It's the month-end mailbag episode! David Gardner answers questions about hating through inheritance, beating the efficient market, what Star Wars means to Disney, and more. Submit your own question for next month's mailbag on Twitter (@RBIPodcast).
Rule Breaker Investing
January Mailbag
It's the Rule Breaker Investing Podcast with Motleyful Co-Founder, David Gardner. And welcome back to Rule Breaker Investing. It's mailbag time. That's right. The final week of every month we go to our mailbag, your questions, my best shot at answers, not that I ever have perfect answers, or even sometimes in many cases an answer at all. But I enjoy the interaction. I like your questions. I learn a lot from them, and I hope you learn something from my efforts at answering. Let me mention a few things about mailbag questions, and which ones I tend to select, and which ones I don't. In fact, let me just go with the ones that I tend not to select. So number one, if you're asking tax questions, I'm not your guy. So it's not really good at that, but it doesn't make for very interesting radio or podcasting. So typically situations, or in fact, let me extend that number two to personal situation like questions. So if you have, what should you do in your 401(k), usually I tend not to select those. It's not that I'm not glad that you're asking, and I know that for a lot of us we're trying to get a better answer for ourselves. But I'm selecting questions whose answers are going to spark general interest. If I come up with a good answer, just the consideration alone takes us all a little bit higher. Those are the ones that I'll tend to select. So sorry if I can't get to your personal answer. In fact, in many cases, we at The Motley Fool can't provide personalized direct advice anyway, because we're more of a publishing company, and there's some regulation there that we don't want to run a foul of. Third, a third category, ones that are simple facts that are out there on the Internet. My friend and producer Rick Engdahl pointed me to the site. Maybe you've seen this one before, L-M-G-T-F-Y.com, that's let me Google that. And any time you have a friend or co-worker who asks you a question that really they themselves could simply have Googled, check out L-M-G-T-F-Y.com as a fun way to send them a URL that will help them realize they could have looked that one up themselves. And the last thing I want to say just about which questions I take, if I have something interesting to say, I'll take that question. You might have a great question, but if I don't have a good, interesting answer, I'm probably not going to answer it. For example, you might really love to know how the stock market will do in 2016. And if I knew that would be very valuable for us all, we could probably make infinite money by knowing ahead of time exactly which day any stock would do whatever it's going to do or how the S&P 500 would close the year. But I don't have an answer to that question. So that would be an example of a great question that I probably won't include in our mail bags. Okay, enough with the knots and the nose. Let's talk about the ones that we are going to cover this week. The first one up this month is Benedict Blimeshine. That's @bblimeshine on Twitter. And Benedict wrote, "Dave, I enjoyed your book recommendations from former podcasts. Can you please share top favorite five books right now?" I couldn't really narrow it down to five, so I'm going to give you a few bonus ones. Benedict, these are not my favorite books of all time. That would take me a long time to think through. These are just books that I've enjoyed that are sitting there on my Kindle app that I've actually read. There are a lot of books I have on my Kindle app that I may not fully have read. In some cases, not read at all. But these are books all of which I've read and really recommend. So first one up, just because it's last in first out, LIFO bookkeeping here would be the book that I'm reading right now and the one just before it. I've mentioned this on recent podcasts, Candice Millard's Two Books, River of Doubt, which is about Theodore Roosevelt's darkest journey. And that was through the Amazon that I read that two books ago. And right now I'm finishing Candice's book, Destiny the Republic about James Garfield. I highly recommend both of those books. If you like American history or just history period, great storytelling and Candice's work is outstanding. Another book that I finished fairly recently, Ready Player One. So another, this is a novel and it's about virtual reality in some ways. It's about what happens if massively multiplayer online role play gaming became such a dominant force worldwide that it could almost take over the world. It's a very fun, futuristic read. I believe Steven Spielberg is making into a movie as we speak. So I would certainly recommend Ready Player One. Here's a business book I've really enjoyed five years ago or so, predictable success by Les McEwen. I talk about it a lot. I've written about this book, Les breaks down businesses from the standpoint of what life stage they're in. And by the way, the presumption he makes is not that there's an inevitable death or