How do you spot Amazon in 1997? Or Starbucks in 1998? How do you know to double down on Netflix in 2004? Today David looks at how we can see the light of optimism through the pessimism of conventional wisdom - and profit by investing in tomorrow's success stories.
Rule Breaker Investing
Dark Clouds I Can See Through
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. And welcome back to Rule Breaker Investing. I'm David Gardner. Great to have you with me. Before we start this week's episode entitled "Dark Clouds I Can See Through," I want to make sure that you're aware of an honor that this podcast was recorded recently by iTunes. And that is, there's a small C button right next to each of our rows as you go down as you pass your eye down iTunes at each of our episodes. And it stands for clean lyrics. And I'm really delighted to know that Apple approves of the lyrics of Rule Breaker Investing. That clean lyrics label, ladies and gentlemen, fools everywhere. That means everything to me. I should mention on a slightly less humorous side note that early on, I had somebody influential in my life say, "Bad language uses bad language, people who think they're being cool." And I think I heard that at a formative age, maybe I was in my late teens. And I decided that they were generally right about that. And so because I didn't want to show that I was cool, I pretty much haven't really used bad language all the way through. So now at the age of 49, I'm not bragging, but I am saying that I think you can go through life without using bad language. And YouTube will earn a clean lyrics honor and accolade from iTunes. All right. And then one more bookkeeping note. I do want to mention last week's episode, we had a huge number of listeners to that. I'm really happy to see that. I think it was popular because I was identifying five stocks, five stocks in the teeth of a bear market that I liked, that I consider to be safer investments. And all I'm going to do is flag that for you if you're either a new listener this week or if you missed last week, I would recommend you go back and listen to that one again. Because in addition to the five stock ideas that I laid out, I also gave a general investing principle that I attached to each one. And those are of course the more timeless evergreen lessons I'm trying to convey. I'm not at all disappointed to see our stocks having done pretty well in the one week since. Now I'm the first of course to talk about the long term, but you know when when Ellie May is risen 20% or so in a week, her Mercado leap raise up 10%, that ain't bad. And maybe shows there is reward, even sometimes short term reward to listening to Rule Breaker investing. And just to riff briefly again before we actually get to the topic this week, sometimes people think you know you shouldn't even look at short term results. And they would expect somebody like me who is an investor who by definition thinks and acts long term. They would think well David probably doesn't even check his stocks that often. I probably check my stocks more than anybody I know. And it's not because I take action, in fact I tend to buy and not sell sometimes for decades. But it's that I love the game of it. So if you're like me, let's just go with the baseball analogy this week, since pitchers and catchers are starting to report down in spring training for Major League Baseball here in America, you know I like to follow each game. In fact I watch the games and I watch every inning and every pitch. And I feel like I learn more and I love, I love not just baseball but a lot of sports. And so I also love following the stock market, it's very numerical. And it doesn't mean that we should draw great conclusions when a stock wins or loses over a given day, week, month, even year. But I find it tremendously enjoyable so please never take away an assumption that the host of this podcast doesn't even bother checking his stocks in the short term. I check more than almost anybody I know just because I love the game of it. I will mention when things are down as the stock market has been, as we've talked about here over the last several weeks, I tend to check it less. The very human me doesn't want to see red numbers quite so frequently as when I can check in and see green numbers most years. And so admittedly, I don't actually nearly pay as much attention in the near term. And while that might sound wimpy or I don't know, some way hypocritical or dishonest, I actually think it's emotionally healthy. What I've found is I have a lot of fun watching stocks as they go up. When they go down, I don't spend as much time watching stocks. I guess I go and be more productive in life. I'm slightly more awesome at other things like being a good dad or making sure I've paid my taxes. So whatever it is that you might not be spending as much time doing during bull markets because you're checking your stocks, maybe like me, don't check as much when we're in down times. It can work pretty well. All right. Speaking of things that work pretty well, this week's episode is entitled Dark Clouds I Can See Through and this is a metaphor of my own design and one that I have kind of built up over the years and what I wanted to share with you this week. Dark clouds I can see through. So let me break that phrase down into three parts. Dark clouds, first of all, let's talk about those. Dark clouds are a prevailing negative view of something. And I say prevailing because it's a dark cloud. Like if you're looking at your window right now, you can see it on the horizon. It's coming. It's big. It's probably making something wet. Everyone can see it. You can all point and say, wow, that is a dark cloud. So it's a prevailing view because it's a big cloud, but it's dark. People are worried. They're pessimistic. Something is not going to work out. Dark clouds I can see through. So that's the dark cloud part. By the way, I'll be giving four examples shortly attached to the stock market. But let me keep breaking down this phrase. Part number two of the phrase I can see and all I want to get across with that one is that what I see