fSometimes we find inspiration from the incredibly insightful authors we interview. Sometimes it’s from the stories of everyday Fools who have seen the light — and, most importantly, taken action. And we always find inspiration from this, our monthly Rule Breaker Investing: Mailbag!
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Amazon, Facebook, Fiverr International, Netflix, Peloton Interactive, Planet Fitness, Roku, and Tesla. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.
This video was recorded on August 25, 2021.
David Gardner: Authors in August started in 2018. For the record, my first ever Authors in August interview was with Seth Godin, the smart and oh-so-quotable thinker on all things marketing and branding. Then a week later, Priya Parker and her spectacular book that everyone in the world should read, The Art of Gathering, because we are constantly gathering. Wherever three or more are gathered together for a purpose, we can do it better, and Priya shows how. Also that month was Amor Towles, author of a beautiful novel, A Gentleman in Moscow. We talked about his craft, the origin of his book, and how he’d left a job on Wall Street to write a best-selling novel. Authors in August was born.
You can see in that trio: a marketing writer, a social gatherings guru, and an award-winning novelist. You can see in that trio the Motley that I’m always shooting for in this podcast. Variety is the spice of life, and it’s at the heart of Foolishness too.
Well, we’ve just finished Authors in August, the 2021 edition. Whether or not you read along with me then or in future, and I hope you’re inspired to do so, one thing is for sure. You were able to listen and learn along with me as we spoke to three world-class thinkers, looking at topics as diverse as the stories we tell ourselves for good or ill, right through to the stories that came from history that were handed down to shape our 20th- and 21st-century perceptions of formative topics that run deep like, well, race or gender.
Now, it’s Mailbag. That means it’s your chance to weigh in on the month that was. Shall we do that? Only on this week’s Rule Breaker Investing.
Welcome back to Rule Breaker Investing. Thanks for joining with me here at the end of August. It’s been quite an August. Quick review, Positive Intelligence. The book we lead off with Shirzad Chamine, that was on August 4th of this year.
By the way, August 4th, always a date that jumps out to me because The Motley Fool launched on August 4th of 1994 on AOL. That was the very first day. This was preweb for those who remember those halcyon and ancient days preweb. The World Wide Web was not a thing yet, but private online services — do you remember the sound of dialing your computer in through the phone? Something like that. I don’t want to make it too loud for your ears, but yeah. That’s how AOL sounded when The Motley Fool launched as keyword Fool, August 4th of 1994.
I do want to mention that back then, AOL barely had keywords or channels. It was early days for America Online. We said, “Hey, obviously you guys are going to give us the keyword ‘Fool.'” But by the way, keyword “help” is not being used. Could we be keyword “help” on AOL? If you would type “help,” would it go to The Motley Fool? They declined that, which is probably the right move for their business. But at the time, it shows how gung-ho we were, and how all out we were to reach as many people.
I will mention our old logo, you may remember our friendly jester face that we used for the first 20 years or so of our business, somebody at AOL just nicknamed him Elvis. That’s because Elvis kept popping up on the AOL main screen, and they just needed a quick handle, a way to refer to it internally at AOL. Like, “Put Elvis back up on the main screen tonight at 7:00 p.m.,” and so they did give us the keyword Elvis.
For years, of course — America Online doesn’t work too much anymore anyway, and not as it once did. But for years, if you typed in keyword Elvis, you were taken inexplicably probably to The Motley Fool. In case we would have somebody pop up on one of our discussion boards, saying, “Yeah, I’ve been using this for a year and a half or so. I still don’t know why when I first typed in Elvis, I got here, but anyway, I’ve enjoyed your keyword Fool.”
August 4th, always a date that jumps out to me. It was a positive talk this month with Shirzad Chamine.
August 11th, Do More Great Work with Michael Bungay Stanier. A delight to talk with Michael about how you and I can make the best decisions to pursue the best work that we can, and all that that asks of us. Making sure that we’re in touch with who we are so that we can make the right selections of what we should do next. By next, I mean tomorrow, I mean next year, I mean, yeah, the rest of your life. A great talk with Michael.
Then last week, Gods of the Upper Air with Charles King, who won the 2019 Parkman History Prize for his book, and he’s not even a historian. I love that detail, but a really thoughtful look at why and how we take for granted today concepts like race, gender, and sexuality, and how so much of that is inherited from a century ago. Actually, just the science of the time, which I suppose was doing its best but came up with all kinds of crazy, sometimes back-headed notions, that really set the tone for people like me who were born in the 1960s, ’70s, or ’80s.
We have to disabuse ourselves of a lot of the assumptions that we’ve made. You need to be a “God of the Upper Air,” get above it all, to start seeing humanity as one undivided whole.
I really enjoyed all three of those conversations. I hope you did too. If you didn’t get a chance to listen to a few of them, well, I hope you can make some beach time in September or some places, beaches are pretty great in October, Southern Hemisphere. There is still a lot of opportunity for you to read those books and/or hear those podcasts, me joining with three geniuses.
I hope my sound quality is about as good as it normally would be from one week to the next. This is the first podcast I’ve ever done with my headphones jacked into my laptop, and with my friend Rick Engdahl, on the other end, my producer. We’re using Zencastrs. We are recording this podcast, but I’m doing it this time from one of the most beautiful places in the world, and that would be Lake Como in Italy. I’m hoping this all uploads. I suppose, if you’re hearing me right now, it means it all worked. Which does suggest, maybe I should give myself license to travel some more in the year ahead. Rick and I have done this podcast without ever taking a break, no reruns, for more than six years now. We’re in our seventh year, so it’s really important to me to be able to do this podcast every week.
But I’ve previously thought I couldn’t really travel while doing this podcast. I just want to say magnifico. It really does work to stream this podcast from Italy. So who knows the places we’ll go in the year ahead.
One final bookkeeping note, if you haven’t already, I hope you’ll subscribe to this podcast on iTunes or Spotify, Google Play, wherever you find podcasts. You can follow us on Twitter @RBIPodcast. You can follow me on Twitter if you like. I’m @DavidGFool. Finally, I hope you’ll give us a review. Throw me some stars, let us know how we’re doing. We read every comment.