decline at all. It's more what stage is this company and companies can stay in a good place for a long, long time. So Les's pattern recognition around what stage's businesses are in, yours, mine, or whatever stock we're looking to invest in. I really enjoy his book. Now with something completely different, anything by PG Woodhouse. We certainly are big PG Woodhouse fans in my family. And I have, because I love reading books aloud, I've read any number of PG Woodhouse books aloud to my kids or my families. We drive to the beach over the years, big Woodhouse fans. A few more. You asked for five. I think like number six, seven, and eight in no particular order The Why of Work by David Wendy Ulrich. And it's an excellent book about how to make purpose live in the workplace and just really good business thinking. If you're an entrepreneur or working in a business or really any organization, understanding why you're going to work and what makes people motivated to go to their workplace is a powerful book. Rational Optimist, this one by Matt Ridley. And this is one of those books that looks over thousands of years of human history and says almost always, especially in the last thousand years, the pessimists sound the dominant chord and everyone's worrying about the end of the world. And yet it was almost always and still is, Ridley says, the right bet. And surprisingly, the contrary bet to be an optimist, to believe that things will get even better and say that they are better than they were when I was a kid, which I would certainly say. And so it's a wonderful historic epic history level look at optimism. Ridley has written a fine book. There are others like this, whenever I mention this book, there are others saying, have you also read, you know, Steven Pinker or another one of these? So I like this level thinking. I think it's right. I also mentioned that it's contrary, which is why I like it as an investor because if people think that Netflix isn't going to work out, you know, they're going to get buried by Blockbuster, that usually makes good money for us as investors. And so pessimism, if it's a dominant chord or people are overreacting to worry, usually the right bet. And in fact, the profitable bet is that those bad things are not going to happen. Finally, The Art of Game Design by Jesse Shell. It's an outstanding book just about design. Jesse Shell happens to be a gamer and a game designer. And it's a brilliant book that he's written, and I love games as I've conveyed before. But this is really just about solid and great design. So there are eight of my five favorite books right now. Next one up, Ken Hart at P. Fool Heart. Love it at Fool Heart. Ken asks inheritance, a great prop told me, quote, "If you hate your kids, leave them money." End quote. Your thoughts, Ken wrote, "Well, I guess my dad hated me because he left me money and I'm aiming to hate my kids as well and to leave them money. In fact, now that my daughter's coming of age, she's already gotten what she's going to get from me." You know, our dad gave us the money we would get from him when we turned 18. He said, "Here you go. I started investing for you when you were born. It's been 18 years. He was a good investor. It was 18 good years." He said, "This is all you're ever getting from me. Anything that I have left when I leave this earth will go to your probably my grandkids, your children. So don't screw up." But that money, and I've written about this before and talked about it in the past, that money is really was the seed capital for the Motley Fool in retrospect. I didn't know it at the time when I was 18. I didn't know we were going to be starting a company or that something like online services would exist in my mid 20s, but I'm extremely grateful for that. And certainly, I'm going to try to hate my kids too by leading them some capital that they can maybe accelerate their own work in this world. Certainly not everybody's going to react to money properly, and it can be poorly given or sometimes poorly received. There's no right answer or one size fits all to the answer to this question. I really appreciate the question, Ken, though. And certainly, we've heard about how some of the richest people of our time, Warren Buffett, is not leaving all his money to his kids or anything like that. If you have that much money, it makes a ton of sense to start foundations or invest as Buffett did with Gates and just give his money over to somebody else or somebody else's organization that he admires. That can make sense. But for a lot of us who don't have that much money, I think it's a tough thing. It's a great thing to be able to set your kids up with accounts. We did not go the 529 education plan route. If kids want to use it for education, they can, but that really locks your money into just being used for education. So in my case, maybe I'm still desperately hoping one of my kids will actually get a scholarship. But I think that the freedom of just having an account that people can spend from there is great. And of course, teaching them about the stock market and making them not psyched out by money and not greedy for money, but just thinking about money in