter, happier and richer. There's no political office needed, there's no campaigning, no special interests, no PACs, no negative ads.

This is particularly good for me because one of the things I'm the worst at is just saying the same thing, the same soundbite over and over. I just can't do it. I take far more joy in coming up with something new for you right here every week on this podcast than if I were just saying the same thing over and over, but if I were good at that, well, that seems to be what politics often can be about. You need to stay on message. You say the same thing over and over the same soundbite that gets you the votes. But that's the opposite of my own inclinations and joy. So to a fault, I think I need to keep coming up with new tricks for you every week on this podcast.

To a fault, I'd say because if you're always playing a new instrument or a new tune from one week to the next, you might make the mistake of forgetting to repeat some of the important trues, the timeless ones, the essentials. From time to time, I liked to hail back to the past, and remake some cardinal points that I've made before so they're not lost. Especially from our newer listeners, I would be a fool if I assumed you knew that critical lesson I taught on this podcast back in 2016, or one of my favorite stories from 2022 even. Well, about once a year I do the series. It's called Blast From The Past. It features five points that I want to make sure you hear again or hear for the first time. Is it 2023 already? Great. It's time for Blast From The Past Volume 7 only on this week's Rule Breaker Investing. 

Welcome back to Rule Breaker Investing. We've started February in the past. It feels like last week I so enjoyed bringing you essays from yesterday where I forced myself to read four past essays, four short-reads of things that I'd written years ago and I have to read them no matter what I was saying and no matter how bad or good sometimes the stock-picks might have been. So it was a pleasure because I randomize from 270 past essays, I randomize which ones to share. That's exactly what I did last week. So if you want to experience some of the glory and the pain if you didn't get a chance to hear last week's episode, it was essays from yesterday Volume 4. Well, again, hailing back to the past, but this time not random reads from past essays, but actually some of my favorite points made once before on this podcast, once in, well, one of these is from 2015, once eight years ago or a story told once years ago and now I'm here because you may not have been listening to this podcast in 2015 and yet even if you were, you probably don't remember this story.

So I have an opportunity to take some of my best and bring them back in this Blast From The Past series. Now what I say the phrase Blast From The Past, I can't not also think of a similar episodic series that we do here on Rule Breaker Investing that's blast from the radio past. I'm here to say that in the coming weeks, I think sometime next month, we will do our next installment of Blast from the radio past. So much fun to have my brother Tom Gardner rejoin me, our longtime producer, Mac Greer, Mac sees back through some of our great interviews on our NPR Show and others with outstanding people of the past and we review what was being said and it is truly from the radio old days and it's great always to rejoin with Tom. So I can't not say Blast From The Past due this week, which is what we're doing, and not think probably about next month and what is yet to come.

Well, I think without further ado, we can get started. We have again, five featured points, all of which are now being reshared with you for the first time in years. Let's get started. Blast From The Past Number 1, this is actually the youngest most recent of my four Blast From The Past, the day was January 13, 2021. I unveiled something I rarely do on this podcast, a list of six top-line principles. I've done this a few times over a few decades. I really only done it three times in one of those times was two years ago, January when I presented six principles for the Rule Breaker portfolio. The very first list of six principles I ever came up with was the six traits we look for in Rule Breaker stocks and we talk about those all the time on this podcast. They were there in the 1998 book Rule Breakers, Rule Makers, which I described with Tom.

They are the traits I look for in stocks I pick and indeed I'll be speaking to one of those a little bit later on this very podcast. But a couple of years ago I decided there's something missing. I do have the six traits we look for in stocks, and I have the six habits you should exhibit as the Rule Breaker investor. Again, all past existing material on this podcast. But what we didn't have, what I felt was missing a gap that I wanted to plug was how to manage your portfolio. Six principles for the Rule Breaker portfolio. Now I'm just going to be pulling one of them here today. But if this is new material and you're a Rule Breaker investor and you didn't know of these that we have these, I highly encourage you to go back to January 13, 2021, the podcast entitled very simply and logically. Rick Engdahl is the one who titles all these podcasts is my dear producer. It's entitled Six Principles of a Rule Breaker Portfolio, so you can't miss that one for its title.

