Do you invest entirely in index funds? Today we are joined by David Gardner, co-founder of the Motley Fool, who is making the case for why picking your own stocks, or picking some of your own stocks, can be an incredible addition to your portfolio and build real wealth. If you’ve ever been told you can’t beat the market, this conversation might change how you think about your fire portfolio.
Hello! Hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my has five copies of his white Costco polo co-host, Scott Trench.
Thanks, Mindy. Great to be here with my motley crew of guests and co-host today here. I’m the only one in the uniform. We are so excited to be joined by David Gardner, co-founder and chief rule breaker. Uh that means uh partially retired, I guess. Uh of the Motley Fool. He has helped millions of investors crush market the market average. While everyone else follows the crowd, David finds companies that will define our future, often years before anyone else sees them coming. David, welcome to the BiggerPockets Money Podcast.
Thank you very much, Mindy and Scott. A delight to be with you.
I am so excited to talk to you today, David.
I think we should jump right off here and and acknowledge the fact that BiggerPockets Money as our podcast, me and Mindy, and most people listening, probably have a heavy bias towards passive, low fee index fund investing, and are biased against the active picking of stocks uh in there. Now, we’ve talked about this before. There are certainly a meaningful minority of people in our community who do um actively pick stocks or or or have a preference for that. But we would love to hear at the highest level your case for active management when there’s a good amount of research that that suggests the average investor be a passive investor.
Let me just say, um, we at the Motley Fool certainly endorse the idea of passive index fund investing. Having had Jack Bogle on my podcast, he’s appeared at our events over the years. What a wonderful man, what a loss for the investment world in recent years, not having his voice, a steadying force and a moral force, and somebody I deeply respect. So, I I want to make it clear that the Motley Fool from our earliest days said, “Sure, if you just want to go index funds, that’s much better than actively managed mutual funds” that sometimes had loads attached to them and are high fee. And so we’re huge fans of making your investing as cheap as possible. And, I guess the one big disagreement I would have had with Jack, and we occasionally talked this out, is, I think it’s worth picking some stocks. Now, it doesn’t mean you need to be active with your stock trading. There’s a huge difference between that and what we advocate at the Motley Fool or what I like as a rule breaker. I like to buy stocks, dollar cost average into great companies and hold. I don’t really sell, which makes me an odd duck in the investing world because so many people are hearing buy and then sell, and they hear things like buy low, sell high. And those are four of the worst words ever invented, I think, to misguide and mislead investors because the truth is we should be using the power of the markets like a sailboat uses wind. It is at our tail if we’re doing things right and it pushes us forward 9 to 10% annualized per year if you just passively index, which is a beautiful magical thing. And when you do that, you’re buying all the worst companies as well as all the best companies. And so I guess my big point is, you don’t have to be filling up your stock portfolio with stocks, although that’s what mine looks like. But I would suggest you think of what are some great companies that you know, that you feel confident in will will be prospering over the next 10 years. How about buy one stock?
Okay, you just came to the point that I was about to make. It seems like there’s these two different camps. You’ve got the camp that says buy index funds and you’ve got the camp that says buy individual stocks. You can be a member of both. They’re not mutually exclusive. So you can have mostly index funds and then a couple of stocks that you want to see what happens or a couple of stocks that you truly believe in. You don’t have to just be one or the other and you made that point right at the end, David. I love that.
I truly believe that our money should be expressing who and what we are. And for a lot of people, they don’t have that much curiosity about business, don’t have a lot of interest in following the markets or even companies. They might like their local coffee shop, but they’re not really that interested in Starbucks’s next quarterly earnings. And yet, Starbucks has been an unbelievable, it’s beaten up on mutual funds silly if you just bought and held over the last 30 years, you’d be way ahead of an index fund. Now, that’s not true of every stock. In fact, it’s a minority of stocks that beat index funds. But of course, since this is my focus in life and you all are kind enough to welcome me briefly as a possible heretic on your podcast, I do want to make a case for finding great companies, buying and holding them, adding more to them over time. And I have the distinction of having found amazon.com very early, NVIDIA very early, Netflix very early, some bad stocks, too, because losing is part of winning for me. And I’m happy to talk about losers. But most of all, I love to focus on great companies that I feel aligned with. So I would want everybody listening to us right now, if they were to buy a stock, buy a company that you think makes the world a better place over the next 10 years. You’re going to do better and I wouldn’t be surprised if you beat the market with that stock.
Okay, this is exactly my investment thesis with my husband. He is the one that is doing the majority of the research into the companies and that’s fine because he loves it. We are very tech heavy in our portfolio. He loves reading about tech news. He was a computer programmer for a long time or whatever the current term is for that. He still gets up every morning and reads all of his favorite tech reports every single day. I don’t have that level of interest in this, so I don’t do that. And we have conversations about it. We are moving into a more index fund heavy portfolio simply because we had all of these stocks in essentially one sector. But I love your comments about, you know, pick a couple of stocks. You don’t have to do all the research that my husband does. Regardless of your feelings about Amazon, who doesn’t have an Amazon Prime account? Who isn’t shopping on Amazon for almost everything? I mean, you go to the grocery store for milk and you go to Amazon for everything else. And this is not a sponsor of Amazon, although I do have to say I am a shareholder in Amazon because they perform really well. I’m a shareholder in a lot of the companies that you just rattled off. It’s like the Pacific Northwest is just a great place to invest in a company that’s located there.
I have a challenge to this though, right? Like like let’s use Costco, right? Mindy made fun of my Costco polo.
I’m a shareholder.