the best most proper way is part of that education. Next one up was emailed to us by Sean and Sean, who lists himself as, quote, a Scottish guy based in London, asks a good question, a little bit more of a longer question than I'll read, but essentially he's saying being British, he's able to benefit from investing in a capital gains tax free product called an ISA for those who know how it works in Britain. You can invest in it. He's investing on a monthly basis. He's trying to keep his commissions below 2%. He currently owns eight stocks, Sean wrote, "Should I look to invest in one stock each month to build up to 15 to 20 stocks in order to diversify more or maybe buy the same stock over a three month period and thus build a slightly more substantial position in it before moving into a new stock?" Any advice would be greatly appreciated. Love your podcast. Keep up the good work. Thank you, Sean. By the way, if you love this podcast, I'd love it if you just write a short review on maybe it's iTunes or Stitcher or wherever and let more people know about Rule Breaker investing, and not just this podcast, but any Motleyful podcast. I love them all. I hope you do too. So Sean, here's my thought on this one. There's no right answer. You can certainly keep adding to certain positions that you like. You don't have to get to 15 right away. You can stick with your eight and if you don't feel like you have substantial positions in them yet, go for it. Or if you also want to listen to what I'm saying at the other side of my mouth, getting beyond 10 stocks or so into more of a diversified portfolio so that you really have a base to build on for the long term, ain't a bad decision either. Let's take this one down the middle. Let's say go for 12 stocks. So let's say this, alternate investments. So next increment, go ahead and pick a new stock, then the one after that, add to one of your existing nine stocks, and then the one after that, pick a tenth, and I like those incremental answers and approaches. A lot of times in the world, we think in two binary terms, black or white, there's a lot of grays out there. Love the gray. Okay. Next one up is Mark W at these days with Z's on Twitter and Mark asked, is it true that long term, very few can beat the index funds like Jack Bogle says, then why buy individual stocks? Mark, you've asked one of my favorite questions because you're right. If beating the index fund would just be luck, why buy individual stocks? I still think there's a good answer to that question, which I'll give briefly right now. I think you learn a lot by investing in individual companies. I think you learn about the world. For me, I learn a lot more about our culture when I own Under Armour or Apple than if I just own some index fund that happens to have those companies and a hundred others in it. So if you're anything from somebody who enjoys studying our culture or maybe you're an entrepreneur or you're trying to figure out how the world works, I think studying and investing in individual companies is just worth it on its own. But more importantly, and to your point and to your question, I don't think that it's just luck to beat the market over the long term. I realize this is a major point of contention between me and us at the Motley Fool and Jack Bogle and Vanguard and we love Jack. I really do love Jack. I saw Jack a year or two ago, in fact he just spoke at my daughter's college class, not at my request, but at Princeton because he's a Princetonian himself. I mean, Jack Bogle is one of the most admirable people I've ever met and he has incredibly great benefit to the world at large, especially for investors here in the United States of America. However, all that said, why is stock picking or investing the one profession that I can think of in the world where it's often taught in college that to be above average at that profession would just be luck? I really can't think of any other job, anything from being a lawyer to a basketball player, whatever it is. Most of the people who are really good at stuff in the world, I don't say that's luck. But for whatever reason, I think random walk down Wall Street, written by, by the way, I think another Princetonian, Burton Malkiel, I think there are some influential works that convince people that the markets were efficient. I will not have time to fully do this for mailbag. We have to get to others. I'm not going to, I'm going to not go off on a rant here, but I'm telling you that the act of putting an effort to pick stocks in every context that I've done it over the course of my life before we started the Motley Fool in our original Motley Fool portfolio, Motley Fool Rulebreakers, Motley Fool Stock Advisor, my caps page where I have a separate portfolio in all of those instances. I've beaten the market. It's not me bragging though, let's go back to caps for a sec. Caps shows you tens of thousands of investors who are picking stocks on a regular basis. The ones that are in the top quintile or so, the top 20% are regularly right, 60% or more of the time, and racking out meaningful alpha. That is percentage points ahead of the market averages. I think there's a transparent