Principle Number 4 is what I wanted to reshare with you today. Principal Number 4 of a Rule Breaker portfolio is for you to establish your sleep number. Number 4, establish your sleep number. Now I think some of us might have a Sleep Number mattress or at least have driven by their stores. Yes, this is a bricks-and-mortar operation these days, although Sleep Number, which used to be known as Select Comfort, renamed itself to its very popular brand name for its very popular line of mattresses where you can set your own setting on your side of the bed and your spouse or partner, your dear friend, your dog, can have a different number on the other side of the bed and that's the Sleep Number and I've never actually use one of those mattresses, but I think it's something like 1-100. So if you're like a 96, I think that means you like an extremely firm mattress.

If you're a much lower number and again, you can have different numbers in the same mattress, on the same bed to different people. A lower number would be a looser, softer mattress. So that's what the world typically knows as sleep number, but Rule Breaker investors know that we're having fun with that language. We're using it to mean something important and entirely different. So what is your sleep number in the context of Rule Breaker Investing? The answer is your sleep number is the percentage of your portfolio, your overall net worth, that you are comfortable investing in your top holding, your biggest allocation. What is the percentage of your overall pie that you're willing to put into a single stock, what's the highest and still sleep at night? There's probably no right answer here. I think that there are probably some wrong answers.

I would say a wrong answer is close to 100 or 97, in my example earlier. I don't think anybody should be putting a huge amount of their portfolio into a single stock. Now I realize some of us start with one stock and so by default, you're going to have all of your stock market holdings in one stock, although I really don't think you need to start with one stock. These days you can buy fractional positions through a lot of brokerage firms and establish right away a position in 10 different companies. I think that's a much brighter way to start investing. If you're listening to The Motley Fool, that's us at fool.com or me here on this podcast, all of us Fools are telling you to be diversified.

But I think understandably, we don't give a single number, we don't specify a direct allocation because all of us are different. We have different time horizons, we have different degrees of risk we're willing to take. We have different amounts of money, we have different plans for that money. There isn't a single obvious number that should be allocated to all of your stocks or to your greatest position. That's why I say establish your sleep number. It's something to think hard about. I think for a lot of people, maybe around 10, might be their sleep number. That is, maybe you have 20 stocks, which is a good baseline diversified portfolio. But as you slice up your pie, you're willing to allow one of those slices, that delectable blueberry pie of your portfolio. You're willing to let that be maybe a tenth of the overall pie, just one slice allocated to your top stock.

Keep in mind a lot of mutual funds these days, the sleep number for a mutual fund might be often one. Many mutual funds own hundreds, if not thousands of positions, especially index funds. So the largest allocation to anyone holding in that fund may well be one percent or even less. So you are getting broad diversification through many funds these days and some people really like that. But if like me, you're trying to beat the market, I think you're much more focused on not buying all the stocks, but just buying what you perceive to be the best companies and buying and holding those and letting them run up and win for you over time and sometimes growing to be larger allocations.

I have had the majority of my portfolio at different points in my history, especially as a young investor in a single-stock, when you allocate a balanced portfolio, and it's the 1990s and America Online is one of your holdings and it goes up 150 times in value over six years and you let it, you don't sell it off in your portfolio. I think you can see if you're mathematically inclined, that it's certainly possible that the majority of your portfolio might be in a single-stock, let's say 60 percent. So your sleep number, in that case, would be 60. Now that is a number of most financial planners, and I think rightly so in most cases would scoff at most of the financial intelligencia, most of the financial planners wants you to be very diversified and broadly diversified. But in the end, it's for you to decide and that's why Principle Number 4 of the Rule Breaker portfolio is where you establish your sleep number and it really is the number that's going to have you sleeping well at night.

Don't push it to the point that you're losing sleep thinking that you had a larger sleep number than your psychology or circumstance can actually bear. I do want to say in closing on this one that sometimes you need to let things happen and see what it feels like and then understand. But as we get to know ourselves better, which is a major challenge our whole lives long, just to get to know ourselves really well over the course of our lives. As you get to know yourself better as an investor, your sleep number, I think will become clearer and what I'm here to do is just to let you know the concept and the phrase that I use to have you thinking intentionally about that with your investing, building a beautiful blueberry pie of a portfolio for you, your family, the legacy that each of us is trying to build, I hope, with our portfolio.

