David Gardner explains seven Foolish principles that investors can use to guide how they invest – and introduces a challenge for listeners.
Rule Breaker Investing
Seven Principles for All True Investors
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, so glad to have you with me this week. My purpose is the same week in and week out, it's to educate, to amuse and to enrich what the Motley Fool has been trying to do low these 23 years and counting. Looking back over our last few weeks, I was just reviewing where we've been and last week we talked about the businesses that win. The week before that, we talked about the hype cycle. Both of those are kind of framework-y kinds of topics, the week before that. It was thinking about thinking, which was once again another kind of a framework type of a podcast. I'm doing something different this week. I'm going to be introducing seven principles. They come from a wonderful article on the Motley Fool website. If you're a member of Motley Fool's Stock Advisor, then you have access to this article. It's about stock advisor section and it's called the Stock Advisor Way. Now the Motley Fool Stock Advisor is our largest service at the Motley Fool. It has more members than anything else that we do. The name of this podcast is Rule Breaker Investing. We do have a service called Rule Breakers, but it's really not named for that purpose. My approach to investing, I call the Rule Breaker approach. It evinces itself in all of the services that I work on. The Stock Advisor Way is just as Rule Breaker-y as anything we do at Rule Breakers. Just a little bit of a background for that. Let me mention, before I launch into my list of seven principles this week, that we got something really nice said about this podcast in US News and World Report, so I would like to thank US News and World Report for recognizing us and a couple other Motley Fool podcasts among nine podcasts that you want to listen to if you're interested in money and finance. Business Insider was even kinder to the Motley Fool in the last week or so, calling our site the number one place to be if you want to bookmark something to get rich. We're definitely not a get rich quick scheme here at the Motley Fool. I think you know we're a get rich, slow scheme of the Motley Fool the best way actually to get rich, although I never mind it when it happens quicker than I think like some of my favorite stocks. Okay, enough with that. The Stock Advisor Way, seven principles, number one. Number one, buy businesses, not tickers. This one can't come straight from the mouth of Peter Lynch, the wonderful famous investor, the Fidelity Magellan Fund Manager in the 1980s, and that's the way he thought about things. And I was very influenced by him. His book One Up On Wall Street was my favorite early investment book. I've only read a few investment books in my whole life. I spend most of my time reading books about business or culture or life, sometimes sports, not so many investing books, but that was a really formative book for me and I know many others, and I still recommend it today even if many of the companies aren't as interesting or even around as when he was writing One Up On Wall Street. But buy businesses, not tickers. So much of the world is chasing after some combination of ticker symbols, charts, graphs, what happened yesterday, all kinds of things that have to do with the stock, not the business. I think we separate ourselves as capital F fools when we actually become business focused investors when we're business centric, when we're in it to win it and we're finding things that we admire and that we think are going to persist over the course of a long period of time by businesses, not tickers. Number two, speaking of a long time, number two is be a lifetime investor. Can we just agree right now? In fact, if you're driving right now or maybe you're walking your dog or just jogging as you listen to this week's podcast, I want you to pull over and just stop for a second and say to me, Dave, I agree. I'm committed as a long time investor. You can even do it in Hal's voice, remember Hal from 2001 Space Odyssey talking to a much more famous Dave back then, affirmative Dave, I read you. That's kind of what I want you to be thinking and saying right now that you are going to be an investor for your life. Too many of us are thinking in terms of whether the market's hot now or not. The truth is the best way to make money is by using the market's compounding power 10% a year. There are very few other things in this world that appreciate steadily 10% per year over a century, which is where the stock market's been over the last century. And I submit it's going to be probably about the same in the next century. There are very few things that are that good. So darn it, be a lifetime investor, okay, crank the car up again, yank your dog forward, let's keep moving, let's jog forward, but together for a lifetime. I hope you do the same with your personal relationships as you do with your money. Sadly, too many people are too short term oriented, especially when it comes to the market. I hope not personal relationships, okay, number three, number three is diversify. One word, diversify in a Walter Schloss who was a famous, very successful investor, had about a thousand stocks in his portfolio, a thousand. Many people start to get worried that they're over diversified if they have more than 20 stocks. I have in my family portfolios that I manage, I think I have about 52 or 53 stocks. It's been pretty steady state there for the last decade or so. I don't