Not to be mistaken for Luke Skywalker's little green guru, YODA is a helpful mnemonic for some (though not all) of the key traits that David likes to find in managers of companies he’s considering for investment. Help you it will!
Rule Breaker Investing
The YODA Method of Measuring Management
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. And welcome back to Rule Breaker Investing. The podcast I'm David Gardner. Really pleased to have you joining with me this week. And this week, we're going to be tackling a subject that has come up a number of times before, mailbag questions, and it's an enduring question, an important question, summarized thus. Hey, you guys at the Fool seem to think that the CEOs, the leaders of these companies are really important. That's part of the calculus, the factor that causes you to say this doc, not that one. But the question continues, "How do I know whether I'm invested in a company with a good CEO? How can I size up or understand whether this is a good or bad manager or management team?" And it's a question that I have some answers for. I have some thoughts about to share with you this week. Before I do, I want to mention one thing. We don't do a lot of advertising. We don't have an advertising read. Rule Breaker's Investing. The podcast is not brought to you by Charmin, perhaps one day as we continue to grow. It will be. And that'll be a really exciting read for me if I can just talk about Charmin and what a quality product it is for our listeners. But I will mention, I will plug one thing very explicitly this one week. And that's Supernova, Motley Fool Supernova, the service that I founded, co-designed when we launched it in 2012. I just want to mention about 60 seconds to you about what we're doing with this service. So Supernova exists for members who might really enjoy Motley Fool's stock advisor or Rule Breaker's. They like a steady stream of new ideas and picks. But either you don't have time or enough confidence as we keep streaming like Netflix Streams and Movies streaming new stocks at you every month. You don't really know how to build a portfolio. You'd like a little bit of hand holding, maybe even you'd like something just a mirror and keep things simple here as we start 2016. That's a common New Year's resolution and that's really where Supernova steps in. What we do is we invest in the ideas that I talk about on this podcast and stock advisor and Rule Breaker's. We invest in them. Our teams put together real portfolios that real people like you can mirror and just keep things simple. We tell you how much to buy, which one to buy and how it fits in a portfolio. And each of our real money portfolios at Motley Fool Supernova is beating the stock market. I'm very proud of that. And that's really the goal of Motley Fool Supernova to help our members to beat the stock market with as little pain as possible. So if this sounds like you, something you might be interested in, the service is now open. It's open this week. It's going to close soon. We only open it one or two times a year. If you're excited about the prospect of joining Supernova, go to supernovaradio.fool.com. You'll see our hub site, more about our service in particular. To close, I'll mention that we have a new mission. That's what we call portfolios at Motley Fool Supernova. We have a NASA theme, so Apollo 1, Apollo 2, that kind of a thing. So when we launch a new portfolio, it's a mission. It's the Odyssey 2 mission, and you can get started with it right from the beginning. It's a mission that every two weeks invests new real money, the Motley Fool's money, into a portfolio of stocks, of the kind that we talk about on this podcast. So if you'd like to get started with us on the ground floor, it's an exciting time. I encourage you to take a look. All right, so last week I mentioned we're going to talk about leaders. I've waited 30 or so podcasts. In fact, this is Rule Breaker Investing Podcast Number 31. So this topic has come up from time to time, and it will recur in future. So this won't be the only time I ever talk about how to assess leaders. But I think it's a really good question and something I love thinking about. So let me share with you some of my thinking. Before I go into an acronym that I've worked up, and if you were listening last week, you may have heard me mention right at the end of last week's podcast, Yoda. That will be the acronym we're working with this week as we talk about effective leaders. But before we get to Yoda, let's just do some preliminary points. So first of all, I don't know most of the CEOs whose companies I'm recommending and investing, and you probably don't either. So I never want us to be too headstrong or confident in our assessment of people that we don't actually know, that we don't get to look in the eye or see on a regular basis. We may not know their history where they're from. I was seeing the other day that the present CEO of STARS, which is an active Motley Fool Rule Breaker recommendation, a company that I like. I like to beat the market. Chris Albrecht left HBO after a 2007 incident in which he was accused, arrested, in fact, for assaulting his then girlfriend. And he stepped down. HBO asked for his resignation. He is the CEO of STARS today. We'll hope that he's gotten over these problems. But examples like that remind me that when I don't even know that or I don't have that as a ready part of my thinking, just about that one person and that one company, it's true of many other people at many companies. So let's not convince ourselves that we know these people too well. At the same time, point number two, we do have an unprecedented ability to research the managers of our companies today. Thanks to this little thing called the internet. We can Google people. We can read their Wikipedia page. We