So Principle Number 4 of the Rule Breaker portfolio, establish your sleep number and then adhere to it. Blast From The Past Number 2, this is a story. It was originally told in this podcast on August 10th of 2016. I won't ask for a full play of the way-back music, but maybe it's worth a bar or two. Yes, we are living in the past these first two weeks of February and we're right now in August of 2016, more than six years ago, although speaking of the past, this story actually took place in 1998, meaning it's more like 25-years-old, not just six-years-old and it's one of my favorite Motley Fool stories. Indeed, as has often said, of fine wines and fine marriages this story gets better with age. It's the story of the first time and the last time that my brother Tom and I were on ABC's television show, The View.

Let's start with the first time it was July 2, I see now of 1998, Tom and I made our first appearance on ABC's, The View. Now, this is a daytime talk show primarily focused on the female audience. All of the hosts themselves are female. The staff has changed, a little bit over these 25 years since our appearances on The View, but Barbara Walters was on back then she actually initiated the show. I remember that maybe Whoopi Goldberg was as well, Joy Bihar. She's still on the show today, but importantly for our appearance, it was a new host and her name was and still is Lisa Ling. Now Lisa is not still on The View, but she's still out there doing the television thing today. Haven't watched it. But it's This is Life with Lisa Ling on CNN. But back in 1998, she was just 24 years old and the newest host in the lineup, and the idea here from the show's producer was to have Lisa pick a stock. Let's have Lisa invest.

Let's have Lisa model good financial behavior for our viewers. Let's have her pick a stock. But since Lisa is not so much if a stock picker herself, why don't we invite the Motley Fools on and we'll have them pick a stock for Lisa? Let's have a stock that Lisa likes a company that she would use or admire, maybe as a consumer. So we got to call at Fool HQ from their producers saying, "Hey, would you guys like to come up to New York City, maybe think about doing this?" Let's do a pre-interview first, which is often what they do on television. So Tom and I did our pre-interview. We thought about a stock, came up with our idea, passed it to Lisa. She said she liked the company and she liked the products, so that was a good stock. I won't yet say what the stock is. We went up July 2nd, 1998. It's a live studio audience. Tom and I came out, started the show.

The Motley Fools are here, raves from the studio audience because, well, if you've been to one of these and I have too, studio audience, that's your job. You're there to rave about whatever happens on the show. So all enthusiasm for the Motley Fools. Lisa is going to pick a stock and they're here to help her do it. David and Tom Gardner are joining us. We had our jester caps on. We had our stock ready, had a nice exchange with the hosts, and then it was time to talk stocks which we did. We picked the stock studio audience seemed to like it. Lisa knew about it ahead of time, of course, she had already been briefed and so it seemed to go really well that five or six minute short appearance on television ended. We walked off the set, the producers said great job guys, let's have you back. Let's update the story. So July 2nd of 1998, that was that day.

Now, over the next six weeks, this stock lost 33 percent of its value. One full-third of our stock pick for Lisa was gone when it came time to think about having us back on the show. They were OK with that by the way, we were OK with that too. I like to talk about my losers. I think anybody listening to me for any meaningful period of time on this podcast knows I like to talk about my losers sometimes a lot, both on this podcast and of course, on our website, I always have a lot of losers, so we're OK with that and they were too at The View, guys, let's have you back. We'll just talk about it. We'll update the story. This we did exactly six weeks later, August 16th of 1998. Again, a live studio audience a lot of enthusiasm.

Here come the guys. They're back to talk about Lisa's stock. Lisa was smiling, she looks excited. She knew where we were headed with this. We began to look a little crestfallen as we started talking about what had happened during the last six weeks. In fact, I think it went something like this. Hey everybody, the Motley Fools are back. Yay, cheers. They've got an update on the stock for Lisa. More cheers and that stock is down. At that point, one of our few friends who actually watches The View on a regular basis told us, guys, I think you're the only ones I've ever seen actually booed on the show, The View. So yes, we did get good-natured, loud boo from the audience. As we reveal that in just six short weeks, we had lost 33 percent of Lisa's fantasy money. We talked a little bit on the show only like maybe another three or four minutes.