demonstration on that platform, but all of the logic and all of my own personal experience and watching my dad invest before me, I'm very first weighted that in contrast to Mark's good question and quoting Jack Bogle, I do not believe that it is true that, quote, long term, very few can beat the index funds. In fact, I strongly disagree. I will say that it's not just easy or like anything else. If you want to be good at something, you have to put in the effort. But if you put in the effort, I think you'll find that you will be beating the market averages. And I think we have thousands of examples I can think among our Motley Fool membership of people who have lived that and seen that for 10 plus years. Next one up. This one comes from John in Robinson on Twitter. He's at, hey, underscore men underscore 412. And John writes, should co-CEO structures be a red flag begs the question, who's actually in charge and why do they really need to? And there were a few other questions following up about Whole Foods. So I think that this came up and was a discussion perhaps on another Motley Fool podcast because Whole Foods is one of the few companies I can think of that has a co-CEO structure. And because the stock has been underperforming recently and because the business has been undercut somewhat with others charging lower prices and eating into some of the profit margins at Whole Foods, I think the question is, does this model work? Well, because I know John Mackey, full disclosure, he's on our board of directors. He's the co-founder and co-CEO of Whole Foods. I know that it works for John. And I think John is a very special person. I don't know whether a structure like that can work for any other two people or whether it's one of those things where for certain people in context, it works. And for others, it never will. From my standpoint, it's always a team effort running a business. So whether you're talking about the relationship between a CEO and his or her chief operating officer, which is again, a very tight partnership, or whether we're talking about the co-CEOs of companies or other tight partnerships at the executive level, in the end, it's going to be about collaborating and it's going to be making sure that you're working with people that you love and people that you respect and have clear, sometimes clarifying lines about what's expected of you and what's expected of me. So I don't see why co-CEO wouldn't work. I think it does work at Whole Foods. It's worked for years there. At the same time, it doesn't mean you should go out and adopt it for your own startup. I think you have to understand the context ahead of time. Great question. All right. We're just going to start running out of time. I don't want to have too long. Our mailbag episodes tend to run long because I enjoy your questions and I enjoy answering them. So we're going to do a few more and then call it quits for this month. Next question and kind of I'm going to pair these two together. We have @Teddy being Teddy on Twitter saying, "What do you recommend buying as a call option on virtual reality? Could you guys make a virtual reality fund, perhaps?" And then Jeff Yulek at Jay Norman Yulek asked, "Do you differentiate between VR and AR that would be augmented reality or do you lump them together? Do you think they're equally influential?" So what I'll call the XR question and what I mean by that is if there's a letter before the R, I probably like it, whether it's virtual reality or augmented reality. These are very important emerging media. This is a new medium. The XR medium. They are different. Let's briefly define our terms, virtual reality. I define in non-dictionary terms as an experience where you are largely shutting off the world around you. You have a helmet on, you have goggles, you probably have your sound also. You're not hearing things around you and you are in another place even though you're just sitting there in your den. That's virtual reality. Augmented reality is typically if you think of something like Google Glass, the possibly failed product, but that overall concept of wearing something on your nose, probably you're looking through it with your eyes and you're seeing, remember the Terminator movie where you got inside Arnold Schwarzenegger's head briefly and you saw that he had all these numbers and graphics as he was looking at the world? That's what augmented reality does. It's when you are seeing information about the house that you just looked at. You see the Zillow price through your augmented reality goggles, et cetera. That's augmented reality where you're just augmenting your experience of reality as opposed to replacing it with virtual reality. Whether we're talking about VR or AR, I like them both as I mentioned, my own suspicion is that virtual reality is the bigger thing, long term, but augmented reality is the more immediate thing, shorter term. The reason I say that is because I think the technology to really make reality virtual truly feel like you're immersive. I don't think we're there yet from a computing standpoint, both graphically and just the, I don't know, this sheer processing speed necessary to create a truly