Let’s do some hot takes with some of the tweets of the past month of Authors in August, […] @JiminyJilickers, Jason Moore, sent in last week, with Box of Crayons. Well, Michael Bungay Stanier was terrific. “My copy of Do More Great Work arrives today. I’m not the world’s fastest reader, so I’m approaching Authors in August with what I dub ‘The sandwich approach. Listen, read, listen again.'”
Well, I like your sandwich approach Jason, and thank you very much. Yeah, I think part of the spirit of Authors in August is to interest you in some of these books. Certainly, anybody who’s crackerjack enough to, a week ahead of time when I announce the following week’s author, go out and buy the book and at least read part of it, gets extra credit. But I think a lot of the purpose of Authors in August is specifically to interest you with these interviews in these books and get you thinking and yeah, sure, reading those books. I’ll also say that we got a number of tweets from people saying something to the effect of “While I didn’t read that one or may not read that one, my eyes are being opened up to the world” or “I’m inspired to read more than I have previously.”
Darn it, do you remember the bookmobile? When I was a little kid, the bookmobile came through town, and got kids to read. That’s what I’m trying to do, bookmobile for adults. On Shirzad Chamine’s second appearance on Rule Breaker Investing, @ProShopGuyMF1 wrote, “@DavidGFool interviews Shirzad Chamine on Positive Intelligence, just remember, ‘Who knows what is good and what is bad?’ As life presents gifts and opportunities at every turn. His work is not about changing oneself, but helping you remember who you really are.”
Well said ProShopGuy. @Jason_Trice, who quotes Shirzad at the start of his tweet, says, “If you believe you can convert anything into a gift and opportunity, you can.” Shirzad Chamine. Jason goes on to write, “Thank you, Shirzad and David, for this week’s Rule Breaker podcast. Positive Intelligence is a must read, and has enriched my life.”
I am delighted to know that, Jason, and I really want to share that work out with as many people as possible. Because like a lot of the books I try to read on this podcast, I really do believe it’s something that anybody could and should pick up and then improve their lives.
Very true of Shirzad’s work as it is also true of Michael Bungay Stanier’s work @307Fool wrote, “Rule Breaker Investing and Do More Great Work. Well, I already mowed the lawn,” said 307Fool. “My favorite Rule Breaker Investing podcast companion activity mowing the lawn. I’ll have to randomly roll for a new chore to knock out while I listen. Can’t wait.”
I think it was worth waiting for Michael’s first appearance on this podcast. I want to mention he graciously then invited me to join him on his podcast, he referenced this briefly a couple of weeks ago. He does a podcast where people are invited on to read two pages from one of their favorite books. He dropped me a note a few days ago and said, he’d love to have me do that. Now I just need to think about what book I would like to read two pages up, but I look forward to doing that with Michael on his podcast.
In the meantime, I’ve already seen a number of photos of people taking pictures of their Do More Great Work book that they ordered off of Amazon or some similar place as a consequence of the interview. I love to see in social media those book covers and that real actions are triggered by this podcast and Authors in August.
Lastly, I want to mention Charles King, @307Fool wrote, “An amazing episode. We’ve come so far, and yet we will only continue to be better together. Humanity is still learning how to unleash our full potential by removing our constructed ceilings and barriers.”
Thank you for that, @307Fool. I agree with that. I share that optimism, and I think in particular, during this time of a lot of pessimism around these topics — and understandably so in some cases, and then, by the way COVID — so there are a lot of reasons for pessimism, but that’s why in particular I think, shining an optimistic light on what I think will be an even better future is so worth doing.
I think Charles’s work really frees so many of us to realize that what we thought was the deviance in ourselves or somebody else, a lot of these are social constructs, that simply are in us because of the place that we were born and the time that we were born. What Gramps told us or the camp counselors around the fire, and while a lot of us have had great influences and have benefited from the wisdom of our elders, it’s also true that many people have heard some crazy stuff from people who influenced them when they grew up.
By the way, the shocking thing about that is a lot of that came from science itself in the 20th century, especially the first half of the 20th century, which Charles is so eloquent about, so I really enjoyed that.
In fact, I wanted to share just one page from a new book I’m reading because I think it connects so well with that conversation about Gods of the Upper Air last week. This one just jumped off the page to me. I feel like it’s relevant, and I hope it’ll open your eyes as it did mine, when I read this page from the book A Good Provider Is One Who Leaves. Now I should mention this is not an Author in August. Perhaps next August I will talk to author Jason DeParle, but I’ve really enjoyed this book about all of those people worldwide who are migrating. They’re migrant workers, they go from usually a tough circumstance to a much better circumstance often by themselves and remit money back home, let’s say to the Philippines, which is the most popular migrant worker nation. A nation that literally for a couple of decades, recently said, hey, please do go abroad.
We don’t have enough opportunities for you in our country, so go abroad and send money back home, and indeed a lot of people have been pulled out of poverty by the sacrifices made by a parent who went by himself or herself to work on a cruise ship, and has their heart, and so much of their money is still sent back to the people that they left hoping to create prosperity and rejoin down the line. That’s the purpose of A Good Provider Is One Who Leaves, and that line comes directly from a Filipino in the book. A good provider is one who leaves their country, their family. It’s both a statement of irony but also a statement of fact in a lot of cases.
Anyway, the author writes this, and again, I’m hooking this back to last week’s conversation, and then we’ll move on to Rule Breaker Mailbag items. DeParle writes, “I was writing about an Irish-born teen whose undocumented parents face deportation, a circumstance with abundant parallels in the United States. Cork born,” that would be of course Cork, Ireland. “Cork-born and proud of it, George-Jordan Dimbo studied Gaelic, ate rashers, played hurling, prayed to the saints, and papered his walls with awards from parochial school, and if the government won its case, he would be moving to Africa. His parents had come to Ireland illegally from Nigeria. ‘Dear justice minister,’ he wrote when he was nine, ‘I heard my mommy and daddy whispering about deportation. Please, do not deport us. ‘Remember,’ he added, ‘I am also an Irish child.'”
DeParle goes on to conclude in this little section, “Ireland’s dash to diversity brought little of the conflict found elsewhere in Europe. His mother’s Yoruba headdress was an accepted sight at the Synge Street school.”