This is television after all about why and what had happened. It was the summer of the Asian Contagion for anybody who remembers that 1998. If you don't just look it up, Wikipedia is your friend. It's going to update you on the roiling events that rocked the summer of 1998 and our global markets. But this company had also made a serious misstep that summer as well. So here we are. Let's come back to the present day. We're fast-forwarding here to the second week of February 2023. I'm going to tell you what the stock was and reflect briefly on its performance. So the stock we pick for Lisa that day, July 2nd of 1998, had the ticker symbol SBU. You X, now I know some of us who dyed-in-the-wool investors you right away know. That Starbucks. Some others may not, but that is the ticker symbol for Starbucks.

Starbucks was our pick for Lisa. Starbucks did, by the way, have a really bad earnings report that summer and lost one-third of its value. However, since we're now looking backwards from this week in 2023, I can tell you that as of this week, Starbucks from the day that we first picked it. I'm including the 33 percent drop here is now up more than 15 times in value. That is a pretty awesome stock, about a 16 bagger. The S&P 500 over the same period, again, 25 years, is up about four times in value. Starbucks, as a 15 plus bagger absolutely crushed it. Lisa, if you're listening, I hope you held. We never did get invited back on the show, history will show. We've still never gotten to update the story of the view. I'm pretty sure that producers working on the show today probably weren't the ones back. Then I doubt there's any institutional memory at ABCs. The view, if you are a booker for the view listening this week to Rule Breaker Investing, Tom and I would love to come back.

I think it'd be really fun to update the story because I think the lesson of not worrying about short-term problems when you have great companies, great leaders, great consumer brands, everything great about Starbucks. I think that lesson has been proven over the last 25 years up more than 15 times in value. That is Blast From The Past Number 2. Blast From The Past Number 3, while I mentioned my list of six principles for building a Rule Breaker portfolio. I also briefly alluded to the six traits we look for in Rule Breakers stocks. I wanted to pull one of those just as a quick reminder, especially to newer listeners, trait number 3 of Rule Breaker's stocks is for many people I think a reason not to listen to this podcast, a reason not to take out a subscription on the Motley Fool to the Rule Breakers service. Trait number 3 is that I look for strong past price appreciation. Now given the popularization and repetition of the phrase, buy low, sell high, the idea of looking to buy stocks high, not low is pretty non-intuitive.

I would say, counter cultural as well, especially in the traditional financial press and the value investing so-called blogosphere. But what is a Fool? If not someone who by definition looks to issue conventional wisdom. Why would Fools do so? Well, not every time, certainly nor in every context, but choicefully. I think we Fools act in this contrary manner when we believe specifically, going against the conventional wisdom will confer advantages, it's going to win. Let me just add. It can get addictive really, because once you go against the grain and when they need do it another time, maybe in another context, and win again, it can change from a hunch to a tactic. You keep going from there, being ready and always willing to lose be an idiot looks silly, of course. We're going to have our losers, but you keep going from there and you might just turn that tactic into a habit or a strategy.

That strategy can become a way of life, by the way, but that's for another time. Doing what other people aren't doing is in my experience, what wins tabletop strategy games. It wins girls basketball tournaments for those familiar with Malcolm Gladwell's wonderful essay, how David beats Goliath. For me too, it's certainly is what has one, what wins, And I expect we'll continue to keep winning for investors. The 3rd trade I look for in Rule Breaker stocks is of the six Rule Breaker traits. One of the two that I would say are really in your face, nonconformist, capital F, Foolish ones, and that is strong past price appreciation. In a world of buy-low-sell-high constantly reinforced by many conventional sources, I say, and do not buy-low-sell-high, but again buy high and try never to sell. Of course, in previous podcasts, starting again back in 2015, although this did start in the Rule Breakers book in 1998.