I’m a shareholder of Costco too because I own index funds, right? I don’t I don’t have any actual exposure direct to Costco. One of the challenges I’d have there is you said, what what’s a company that you’d use, admire and think is going to be there in the same capacity, growing and incrementally improving over the next 20 years. Costco’s the first one on the list, right? It’s almost inconceivable to me that a major portion of my shopping will happen somewhere else in the long-term future. That’s how suburban dad I am at this point in my life. But the problem is when I look at their stock, it’s like 55 times earnings. So that those expectations are already priced in. As a, you know, someone who’s immediately tuned to value in this, like if I was going to pick stocks, I think I’d almost certainly have a value bias because that’s just my nature. You say pick a great company, but then how does price or relative price come into play?
Yeah, it’s a great question, Scott. And first of all, Costco has been a premium price company pretty much its whole time through the public markets. My experience suggests that the great companies always trade at premium prices. Starbucks, Netflix, Amazon has rarely looked cheap to anybody. Most people thought it was going out of business or would never make any money. So, I think this is really where we get into the heart of my thesis and my approach, which is rule breaker investing, not just stock investing or value investing, but specifically looking to break the rules. And I guess without going too deep into this unless you both want to, but just keeping it at a
at a acceptable but not shallow level. I would like to point out that many of the valuation metrics and approaches that people do take when they look at stocks are missing some really important factors that cause the best companies of our time, which I call the rule breakers, to look overvalued. And so as a consequence, people don’t buy Amazon, they don’t buy Netflix or Tesla or Facebook, because they always look like they’re expensive. And anybody who’s looking for a bargain or a dip often just flat out misses NVIDIA, and never buys it. And in the meantime, Amazon, and NVIDIA, and Tesla, and Netflix end up, just looking back over the last 20 years, being the best stocks you could have owned, way ahead of the market averages. Each of those has been a 100-bagger for me. And I don’t mean to brag, because I’m more than happy to talk about my losers, too. That’s important. But it’s worth pointing out, especially to the mathematically inclined and the intellectually curious that you can only ever lose 100% with a bad investment, which is very unfortunate. And I’m sure we’ve all gotten there. I’ve gotten near there a few times. But what is the upside that is available to us when we find a great company? Good news, it’s not 100%. It’s actually infinite. And so when you find great companies, like Mindy mentioned Amazon being a shareholder, I am too. And my initial recommendation, and I’m still holding, was at 16 cents in 1997. And believe me, in 1997, there were doubts about e-commerce flat out. Would people even give their credit cards over the internet? Those of us old enough to remember, I was like fighting the fight in favor of e-commerce going, “Yeah, I think people will give their credit cards over the internet.” And I think Amazon won’t just be selling books. So, I happen to be right about that, and I love to talk about times that I’m right, but more broadly, Scott, I just want to point out that part of what happens with valuation is people do it off of earnings and cash flow, they’re missing Jeff Bezos. There is no line in the financial statements that puts value on a company’s CEO. And when you talk about these kinds of visionary CEOs, it’s almost incalculable the value that they represent. So their stock looks overpriced because nobody’s factoring in Jeff Bezos versus Joe Schmo as the CEO of the company. And that same is also true of brand. Brand names are not accounted for in financial statements. So all the companies, Starbucks, with great brands, Costco always look overvalued by traditional metrics. So as a rule breaker, I like to point that out and, you know, turn rules on their head. And instead, I love companies that have 55 times earnings. And had you and I done that with Costco 10 or 20 years ago, and I sentence I think you own some at least through passively through index funds, we would be really happy because Costco has crushed the market averages. And I think for very logical, repeatable reasons. So that’s my rule breaker case.
All right. We don’t want to break any rules, but we do need to take a quick break. See what I did there? To hear from our show sponsors. But we’ll be right back.
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Thanks for sticking with us. Okay, so when you say rule breaker, I’m hearing disruptor. You’re looking for disruptors. And not everybody who says they’re going to be a disruptor actually does end up disrupting, but I’m making a list of these stocks that we’re talking about, Costco. Costco is such a dumb idea. I’m not going to pay to shop at a store. I could just go to a grocery store for free. Well, Costco is amazing and my executive membership actually pays me more than it costs me to get in there. So I shop for free anyway. And Amazon online shopping? Like Scott was born in 1990. I remember hearing ads on the radio for amazon.com, which started off just selling books.
Earth’s biggest bookstore, Mindy. I still have the mouse pad.
And they probably are the world’s biggest bookstore. This is a little bit of a side note. The very first time I ever heard of The Motley Fool was 1999. I was on a cross-country bike ride and two of the writers were sponsored by The Motley Fool and their job was to ask people on the ride different questions. And one of them was, would you ever shop online? And I was like, or do you think online shopping is going to catch on? And this is 1999, the internet is nothing right now. And I was like, there’s no way anybody would ever shop online. Cuz I’m thinking clothing, but you know what? With Amazon, I can buy a piece of clothing, bring it home, try it on, it doesn’t fit. I just take it to Whole Foods and it’s returned.
So this is great. Sorry, I I got to try to him here though, right? We’re talking about this, like it seems like these crazy concept and like it was going to fail at the time there. But let’s not forget like pets.com, AOL.com. So what made Amazon for you, David, different than the companies that look the same. I I think I think you go back and even as a historian, you look at these companies and you might see a lot of similarities. Like if you didn’t know who the winner was going to be, you’d have a really hard time picking Amazon still today as the winner out of that crew. The bookseller versus the pet store versus the online news site. What why did Amazon win and how are you making that analysis at that point?