And now the line that just jumped off the page at me. Not long after George arrived, a classmate confided that he disliked black people. “‘But I’m black,’ George said. ‘No,’ the boy said. ‘You’re Irish.'”
How much should the place you were born determine your identity? How much should looking like most of the people in the place you were born mean that you belong or not? I know many people who have come to America as immigrants, and a bunch of them are as or more American, in my opinion anyway, than others. Some of them are my fellow Americans, so identity, it’s such a compelling topic. In the end, I think what unites most of us beyond, as Charles King would say, our undivided whole of being all humans. Where I think identity makes the most sense and aligns us is probably around values.
That’s why I’ve often asked myself, what are America’s core values? What are any places core values? I think those things in the future will count for more than they have in the past and things like what you look like or sound like will matter less when we’re talking about your identity and who you’re connected to. Just a thought, maybe that’s a book I’ll feature next August. But I just read it in the past week. I connected so well with Charles’s work that I wanted to share that with you this week.
Let’s get on. We’ve got six Rule Breaker Mailbag items this month. Let’s start it off with Rule Breaker Mailbag item No. 1. This one comes from Ross Parish. Ross, thanks for the note. “David and the RBI crew, I’ve been listening to this podcast for a couple of years now. It’s been truly enlightening and changed the way I view not just business but life. I frequently find myself analyzing the world through a Rule Breakers philosophy, and I love it,” writes Ross. “Innovation is just one well-executed idea away. But in the words of Ferris Bueller,” and he quotes, “Life moves pretty fast. If you don’t stop and look around once in a while, you may miss it.”
Ross goes on, “I didn’t realize how much the Rule Breakers philosophy had infiltrated my mind until earlier this week while watching the Olympic high jump. As I was watching, I couldn’t help but think about how revolutionary it must have been the first time someone jumped over the bar with their back toward the bar. I imagine the other competitors at the time probably thought the athlete was breaking the rules by not following the generally accepted method. But now, I can’t help but wonder what accepted method in sports we’re going to look back at 40 years from now that will make the 2021 contests feel antiquated.
“Progress and innovation always seem obvious after you see them. Whether it’s the high jump, the West Coast Offense, sabermetrics, or your favorite stock, we are all just one well-executed idea away from changing everything we thought we knew. I want to end by saying thank you. Thank you for disrupting my old outlook on life with this Rule Breakers philosophy. Fool On.” Ross Parish.
Ross, thank you very much and I appreciate that celebration of Rule Breaking. Really, I can never hear too much of it because I’m always fascinated by people who come with things from a totally different angle and change the world. That’s certainly what the anthropologists of the 20th century did, to hail back to the book we were just discussing. But you gave some great examples largely from sports starting with the Olympic high jump, but you also mentioned the West Coast Offense, which is from American football, sabermetrics, which is a refreshing statistical look at American baseball that lead to Moneyball.
I just want to mention a few other non-sports examples just to add to the list, how about jazz music? Now, I’m not a huge jazz music aficionado; I just don’t know that much about it. I don’t know the history, and I did not watch Ken Burns’s jazz documentary, although I’m sure it’s very worthy. But I certainly admire what I know of it, especially how Rule Breaking it was. Instead of playing from a score, from a script, musicians, all of a sudden, were just playing, listening to each other and creating as they went. That is certainly a rule-breaking approach to music.
How about food? Really, since the 1970s, this began in earnest, but fusion cuisine. Do you remember those Reese’s peanut butter television commercials of yours, older hands among us? “Hey, you got peanut butter in my chocolate. Wait, you got chocolate in my peanut butter.” And then they both bumped into each other with their respective treats. They both taste the mix and go, “That’s really good.” That’s exactly what people have done with Mexican and Asian food for the last almost 50 years or so. A lot of us almost take it for granted today, but this is a relatively new phenomenon, the rule-breaking phenomenon of fusion cuisine. Whether we’re talking about music or food, sure, e-commerce stocks you mentioned.
Here’s a pretty innovative Rule Breaking company, and yet what it did reminds us sometimes you don’t have to be that amazingly inventive. I think Planet Fitness is a pretty good example of a Rule Breaking company. In a world that has more and more and more complicated workout machines with higher and higher prices at your local gym, Planet Fitness came along and said, “Actually just $10 a month, and by the way, this is mainly just going to be treadmills. This is for the rest of us.” And that’s the positioning that Planet Fitness has taken to multi-billion-dollar valuation and industry leadership within what it does.
The examples go on and on of somebody who specifically subverted the status quo, challenged power, or questioned conventional wisdom out in front of us, and whether it’s sports, music, cuisine, or yeah, fitness, I think Rule Breaking can never be celebrated too much. I loved your note, Ross, and I was more than happy to make that the lead-off hitter for this month’s mailbag, thank you, Ross Parish.
Rule Breaker Mailbag item No. 2. This one comes from Mark Blank. “Hi David, I’ve been listening to your podcast for about a year now and really love your simplistic and thematic approach to explaining the stock market. I recently had the pleasure of watching your interview with Dave Lee from the Dave Lee Investing YouTube channel. It was a great watch and really cool to see you on the other side of the interview process, answering questions about The Motley Fool and Rule Breaker Investing. great job.”
I pause that note right there for a sec, Mark. I’d say, I loved it, that was so much fun and anybody who would enjoy watching me for 1 hour and 36 minutes, talking heads with Dave Lee on his very popular Dave Lee Investing channel on YouTube. Just Google Dave Lee, David Gardner, and you’ll find that full conversation, which was immensely enjoyable. He asked great, really thoughtful questions, and I had so much fun with that. A lot of people have watched it. Dave has a popular channel, so it’s my pleasure to join in. My brother Tom Gardner also was on Dave’s channel. You can see Tom was on a few months before I was, so if you want to see both Gardner brothers in action, Dave Lee has got you covered on his YouTube channel.