can look for the source material behind what is being asserted about this or that man or woman. And so really everything from getting to see CEOs interviewed on live television today, which I really didn't get to do when I was a 10 year old, first thinking about the stock market in the early to mid 1970s, there weren't that many CEOs. These days I can just see on YouTube, usually I can just see a lot of body of work of somebody's video interviews, let alone checking facts about their background or that kind of thing. So we have an unprecedented ability today to really size up the character of the people who are leading our companies point number three. It's a reminder to you to meet all of us. It's the gut check. It's the humility check. Everyone is flawed. I'm flawed. I know my flaws. Sometimes I talk about them. Sometimes I don't want to talk about them. You're flawed. You probably know most of your flaws. You and I probably don't know all of our flaws. Every CEO, every great entrepreneur, every bad entrepreneur is flawed. And so let's remember that we're not looking for perfection. It doesn't exist at least so far as I've seen in humanity today in the year 2016. The next point, point number four, the framework I'm sharing with you is not one of those where a given CEO has to hit on every one of the traits I'm mentioning. In many cases, if a CEO possesses one of the traits that I'm mentioning, that's good enough for me. So I'm looking for specific things in people, but it doesn't mean I'm seeing the whole body of work or the whole person or judging them or needing them to conform to what I'm going to be mentioning shortly. And those are our preliminary points. Now with that said, as I was thinking about four primary attributes that I value in great CEOs, great entrepreneurs, many of whom have been the leaders of my best investments over the last 30 years, companies that I've grown greatly to admire led by these people, I started ordering my words, I had my four words, and I realized if I just reordered them a certain way, it would spell Yoda. And who doesn't love Yoda? In fact, we were talking the other day at the Motley Fool around our headquarters saying, you know, the new Star Wars movie, just the whole Star Wars arc, the overall story arc of Star Wars. Who is the true fool, Capitol F? Who is the most Capitol F foolish character in all of Star Wars? And we agreed, I think, I mean, there's some arguments about C3PO that you could definitely think about R2D2 as a fool, but really, I think Yoda is the ultimate fool. So I like Yoda anyway, so I was really happy when I noticed that my letters, my acronym spelled Y-O-D-A if I just ordered it in a certain way. So that's the order I'm going to present these four traits this week that I value when I can see any one of them present in an entrepreneur or CEO. And this, if I see them, tends to predispose me to looking harder at that stock. It doesn't mean I'm a buyer, but it means plus in the plus column for leadership, which is really the question that we're answering this week. The letter Y, Y is for youthful. Now there's no real getting around it in my mind. Most of the great entrepreneurs, most of the really great business people tend to start when they're young. We know all know the stories of people like Bill Gates, age 20, starts Microsoft, Steve Jobs, age 21, starts Apple, Mark Zuckerberg, age 20, starts Facebook. These are companies that are now worth hundreds of billions of dollars all started by people. If you're my age 49, you watch these people grow up during your own lifetime. It doesn't mean that you have to be young in order to be a successful entrepreneur. I have at least one or two examples I've given a sec. But it means that most of the time, I see the great entrepreneurs showing their colors at a very early age. And the beauty of that as a stock banker and an investor, a fellow fool here with me, what we can appreciate together about that is that typically coverage of people who are young tends to be a little bit hesitant to really celebrate them or lionize them. In fact, it's often quite skeptical because they are so young. They're so wet behind the ears. They've never run anything before. And so this tends to create a sense of skepticism around this person. His or her voyage that they're on from this very early age. And certainly we've all been youths. So we know that we were making mistakes back then and young people make mistakes. And especially if they're CEO of a public company, they probably will get far more criticism than somebody who's twice that age would, partly just because they're young. So there's an interesting psychological dynamic built into a lot of our financial press and our coverage and really possibly just mirroring back our own societal collective instinct about youth versus age. We tend to be a little bit dismissive of younger people or doubting that they'll really be able to do what they're going to do. But isn't that a beautiful combination then when it sets up that you find a CEO who's 20 or 21 with a big and ambitious dream revision and they start to deliver on that. So I think, you know, I value youth. Yoda leads off with the letter Y. Now I did mention not everybody is a young and successful entrepreneur. Let's go to the advanced age of 30. That was the age when Jeff Bezos started amazon.com. Or if you want to age things just a little bit more 31 was the age when Reed Hastings decided, you know what? I'm going to start this thing with a friend called Netflix 30 and 31 in grander terms, especially now that I'm 49 still sound pretty young to me, but we're not talking about college dropouts here. We're talking about people who had already done some substantial things in their life. Reed Hastings had already founded successfully a company and sold it before he started