is what I see. It is the unique me. It's whatever I have built up over the course of time. It's my pattern recognition that I've built up by earning it over the years. And what you see is what you see. So when I talk this week about dark clouds, I can see through, I'm going to be sharing some things that I've seen. But I'm not presuming that you should either agree with me or that you saw the same things. You may be seeing completely different things than I am right now. And I'm here to teach them the mode of self-reliance. I'm here to say, yes, I validate your experience, your pattern recognition. And I'm encouraging you to act on it because when you're right, you'll feel a great sense of pride and authenticity that you acted on your own instincts. And if you're wrong, then you'll learn, I'm not always right. What can I learn from that? And you'll tweak and you'll get better. So far better for you to listen and learn and do your own thing based on what you hear on this podcast or anything at fool.com than if you merely mimic me. So dark clouds that you can see that I can see. And then the last part of that phrase is through. And what I mean by that is simply that even though there's a big cloud up there and even though it's dark and everybody is looking at it, you're able to actually see through the cloud. In other words, in a pessimistic context, whatever it is, you're the optimist. You're the person who thinks that what's going to happen, what everybody thinks is going to happen is actually going to be wildly better, wildly different from the not good tidings that you're hearing blurted around you. Dark clouds, you and I can see through. So why does this matter and how do we attach this to the stock market? Well, in my experience, many of my best investments have been because I believed when the vast majority were not believing. So this is a fun podcast for me to do this week because I get to talk about the times I was right. I'm wrong all the time. We talked about that some other weeks and we'll go back to that in future again. But I'm going to be talking about things that worked out when I was among a small minority. I hope you were with me. I bet you were for a few of these. I was in a small minority and the headlines and the prevailing perception was that something bad was going to happen, but instead you and I, we bought shares and we held. And the key here is that if you're right, if you're right, when the entire world was betting against you, you are going to make a lot of money. If you leave that investment in because if you end up being right, slowly the world will start to realize that it was wrong and that you were right. And some of those people will start to buy that stock. And because there was such a huge prevailing negative perception of the stock, there are a lot of converts to be made over the succeeding years, sometimes decades. And so we hold those stocks because they were dark clouds that you and I could see through. So what are some examples I have for this week? The first is e-commerce. Back in the day, rewind your clock back to 1996 or 7. One of my early television appearances was on CNN. It was actually on CNN headline news, but they were doing a short interview in their tight 25-minute timeframe and it was going to be me coming back. In fact, they said coming back, we're going to have David Gardner from something called the Mopley Fool and he thinks you will give your credit cards over the internet back after this. And that was the interview. I came on to be the guy and this seemed crazy at the time. And if you were alive, I hope you remember this, it seemed crazy to a lot of people that e-commerce would work, that people would give their credit cards. This sounded scary over the internet to buy something. And so even though we were doing the same fool thing back then that we're doing now, which is mainly talking about the stock market and stocks, at that time we were almost apologists for the medium itself. We were believers in online. In fact, with America Online, we were even pre-worldwide web, but we were pro-web. And so we had that perspective that this medium, the internet, would be awesome. We had no idea of how awesome it truly has become now by 2016, how many solutions it creates for how many people across the world every day, and how many contexts. There was no way to know it or see it back then. Gee whiz, Google wouldn't start for another five or ten years and Facebook wouldn't start for another ten or fifteen years. So really early on. And it was a dark cloud that we could see through the prevailing negative perception of the internet. In our space, people were saying, "Well, people are hyping stocks in chat rooms." That was the big fear or worry that this is all useless, drivel discussion of stocks online, amounting to just mere chat in chat rooms. So we went on as the Motley Fool, my brother Tom, me, and a number of our advisors, people like Jeff Fisher, if you know Jeff and his work here at The Fool. We've been around for a couple of decades now. And we were largely buying these companies, Amazon, eBay, AOL. And all of these ended up being the just tremendous stock investments of the next ten years or so. 2001 certainly did hurt this group of so-called dot coms a lot. And some, the weaker ones never did come back. But really the stocks that I continue to look back on say of my ten best investments, three or four of them are right from that era, some of which like Amazon I still hold today. So that was a dark cloud that I could see through. I know I wasn't the only one. I hope you were seeing through it with me too. Number two. Number two is just the phrase Walmart will crush blank. Walmart will crush blank. The dark cloud was that Walmart so large, so impressive in many ways, so threatening. In times so maybe over large, kind of a big brother like perception, which sometimes happens with other companies too like Microsoft, companies that become so big that people stop liking them and sometimes in some cases begin to protest against them because they start to look like two powerful entities in our society. And