Motley Fool Co-Founder Tom Gardner on "the Next Internet"

In this segment from a recent episode of The Motley Fool's premium podcast Stock Advisor Roundtable, Motley Fool contributor Brian Stoffel and Motley Fool co-founder Tom Gardner discuss:

• Is AI the next internet?
• The future of fraud detection.
• How to succeed at thinking clearly.
• The amorality of big tech companies.

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This video was recorded on Feb. 11, 2024.

Tom Gardner: AI is the next Internet, it's just coming on faster and it's less expensive. It doesn't require a whole infrastructural investment. To get all the pipes, to get everything connected, we're already connected, so AI is just riding on the systems that we have. It needs more power to continue its acceleration, but it's coming on very very quickly right now.

Mary Long: I'm Mary Long, and that's Tom Gardner, co-founder and CEO of The Motley Fool. Longtime Fool contributor, Brian Stoffel, caught up with Tom on a recent bonus episode of one of our premium podcasts, Stock Advisor Roundtable. Typically, episodes of Stock Advisor Roundtable are only available to Motley Fuel subscribers, but today we're sharing a portion of that conversation with you Motley Fool Money listeners. In this segment, which was recorded in December of 2023, Brian and Tom discuss why companies need to hire Group 3 talent, making assumptions about failure into your portfolio, How to succeed at thinking clearly, and why AI is the next Internet but better.

Brian Stoffel: There's a lot of excitement around generative AI like ChatGPT and for members who might not be using ChatGPT or who may not ever use ChatGPT. For instance, I know my parents have never used it as far as I know, what should members know about generative AI and investing because it might be really hard to understand how one could help improve the other.

Tom Gardner: First of all, I would say in terms of the actual holdings in your existing portfolio, the most important thing that generative AI could teach you is how they're using it. I would start by looking at the companies you own and just doing Google searches and trying to understand what is their message about this new tool kit that's arrived. That's number one. Number two, I would want to understand thematically what's happening in the world. Of course, I like to learn by doing so I do believe that anyone who can afford it should pay the 20 bucks a month to get GPT-4, the most upgraded version on OpenAI, chat.openai.com. I'll pay that 20 bucks, that'll be some of the greatest research money we've ever paid in our lives I believe. This is such a powerful tool, it's like YouTube. One of the best investments I made was just to pay to have the ads removed from YouTube so I can just click and start watching and how many things have I learned from YouTube? It's been an amazing benefit to me as an investor and in other aspects of my life. But back to the key thing before even worrying about learning by doing is to see the theme, the major trend. Here's what I have to say about AI. AI is the next Internet. If you look back over the 30 years of The Motley Fool history, we started in 1993 with a print newsletter '94 with our first online site, 1994. Most people were looking at the Internet and saying, what's that, chat rooms, there's hype, it's mysterious and anonymous, I don't even know what it is, my computer is not even networked. It's cyberspace, we had an obscure word to describe it. It was not center stage for years and then look what happened. Look from 1997, let's just say and look at the capital raising.

Look at the bubble, look at the bursting of that bubble, look at the renewal of it. Look at the diminishment of all non digital assets, as a class. If you weren't woven into the internet, it started with what are the Internet companies and now you would never say that's an Internet company, everything is connected to the Internet. Well, AI is the next Internet. Again, I'm speaking to people who are not following us, many people may be like move on. AI is the next Internet, it's just coming on faster and it's less expensive. It doesn't require a whole infrastructural investment to get all the pipes to get everything connected. We're already connected, so AI is just riding on the systems that we have. It needs more power to continue its acceleration, but it's coming on very quickly right now so that's the second reason. Now that you have that context, what are my companies doing with AI and wow. This trend is a multi trillion dollar making creation. There will be a lot of hype, a lot of stocks get we're AI whatever and they'll get thrown down because they're promotional businesses but what's happening is real, very real coming on faster, less expensive and then pay the 20 bucks for GPT-4, take your largest holding and just start asking questions about it and don't stop, keep one channel open, take your largest holding and just keep prompting asking questions and one of the best prompts you can use is to ask GPT to write the prompt for you.