Netflix. And certainly Jeff Bezos had had a successful career on Wall Street in his 20s. The way I think about age to close this one is it's kind of like golf. Most of the people who have a great shot at winning Augusta from one year to the next, if they're not already quite young, then they showed as a great golfer earlier in their career. So Tiger Woods, who doesn't really have a much of a shot anymore of winning Augusta. Nevertheless, got started so young, he said, hello world at his first press conference. And there he was coming right out of Stanford and already competing really at a world class level and did for years and years and certainly the young guns of golf today. We see them. So I think it's like golf. Most great entrepreneurs show that like most great golfers from an early age, but it certainly is possible to come along at a later age and still do pretty well. All right. Next, Oh, oh stands for owner. I love to find people who own a lot of their own companies stock. There's really no substitute at the end at the end of the day. It's kind of about do you have skin in the game or not? I'm thinking about buying your stock. How much of your own stock do you own? Now this is not the best trade to apply willy nilly because there are many situations of really great leaders who might come to a company at a later stage of that company and there's no way they're going to be able to be a significant shareholder. So whoever is the next CEO of General Electric will not own much of that company's stock. And that's true of even today, Apple, Microsoft and Amazon, Facebook, the list goes on. As new managers come on at later stage companies, certainly they don't have any chance of owning a substantial amount of stock. So it's usually those that found the companies that own a lot of the stock. And a great example for me here is Elon Musk, certainly Elon Musk owns 27% of Tesla. So if you've been a Tesla shareholder, and I hope you have, because if you already have a smile on your face right now, if you've been a Tesla shareholder, you've been with a guy who's running the company, who's running the show, who has put so much of himself, especially his own money in this company, that should add to your confidence as you assess leadership, as you assess management. You know, when Tesla went back out and raised more money in a secondary offering in 2013, the company raised $450 million or so at that stage. It was already a public company, just went back to the markets and said, "We need more money. We're going to issue new shares. Please buy." The world did. But of those $450 million raised, 100 million of those came from the CEO himself. This is unusual. He was a buyer at the secondary offering of his own company. And he's continued to buy his own stock since then and talks about how he's going to be buying it his whole life long. That is a remarkable stance. Not everybody has the financial resources to do that. But for those that do, they don't have to spend it that way. But when they do, that says a lot to me. So owner, of course, is very numerical. It's easy to assess. Typically, I like to see my leaders have 5% or more of a company's stock. But again, in practical terms, that's going to be the person who's founded the company because it's hard to establish a 5% or larger position for a later stage company. So 5% kind of a rule of thumb. It can be all very numerical. But as I move on to the next letter, I do want to say that it's not always just about dollars and cents and shares. It's partly an ownership mentality. Capital O, does this person think and act like an owner? D. D stands for delivers. I love CEOs. I love managers who deliver. When they say they're going to do something, they go on and they do it. And if possible, the best ones will over-deliver. Of course, the classic line under-promise and over-deliver. And I think about Jeff Bezos as a quick example at Amazon. There he was early on, early on in the company's history in his CEO letter saying our goal at Amazon is to be the most customer-centric company in the world. He didn't say sell the most books or anything like that. He said to be the most customer-centric company in the world. I have to say in the roughly 20 years or so since he wrote that, I can't think of many companies that do customer-centrism, that really try to serve me and make my life more convenient and easier with a wider selection, free shipping, the list goes on and on. That's just for the commerce side, the e-commerce side of this business. I can't really think of a company that does that better. There might be others that are tied with Amazon, although I can't think of any. But what an outstanding thing to say at the early stage of his company and 20 years later, the world can really look on and say, "Well, the reason I'm buying Amazon Prime is because it's a really useful service. It has enhanced my life and I feel like Amazon is always trying to tailor itself to me or improve personalized suggestions if you know of the Amazon Echo, which is the new device that you can speak to. We have one in our kitchen and that's an example. Amazon Echo is not a perfect product yet, but it's again trying to help me. It's very focused on me customer-centrism. It started as books, then it became books, music, and more. I still have a little notepad next to my computer, just a little post-it note branded thing from Amazon 15 years ago. It said books, music, and more, and boy did he deliver on more. There are a lot of fly-by-night companies. I think part of delivering is that you're delivering over the long term. When I say capital D deliver, I'm not thinking about just doing it really well for a given year or a given earnings report. I'm talking about doing it over the only term that counts to me, which is the long term. There are a lot of