so Walmart will crush blank. I'll give two quick examples that I have seen up close and personal over the years. The first was Amazon. Amazon was going to get crushed by Walmart. I hope you remember this. If you were around in the years 1999 through 2005, the perception was that once Walmart really comes in force online, Amazon will be toast. Some years later, this really shows how powerful Walmart has been. I don't think it is today but has been. Another company that was going to get crushed by Walmart, another one that we believed in, a dark cloud that we could see through was Netflix. Do you remember this? Walmart began to offer video rentals in Walmarts where you could just pick it up and drop it off there going head to head against Netflix, which was largely still the DVD rental business back in the day for Netflix. And the idea was, well now that Walmart is doing this, Netflix is going to get creamed. And the reason I think Walmart will crush blank is a dark cloud that I saw through maybe you did too that we can see through in general is because I think these kinds of perceptions don't really respect two things. First, the extreme difficulty of being a very, very large company and trying to compete along one aspect of your enterprise like Walmart, movies, just movies with a nimble focus competitor that is using the internet as its competitive weapon. So number one, again, I really don't think it's that easy to be a very large company and compete against well-funded visionary competitors that are highly focused on something that sounds or looks like a niche as DVD rentals did back in the day or even when Amazon started e-commerce as e-commerce looked like, just books online back in the day for Amazon. That's number one. Number two, I also don't think that this perception respects just truly how powerful visionary founders can be. Whether it's Reed Hastings, a quote I'm going to close this week with Reed Hastings quote to make a separate point, but Reed Hastings is a visionary, so Steve Jobs, the list goes on and on of people who are really brilliant business people who started enterprises. And really if you think about it, even to get your company public and scaled to the point that people would be saying, "Well, Walmart will crush blank." Think about that. Think about how hard that was, how many smart decisions, generally youthful visionary founders of small startups to even get their startup to the point where people would say that is such a bullish indicator to me. It doesn't work every time, but it works well enough and what it does, if it's a dark cloud, you can see through, you're going to make a lot of money. I was number two, Walmart will crush blank. I admire Walmart, by the way, in many ways. It was a great growth company in the 1970s and into the early '80s. Once e-commerce showed up, I never invested in Walmart. It was always perceived to be a rule breaker in an overpriced commerce company back in the '70s and '80s. It was a tremendous stock, but I haven't seen a lot of innovation from Walmart for a couple decades during a time where innovation is at a premium, is driving everything. And so for this reason, I've remained on the sidelines from Walmart, but I'm not part of the anti-Walmart contingent. I'm sure some people are, especially those that were run out of business by Walmart, but in general, my take on things is the only reason Walmart ever succeeded is because the small towns where it did succeed, everybody in the small town was buying from them otherwise, how would they have had any sales and profit? But thus much for Walmart will crush. Number three, number three is the concept that something is a fad. So fads, I'll give two more quick examples. But before I give them, the idea here is, you know, people are telling you that whatever thing that you're looking at, thinking about investing, and that that thing is going to go out of fashion. It's temporary, it's probably overhyped in the short term, and it's not going to last. And I remember when Starbucks, my first example came public around 1990, there was a major perception at the time, a couple of years in, as Starbucks is succeeding as a public company, that coffee houses were a fad. This is not going to last. Look at a history, look backward at the 20th century. Where was there a big coffee house revolution in America? There were certainly local mom and pop coffee shops always have been, and there have been some mom and pop coffee brands, or sometimes larger corporate ones like, I don't know, Senka, some mediocrity before Starbucks showed up. The perception that Starbucks, by charging more, could create a revolution that would proliferate globally was very much not on the market's mind back in the early 1990s. And I think Howard Schultz, one of those visionary leaders, we talk a lot about Howard Schultz's proven them wrong, and today Starbucks, last I looked, the market cap is about $80 billion. That was a huge dark cloud. I did not see through that dark cloud back in the early 1990s. I didn't know then what I know today about investing. So this is not one where I can talk about how we had it back then. I am happy to say we did first recommend Starbucks in 1998, and it's done very well since. So we've had a long time, but the idea that Starbucks was a fad. There's another fad. Do you remember this? And this did lead to one of our better investments, Motley Fool's Stock Advisor. And that's the idea right after Spider-Man 1 came out and succeeded as a movie. And they're talking about the Spider-Man 2 sequel. The idea was that Marvel was riding a short-term fad where all of a sudden superhero movies were hot, but they weren't going to stay hot. And some people would point back to some kind of a failed Batman franchise, or Superman kind of giving back out in the '70s or '80s as reasons that superhero movies wouldn't really take off. I don't think I have to argue for superhero movies anywhere today. Everything from the incredible Marvel's Avengers series right through to the most recent Deadpool, which I think was number one of the box office over last weekend coming out