Great question, Scott. And first of all, that’s the right question, right? That’s the kind of question that I ask as somebody who does love to buy stocks and I have some funds too in my life. I I think this is very important to point out. This is not a binary thing. But I I think that there is one key reason to recognize why Amazon worked and yet not everything else did. And that is that when you’re talking about important emerging industries. The companies you just mentioned were all parts of important emerging industries. We could debate how important pets.com was relative to AOL or Amazon, but you know, keeping it in the mix there, that’s where I train my focus. And the stocks that I buy and I hold for long periods of time that would astonish many people who watch CNBC or Wall Street Journal readers because they’re generally trained to think you’re trading in and out. And I basically buy and add some more and hold. As you do that, Scott, you start to realize two things. The first is that, uh, you’re going to have some losers. And some are going to be huge winners like AOL literally went up 150 times for me from our cost basis back in 1994. By 2000, it had gone up 150 times in value. And yet, it declined significantly from that point on. So even some of our winners don’t end up staying winners. But here’s the key. If you were to have bought that three stock questionable basket, AOL, pets.com, and Amazon, if you put in $5,000 into each of those, in the same year, 1998 or 9 we’ll say, and you held, would you have beaten the market with that basket of stocks? The answer is, you would have absolutely destroyed the market. Like it’s not even close. And that’s because you don’t have to be right with every stock. We don’t have to put our pressure on ourselves like Olympic figure skaters to not fall, otherwise we won’t get the gold. The beauty of investing, dollar cost averaging. Again, whether you’re talking about into passive index funds, or if you’re talking about into a mix of stocks as well. If you do that, your winners, if you would let them win, which most people don’t, and that’s really the fight I would pick, not with you all, but with Wall Street, most mutual funds have traded out by December 31st what they had in that same fund on January 1st of the same year. The amount of trading and changing our minds driven in part by a financial media that wants you to tune in to figure out what you should do next. When we’re just passively buying and adding to great stocks, I think there’s a reason it works.
So, you said that you test the waters, you buy them, and then you start adding more. How much are you buying initially? And at what point do you start adding more?
Well, I think anybody who’s investing, and we’re not talking about stocks now, we’re just talking about broadly your portfolio and mine. I know for you all, there’s a lot of real estate focus. And that’s something I don’t know that much about and don’t spend a lot of time investing in. So I’m a huge fan of like us staying to our lanes and doing what we think we can do well. And like Jack Bogle, I think many of us can just dollar cost average into our 401k over our lifetimes and retire happily. I just want to make sure I say that again. For me, I think you should have a minimum of 20 investments, and if I were just starting a portfolio today, I would have 5% of my money in each of those 20 things. For me, all 20 would be stocks, and I realized many listening would be like, no way for me. So for you, I might say, hey, how about 18 funds and two stocks? And I would put 5% of my money in each of those, and then I would let them show me through performance over time, what their allocations should be. A gripe that I have against the mutual fund industry is because of regulations, they’re forced to rebalance. And rebalancing sounds like a good thing because it provides stability and you ensure that the index fund stays invested in the things it’s supposed to. But the problem is you’re constantly selling off Amazons and adding to pets.com when you rebalance, when mutual fund managers do that. They’re forced to do that. But you and I don’t have to do that with our portfolios. We can find a great company. Let’s start mixing in some new names here like Intuitive Surgical, which is basically leading the world into a robotic surgery age that’s much cheaper and more effective than human hands doing surgery. Or Axon Enterprise, the company behind Taser, or Mercado Libre, which is basically the amazon.com for Latin America. These are all phenomenal companies, all of which I’ve recommended and continue to hold years later. They’re lesser known and yet they’re more examples of great rule breakers, the companies that are the leaders in their important emerging industries. So, I would tend to want 20 of my investments, I’d try to have at least 10 be sort of rule-breakery, but not because David said so on the BiggerPockets podcast that you should look at Intuitive Surgical. I would say, what makes sense to you, dear listener? What is a company you know really well, Nike, Chipotle, phenomenal market beating stock. These are all the companies that we’ve grown up with, Disney, Marvel, and they’re all the market beaters. So I think if I have a bone to pick with, you can never beat the market, just passively index all the time, I would say you’re never going to beat the market if you passively index. The good news is the market’s good enough that that’s good enough for most of us. But if you’re serious about financial freedom and FI and accelerating that, I think you should take a look at least at adding some stocks that you know well, that you esteem to your portfolio. And I’ve mentioned a bunch in our brief time together.
I like how you say 20 different investments and then, um, you know, 18 funds. A different investment doesn’t have to be 20 different stocks. I like how you clarified that. And, you know, I do think that you should test out the waters with stocks. If you’ve got $100,000, don’t put $50,000 into one stock. Try $100, try a whole share of the stock. See what happens. Watch the stock for a while. I mean, there’s all sorts of simulators online that you can even just make up your own portfolio and see what happens.
I have two questions here, I guess they’re in part and parcel. One is, mathematically, like if we taken an index fund, we’re going to get the average return of every company market weight capitalized, right? I’d have to run the math, but if you bought 20 companies, you just threw a dart at the board for 20 companies and put $5,000 into each of them, and, you know, a thousand people did that, and then the index fund competes, you you’d presume that some portion of that population, I’d have to do the probability waited math on market cap, but but you’d assume like half the people would beat that index and half the people would lose on the index. So, on the one hand, there’s kind of an appeal to that, right? You could get lucky if you’re just shooting arrows at the dart board by spreading it across 20 companies. Maybe there’s actually something to be said for the early stage investor doing that because there’s at least a chance to win and move forward. There’s that component. I’d love to hear you address that. And part and parcel to that question, there’s a great article on fool.com called The Agony of High Returns by Morgan Housel on your star contributors previously, I think he he moved on a few years ago. By the way, you see a company that has great alumni network, you know things are going really well. And this article is about Monster Beverage. So it was the best performing stock from 1995 to 2015. A $10,000 investment would have become $10 million over that time. But in order to have actually realized that return, you had to watch the stock go down like 50% three times in a row. Or like some some huge drops during that same time period. And that is probably true of many of these incredibly high performers as well. Do you just hold everything? Do you ever sell any of the investments in there? How do you think about that? Those two questions are linked in my mind. How do I pick these 20, these 20 stocks and actually have a shot at beating the market, not just, oh, it’s not random luck. And then two, when do I declare victory? Because those returns come in crazy waves.