fly-by-nighters. I can think about a company like Zulily, which came public some years ago and then a few years later just sold itself off to QVC. A fair amount of money was made. It was an impressive startup from really within the last 10 years or so and ended up selling for more than $2 billion. When it actually came public, it was not a very good stock. A lot of public market investors lost money on Zulily and ended up selling itself to QVC, as I mentioned. I don't mean to highlight this one as a bad boy. It's actually a great entrepreneurial story, but at the same time, the company didn't really deliver over any meaningful period of time that counted. If you were a stock market public investor, you were not very happy about that company and your ownership of it. Delivering isn't just about doing it really well for an IPO. It's about delivering results for customers, for shareholders, for partners and suppliers, for your employees, deliver over the long term, which brings us to the letter A. An A is for ambitious. I had the pleasure of meeting some of the CEOs I've talked about in this week's podcast. I haven't mentioned Howard Schultz yet. Howard Schultz is somebody I deeply admire. Maybe you do too, the founder, CEO of Starbucks. Howard Schultz is probably of the people that I've gotten to know a little bit in my life, one of the most impressively capital A in a good sense ambitious person that I've ever known. And to see Starbucks today with a market cap right around 80 to 90 billion dollars is just an incredible demonstration of stick-tutiveness and ambitious vision over now three plus decades. I remember when Starbucks came public in the early 1990s and the big knock on Starbucks at the time. Do you remember this? Do you remember this? It was, isn't this just a fad? Coffee houses? This one's going to go cold sometime soon. Where's the big history of coffee house success in the United States of America? It's a big fad. Starbucks is riding the wave here, but it's not going to persist. If you were able to look past that and buy shares, you were an extremely happy, probably an extremely rich person today. I was not a buyer in those first few years of Starbucks, but I have owned the stock for a couple decades now. It's done really well for me, perhaps you too. And I think it's really because Howard is so ambitious. And sometimes ambition takes us into a place where we can't deliver on that ambition. And occasionally Starbucks has lost, sometimes it's gotten cut in half as the company tried to do something outside of its core business of coffee. At one point in the late 1990s, Starbucks was trying to be kind of an internet portal. Maybe even a place you might find your news and you could kind of see it because, hey, looking over your newspaper with your morning coffee, you could kind of see that doing that online. It didn't really work out well for Starbucks. And the company has made some missteps over the years. It's human, so am I, and so are you. But when you find real ambition, I mean, what Reed Hastings thinks about Netflix, about that global vision that he had from the very beginning. And about Netflix being one of the world's largest media companies, which he had from the very beginning, back when Netflix was mailing you DVDs. Reed Hastings and I interviewed him at the time said, "Our goal is to be one of the top five media companies in the world," which I didn't quite believe at the time. But I think now we're seeing increasingly, it seems likely that Netflix will be just that. And we've all, those of us who've owned the stock, have made a lot of money on Reed's ambition. So that's a ambition. It can cut both ways in a lot of these can. But when you see that attribute in the CEO or the management team, that's also, to me, a real net positive. So there we have it, Yoda. Youthful, which arguably Yoda wasn't, youthful owner delivers ambitious. When you can find all four of those traits in someone, I think you have the best entrepreneurs, not just of this era, but of any era, and you want to be invested in them. But if you can only find one of those, that's fine too, because each of those to me is really promising as I assess management teams. And of course, there's a lot more to say on this subject. I've given it short shrift by just coming up with a few traits and stringing them together into an acronym. And in a future podcast, in fact, I'm cutting material from this one, because I was planning on going further and talking about leadership. But I'll do that sometime later in 2016, talking about the definition of leader. What's a leader? What's not a leader? That's a favorite subject of mine. And we're definitely going to cover that, because it's so relevant for us as investors. Having the best leaders of our time, we want to do it in politics, it's been hard recently. We want to do it in politics. We want to do it in business. You want to have it in your schools. You want to have it in your sports teams or franchises. It's such a critical attribute. And it's definitely important when your money's riding on it. So we'll continue talking about it. But next week, I'm here to say it's mailbag. The last Wednesday of each month is mailbag. This will be our third one. So all you have to do using Twitter is drop @RBI podcast, your question, your thought. And I'll address as many of them as I can in next week's podcast. Can never get to them all. But the ones that I favor most, by the way, are the ones that fit within the body of this podcast, the focus that we have on investing, on business philosophy a little bit, sometimes literature or culture. So when you feel like you have that sweet spot, that's the one I'll probably address. I'm looking forward to next week's mailbag. In the meantime, have an excellent 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]