I explain more why buying the 52-week highs as opposed to the 52-week lows really works. Just to add a little bit more before we move on to Blast From The Past Number 4. I'd say two reasons. First of all, usually the companies that are making highs, are doing so for good reasons. Not always, but usually they have great earnings. They might have great prospects, they're delivering on those prospects. Wall Street recognizes that the stock is rising. If you follow any great stock over a meaningful period of time, pick your favorite stock. Let's go with NVIDIA. Over the last 20 years, you'll see that it consistently makes new highs over time. It was very hard to buy low. In most cases, the right move was simply to buy high and keep adding to a great company.

That's just one easy example for me, NVIDIA, a wonderful Motley Fool Stock Advisor stock pick, but it's true of every significant winner overtime for Mercado Libre right through to Amazon certainly for 25 years plus. The reason this works is because when you're looking at things making new highs and buying high, you're buying excellence. Then the second reason this works is because everybody else isn't thinking this. They're thinking buy-low-sell-high. They're waiting for a dips, as I've sometimes said in the past, dips, wait for dips, as Rule Breaker investors. Of course, there are many ways to invest in the stock market and some of the buy low, sell, high strategies can work great, but this is the Rule Breaker Investing podcasts.

You're listening to me and what I do. I want you to know that part of the reason that strong past price appreciation works is because the vast majority of investors have been coached specifically against that. They think what goes up must come down. I say, maybe for some companies, but not for most Rule Breaker's over time. On the Blast From The Past number 4. This is the one that goes all the way back to the very earliest days of this podcast. It's hilarious for me to review some of these because for better or for worse, and you can tell me, dear listener, but for better or for worse. Typically the podcasts back then were, I don't know, this one was 13 minutes long. Now I think some of you might be thinking right now. I wish Dave, were a little briefer in 13. That would actually be a better podcast if you just came with 13 minutes each week. But then again, if you've enjoyed this week's podcasts, I couldn't possibly fit five Blast From The Past points into 13 minutes.

Anyway, reviewing back to September 16th of 2015, one of the earliest podcasts, 13 minutes in duration was entitled of killers and kings. I want to briefly explain what I meant by those. When I'm talking about killers, as I mentioned that podcast, I was talking about the headlines like this. Is the iPad, the ultimate Kindle killer, or will Hulu being a Netflix killer or will Netflix be a Comcast killer? Killer. We can all agree, it makes for good headlines. I know some of you are thinking along with me, and I really appreciate you, those who are, you're thinking of Betteridge's law of headlines, and how any headline that ends in a question mark can be answered by the word no. Again, that is Betteridge's law of headlines. It's a brilliant point and I'm happy to share that one for free as a sixth Blast From The Past this particular week.

But yes, you might think if people are going to ask the question with their headline, is the iPad the ultimate Kindle killer? The answer is going to be no. I would say Hulu was not a Netflix killer and Netflix wasn't a Comcast killer. As you can see I was highlighting the wrongheadedness, I think, of what I'll call killer thinking. The notion that there's only going to be one tablet, that we're all going to use or read. There's only going to be one streaming service. I think you could call that the Highlander fallacy of killers and kings. Let's talk briefly about kings as well because that episode also in brief, spoke to kings and we can say queens here as well, but we'll just stick with kings because who doesn't often hear a debate about which will be king? How about this one. Is content king, or those in the other side of this, or is distribution king? Now at different points in history may be one of those was more king than the other.

But the point I was trying to make eight years ago and now I'm making again eight years later, is it's a false framework. It's not an either-or. In fact, often when you can find both, that's a much better answer. So does any company come to mind when we talk, have a fake, arguably useless debate about which is king, content or distribution, the show, or the channel? Does any company come to mind? Maybe a streaming company? Well, I'm really happy to say that in that 13-minute podcast from September 16th of 2015, I did indeed highlight Netflix. It's right there in the title Of Killers and Kings: What Netflix Gets That Most Investors Don't. The key takeaway is that Netflix and its brilliant CEO at the time who's now stepping back to become, I think, Executive Chairman, but Reed Hastings who has brilliantly guided this company of his own making over 20 years or so, Reed Hastings understood that you could be both.