Well, let’s take him one at a time, Scott. And, you know, the first one about, um, 20 investments, hey, you might get lucky. Like, some people are going to beat the market, some people won’t. And, you know, maybe it’s just luck. I would also say maybe it’s not. And in my experience, Warren Buffett beat the market for a reason. And I know people who don’t do well with investing, and I think it’s for a reason because it isn’t always just the stocks that you pick, Scott and Mindy and everybody listening, it’s actually how you behave with the stocks that you’ve picked. In my experience, a lot of this comes down not to the quality of the actual investment, but the decision or habit of the person investing. And that’s why in my book, Rule Breaker Investing, I lead off with the first part isn’t about, you know, which stocks to pick or what we’re looking for in stocks. It’s specifically the habits that we need to develop to be successful. And that would be true whether you’re an index fund investor or a stock market investor. For example, habit number one is let your winners run high. And that means for me that I tend to add money only to things that win for me and I let them run high. So Amazon, Nvidia, we’ve gone over these. Mindy has a bunch of them in her portfolio, she’s already mentioned. So, Scott, I would say that it’s not so much randomly over a short-term time period, who picked which stocks that happen to beat the market. I think it’s much more about how we behave with the portfolio, funds and or stocks that we manage. And I think that’s a really important factor and that’s not luck. Speaking then to the second question about, um, you know, companies, how long do you hold them? What do you have to sit through? The agony of high returns, as you mentioned Morgan’s wonderful essay. I would say that you should take a whole life approach to investing. And again, we’re going to make this agnostic, whether we’re talking funds or stocks. I believe that each of us has been born into an ownership culture that is a small miracle. It returns on average a 9% or so annualized return. That is crazy great. Like pinch yourself. Therefore, the earlier you personally get started, the earlier you start your children, some listening your grandchildren, the earlier you get on that train that goes up 9% a year. Some years, it goes down 33%. Some years it goes up 52%, but on average, and we’re not playing a short-term five-year time period, we’re talking about your life. You’re going to live 90 plus years. I’m not good at guessing which of those is going to be a recession or which are going to be up years. I am good at saving and adding and not worrying about near-term tariff worries or wars or financial recessions, all of which have happened over the last 20 years, all of which Amazon has gone up over a thousand times through. All of the worst things we can think of, Covid, the great financial recession, the dot bomb era. And that’s just one company, but all of the great stocks we’ve talked about in our time together have prospered through a horrific 20 years. And guess what? The next 20 years is going to be amazing and horrific as well. And if you take a whole life approach to your money, then you’re simply trying to save and add and find the best things you can put it in and add some more. So for that reason, Scott, it may sound hard for me to sit through 50% drops in Monster beverage, which has been a Motley full recommendation or Nvidia, which went down 2-3 twice that we’ve held it and got went sideways for 5 years as the market was rising. If you take that approach, then you end up owning all these great companies knowing that Netflix will come up with a quickster once every decade.
Great argument there, and I think that over very long periods of time, there’s a there’s a lot to really like there. What if my goal is a little different, right? What if my goal is I want to amass my two and a half million bucks in net worth. That’s my number, and then I want to stop, and I want to transition and actually stop working and build a more traditional retiry portfolio that I can withdraw from. How do you map this philosophy of whole life investing to that goal?
Well, I guess I would say first of all that that person is still investing their whole life, right? What you’re saying is they have a number and often people act that way and understandably they have financial planners or they have their own tools because they’re self-directed and they’re like, here’s my number. I think that’s incredibly admirable. And so, I would say to that person. I guess if you have a number, which I never have taken that approach myself, but if you have a number, then you’re looking at rates of return. The year you hit that, it’s going to be a good year for the market or the year after you retire, you hope the market doesn’t do a 2008, 9. I mean, you end up, I think, if you’re goal-oriented with some acting on faith, because you you just don’t control the rates of return that you’re going to be exposed to. That’s why for me, I haven’t been so much of a goal-directed person. I would say I’m a purpose-directed person. So, I believe the purpose of our money is to provide us freedom as much as we can find in our lives and to spread that freedom to others around us. I don’t have a certain number and if I hit that number, inflation might show up 10 years later that I didn’t plan for hyperinflation, Black Swan moment, and all of a sudden my number doesn’t make as much sense anymore. But I would say it makes a lot of sense to me, Scott and everybody listening, that you would have a goal, that you would have an amount. That’s what most people shoot for. They hope to, quote, retire, a word I usually don’t use, because I think we should all stay as engaged as we can and add value to our own lives and those around us and not like tune out because we hit a certain number with our portfolio. But I certainly agree that people should transition how they invest depending on their age and the number that they’re shooting for. I’m, you know, big fans of rotating it back into out of aggressive stocks and into dividend paying stocks or funds, obviously income funds, things that, you know, I I know people that I love who have set up their whole life to just send them income for the rest of their life. And that’s all they want from their money. And I think that’s great for them. I’m sure most people would love to have that. So I don’t have a strong sense for or against here other than I think you should realize you are going to be invested, however you are invested your whole life long. It’s not about like just not doing it at a certain age or time, at least so far as I see it.
All right, let’s take one final ad break, but more from David after this.
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Let’s jump back in.
Well, a lot of people who who listen to BiggerPockets Money have that goal, right? Like I want to hit my two and a half million dollar number and then I want to stop. I want to go and just like kayak on the river on Tuesday afternoon or whatever it is. That’s where I’m wondering, Hey, I own Monster Energy or I own Nvidia where it doesn’t go anywhere and you held on to that, you’re rich now. You you got you blew past that number so many times over that you’re going to have every option in the world in there. But how do you map that to I’m three years away. Three more years left, then I’m done. How do you, how do you marry those two approaches?