Anyway, picking it up right there, Mark writes, “There was one question that Dave asked that really stuck with me, and while I thought you answered it elegantly, it did leave me wanting a bit more. Essentially, he was asking about the quantitative aspect of your stock-screening process, since most of the six Rule Breaker attributes are largely qualitative. You’ve explained on many a podcast that part of your contrarian approach to Rule Breakers is not looking at companies the same way that Wall Street does, i.e. P/E ratios, valuations, etc. But I wonder,” Mark writes, “if you might spend a bit of time going over the main financial criteria you look for when picking these stocks.
“You even mentioned the template you would provide to Motley Fool analysts when asking them to dive into the ideas that you came up with. Insights into the types of things on that template would be very helpful for someone like myself, who has,” Mark writes, “next to zero accounting or financial background, and yet I consider myself to be a part of the one-third of Fools who find investment research fun and engaging. I believe that was the ratio used in the interview, but correct me if I’m wrong there.
“All in all,” Mark concludes, “it was a phenomenal interview and a great summary of what The Fool and the Rule Breakers is all about. I look forward to your reappearance on Dave’s show and others, Fool on. Mark Blank.”
Well, Mark, thank you very much for that note. I think one of my primary points is almost anything that can be expressed as simply as a number of these days. As a stock picker, I feel as if computers can grab that number, can add it to ratios, can compare it to other numbers, and can make calculations much faster than you or I can. I think the spirit of the heart of Rule Breaker Investing is the qualitative things that computers can’t latch onto with numbers, and that’s why I tend not to emphasize numbers very much in my investment approach. In fact, you used a phrase in your note. You said “when you screen for stocks” — and I actually don’t screen for stocks, Mark.
I’ve never used stock screening that would be taking a whole industry or the whole market at large and deducing down, filtering down from everything to a few things. That is not a stock-screening process that I use. I’m actually an inductive thinker. I like to flip up stones, look at what’s underneath them, and if there happens to be something interesting underneath whatever stone I just flipped up, I get more interested. I start researching it as the stock. You should know a couple of the assumptions you’re making in your note, I don’t use as part of my investment approach. I never have screened stocks.
Now with that said, I feel like I do or use the numbers. Let me give you five quick numbers that I think are worth looking at when we’re researching stocks. In no particular order, here they are.
The first one I’ll mention is sales growth. That’s really important because if you’re going to find a company that you think is a Rule Breaker, you want to actively make sure that people are actually purchasing the product or service that it’s real, it’s out there in the market, and it’s popular, and it has a high growth rate. Now, most companies that come public at some point were private and they probably had to have a very high growth rate to even get venture capital money to get them started in the first place.
This reminds me of my wonderful conversation more than a month ago with Ollen Douglass, head of Motley Fool Ventures, that I think a number of you enjoyed on this podcast, where you hear that it’s really important to have like triple-digit sales growth. That means 100% or more sales growth. If you’re a tiny start-up, you really have to be punching it on the top line. I don’t favor companies that don’t have products yet or, pie in the sky, hope to have products or services one day.
I like to see companies that have high sales growth, double-digit, certainly depending on the size and stage of that company. Sales growth.
No. 2, net profit margin. That’s a complicated phrase for some, but it’s very simple for most of this to understand. If a company has a dollar of sales, the net profit margin is how many pennies on that dollar represent profit. For example, if somebody is selling a cup of lemonades, but it actually costs more in cups and lemonade mix and service than the dollar they’re charging, they of course have no pennies of profit on the dollar. They have losses. But most of my favorite companies are quite profitable.
A simple rule of thumb: I often look for companies that have net profit margins. That means profits after you’ve taken out everything including taxes, and if they still have $0.10 or more of profit on the dollar, that’s a net profit margin of 10% or higher. Those are often the companies that I favor, because I believe this is a very competitive world in business that we all live in, and so if somebody is making quite a bit of profit, a lot of other people are probably competing for that same high level of profit. But if companies maintain high levels of profit, well, that starts to look like they have a sustainable competitive advantage, which is another Rule Breaker Investing trait we look for. Anyway, No. 2 that I’m mentioning is net profit margin.
The third number I’ll mention for you, this one’s a proxy. It’s more a concept than one you can easily look up on financial statements, and it’s not true of all companies, but I love to think that there are raving fans among the customer base of the stock that I might be looking at. It’s especially easy to see if there are consumers buying from the company. Peloton has become one of the most popular brands in the world today, very quickly. This is among consumers who are quizzed about which companies they really love, and Peloton ranks extremely high, which is very impressive to me.
Again, it’s easy to have some of that consumer love and see it as the stock research or when a company sells to consumers. But of course a lot of businesses are business-to-business. They don’t sell to you and me, they sell to other businesses. But as best you can, the Net Promoter Score, if you can find it for companies that you’re researching, is basically showing among its customer base what portion of the customers really love or admire the products or services that they’re buying from that company. What portion are indifferent and what portion might actively dislike that company’s products or brand.
The Net Promoter Number, which is something I’ve talked about before on Rule Breaker Investing basically nets out all the people who are indifferent or negative from the people who are positive and expresses it as a percentage. Quick math. If a company has 60% of people who are raving fans, they say, yes, I do recommend this to my friends and family and I give this company a 9 out of 10 or higher, then those are promoters.
In our example, we’re going to say 60% — which by the way, is eye-popping. This is not true for most companies but 60% of all people actively promote that company to their friends and family.
Let’s pretend now that 30% are indifferent, take it or leave it. Well, we actually ignore those for our number, and that leaves us with 10% that we would describe as detractors. They would give the company low marks. They don’t like it for whatever reason. To determine the Net Promoter Score, you take that 60%, you ignore the middle group and you subtract out the detractors, and so you’d end up with a Net Promoter Score of 50.
Now 50 is a very high number. But if you can find a company that is, I would say 20 or higher, it all depends on industry dynamics, lots of other factors. There is no magic number I’m here to promote. I am here to promote the concept, and we’re talking about trying to put a number on how much people really like a company and its products and services. That seems very important to me.
The last two numbers I’ll mention are the amount of cash the company has versus how much it’s burning. We’ll talk about that in a sec.
Then the fifth one is straight out of the Rule Breaker Investing trait for the companies, No. 3, strong past price appreciation. I like to see a stock that is well beating the market over the previous six months before I recommended it. Some of my best stocks have actually more than doubled in the year leading up to me finally deciding to recommend or buy the stock, and that has been a very positive indicator of their future performance.