Say, what should I ask about the leadership of Nvidia? Let's say if that's a company you want to learn more about, or we mentioned Tesla maybe. Please write a prompt for me that explores everything that can be learned about the CEO, CFO, and founders of Airbnb. You'll get a prompt, you put that prompt in, you get the response and now you're starting to read something that's a gathering of insights from numerous sources that you couldn't find on your own. Even if you searched it on Google, you'd have to click multiple articles to get it, and it is not perfect but it's that unifying effort to bring insights and then you start to learn more and more prompts to go deeper and deeper and you might just uncover some patterns that help you find the best companies that we're recommending. I do believe, I will say this the next big Enron made off Theranos, FTX. The next frauds are going to be discovered by people using generative AI to sort through filings, documents, interviews, and look for patterns that identify fraud. That's just one example, that's not a great value creating thing to go out and identify frauds but it's just an amazing library for all of us and it's important to learn by doing so. I think everyone should have a GPT-4 account.

Brian Stoffel: Tom, I have two follow up questions. You gave some really good examples there. Just to make this even clearer and more simple for the people listening who might not have any experience, if they go to the website you talked about and they go to it, tell me in the last 24 hours, what have you prompted ChatGPT to help you with?

Tom Gardner: That's great. I can actually bring it up right now and look at my channels. I have looked at the leadership teams of a few different companies. For example, I wanted to learn more about what's happening at Block with Jack Dorsey having returned, who's there, who's not, what was his performance as CEO? It turns out Jack Dorsey, when he was the sitting CEO of Square Block, it was something like a nine-bagger over ten years. I don't have those numbers exactly right, but so I'm able to quickly learn things. I don't know how long it would take for me to study and learn about Block's leadership team, the stocks performance under Jack Dorsey, all of a sudden, I can ask those questions and learn. Yes, there are a number of other things, and it does range outside of investing as well but I wanted to learn more about natural gas prices, the history of natural gas prices through environments in the economic cycle where we are now because I want to understand EQT better and better. I think we have a winner in EQT, I think we have a temporary knockdown to natural gas pricing with a warm winter oncoming but I don't think that there's going to be lower demand going forward and we need a lower emission source of energy before we can really turn things over to wind, solar. I do think EQT is very well positioned, I can learn more about EQT on GPT-4 than anywhere else.

Brian Stoffel: That's really helpful. Here's my follow up because AI is what most people are talking about today. It's hard to do this because this isn't visual, it's audio. But the Gardner Hype cycle says that you have a technology trigger which I would say was ChatGPT being released about a year ago and you go all the way up to the peak of inflated expectations, down the trough of disillusionment and then you really see what they call the Slope of Enlightenment and that's where the real benefits of a new technology come in. The Internet is a perfect example of that where you could be whatever.com 25 years ago and people would pour money into you and then it all crashed around 2000. Where do you think we are in the hype cycle right now when it comes to AI. Have we hit the peak of inflated expectations, are we past it, are we still getting there? I know it's an impossible question, but I'm curious as to your thoughts.

Tom Gardner: I'm probably going to give an unsatisfying answer. I'd start by saying I don't know, then I would say, I think that there may be so many different little curves in this that it depends on what you're looking for the application. For example, if you're a developer, the cost of having a junior developer working with you has pretty much collapsed to zero now because you can utilize these tools to review your code, write the basic code that you review, etc. That's a different experience than users that are now going to be looking at PIKA, P-I-K-A, I recommend searching that. I recommend watching their trailer and apparently, now the first wait list accounts have been released or some of the earliest wait list accounts and the limited number of reviews that I've seen and one person that I've spoken to has said, wow. W-O-W, it's text to video, think about that.

You could put a GPT script, you could ask GPT to write a script and you could then send that script to PIKA and it can make an animated, or increasingly like a photo, real film for you out of that script. That's going to begin its own inflated hype site, that's going to inflate. Someone who's been in the center of film-making for decades is Jeffrey Katzenberg and what Jeffrey Katzenberg has said is that the cost of creating an animated film will fall 90% over the next three years and the number of people employed on an animated film project will be reduced by 90% as well. He said there used to be a need for 500 artists for an animated film, now we'll need 90% fewer. That's somebody who you think with his legacy in the industry might have been thinking, don't worry, this is not going to be a threat. But here he is, letting us know how dramatic the changes will be in media and entertainment. That's quite a remarkable statement, he said, it's going to happen over the next few the years, it's probably going to happen over the next 18 months because we're moving up the non linear curve. I think there's so many expressions in medicine, in entertainment, in technology that it's going to be hard to pin it to one thing and say, now it's overinflated because I think there's so many new expressions that'll be popping up along the way.