I would say that I can’t fully be helpful in a way that I bet you all are for your listeners and your base because my approach is more for people who are going to be doing it their whole life. When I say tune out, I don’t want that to sound like a phrase with a negative connotation. But if you’re talking about kayaking, that feels like you’re removing yourself from urban situations and positions of responsibility or really, in some ways, influence or effect on the world around you. It’s not to say that you can’t actually change the world from a kayak. And I know we’re just having fun with kayak, but I would say that I don’t personally aspire to retire in the traditional sense. And yet, I recognize so many people do, and I think that you’re serving them really well, and I think they’re listening now to us. And I would just say for me, I am probably best at speaking to people who are looking to grow it, not end it, or cap it, or at a certain point, say, “I’m done.”
I love that answer.
The Motley Fool has answers for those people, but rule breaker investing is more set up for people who are like in it to win it and ride that wave their whole life.
I think it’s a fantastic answer. I love that directness of that question because that was a challenge I was struggling with is like, if you pick stocks, it’s fun, there’s a chance for growth, but the research on like retirement portfolios with withdrawal rates and those types of things, like it just can’t do it with individual stocks, um, on there as has been my my conclusion. It’s like or it’s like there is no research on there for these things. And so you have to be, I think that’s right. I think you have to, you have to have a long-term growth mindset, and then there’s a really good opportunity to blow out returns here over time if you’re willing to do your work. You can also lose, but but that’s I think it’s a great answer to the quesstion.
Well, thanks. You know, I think for a lot of it, it’s not an all or nothing thing. And maybe maybe too many people think that way. I actually know very few people who are all in on the stock market. Like, I am. We have a silly simple ratio that we use that anyone could apply to themselves. It’s like, what’s your age? Great. That’s how many stocks I think you should have, right? So, I’m 59. I have about 55 stocks in my portfolio. I’m broadly diversified, but I’m overweighted in incredible winners that I’m going to let keep winning because I’m already past any number I ever needed. And I’m more like playing for the history books with a 16 cent cost basis in Amazon and a 16 cent cost basis in NVIDIA, and I’m trying to turn people on to the benefits of owning at least one stock. As I started by saying, I don’t actually know that many people who just have stocks. I do know a lot of people who just have funds or don’t even think about the stock market. And that makes me a little sad, frankly, because I think there’s an intellectual curiosity that gets rewarded and you get smarter when you actually own a company. A fund is just a fund and a bunch of funds is just a bunch of like, I’m broadly diversified. I’m going to argue that I think you would advance your own understanding of the world, whether as a consumer or a hobbyist or professional, when you lean in and really start studying in the same way Mindy described sharing with her daughters, companies, you start paying attention in a way other people aren’t, which by the way gives you an advantage over the people who aren’t. And so I have benefited mightily from being an internet entrepreneur, starting in an age of doubt where people said they won’t give their credit cards over the internet. I have learned so much about how to pick better stocks by being an entrepreneur. And with Warren Buffett’s great line who said, “I’m a better investor because I’m a businessman, and a better businessman because I’m an investor.” I truly do believe, not here to convert anybody to buy an all stock portfolio, but I truly do believe if you do buy one, two, three stocks, you’re going to start getting smarter than you would if you did it. And I think it’s really rewarding at an intellectual level. In fact, I might even argue here that you could have an all stock portfolio that simply matches index returns. And that might sound like a huge waste of time, except that I actually think you learn so much more than the people who merely got index fund returns because of the reward of learning that you get from paying attention to that new line that Lulu Lemon just released or whether the McDonald’s adult Happy Meal is winning or not. There are lots of rewards to these kinds of questions that go beyond just market returns or a retirement date.
Okay, David, we’ve talked about your winners. Can you name names on some of the not so winners?
First of all, I just want you to know that I picked for our Rule Breakers service, which after 28 years, I I stopped picking for and moved on. I’m not going to say the R-word, friends, but moved on to doing other things at The Motley Fool and around the world. So my formal period of stock picking, I picked 389 consecutive twice a month picks for Rule Breakers. And get this, this is horrific. 63 of them lost 50% or more. I’m a professional, every stock I picked, I’m like, I think Peloton’s going to work out. I think GoPro, GoPro, the cameras, the new media channel that they had 10 or 15 years ago, that’s amazing. And right alongside that I was saying, I think NVIDIA will work out, I think Amazon will work out. Each time I was picking stocks, companies that I admire and that are broadly different. Trex, the outdoor composite decking company, fantastic investment, huge market beater, picked that too. Right alongside 3D systems, which was a leader early in 3D printing a decade ago, which went up eight times of value for me and then I sold at a loss disconsolately five years later. So 63, basically one in six of my picks didn’t just go down, friends, it went down 50 to 100%. That’s the horrible news. The good news though is that the 63rd best pick was HubSpot, which is a great internet advertising firm and it was up 402%. If you’re mathematically inclined and doing the math with me and you hear that my 63rd best pick was a plus 400 and my 63 worst were between minus 50 and minus 100 and you can’t go below that. You start to see why Rule Breakers was one of the great stock picking services of all time because the single best performer, which was Tesla, on its own wiped out all 63 of those minus 50 to 100 percenters, literally, and left money on the table, and that was the top picking stock. And we had 61 in between Tesla and HubSpot, great companies like Mercado Libre, I mentioned it earlier, Intuitive Surgical, that all are up between 5 and 100 times in value. And again, this is more of a venture capitalist’s approach. This is what VCs do. They invest at early stage and they know they’re going to lose. They’re comfortable with, they hate it, but they’re comfortable with losing because they know their winners are going to wipe every mistake they made if they do a great job with that fund. So again, I’m not trying to convert anybody to being a rule breaker, but I am duty bound to share the math because it opens up new awakening and understanding in people’s minds when they realize you’re not capped on the upside. And so many people, even Motley full members, live in fear of that stock dropping 50%. That’s so sad. They paid me for my advice and they lost 50% of money they personally had saved. It sounds horrible until you realize you should be broadly diversified and if you find the rule breakers, the companies we’re talking about in this conversation, I think you really turn the odds in your favor in a most rule breakerry way.