A lot of people figure they missed it at that point and ignore the stock if it’s doubled. I get and always have gotten more interested once the stock has doubled. That makes me more bullish. That’s a number.
I did quickly skip over No. 4, cash. It’s really important to be able to look at the balance sheet — and I’m an English major. I’m self taught, you can too. Anybody who takes some time to Google and read, and there are lots of learning resources these days on the Internet to learn how to read a balance sheet. But it basically is looking at somebody’s bank statements, seeing how much cash they have in the bank versus how much debt they might have. Well, we can do that for ourselves with our own little bank accounts.
Every American company has to report, on a quarterly basis, the state of its balance sheet. I love to see how much cash they have and whether they are adding to that cash from one quarter to the next or burning cash. If they are burning cash, how much cash do they have, and might they run out of it? I think those are really important dynamics. I’m speaking generally to the balance sheet.
To close with a long, shaggy-dog answer to Rule Breaker or mailbag item No. 2, Mark, there are a lot of numbers that we should know as investors if we’re taking ourselves seriously and becoming avid about the subject. Most of them are fifth-grade math and involve learning a term that you might not have known before, but once you know it, the number itself is pretty easy. It often comes down to addition, subtraction, multiplication, or division, and so that’s why I’ve always tried to make it evident to as many people as possible that yes, you can do this, Mark Blank and everybody else listening to me right now. You can certainly be a successful investor and use these numbers and of course, others that we’ve written about in our books, etc,. to choose stocks and beat the market. I think over the course of time, using time as your ally by looking for excellence among the companies that you buy part ownership of.
So there was a mini investment lesson, Mark and anybody else still listening.
Let’s go on to Rule Breaker Mailbag item No. 3. This one comes from Brandon. Brandon writes, “Hi, David and team. I’ve been a member for about a year and a half and then a Rule Breaker Investing podcast listener for about the same time. I have a question about a theory of adding up versus doubling down. Now, the recent episodes, Two Fools and Five Stocks Pursued by a Bear, both of which appeared earlier this summer, caused me,” says Brandon, “to think of two seemingly opposing views that are perfectly valid in the Rule Breaker Investing universe. They are one, winners win,” which he quotes from the Two Fools podcast I did with NFL head coach Frank Reich. We had a great talk about winners win. That’s No. 1.
The second Brandon’s mentioning is that sometimes our favorite stocks are down. That is, the winners aren’t always winning. Sometimes they drop and that’s why Brandon referenced my final five-stock sampler, Five Stocks Pursued by a Bear.
I see, Brandon, you’re thinking about how these two things, both of which I said out of my own one mouth, looked almost like I’m talking about both sides of my mouth because we’re celebrating, on the one hand, winners winning and buying more of a winner and letting them continuing to win, but then there I am in my final five-stock sampler picking intentionally five stocks that had declined 30% or more in every case in a very recent period of time.
Anyway, Brandon goes on, “Now, thinking about these two ideas caused me to build a tool that would allow me to look at my individual stock performance versus the market for any given time frame as well as check the last time that I’ve invested in a given stock.” Brandon goes on, “I decided to try and experiment. What if I invested in the stock that is up 30% or more in,” what he calls, “the medium past?” That would be the last three to six months. “But to also consider but not necessarily invest in adding to some of my holdings that are currently being pursued by a bear,” that would mean dropping. “This framework and theory allows me to highlight the winners so I can add to them but also see when some companies are on the discount rack. Is this idea Foolish or foolish? Fool on, Brandon.”
Well, first, I just want to praise that you’re hitting on what I think of as a polarity. Now, the concept of polarities has been written about before and some great books on the subject. It’s a framework that I think everybody should know, so dear listener, if you don’t know what I mean when I say “polarities,” let’s do a really short course in this concept.
At the heart of polarities is the notion that there isn’t just one perfect way to be. Things often bounce back from one end of the spectrum to another, and it’s fine and appropriate when they do so. Let me give a quick example from the world of business. Let’s say that you’re a leader, and you are overseeing an employee, and you find yourself, on the one hand, challenging her. She responds really well to challenges. You’re not going to do this all the time, but you feel it’s an appropriate time to really get up in her face and say, “I don’t think you could just beat that target this year. I think you can double that, and I challenge you to do that.” There might be a little bit of, I don’t know, college football halftime talk when we’re down, motivational talk. But you’re really getting up in somebody, maybe a team’s face and challenging them and that often can look like great leadership.
However, if we were doing that all the time, it would probably get tiring and not be very effective, so at the total opposite end of the challenge approach as a leader, how about support? How about, “You know what? Things are down right now. But I want you to know something. You’re great at what you do, and I believe in you and even though we didn’t get this right this time or maybe you made a bad mistake, I’m pretty sure you’re going to turn that into a gift and an opportunity,” you say to this person or team, and you make sure that you are deeply supportive of them, challenge at one end of the polarity and support, the exact opposite instinct, at the other.
The key for most great leaders is they bounce back and forth, and they know which end of the polarity to be on. There are leaders who probably get by with just challenging people all day long, all life long, and maybe that does work and there might be people who just nurture, nurture, nurture, nurture but never challenge. But I suspect most of the great leaders do both and know when to do it.
So, Brandon, that’s why, to return to your question, I think we’re talking here about a polarity. On the one end, you’ve got winners winning, and you and I want to identify the winners. We want to buy the winners. As they win, we want to add to them and that’s because why? What do winners do, Brandon, and everybody listening to me? They win. You and I are going to do the best companies, the best stocks of our time are stocks that typically just keep going up. Yes, they have hard times sometimes, but they keep winning and for really good reasons because they’re a winner. I’ve talked about that elsewhere, we don’t need to go on about that right here.
But then on the other hand, sometimes, as you wrote, our favorite stocks are down. And yes, my Five Stocks Pursued by a Bear, which I’m really delighted to say is my final five-stock sampler is beating the market pretty handily just some weeks later. I realize it’s only early days for that, but those were all stocks that were actually down 30% or more just weeks or months before I picked them. And so it might look like I was a hypocrite when I did that because I was all about winners, but they are selecting losers. Yet I think here’s the key point to conclude: When some of our favorite stocks are down — now assuming that they are winning companies — I think we’ll be well rewarded in that short-term drop to add to that position. I’d also be fine with you adding to a position on a short-term rise.