from Fox. It's very clear that superhero movies have not been a fad. In fact, they have been one of the safest bets that you could make about cinematic success. And sometimes you hear the complaints today that the only movies that seem to really deserve the scale of a movie theater or consistently make money are these kinds of movies. So Marvel has been a tremendous investment. Of course, it did get bought by Disney, and we've just held shares all the way through. But that was-- so that's the fads, Dark Cloud. The idea that something is a fad. Even-- I remember when my kids were into Pokemon early on, people were saying Pokemon was a fad. They I see just as much Pokemon gear 20 plus years later as when it was supposedly a fad that was going to run out. So this is, I would say, a frequent misperception. And if you watch carefully and invest well, you'll make quite a lot of money by seeing through this Dark Cloud. And the last one I want to mention this week is just Activision Blizzard, one of my favorite stocks, which several years ago was dogged by the notion that it wasn't participating in mobile apps, and especially the free-to-play gaming revolution happening on Android and certainly in the App Store for Apple, where you see all these free-to-play games in Activision Blizzard, which has great franchises like Call of Duty or World of Warcraft or Hearthstone today. Some of my favorite video games, and I really admire this coming as one of my favorite stocks, but it was considered to be slow and have all the other horses left the gate when free-to-play mobile phone games showed up. And Activision Blizzard kind of as a stock spun its wheels, just tread water there for a couple of years, while Zynga and a few others came public and achieved multi-billion dollar valuations. But as a gamer myself, this is really one I can see through. As a gamer myself, I knew the value and the depth of the games and franchises that Activision Blizzard has. I checked Zynga is in a stock you wanted to evolve in the last few years, and Activision Blizzard meanwhile has added a few mobile games, even buying out Candy Crush Saga in the last year or so. So it's a company that has continued to evolve, but it didn't need to please the perception of a short-term trend that was supposedly going to put it out of business. In fact, the company brilliantly managed by Bobby Kotick has just continued to be not just a great stock, but a purveyor of great products, in my opinion anyway. So that's pretty much it for dark clouds. I can see through, you know, looking forward from here, it's a natural question. What are some dark clouds that you or I can see through today? And I'm going to just give a quick short one as a thought starter, but I'd love on Twitter this week. If you see any, you could just hashtag dark clouds or just go @RBIpodcast, because you're going to teach me a lot if you have any answers here, what you're seeing, because you and I, I think, will make quite a bit of money if we can identify the right trends that people aren't believing in that will, in fact, prove their worth in the coming decade or two. So the quick example I'll give is, and this is a minor example compared to something like Walmart, Will Crush, but I think we've reached a stage where most people think that newspapers are a dead business and are pretty much going out of business. And one of my most recent recommendations about the full stock advisor was the New York Times Company. And what I see in the New York Times Company is a company that while its revenues have come down dramatically from where they were 10 years ago as a media company, it is a company that today has stabilized, is profitable, is innovating, and actually doing some really good stuff in mobile. And in general, I think has really started to evolve and transition. So just as Jeff Bezos ended up, the founder of Amazon.com ended up buying the Washington Post, seeing presumably some value there, you and I can be part owners of New York Times stock, I'm not suggesting you should. Maybe this is not one you agree with, but this is one that I think about where people assume that the newspaper business is dead or the so-called news business has been commoditized. But my view of it is while Twitter has helped do that in some ways to the news companies, what are people falling on Twitter? Well, one of them is the New York Times. So what's a dark cloud you can see through? And as I mentioned earlier, Reed Hastings, I said I was going to quote the man, I've got a great quote that I think really fits in with our theme this week. I want to mention, by the way, that back in 2006, Netflix's big dark cloud was the whole concept of video on demand. The idea was that video on demand was going to hit big and reach scale fast and be a strong consumer adopted technology. This is at a time when Netflix was just doing DVDs. And so video on demand, ironically now in retrospect, was the big dark cloud that had a lot of people saying Netflix is going to be toast. Well, this quotation I found a while back from none other than Reed Hastings, the CEO of Netflix, and this is what he said. And this isn't about 2006. This is about 2016 and beyond, quote, "At the heart of any good investment, I tell investors, is a contrarian thesis that they and the company believe very deeply and that the rest of the world thinks is crazy," end quote. Reed I call those dark clouds I can see through, and I totally agree. And thus much then for this week's podcast. Hope you enjoyed it. Next week, we're going to go back to the mailbag. That's right. It's the last Wednesday of the month. That means it's time for a rule breaker investing mailbag. You're the one who makes it happen. Just drop us a line. You can either drop us an email, rbi@fool.com, or you can just put it right out at rbi podcast on Twitter. For questions, my best shot at answers, in the meantime, full on. As always, people on this program may have interest in the stocks they talk about, and the Miley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about rule breaker investing at rbi.fool.com. [MUSIC] [BLANK_AUDIO]