I agree with and have lived a large portion of what you’re talking about, but also, we put the research into it before we buy the stock. I didn’t just walk into Chipotle once and say, oh, there’s a line, I definitely need to buy this stock. We went there a lot and saw it. You go to Costco on a Saturday morning, oh, it’s the worst experience ever because everybody and their mother is there shopping and the lines are like 100 people long. And they’re not buying one thing. Their shopping carts are absolutely filled. They’ve got those actual like flat carts. You can’t go into Costco and think, oh, this stock’s not doing very well. People are literally paying to to shop here. David, I have one more question. This is more of a personal question. Let’s say you’ve picked a winner of a stock and it grows to be an outsized portion of your portfolio. At what point would you specifically feel like you needed to rebalance? Even though you believe in the viability of the company, you don’t want to Enron your portfolio.
I absolutely love that question. In my book, Rule Breaker Investing, I just want to make it clear, only the middle third is about stocks. The first third is about the habits I believe you should develop, six, as an investor that will set you well, no matter what you’re investing in your whole life long, and you’ll be going against a lot of other people’s advice when you do stuff like hold through down times. But anyway, the final third, also not about stocks, is about the principles of your portfolio. And rule breaker portfolio principle number four is establish your sleep number. So, some of us may know that phrase from the mattress industry where you and your sleeping partner can have different numbers dialing the firmness of your mattress, which by the way, has been a very bad stock pick, sleep number by me. But apart from that, I did co-opt because I love the phrase, I co-opted that concept and I redefined it for investors. Here’s the sleep number, Scott and Mindy and everybody listening, what is the single largest allocation you would allow your biggest holding to become as a percentage and still sleep well at night? That is your sleep number. I will tell you mine if you like. You can show me yours too. But this to me is the important question people should ask themselves because there’s not a right answer to that question. The only right answer is what makes sense for each of us. We all have different risk tolerances. We all have different amounts of comfort with this, with money at all, with holding, with investing. Most people who are broadly diversified have a sleep number of one because they’re only allowing about 1% at max of their money to go in any one thing. And I think that’s great. That’s what Jack Bogle introduced to the world. A lot of people who buy stocks might have a sleep number closer to 10. And there was an older gentleman, if any stock ever got above 10% of the club portfolio, he’d raise his hand and he’d say, we’re head to 10, it’s 11.7%, so I’m going to move that we sell down below 10%. And that for him was his sleep number. So, I think that’s the critical question, Mindy, to ask yourself when you start talking about a runaway position for the best reason of all, it’s NVIDIA, and it’s a monster. And so for me, my sleep number has been different points at different points in life. But it’s around 50. I will allow a single stock to become up to 50% of my net worth. And that is not advisable to anybody else. I’m not trying to sell anybody on anything here, but I’m describing for you literally my own risk tolerance and I’ve learned this over the years at the age of 59, I’m comfortable with that. I’m also financially well off enough that if my top holding caved in, I would still be okay. So what our sleep number is is very personal, but I I want to at least put that phrase out there and stick it in everybody’s mind because I think it’s a critical question to ask with you and your spouse or partner to make sure you’re both sleeping well at night because that counts for a lot. If you want to compound returns over a long time, you need to live a long time. To live a long time, you need to sleep well. So that’s the sleep number.
And I was specifically asking you, not your advice for everybody, but you specifically, what is your sleep number? I like that a lot. I’ve got like a third in companies owned by one person and or headed by one person and it isn’t making me nervous yet, but it’s starting to. Cause I don’t want to lose that third. Although I also don’t want to lose the gains because it’s been really, really good for us. So it’s a balancing act.
And it’s just worth saying that we’re all different. I hope nobody does my number or Mindy’s number because they heard us say that, right? It’s about what makes sense for you. I also want to say it changes at different points in life. Generally, as we get older or nearer retirement, or that person who had that two and a half million dollar number, Scott, and they’re like, that’s my number, I think your sleep number’s lower than mine, and I think you should lower it further, probably. You need to be conscious about it and, uh, I would say intentional about it and it can change at different points in life.
I think this has been a wonderful discussion. David, you’ve answered really good challenges wonderfully. Thank you very much for this. I guess the next step is, aside from picking up your book, what what is the first step somebody can do? Let’s say that I’m 24 and I’ve got 20 grand and I’m thinking about getting started down this investing, right? And and I was that person. I bought a Chinese fruit juice company. That didn’t go well. How does that person get going? What are what are some actionable steps they can do to start this investment?
I love it. I also, one of my first investments when I turned 18 was Interlab Robotics, which was a Chinese robot company. I saw written up in the Wall Street Journal, and that didn’t go so well for me either.
Trading below net cash. How could I lose?