That you could not just be a very popular platform for people to initially rent DVDs or later stream content, but you could also create your own shows. People who were having arguments at the time about which was king, content or distribution, had only but to buy Netflix and realize the answer can be both. I'm just checking the stats here. I see Netflix is up 300 percent since that podcast, a four-bagger with the market up 100 percent a two-bagger. Market-crushing numbers for those who recognize the relative uselessness of phrases and frameworks and the headlines that lean on killers and lean on kings. Let's close it out with Blast From The Past Number 5, it comes from one of my great quotes podcasts. In this case, it was Great Quotes Volume 9, which was entitled Exit Pursued By a Bear.

We're not going to go Shakespeare that line, of course, Shakespeare's most famous stage direction from the play, A Winter's Tale. No, we're going to go with, I think it was the fourth quote in that particular podcast of five great quotes. The day was October 24, 2018, and I was quoting one of my favorite authors on leadership, Warren Bennis, the now dearly departed Warren Bennis. But here's what I wanted to share with you for Blast From The Past Number 5 this week. I quote, "What determines the level of satisfaction in post-middle-aged men is the degree to which they acted upon their youthful dreams". What determines the level of satisfaction in post-middle-aged men I suspect it's not just true by the way, of post-middle-aged men, is the degree to which they acted upon their youthful dreams. Now the reason that Bennis said that is because in his book, On Becoming a Leader, he's talking about a study.

He's reflecting on a study that was done, but I suspect it's true of women as well as men and I suspect it's true of people of all ages. Now to act on your youthful dreams, you probably need to be a little bit older than a youth, but that might be true of you if you're 28 or 32 right now, just as well as if you're 48 or in my case 56. I think it's a reminder to all of us, that we should think about what really drives us and motivates us in life. Often there are visions that we had or desires we had even as young people and to the extent that you have acted on that for better or for worse, to the extent that you pursued that dream, you're much more likely, I think, to be a happy listener of this podcast this week than if you have not, yet.

In fact, Bennis goes on in the very next sentence of the book to say, "It's not so much whether they were successful in achieving their dreams as the honest pursuit of them." I guess I'm recalling this great quote to challenge all of us, me included. We're still near enough to the start of a new year that some form of resolution can be important. We also may be far enough into the new year that you've already cast aside some other presumably lesser resolution. Let's take a quick look at ourselves in closing this week, maybe pick up an old photograph back before there were computers and digital photographs. Maybe you have a photograph of yourself as a younger person printed out in some shoe box somewhere, a Kodachrome special, or sure, maybe just a recent one buried somewhere 10,000 deep in an iPhone photo album.

Look your younger self in the eye and remember what you were dreaming about in that picture. Then I ask you to ask yourself whether you've done it. Have you acted on it? The good news is whatever age you are is you hear me this week, you have an opportunity to act on those things if they're good things to act on, starting today. Do you feel constrained, do you? Often we are the ones most responsible for our own constraints. Many of us habitually stand them up in our own paths, not somebody else's rules, but in fact, how we think about ourselves and how we often limit ourselves. One of my favorite quotations, in fact, I think I included this in another great quotations podcast. Maybe it was Volume 8. Mae Jemison, who said, "Don't be limited by other people's limited imaginations". Sometimes we create a box around ourselves based on what other people tell us about ourselves.

But I would still call that a prison of our own creation. I'm here with this Blast From The Past great quote to prick you a bit, to poke at you and encourage you to do that for yourself and realize that even if it doesn't work out, you'll probably, post-middle age, feel more satisfaction that you've tried. Or as my friend Jeff Bezos has said, he calls it the Regret Minimization Framework. Bezos says, when you're 80 years old, look back to the decisions that you're making right now and try to minimize the regret that you're going to feel at the age of 80. Now I realize some of my listeners are over 80 so you're probably knowingly nodding right now along with me thinking about well, when you're 90 or 95, looking back to today and trying to make good decisions.

But sometimes that means you should do something that you haven't been doing and other times it means you should not do something. I'll leave it up to you to decide when you should or shouldn't act on youthful dreams. But with Jeff Bezos and of course the author, Warren Bennis, I encourage you to examine from the future your present self and think about what's going to lead to your greatest satisfaction. Because we here at The Motley Fool, as I've mentioned before, are here to help make you smarter, happier, and richer and while this one's about the happier part, have a great week. Fool on.