Brian Stoffel: We're going to shift away from AI for a second and we're going to turn toward a question that you got from your October member event at the time. Numbers were one thing, I'll change them as I read it. The question was, with US Treasury rates and corporate rates around 5% and today they're around 4%, stock investors now have to earn seven, eight, ten or 12% to beat that. As the corporate rate increases tremendously, does your investment strategy change tremendously as well and you can use hindsight to help you here as well, knowing that the Treasury rates have come down since then.

Tom Gardner: I have been pretty consistent in my belief that the rates are going to come down. I was not right on seeing the spike in rates. I completely missed that. But what I see happening now is that a lot of the decline in inflation has come from untangling supply chain issues. Against that, we've been boosting rates, but now you get the core of the reduction is coming from improving supply. Now we have new technologies entering the field that are extremely deflationary. The layoffs at large technology companies are not because they need to fix their balance sheets. The layoffs are happening at large technology companies, and I said this very early on because a lot of the capabilities that we bring to the table now can be automated and how companies address that will be interesting, say a lot. It will be a societal issue. We already know that. Of course, I favor the companies like ServiceNow that have said we have a People Pact. Our People Pact says we're not going to replace you with a tool. You just need to be using the tools. If you're not going to use the tools, that will be problematic. But if you're going to go out there and utilize all these tools, we're not looking to say, that one took you out because it's a calculator, so we don't need you to run small math for us anymore. That is so deflationary and so I don't think we're going into a high rate environment now. All the decoupling and geopolitical issues, that's a big unknown. But my primary concerns are around the decoupling and around our national debt.

Those are my primary concerns. But I actually think at the core, we're not going to see a high-rate environment here. Again, I could be completely wrong about that. I'm not knocking Jeremy Grantham because I love Jeremy Grantham, I think he's brilliant. But Jeremy Grantham is still out there with his 3,200 S&P 500 prediction. As far as I know, I don't know if he's corrected that this is. The problem with making these big predictions is we need to hold ourselves accountable to these because we're now at an S&P 4,700. What the Fools pretty much consistently never doing is making a one-year or two-year call or a specific market call, but really looking five and 10 years forward and trying to find those major trends and themes. I think we're going to be in a reasonable rate environment over the next decade. I may be an outlier on that.

Brian Stoffel: I just want to parse out what I just heard you say because I think it's important. I think that the narrative that we hear a lot is that, hey, the reason there was a bunch of tech layoffs is because these tech companies over-hired during the pandemic and they are correcting themselves now. What you're saying is that might be true, they might have over hired, but these layoffs would have happened anyway because this new tool we have in AI is rendering a lot of services moot for human input. Then at the same time you're saying, hey look, the supply chain was a huge part of this. To quote Nassim Taleb, he says, I've never seen a shortage, not followed by a glut. What you're saying is we're working through that. It's just this, this feedback loop takes a while to fix it when you're talking about a global supply chain. You don't see super high rates moving forward, so you're not going to be changing your investment process based on that assumption.

Tom Gardner: True statements. I think you nailed that and said it much more succinctly than me. Maybe I would add two other things in there. One of them is wealth inequality already is an issue and for anyone who doesn't think it is, watch what happens in the next 3-5 years. Think of the creation of Instagram, which was sold to Facebook for a billion dollars when they had 13 employees. Thirteen people can create a billion dollars of value. Think how many thousands of people or hundreds of people would have to work to create a billion dollars of value in the past. Now that's an acquisition price, so was it worth a billion? [laughs] Yes, it was. It was worth a lot more than a billion. Those 13 people created a lot more than a billion dollars of value, we could say, given what's happened since. But that is not going to be an unusual thing. That will happen more and more small teams creating a lot of value. I think smart companies will be making a lot of acquisitions of private, rising tech companies with true AI expertise because there are three groups with AI. Let's just say group 1, not really interested, don't necessarily love it. Group 1. Group 2, learning, very excited. Group 3, fascinated, the group 3 should be the decision makers. Companies need to hire group 3 talent as quickly as possible or contract it, find it as advisors and in our own daily lives as investors depends what you're doing and how you like to spend your time in life. But if one of your children or grandchildren, nieces or nephews or somebody is in computer science or has a friend who really knows AI, have them over for dinner, go out for coffee, ask them a lot of questions, ask them to explain it to you and to walk you through some examples.