immersive place that you or I could be in while we're just sitting there in our den. Whereas it's not as high-tech or demanding to augment reality by seeing information through glasses as you drive down the street. I think more immediately augmented reality makes sense. If you're a shorter term thinker, that's where the VC money should head, but there are a lot of non-short term thinkers out there. There's a lot of VC money heading into virtual reality, and ultimately, because virtual reality can be anything from entertainment to training to an amazing communications platform. I mentioned earlier the book Ready Player One. If you're familiar with that book, you see some of this in your head as I'm saying it. It's a bigger deal, but both are really interesting. The investment angle question, I don't have a great answer for. We're still early on enough, there aren't clear public companies that let you buy virtual reality or have a sector fund that just invests there. We're probably not going to invent that at the Motley Fool, but it's enough for us, I think, to just recognize and respect these technologies, be watching them, and often I rely on you and your help the Motley Fool community to help me because I don't have eyes out everywhere and not nearly to let me know of some really interesting or compelling new company coming along or a new stock. Certainly, we can think about a company like Facebook, which has made substantial investment by buying Oculus. That's a play on Facebook, certainly, but Facebook does a lot else besides. That does transition nicely into the next question. This one was submitted by Zach Kannarska at Zach Kannarska on Twitter and Zach. One of our better looking, if I may say so, sir, one of our better looking listeners of this podcast, thank you very much for sending in a video question that we just saw off of our phone. But you asked a great question, Zach. You basically said, how do you evaluate companies when you only know a piece? For example, YouTube, it's part of Google. Does that mean you should invest in Google? Or hey, there was this Star Wars movie we all saw. How big is that? Should I buy Disney stock for that reason? So a really good question. I'm not doing justice to hell while you asked it. But here's the way I think about that. First of all, it's enough to know that a product is key to a company. Many people don't realize that. Many people have not been raised to think, when I see a great product, that is offered by a company and I could become a part owner through the stock market of that company. I wish everybody quickly went through that three steps of thinking. But many people don't even think about what the company is that offers this interesting product you or I are enjoying. So just having that sense of continuity is a major gain for a lot of us just from the get-go. Then the next thing you want to do, once you realize, wow, the Star Wars movie, that's Disney now because they bought LucasArts. You do want to figure out roughly what percentage of the overall company would the revenues from that product reflect. And for Star Wars, it's just a movie. Disney is a gigantic company. Now Disney does take a property like Star Wars and run it through everything from theme parks to lunch boxes. So it's an important, it's not just a movie, not nearly for Disney. And that's kind of a unique situation. But for each of these companies you want to ask, so maybe you've been to pizzeria locale. There are only a few of them nationwide, but you find out it's owned by Chipotle. It's run by Chipotle. But it's a tiny percentage overall of Chipotle's numbers. And the way you figure that out is any combination of going online, if you're a serious and investment-minded, reading the 10K, which is public disclosure, you can find it on the Internet for any public company and you can read and see the revenue mix. But a portion of a company is what portion of Exxon is natural gas versus oil. These are fact-finding questions you can use the 10K for. You can also just ask around. And often in these days, some pretty good business journalism breaks down businesses and gives us some simple numbers and helps us realize how much of monster is just the monster beverage. So these are all, I'm not going to throw the LMGTFY.com at you because it's not often that easy. But you're asking the right question, and I hope I helped you toward a better answer, which is understanding the percentage of revenues, then beyond just what percentage of overall sales that product is, especially if it's a new product, you're really asking how big could it become? So rather than look backwards at something that may not have existed last year, ask yourself how significant could this new product or service be? How big is YouTube starting to charge? Is it YouTube red starting to charge, create almost a competing service to Netflix using the YouTube platform? How big is that for Google? I don't have an answer for you, by the way. But those are the right kinds of questions. That was just an example. So thank you, Zach. And the last one for this month's mailbag is from @DavidGFool on Twitter. And I recognize that handled because that's my