For for you and for me, I hope that wasn’t all of your money that you put into that one stock. I think we’ve been very clear that’s not the right way to approach investing. I realize a lot of people do that. Or maybe they don’t have $20,000, they have $200 or $1,000 and they don’t really think about 20 things. They just put it all down in one or two things. But here’s what I would say to that that enterprising youth who is thinking about getting into the game that I hope she’ll play her whole life long. So I would say $20,000, fantastic. I hope you’re not paying any credit card double digit debt because that’s a huge mistake. You need to make sure that’s clean savings for you. Congratulations at a young age that you have that. Let’s get started. Let’s divide that up into $1,000, 20 times. And we’re going to invest in 20 different things. Good news, person of the present. You uh no longer have to pay commissions. What Mindy and I did, probably, we’re about the same age, back in the day, we were having to pay substantial commissions. Often to Wall Street brokers who didn’t list their commission full list of like it wasn’t published what you were paying. They were like screwing individual people based on how much they could get them to pay for buying into a stock or a fund. But anyway, I would say good news, there’s no commissions anymore. Open up a commission-free account. There’s no friction cost. Even better news, if you’re doing it right, I think Robin Hood offers this. A bunch of firms do these days, you can buy fractional shares of things. Back in our day, I’m going to say again, you had to buy round lots. Sorry, 50 shares, not four shares. Sorry, 10 shares, not 0.74 shares. But these days you can buy 0.74 shares. So now you can buy anything you want with no friction cost. That is amazing compared to 25 years ago. So I would get that person. I would find out how comfortable she is building a list of companies that she admires, that she might want to be part owner of. We’ve talked about Lululemon, Chipotle. Maybe she’s high-tech oriented, you know, we’ve talked there’s some great AI companies. I love the commercialization of space. I think that’s a big deal right now. I think it’s very rule-breakery. So a company like Rocket Lab, I favor a stock like that. I would probably try to have a little fun there. Out of 20, I might have five rule breakers and I’d make them all stocks. And then depending on where she is, I’d say great, with the other 15, go with a broad mix or literally you could take that $15,000 and you could put it in the Vanguard Total Market Index fund. A single investment choice can broadly diversify you across that money if you want. I don’t think Vanguard’s going to disappear with your money at any point in our lifetime. So, I’m a fan of actually not having to have 20 different things if you’re buying broadly diversified things. Scott, I assume you would like that too. So, I would say to that person, I love for you to have one to five stocks in that portfolio, one to $5,000. Go ahead with the rest and broadly diversify and compete. See if you can outpick the performance of your funds. I’ve seen enough people do it, and I think if they pay attention to some rule breaker notions, they increase their odds. And frankly, it’s pretty magical having a 20% rate of return annually through great stocks like Warren Buffett has done, and I will also say, you had me on, I have to brag briefly, I’ve done that for our members, for 25 years of doing that, picking stocks, winners and losers, 20% is a lot faster to financial freedom than than 9 and a half percent. I would at least want that young person to to understand that’s possible and in her own way, go for it.
So, when you were doing this stock picking, were you just making stuff up or were you doing research on this?
The latter.
I understand it’s a leading question.
People are paying us hundreds or thousands of dollars a year. You bet we’re researching things. I obviously we take pride in the research that we’ve done. People like Morgan Housel have contributed a lot to The Motley Fool over the years. We have a lot of people who are at our company or over 32 years retired to go on to run their own funds from our company. We’re a deep research, but I also want to make it clear Mindy and Scott that we do the research for our members. You’re not expected to be Mindy’s husband infatuated in a great way with whatever’s happening in the market and studying things like that. I I’m not even that way myself. I prefer playing board games to following the market from day to day. That’s my favorite game where like the 600 board games that are in the room that I’m talking to you from because I’m obsessed with board games. But anyway, I just want you know, we do the research for our members, but yes, we do the research.
Yes, and I knew that, and that was a very leading question on purpose. I want people to realize you don’t just choose to invest in a stock because you heard from your best friend’s sister’s boyfriend’s brother’s girlfriend that this would be a good stock. Either you do the research or you find somebody who’s done the research and listen to them and understand why they think that’s a good stock.
You opened up by saying actively managed funds don’t outperform the market, right? The highly high load fees and those types of things in a general sense, right? You know, we mentioned Warren Buffett who essentially is an active manage, manages an active mutual fund. That’s publicly traded as a company, right? as a publicly traded company in Berkshire, right? And makes stock investments and receives carried interest. And then your model, you know, you’ve had all this success picking stocks. Have you ever gone back and thought, what if I had just started a freaking fund or did something along the Berkshire Hathaway world where I just aggregated capital and invested according to this thesis. Would I be a absolute bajillionaire by now? Not that you’re probably not a bajillionaire. But if you ever gone back and thought about that, and if so, what does that look like for you? Why did you choose the model you have at Motley Fool instead of that structure?
You know, we started as basically a newsletter for our parents’ friends. I’m the one who picked the name. I was a Shakespeare student in college. I love the fools. And so we started from a place of, I guess, humility or small shop. And so the idea that we would have, in our 20s, commanded enough respect from the world at large that we could actually open up a brokerage firm or a big fund, asset manager, probably preposterous. I didn’t even have that aspiration. But with that said, I think we’re teachers at The Motley Fool. I loved writing this book. It’s really meaningful to me. It’s my final stock market book. I’m not a new book every year guy. This is what I’ve learned over 30 years and I this is what I want the world to know. And I guess the good news is our business has done well enough as more of a publishing company than a financial services company that, you know, we’ve done well over 30 years and we’re, you know, those of us who have been invested in are financially free thanks to the company we’ve started. But I I’ve never wanted to be um a fund manager. That’s not how I want to personally spend my time. But I guess good news for The Motley Fool, we do have funds and we do have wealth managers. We have people who have added those services over our 30 years, Scott, people who are passionate about that, who take financial planning customers on. That’s a portion of our business I don’t even work for because that’s a regulated side at The Motley Fool. You can look at our five star morning star ETF. You might be like, wait, The Motley Fool has ETFs? What about Dave and his whole stock thing? Well, of course our ETFs are full of our favorite stocks. Anybody can look at them, but I’m not actually allowed to speak to them or promote them because I work for a publishing company that provides the same advice, the same stock pick to Mindy and Scott as to every listener. We don’t tailor it individually to people or manage their money for them for that portion of the business. So Scott, I would say, I’m very happy with what we’ve built. I’m not actually in any way ambitious for more than it, frankly, it’s outperformed my wildest dreams already. And I’m just sharing it back through this book for as many people who I think should realize they’re investors even if the world doesn’t think that they’re investors. The first line of my book is everyone’s an investor. And that’s that’s my message.