Because AI is the next Internet and it's coming faster and it's less expensive, so there's a huge incentive for companies because it's provides capabilities that could present a richer experience for their customers and it's less expensive than making full time hires. It's a reality we're going to have to wrestle with it as society. I do think that what the large tech companies, and I excuse Apple from this, because they have not gone through layoffs. I think that what the large companies are doing right now is amoral. I won't say it's immoral, but I'll say it's amoral. It's societal neutral. Look, we're not worried about that. We're going to optimize everything and get our operating margins up another 0.6%. If that costs 7,000 jobs or 14,000 jobs here and there, we're going to do that and so I think that they've shown their hand about how they're going to play this game I don't think that's going to stop because exactly as you succinctly shared, Brian, I think this is more than just over hiring during the pandemic, a lot more. I think that's a small bump in the road. The much larger issue is these tools replace the need for a lot of legacy functions.

Brian Stoffel: Well, let me ask you this then, and I know we're beating this topic to death a little bit, but the question from the member had to do with whether or not interest rates would affect how you might approach investing. Largely, I'm hearing no it doesn't, but you pointed out inequality might be a big deal. We could talk all day about how to handle that, but I know that taxes are going to come up as one of the ways to handle that. My question is, if there are higher tax rates or higher tax rates for the wealthy moving forward, does that change anything about how you approach investing or is it one of those things where you just have to let it play out?

Tom Gardner: For me, it's mostly letting it play out and observing it, trying to learn from it and understand it. I'm not a legislator, so I'm not tasked with coming up with what the new rules should be. I did watch an amazing interview, which I can't cite it right now because I can't remember the professor's name. But it was a wonderful interview of what's happening with office real estate and all of the things connected to office real estate. Essentially it's the suggestion that if you take, for example, New York City, it's going to lose 10% of its revenue because of remote work. You're going to see much lower commercial property, much lower activity, lower sales taxes around those office base dollars. Just think of office parks. There's a lot that's vanishing that was relied upon. When you have a 10% cut to a city's budget, that has a lot of implications. I think we're going through a time of quite significant change and I'll speak for myself. I'm only going to be right 55, 45 maybe. We know as investors, if we're right, six or seven out of 10 times long term as an investor and we end up with a few big winners in there. Wow, are we going to be very happy with our returns? But we have to emotionally be prepared and have a system that prepares us for three or four of our ideas out of 10 to be wrong. If we don't create portfolios with the assumption that will happen, we're setting ourselves up for a narrower margin of safety than we should. We should assume that three or four are going to be wrong out of our investment recommendations or, in this case, our ideas around rates, macro issues that could impact the markets. For me, my major themes, yes, are national debt, like geopolitics. When do we start unifying come together? Where do we find the common interests in conflict areas? I watched it happen and studied a lot in Northern Ireland back in the 1980s and 1990s, and as you saw the peacemaking process develop. That's going to be a big theme, no question. Then wealth inequality, taxes, try to get the big themes on the page so that we can look at them. Some of them will be the tailwinds for great investments, and some of them will be the headwinds that we really need to rethink our overall approach based on that. But I'm not going to be right more than five or six out of 10 times on the big themes.

Brian Stoffel: Last big question before we move on to the lightning round. There's been a lot of scary stories about an upcoming recession, we've hard about it for seems 18 months now, and for every story, your recession is imminent in the next six months. What should members take away from hearing that information or maybe it's disinformation when they tune into the financial media?

Tom Gardner: Imagine a recession where the market rises, or imagine an expansion where the market falls. We don't think that those things could happen, but they can, and the timing of them, and the market's reaction to them. There are cycles, there are patterns, but there's no certainty. Imagine that things in the business world went very well, but the market went down. The reason I say that is instead of trying to figure out how the loops match up, how the curves twist and turn, just go back to the historical data that shows that on average, the stock market falls 10% every 12 months. At some point, if you have $100,000 invested, don't be surprised if it's down to 90,000. That happens on average once a year. On average, once every five years, the market falls 20%, so when that happens your 100,000 would be down to 80. Even less frequently, I won't go through the other expressions, but there are obviously 30%, 40%, 50% declines, the 50% declines are twice in your lifetime. But we saw that in the financial crisis. We saw the Nasdaq go down 80% in 2000, 2001, it happens. If it has happened before, it must be possible. If it has happened repeatedly before, we can look at the data set and say, with this level of frequency it will happen again, we should all build our portfolio with the assumption that the market could easily fall 10% at some point, starting today, perhaps, over the next two weeks. It could pretty easily fall 20% once every five years and 30% once every 10 years. We have to build our portfolio with that in mind. That data helps us more than predicting where we are with regard to the threat of recession.