trade a lot. I tend to add to the existing holdings that I have. That's a good number for me. Maybe a good number for you is 152 or maybe you have zero stocks right now. So a good number for you I would say would be 15, getting from zero to 15. For many of us who are starting investing, the first biggest challenge, but get diversified. There's a tremendous benefit to that. Assuming that you're not over diversifying, spending too much time or you can't keep track of things, I'm not talking about that kind of diversification. I'm talking about the type that has you studying different kinds of industries, companies, learning, your intellectual curiosity, you're bringing it to bear, not just in all those other areas of your life, but to your money and to your portfolio as well. There is such a benefit of diversification. Most people who end up not being successful as investors are quit investing, it's because they have a bad stock or two or they load up on something and then they swear the whole thing off as the market sells off in 2001 or 2008/09. Don't do that. Again, principle number two, be a lifetime investor, principle three, diversify. I was reading a great post on our discussion boards on Motley Fool's Supernova this week by one of my favorite fools online. His screen name is CMFJNew. CMF means community Motley Fool because J assists as a volunteer in our community. He's that passionate about investing. He's very successful outside of what he does at the Motley Fool as a media professional today, but he was talking about his portfolio that he's built up using Motley Fool's services. He has 90 stocks in it and I'm pretty sure, I mean, J's not right here with me. I'm not interviewing him right now, but I'm pretty sure J didn't expect to have 90 stocks when he started investing a decade or so ago. But now he has him in three buckets. He's got the ones that he's very confident about and then on the opposite side, the ones that are much more speculative or that are out of favor, but he's taken the time to kind of massage it into a meaningful hole where he's got three buckets, but it's 90 stocks. This is a guy still pretty young in life with a lot of earnings potential going forward, a family support and what a beautiful position, what an aspirational position for most of those to think that, let's say by the time we've just cracked 40 years of age, we have 90 stocks. Now that might be too many for you. I mentioned I only have 52 myself, but whatever it is generally, it's 10 more than you think it should be. And most people think that if you have too many stocks, you end up with average returns or you end up not getting market bidding returns. We'll tell that to Walter Schloss or many or Peter Lynch who managed Fidelity Magellan with 800 stocks and whacked the pants off the market. So no question about it, diversification leads to victory. It does not slow you down. Number four, fish where others aren't. Dr. Seuss, wonderful book, Magellan gets pool, starts. Young man laughed the farmer, you must be a fool. You'll never catch fish in Magellan gets pool. And I've used that wonderful start to Magellan gets pool to talk about investing the past because a lot of us were told that we shouldn't do this ourselves, that we need a financial professional or it's just too complex or it's not there for us. You're not going to find winners, don't fish in that pool. But the truth is I think once you start to find and I hope you're enjoying our podcast and then maybe you've already a long time investor, you're going to see real benefits to getting started and to investing and to fishing. But when you do fish, I think fishing where others aren't is going to be more likely to lead to your success. I'm going to keep moving in our list day because I have several more to get through. So I don't want to give a short trip to this one, but I would say just succinctly that rule breaker investing, this podcast in this approach has you fishing where so many are not. Number five, check your emotions at the door. I go back and forth a lot on emotion and investing. This principle from our article, I like and support. That's why I'm talking about it here, checking your emotions at the door. It doesn't mean that emotion is bad at investing though. I want to be clear that I think things like being passionate about the companies you're investing in, being excited if a stock doubles or if you get your first spiffy pop, these are wonderful emotions and I am all about positivity and bringing emotion that is positive to as many of our endeavors as possible and most of the most psychologically healthy in my experience and productive people in our world are positive people and that's an emotion. But the type of emotion we're talking about here that you should check if there are reactive emotions and usually they come about as negative reactions to things that have just happened and cause us to make poor decisions looking backwards at what's just happened. We've talked about this on this podcast, I know I'm going to do it again in future, but don't invest with a rear view mirror. So much of the world is looking backwards as Jack Bogle reminds us with his rowboat syndrome, we're paddling forward, but we're looking backward to many of us and when something goes wrong, we tend to overreact and we start to do things like, you know what? I shouldn't be investing in all of these kinds of things which I've covered. So check your emotions at the door, really important, but also remember that there are some great emotions that you should be bringing to bear with your