The main point is if you found a winner, you can buy it at almost any time, and if you really think you have a great company, how about a great company like Netflix, one of my biggest, longest-time holdings. I’ve been rewarded continually for adding to it when it rises and, by the way, when it drops, sometimes it feels easier to do that during one of those times than the other. But the main point is if something is going to win for 20 years or more, your main goal is to add to that over the course of time, not head-fake yourself about whether it’s just recently won or lost.
I think the key lesson here is sometimes when people hear me say “winners win,” I think they’re only thinking about the stock and its stock market performance. But really I think what we’re talking about is we’re talking about winning as a company. The companies themselves are putting up great numbers. Sometimes stocks drop 30% not because the company blew a quarter, but because it posted a great quarter. It just wasn’t as great as the market thought, but it’s still a great quarter. If you can briefly stop crying in your soup the next day or so when the stock trades down 17% at market open, you’ll realize, this is still a great company. You might want to continue to add to that winner and let it win over time.
I hope this has given you a little bit more knowledge about why I sometimes talk out both sides of my mouth. It’s because of the nature of polarities and recognizing that there are multiple good answers that sometimes sound like they contradict each other. But the truth is, it’s about knowing when to pull out the right tool. So I hope both of those will work for you. I won’t speak to your overall system. I think it’s great you’re experimenting and learning, and that is itself a Foolish approach.
It’s funny thinking through the first three Rule Breaker Investing mailbag items. This month was Authors in August, and I certainly talked about that a lot up front on the show, speaking to a lot of tweets. But here I am answering investment questions for the most part. It is a reminder that this is Rule Breaker Investing. I do love reading, I do love business, but I know a lot of you are focused most of all on investment advice, and I won’t forget that. In fact, we’ll be returning to that as we do at the start of September every year, and I’m looking forward to the month ahead.
You know something else I love? Stories and here’s a great one. Rule Breaker mailbag item No. 4, this one comes from Bradley Larson. I want to mention before I read this that Bradley submitted a much longer version of this a couple of months ago, and I had some fun with him, tweaking them a little bit, saying, “Great note, how about like half the length because I just can’t read a five-page letter on this podcast, it goes too long.” And so Bradley took that the heart, reshaped it in what I’m about to share with you and it’s even better than it was the first time, so thank you for this note. Let’s begin.
“Dear David, often in life less can be more. I would like to tell you how I came to learn this and how it may apply to investing. In 1996, I left my home on a great adventure, a road trip. My friend and I quit our jobs and headed where young men often go: west. I believe Marie Kondo’s future self would approve of the limited items we packed into that van. Backpacking equipment sparked our joy, and destinations to use that gear were our focus. In Yosemite National Park, our hiking turned vertical, and we started rock climbing. We learned to climb, as well as the art of dirt bagging.
“Now dirt baggers, climbers on the road, are proud to live on almost nothing, pinching every penny. Wealth is not measured in money, it’s measured in adventure. Pre-smartphone, we were unconnected, life was simple and we lost ourselves in nature at night, staring into the dirt bagger TV,” that’s Bradley’s phrase for a campfire, “a phrase was commonly uttered: ‘I wonder what the poor people are doing.’
“I spent the next 10 years in Yosemite,” Bradley writes. “I combined my love for hiking with rock-climbing and several of the Sierra Nevada mountains. Mountaineering, or peak bagging, requires hiking many miles to a remote summit. The phrase “light is right” became my mantra, less is more when you carry it to the top of a mountain.
“Like me, many have lost themselves in Yosemite. Alex Honnold can be found climbing El Capitan with just a chalk bag around his waist in the film Free Solo. Less is more for Honnold on a 3,000-foot granite face. You may also remember Cheryl Strayed’s memoir/movie, Wild, where she started her 1,100-mile hike on the Pacific Crest trail with an oversized backpack and heavy boots. She learned quickly and shed the burdensome weight before she reached Yosemite. Light is right when you carry it from Mexico to Canada on the Pacific Crest trail.
“While life on the road and mountaineering taught me less is often more, less physical weight when we carry it, and less mental weight when we tune out the modern world. For me,” Bradley writes, “too much information resulted in decisions to sell stocks that went on to be huge winners. Less information would have been more when I started my climb up Mount Netflix in 2006. I sold my shares,” Bradley writes, “after reading articles about how Blockbuster was going to eat their lunch. And how grand the views would be from the top of Mt. Facebook if I hadn’t turned back — that is, sold — because I was told they were the next Myspace. Mount Tesla? Too many crazy tweets. With less information, I may have stayed on my path.
“While moving forward, I’m going to listen to the guides. Those would be my favorite Motley Fool analysts. I’m going to pick a mountain to climb — that’s a public company. And stayi on the trail. I will bring my rain gear and be prepared to face some dark storm clouds if they come. I will emulate the great naturalist, John Muir, who also lost himself in Yosemite. Muir embraced turbulence in nature, and I will embrace turbulence in my investments the same way. After an earthquake that sent rockfall down the steep cliffs of Yosemite valley, Muir wrote, ‘Storms of every sort, torrents, earthquakes, cataclysms, convulsions of nature, etc. However mysterious and lawless at first sight they may seem, are only harmonious notes in the song of creation, varied expressions of God’s love.'”
Bradley goes on, “When my stock takes a 30% drop, well, I’ll think of John Muir at the top of a 100-foot-tall tree he climbed in the middle of a windstorm and later wrote, ‘In its widest sweeps, my tree top described an arc of from 20 to 30 degrees, but I felt sure of its elastic temper, having seen others of the same species still more severely dried bent almost to the ground, indeed, in heavy snows without breaking a fiber. I was therefore safe and free to take the wind into my pulses and enjoy the excited forest from my superb outlook.’