I was just curious about it. We do the same thing at Bigger Pockets, right? We never had capital to manage, right? We never we never did any those things or whatever. But for me it was much simpler. I just didn’t think that we could beat the market. I think it’s hard enough to beat the market as an investor with that’s your full-time job, right? When when you’re like the syndicator raising money for like real estate deals or building the fund or whatever. And how could we possibly run a publishing company like Bigger Pockets and also beat the market with any real estate investment? So it was just a lack of desire to compete with the people who were doing it full time. It doesn’t sound like that was the way you were thinking about it. Sounds like you were thinking about it from a what’s the life I want to live and the way I can add the most value on to these folks. and you did dabble to a certain degree in some of those.
Well, I think there’s a lot of kinship between what you all have built and what we’ve built and I appreciate it. I mean, here we are basically broadcasting to people who are looking for help, looking for a better answer, a new idea in some cases, or confirmation that what they’ve done is good. I can’t say I’m a great real estate investor. I’m not. I can’t say that I’m highly interested in a financial planning metrics and numbers and what I am is somebody who recognizes, I think I recognize excellence in the marketplace across many different industries. What I’ve done is I’ve helped a lot of people exceed market averages by simply buying the great companies and avoiding all the bad ones because there are more mediocre companies than great ones. So let’s focus on Tesla, not Ford and General Motors. Let’s focus on Chipotle, not Taco Bell. Let’s focus on Netflix, not Blockbuster. Let’s focus on, you know, all of these kinds of companies, like I try to find excellence, buy excellence and add to excellence over time. I sell mediocrity. That’s basically what I do, Scott, and we’re all, you know, different with different backgrounds. So I’m just being me.
In fact, I used to work at Dish Network, which acquired Blockbuster and ran the uh did a little bit of the financials for them for not I didn’t run the financials but I did a little bit of the financial forecasting for for Blockbuster eventually right right at the end.
What did you forecast? Zero?
I can’t remember. I probably wouldn’t be allowed to speak to it if I did remember.
I love it though. That’s that’s cool.
I don’t think the lines went up into the right, I guess.
No, they didn’t.
David, you have a new book. What is the title? When does it come out and how can people order it?
It’s called Rule Breaker Investing. It’s got a colorful green cover with a jester on it, and I think it’s a subversive, fun guide to rethinking in some cases how people are investing, especially playing the long game. And Mindy and Scott and everybody, it’s available for pre-order. Absolutely wherever you find find books. Of course, it’s right up there on Amazon. I did the audio book. I’m totally fired up about that coming out. And it all comes out on September 16th. That’s when it hits, but pre-orders can happen now, and pre-orders really help authors like me. So if anybody wants to pre-order, good on you, I say. But I hope it’s a a book that you’ll read. It’s short, so it’s fun. And I hope a lot of people will feel motivated to hand it to somebody else in their life, especially younger people, and get them started on the track toward financial freedom.
Awesome. I just pre-ordered it. I love the internet.
You’re my favorite podcast host, Mindy.
Woohoo! David, thank you so much for your time today. Is there any other place that people can find you online?
I’m on Twitter X @DavidGFool. I’m on LinkedIn, you can look me up there. I do a weekly podcast called Rule Breaker Investing, and uh, so if people ever want to listen to a clown talk about what he thinks might beat the market in the future, I’m there every week. I’ve done it every week without any skips or repeats for I’m now my 11th year. So if you’re a baseball fan, I’m trying to be Cal Ripkin and not miss a single game. So that’s my passion project is my weekly podcast, so you can hear me there too.
Awesome. David, this was so much fun. Thank you again for your time today.
Thank you, Mindy. Thank you, Scott. I had so much fun. Fool on.
Thank you so much for coming on. It was great.
Scott, that was such an awesome conversation with David Gardner. I am so excited to check out his new book. I love his sleep number idea. What are your thoughts about this conversation we just had with him?
I thought David was fantastic, and I think that the FIRE community and the Boglehead community in particular, which often overlap, can get way too dogmatic about where they’re at. This is the right way, this is the only way. There’s no room for these other alternatives. Real estate’s bad, picking stocks is bad, entrepreneurship is bad, businesses, it it’s just not true. It’s just not, and and there’s there’s plenty of people who are winning in all these different fields. I’m not a winner in picking stocks. I haven’t been. I am unlikely to be. I may one day begin dabbling or trying my hand at picking stocks in there. But I totally respect the folks over at The Motley Fool who do do this, even as I understand that the averages are not on the side of those things. So just take all of these rules with a grain of salt as you get going. We’re going to challenge all of them one by one and probably break a bunch, and no one, almost nobody I know who’s extremely successful, really achieved FIRE at an early age followed some rule book to precision on this. So, I think that’s the the answer there, and I really appreciate it. So go check out David’s book. I know I will. Follow him on the show and grateful to have a chance to talk with somebody as as accomplished as he is.
Yeah, and just keep in mind, it’s not an either or scenario. You don’t have to only invest in index funds or only pick stocks. You can do a little bit of both. If you feel more comfortable with index funds, go the majority of that route, or go all of that route. You certainly can. But if you have an idea for a stock, I mean, that’s how some of my really great stock picks came from is, oh, I noticed something. I think I want to put a little bit of money into this, and then as I see it perform, I put a little bit more in. Kind of just like David. We’re like twins. All right, Scott, should we get out of here?
Let’s do it.
That reps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying
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Say cool, fool.