investing. Number six, keep score, keep score. Wall Street doesn't keep score. The media won't keep score because scoring is the best way to know a how you're doing and be to get better. It's amazing to me how little scoring is going on when it comes to the world of investing. We have pundits constantly calling where the Dow Jones industrial average is going to be. By next fall, we have individual predictions being made on stocks all the time on CNBC in many different media venues. And if they were all really good, they'd be reminding you of what was said the last time that person came on air. They'd be crediting somebody with a correct prediction or discrediting and not having on people who consistently make bad predictions. There is very little scoring going on. Part of it is because the best medium of all the internet is the only one that really scores. The internet has a memory, television has very little memory, print tends not to have too much memory these days. If you really want to get good at something, you need to be scoring yourself. You create a learning system where you observe, did I do well or not? And once you know that, you can then go on and say, well, what do I need to do differently to do better? And that system is not in place when we look at what's happening with market commentary globally across many different media channels and venues. It's remarkable to me, if you're a baseball fan, you know that it's World Series Week. It's remarkable to me that we have statistics for every minor league baseball player at any level in night games, maybe on AstroTurf for away games. We know that for the lowest level of minor league baseball, but for most of the biggest names in the investment world, we have no idea what their record is. We don't know their batting average. What an incredible contrast between the world of sports, which I love and has so much scoring and so much learning and the world of finance, which I don't love as much. And part of it is because nobody's really scoring things, so keep score. It's not hard to do. See how much money was there on January 1st in your investment portfolio, and then on December 31st, see how much is there then and calculate the percentage change. Do the exact same thing for the S&P 500? That's going to give you the stock markets return and check yourself and see if you're beating the market. Did you beat the market last year? How are you doing this year? Simple questions. We have other ways of keeping score at the Motley Fool. We have Motley Fool caps, where you can come in and score yourself for your predictions. I like this stock to outperform the market, thumb up. You can even give a time frame next three years or next three months your call. Or I don't like this stock. We score everything. We try to score as much stuff at the Motley Fool as we can because we want to learn because that's how we get better. And finally, number seven this week. Simple one to close. Be foolish and have fun. I said at the start of this podcast, our goal is to educate, to amuse and to enrich. And when the Motley Fool is operating at its best, we're doing that. We're doing all three of those for you. When you're at your best, I bet you're smiling. You're prospering and you're smiling. Those two things typically go together. And I hope you're having fun. And we try to have fun even in bear markets. After all, as investors, going back to principle number two this week, be a lifetime investor. If you are, you know, one year and three, we're going to lose money. The stock market goes down one year and three. So that just becomes something to expect, something to accept, something not to principle number five, get your emotions out of check, check those emotions at the door. You're prepared for that. You're having fun. So there they are. Seven principles to guide how you invest, how you think about investing. We call it the stock advisor way to go back through them really quick. Number one, buy businesses, not tickers, two, be a lifetime investor, three, diversify, four, fish where others aren't, five, check your emotions at the door, six, keep score, and seven, be foolish and have fun. You know, I bet there's an eighth one. I bet there's an eighth one that I didn't include. It's the one that's running through your mind right now because all of us over the course of our lives are building up principles that we live by. And I just shared with you seven of ours that we use at the Motley Fool to invest, but I bet you have an eighth in your mind. And you know what? I think it'd be great if you tweet that out this week. I'd love to hear your eighth in 140 characters or less. If you're on Twitter, just reply at RBI podcast and give it, give us that eighth principle that helps guide you toward making good investment decisions. One of the things we do at the Motley Fool's, we're a community. We learn from each other and I love to hear from you. I love to see what you do because some of these seven were ideas that weren't mine to start with, but I learned from others. So teach us this week with number eight at RBI podcast. Next week, I'm going to go over three additional, what I'll call my own special sauce rules that go right alongside these seven we covered this week, but that specifically have my own brand and thinking in them, and I'll probably give some stock market, stock examples as well. Thanks a lot for listening to RBI podcasting this week. Fool on. As always, people on this program may have interest in the stocks they talk about, and the Motley 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]