handle on Twitter. And I occasionally get to ask questions in the mailbag, too. And sometimes I'll even select my questions to answer if it fulfills some of the criteria that I was giving earlier. And so here's what David G. Fool asks at the end of this mailbag. You know, I've seen a lot about market volatility. We hear about China, oil, lots of negativity. Should I stop investing? Well, that's a great question, David. I think it's a natural question for a lot of us to ask is, you know, should I have new money? It's the new year. I've just got my every two weeks salary check. Should I put this in this crazy volatile market? And the answer is yes, you should. And here's why, because the stock market typically rises 10% or so a year. And you and I aren't going to make great calls. In fact, I don't know of any human being who consistently makes great calls knowing whether 2016 will be a good year or not. But the one thing we do know, just looking out a few years, is that on average, the stock market rises and really more significantly than almost anything else that I can think of to invest in. That's easy to invest in. Maybe you have some hot real estate property in mind, and maybe it will appreciate more than the stock market next three years, but that's not that easy to invest in. And for a lot of us, the liquidity of the stock market is just tremendous. Should I stop investing? You should never stop investing. The only time you should stop investing is if you really need the money and you are no longer going to have that money to invest in. That's why we invest. If you do want to buy that house or if you are retiring, if you're changing things up, whatever you want to spend that capital on, great, go for it. That's why we invest. But you shouldn't stop investing just because of volatility. In fact, to close, it's sort of funny to me that the two big factors that are blamed for the market selloff, really some of my favorite stocks down well more than 10% over the last three months, oil and China. First of all, oil power is so much of our economy. The idea that it's really cheap because of a glut, that sounds good to me. Where we all enjoy $4.50 oil prices per gallon, I don't think so. It's amazingly cheap and I realize it's hard for that industry and it stops drilling and if you're in that industry, it's not easy at all. I do recognize that. But this is one of those things, kind of like water that so many of us use, sometimes without even realizing or thinking about it. When you take the cost of that thing and you dramatically reduce it, that doesn't sound like a huge problem to me or certainly not a reason to blame for market selloffs. And then China, I just want to mention in closing, China is a competitor of the United States of America and China is a wonderful competitor. As a basketball fan myself, I apologize for people that I'm going to miss with this analogy. I went to the University of North Carolina, which has an outstanding college basketball tradition and some national championships over the years. We have a great rival in Duke University, about 10 miles away from Chapel Hill and Duke University also has a great tradition of winning basketball games. And the two are really great rivals and I love the rivalry and I hate a lot about Duke basketball, even though I greatly admire Duke basketball. But that's sort of how it should be, I think, between the U.S. and China. I think both should be great players, trying really hard and both are always going to be competing. So I think the best situation of all is when both are doing very well. So when one of them doesn't do very well, I do think that that hurts whether it's college basketball, if Duke loses four out of five games, which by the way has, or if it's business, if China is having a really tough time, at the same time, part of me thinks, "Hmm, well, we are competing against them. They're not doing so well." So that's not bad for us necessarily either. So I think a lot of other countries, certainly the U.S., as a great innovator, can step in and fill voids if China is slowing down in some ways. So that doesn't sound like really bad news to me either. It is mildly bad, and I always wish for good things for all people and better global business equals, better prosperity among all countries. But it's interesting for me to think about all the volatility and sell off in the market when there are a couple of factors that sound non-bad to me that are regularly referenced as the reason that the market is so bad right now. Well, I hope this mailbag wasn't bad. I had a lot of fun with it. I hope you did, too. We'll be doing this, of course, again, at the end of next month, so get your questions ready. In the meantime, we'll be back to our regular schedule next week. In fact, I think I'm going to talk about some of my least favorite terms next week. Some of my pet peeves, most of them investor-related, perhaps a few that aren't. But let's have some fun. Let's be a little cranky as we start February and talk about things that could be said or thought of more intelligently. Until then, I hope you have a wonderful week. Fool 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]