“My life has been a wonderful journey, Bradley concludes. I return to my career in the mid 2000s and enjoy finding new places to put 401(k) contributions each month. I’ve been a dirt bagger, a peak bagger, and fortunately had a few multibaggers thanks to The Motley Fool. Thanks again, and always remember, less can be more and light is right. Yours truly, Bradley Larson.” And if you want to give Bradley a follow on Twitter, he’s @livingitlars.
Well, of course, the parallels that you draw between climbing and investing or life and investing are completely appreciated, Bradley, and that’s an eloquent note. Lovely to read. I’ve never read anything by the naturalist John Muir, but I have been through the Muir Woods, I probably should know a little bit more about John Muir, I do see he’s a Scot. Good on you, John Muir and all of our fellow Scottish friends.
I love not just those connections in your eloquence, but also you’ve given us an example of how you live your life with a philosophy. I think it’s great to have a mantra or two, not just one, and you have more than one, but light is right. Sure. Less can be more. And while I will say that less can be more, is a phrase that I think many of us have heard many a time, i.e., it’s not wildly inventive or original, it’s powerful and sometimes just locking down on things that run deep and are powerful can take you to great heights. And clearly, I can see it’s done that for you, Bradley.
Again, thank you for sharing. Love hearing about your early adulthood. Your fling with nature and all that you learned and then came back to an adult life and tested out some of those lessons and no doubt continue to do so. Best wishes for you in yours and of course, your investing, sir. Fool on.
Rule Breaker mailbag item No. 5. This one comes from Belgium. Thank you, Benjamin, for this note. “Hi, David. I listened to your interesting interview in your podcast with Shirzad Chamine about Positive Intelligence. Thank you for including these insightful interviews about life. Thank you very much. I love the many analogies and life lessons in that interview.
“At some point, you asked for his view on an investment topic, and a question came up in my mind,” Benjamin writes, “which probably many have when hearing the expression that ‘watering the flowers and cutting the weeds’ is so much better than cutting the flowers and watering the weeds. I wonder what is best to do with fresh money to invest when correction strikes a few of your stocks when earnings reports are released.
“Last week, for example, a few of my stocks which are recommended by Stock Advisor and Rule Breakers had a significant decline despite the earnings reports being quite positive. The decline had more to do with a lowered forecast for next quarter. Fundamentally and over the long run, which is the Foolish way to invest, there is nothing wrong with the stocks. Therefore, a buying opportunity to strengthen the position was published by those services” — and he gives examples of, for example, Roku or Fiverr.
“However, when following the principle of watering the flowers and cutting the weeds, isn’t it better to add to a winning position with fresh powder versus strengthening stocks which went down significantly. Even though the stocks are still healthy, obviously, it will take more time to turn around the general investment sentiment while winning stocks already have a tailwind. What are your thoughts on this? Kind regards. Fool on! Benjamin from Belgium.”
Well, obviously there’s some continuation from some of the points that I was trying to make earlier when I was speaking to Brandon’s notes about when to add. Do you add to winners that are winning or do you buy stocks that are declining 30% in the short term? I think just to underline one lesson we’ve already talked about and then add one more.
Let’s just re-underline the importance of looking at the company itself. Stocks go up or down and the movements the stock market makes are driven by investors. It’s nothing the company did. It’s you or me buying or selling, creating demand or supply, and all of a sudden, prices move as a result. The companies, meanwhile, just continue executing with our purpose, with their products and services. I hope to win for all stakeholders from one day to the next, to say nothing from one quarter to the next.
For me, the winners are the ones that do that really well. I’m confident, over time, that the winners will win. The point I’m reemphasizing here is just making sure you like the company itself and its performance, adhering to your own expectations or maybe consistently exceeding them, but always being comfortable realizing that sometimes your expectations and Wall Street might be surprised. As long as it’s not a bad habit the company gets into, if you feel good with what the company is doing then sure, go ahead and buy a stock pursued by a bear.
Then finally, just one new note that I’ll add pertinent directly to your mailbag item. You’re talking about fresh powder here. You’re talking about new money that you’re adding to the market. I really don’t think, for the most part, that you need to label any money that you add to the market as fresh or not, whether it’s something you just saved and made from your salary or you sold another stock and you have money to put into the market. In the end, the money doesn’t know where it came from; it’s yours and it’s yours to decide on. I don’t think we should necessarily take any different attitude as we make any purchase with capital that we have.
I also don’t think we should spend too much time labeling things winners and losers, because after all some great companies get sold off, sometimes well more than 50%, often multiple times, like Tesla or Amazon has on their way to stock market glory. You have to recognize that losing to win is a reality not just for you and me as investors, and I’ve done a whole podcast on that, but for the companies themselves and the results they generate one quarter to the next. It’s very hard to win every single quarter to beat people’s expectations every quarter of every year. You and I should expect that these companies are human, just like we are. The fresh powder that we bring, whether it’s fresh or not, in the end, you should be putting it toward the thing that you think has the best chance of flourishing five years from today.
Hope that’s helpful, Benjamin. Thanks for the note.
And Rule Breaker mailbag item No. 6. Let’s close it out this month with Linda from Austin. “I’m a Fool since 2008-ish and a wannabe longer than that at the risk of too much information. I’m sharing the blow in case anyone in your organization needs motivation on how transformational your business is. For the little gals out here,” Linda writes, “The Motley Fool has changed the trajectory of our lives. My husband and I, he is now 71 and me 57, we’re both low-salary local government employees early in our careers, looking forward to the promise of a tiny pension. He stayed on at the city and got his pension.
“I left government jobs for small start-up opportunities — more money, but most with no 401(k) plans. I quickly realized I was on my own for retirement planning. We couldn’t afford to get remotely close to funding a Roth, but still I tried. We had zero knowledge of money, just that we had little and we tried to live within our means. While the 1990s and 2000s Sunday newspaper articles in the Austin American Statesman educated me to the point that I felt confident to subscribe and begin investing.”
Now, Linda is referencing our syndicated newspaper column, which is still out in some papers, even some papers that are still in print these days. But a wonderful long-running relationship we’ve had with Universal Press Syndicate, and no Fool more than Selena Maranjian, a longtime employee and sometime contractor for The Motley Fool. No one has put more time in than Selena to make those Sunday newspaper articles in your local finance section from The Motley Fool to make them sparkle. I want to make sure I thank Selena yet again right here, because Selena, here is some of the legacy that you’ve created. You’re getting to hear it from Linda’s lips.