Brian Stoffel: Now we're going to move on to the lightning round, so I encourage you to give 1-3 word answer to each one and I'm very curious where you're going to fall on these. Number 1, one investor outside The Motley Fool that I always think is worth listening to is?

Tom Gardner: I'm going to say Ian Cassel who runs the MicroCapClub. You can follow him on Twitter. He's a super long-term investor in a category we don't cover much in Stock Advisor, but micro caps, wonderful way to invest for the very long-term with a small portion of your portfolio and he's a brilliant investor.

Brian Stoffel: Number 2, when considering a potential investment, the percentage of time that I spend evaluating leadership is?

Tom Gardner: Twenty-five percent.

Brian Stoffel: This one's two-parter. I think blank is the next blank.

Tom Gardner: I'll repeat what I said before, AI is the next Internet, it's just larger, faster, and less expensive. Think of those three combined to what we just went through with the introduction of the Internet now happening. Larger, faster, and less expensive.

Brian Stoffel: Number 4, as an investor, when I think autonomous vehicles, I think blank.

Tom Gardner: Not here yet.

Brian Stoffel: Not here yet. This one I'm particularly interested to hear your take on. It looks richly valued, but I think blank is just getting started.

Tom Gardner: Just getting started. When I heard that right after autonomous vehicles, I was thinking, I think Tesla is going to be one of the largest companies in the world. I don't say that to say that I support everything that Tesla does or says, but I do believe that that business is positioned to become the largest company in the world in the next 15 years. But you said is just getting started? This is a small cap, and we don't bring a lot of small caps into Stock Advisor, but I'd say Kiniksa Pharmaceuticals, KNSA, take a look at that business. Richly valued, but I think it's just getting started.

Brian Stoffel: One thing that is guaranteed when it comes to investing in 2024 is blank.

Tom Gardner: There are no guarantees.

Brian Stoffel: Smart answer. One opportunity that excites me in 2024 is blank.

Tom Gardner: Well, I mentioned natural gas prices and EQT and their CEO, Toby Rice, and if you're using GPT-4, just start prompting around Toby Rice, the Rice family, Rice energy, their father's work as a money manager, their reputation, and you'll see that by putting some capital into EQT, we're putting our cash in the hands of a management team that does a great job of cost management, knows its category very well, and is likely to set us up for long-term success. But even so, I think 2024 is an exciting year.

Brian Stoffel: Stock Advisor is for blank.

Tom Gardner: Fools.

Brian Stoffel: During an election year, because we are joyfully entering that time of the cycle, I do blank differently.

Tom Gardner: As an investor, very little.

Brian Stoffel: My biggest question for 2024 is blank.

Tom Gardner: My biggest question for 2024 is let there be peace on Earth, and let it begin with me. Is it possible that we can learn how to address disputes in every aspect of society more effectively? For all the AI, well, hey, let's hope AI delivers this, we need mediation. We need to be training tens of thousands of mediators.

Brian Stoffel: What do you mean by mediators?

Tom Gardner: Pick your most strongly held belief, and let's dedicate this short section to Charlie Munger and the amazing life that he led and what he brought to us. That in order to really succeed at thinking clearly, you have to see the other side effectively. Whatever your most strongly held belief is, how well can you articulate the other side convincingly and feel it and own that experience versus reaffirming your belief.

Mary Long: If you enjoyed this conversation and are ready to take your investing chops to the next level, head over to fool.com/signup to join Stock Advisor, our flagship investing service. As a Stock Advisor member, you'll get two new stock picks each month, rankings of a whole scorecard of companies, and access to all episodes of our premium podcast, Stock Advisor Roundtable. That show is only available to premium Motley Fool members. It focuses on Foolish recommendations and takes a deeper dive into the businesses we cover, featuring Fool analysts you already know and love from listening to Motley Fool Money. Tom appears regularly on bonus episodes of Stock Advisor Roundtable to discuss what's new in the Stock Advisor universe and to answer questions sent in from Motley Fool members. If you're looking to sign up, again, you can go to fool.com/signup to do so. As always, people in the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.