Let’s go back to this note. “My first subscription may have been $100.” That was probably a Stock Advisor subscription, I’m guessing. Linda: “That was a big deal back then,” she writes, “my first Roth contribution was $400 February 2009 with a total,” and this is her total, “of $43,067.55 contributed to date to her Roth. “That first contribution, $400 today. It sits at $222,395.28.” I love that we’re taking that to cents for specificity, “And with only 2018 to 2021,” Linda writes, “being fully funded. Before 2018, the most I’d ever managed to save was only $3,000. Most years were under $2,500, and a couple of those years had zero when I worked at a financial firm and was barred from trading.”
If there are a couple of chapters to this note, here comes the second one because we’re about to hear what Linda’s work was like at that trading firm.
“One of those brokers,” Linda writes, “tried to shame me out of actively managing my own account. He said I had no business buying individual stocks. I am so happy you taught me to be contrary. I briefly worked for a commission-based advisor and then a fee-for-a-service firm. The commission-based guy had me licensed for 6 and 63.” Those are licenses to work at a brokerage firm. “He didn’t expect I would understand and apply what I learned and research enough to know that a commission-based recommendation he gave to me was a rip-off for me. I picked the Vanguard STAR Fund instead, I didn’t last much longer in that office.
“What a blessing that education and firing was. Sometimes a bad job is a good thing, even though a person is considered a fiduciary, that doesn’t mean they will always act as one. He was one of their top performers,” Linda adds. “I was told I was privileged to work for him. They fired him not long after he fired me. I don’t think I will ever be able to fully trust an advisor that sells products.
“I’ve dabbled in other Fool subscriptions,” Linda writes, “I think I even canceled Stock Advisor, but I always come back. Now I’m following Stock Advisor and Rule Your Retirement. Just yesterday, I bought ETFs to build my Rule Your Retirement model portfolio. Giddy,” Linda writes, “is an understatement. I have Rule Breakers but will end that once this annual subscription ends. I still can’t afford having multiple subscriptions and can’t afford the big-dog subscriptions. The new Find Stocks feature in Stock Advisor that includes Everlasting and Rule Breakers guidance, by the way, is exciting. Thank you for adding that.”
Thank you, Linda, that’s to the credit of my brother Tom and our team continually trying to enhance our services.
“Over the last four years in my current job, I’ve been able to begin fully funding a 401(k) with 6% matching” — wow, nice — “for my employer and will fully fund an HSA.” That’s a health savings account. She mentions, “That’s another Fool educational recommendation. I am on track to be saving 53% of my income this year and plan to do the same every year until retirement. I’m on track to see a total portfolio of over $400,000 by December.”
She concludes, “Saving for myself always felt like paying to someone else, but now, it is super exciting. Now my husband, who had refused to learn about investing, is reading Fool articles and offering additional family reserves to be invested in a nonretirement account. [smile] He’s a saver and built us a nice safety net over and over, but was always afraid to do more than put in the credit union savings account.
“Thank you for making investing understandable and accessible. Thank you for keeping Stock Advisor and Rule Your Retirement affordable. Thank you for the guidance that helps me to challenge advisors’ assumptions that my accounts should go into an annuity. Maybe an annuity has a place in my portfolio down the road, but you can bet I will know the ins and outs of that product before I purchase.” Signed Linda in Austin.
Well, there are about 16 beautiful things in that note, and that’s why I want to share it right at the end of this week’s Mailbag, but three things jumped out to me as I listened to your story, Linda. The first one is what I’ll call that “man behind the curtain” moment or the “wicked witch is dead” moment. What I love about both of those is they, of course, both come from the Wizard of Oz, I’m thinking of the movie here. In both cases, they’re remarkable turns in the story. All of a sudden, you see the Great and Powerful Oz who’s just the man behind the curtain, a shocking eye-opening moment, or as the wicked witch’s melted — spoiler alert, I hope I didn’t spoil the Wizard of Oz for anybody with that one. But as the wicked witch melts away, all of a sudden, all of her guards, presumably her faithful troops, said, “All hail Dorothy. The wicked witch is dead.” I love both of those moments in the Wizard of Oz. They do the same thing. They open our eyes to the reality that we had no idea was in place. They shock us in a good way, and I feel like you had a couple of those moments yourself, and so thank you for exposing the man behind the curtain.
The second thing I was thinking, Linda, is you’re reminding us it is never too late and you’re never too small to get started investing. I love hearing about your journey. You’ve been doing it for a while, but you’re middle to older age as a couple, and it’s still such a near and present thing for you, and you’re working, thinking about the future. And good news, you got a lot of years left and a great plan in place. A lot of people are hearing us right now who are in their mid-40s thinking they finally need to get off their schneid, maybe save some money, maybe kids’ college is paid off, they can finally start paying off their own debt. In a lot of cases, it’s a reminder to all of us: Wherever you come from, it is never too late and you’re never too small to get started. Thank you for that part of your story, Linda.
Then the last one of course, I saw, especially toward the end and your enthusiasm, your husband’s relatively new-found enthusiasm about this topic. I’ve observed this phenomenon many times before, I’ve highlighted it before in Rule Breaker Investing, I predict that I will do so in future because it’s human and it’s natural, and that is that the better you invest, the better you save. There is no greater inspiration to start saving and saving better than realizing what you’ve already saved, that money is making more money on its own as people have their eyes opened to the man behind the curtain. They find out when the wicked witch is dead, everybody was cheering for that. When they have that “switch on” moment, all of a sudden they start to realize, you know what, honey, we should save more.
One of the best ways to increase the American savings rate, in my opinion, to conclude, is to get as many Americans as possible invested. Good news, a lot of us are, even if it’s just through our 401(K), even if we’ve never picked an individual stock directly, we are invested. But the more we switch on, the better our future will be and I think the better the world will be.
Thank you, Linda. Thank you, Fools, for a wonderful August. Hope everybody has a great weekend coming up, see you in September. Fool on.