The greatest investing secret of all is simpler than you might think. David takes us back in time to a formative event in his investing career and shares this secret.
Rule Breaker Investing
The Greatest Investing Secret of All
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. Welcome back to Rule Breaker Investing. I'm David Gardner. Pleasure to have you join me. This is the seventh podcast in our series, and in our first several, I spent a lot of time going back over the Rule Breaker traits. Rule Breaker Investing is about a lot more than six traits that we're looking for as we develop pattern recognition toward finding some of the best companies, and in my opinion, therefore the best investments that you'll make over time. So I'm glad that we covered that material, and I hope if you're just tuning in for the first time, you'll go back. Because the reason we did those upfront is so that there is good source material, anyone who encounters this podcast weeks or months or years hence can go back and re-listen and check back in with those six traits. But now we're entering a new phase for our podcast where I'm just going to be talking about things that are on my mind, and specifically things that I think should be on your mind as an investor. And so I wanted to lead off this week with the greatest secret of all. Now it's not probably the greatest secret of all because they're probably greater secrets than this, but from an investing standpoint, this is my greatest secret. And in fact, if you Google, and please do after the podcast, the phrase, "Gardner, greatest secret," sure enough, the column that I wrote in 2008 ranks number one in Google rankings. I'm not bragging. It really should be there. I'm not sure there are many other Gardner, greatest secrets out there. But please enjoy that column, which I'm speaking to this week if you want a little bit more about the greatest secret of all. So the story begins when I turned 18 and unbeknownst to me when I was born, my dad began investing on my behalf, did the same for all Gardner's siblings. And he'd set these up so that when we turned 18, we would end up with our own portfolio that he had invested for us from birth. And that was a wonderful thing. It gave me a measure of independence. I didn't have to go right out after college and seek a job, which was a blessing and a curse at the time. But I'm fast forwarding past that to the age of 25 because one more event like that happened in my life the day I turned 25. And that was that my grandfather had done the same thing. He had invested. He died when I was six. So 19 years later when I turned 25, the portion of his estate that was going to go to me went to me. It was in Lancaster, Pennsylvania. That's where our family on my father's side is from. And there's a very talented money management firm called Gardner Russo and Gardner in Lancaster, Pennsylvania. And my uncle founded Gardner Russo and Gardner. And my uncle was the one who managed money on his dad. My grandfather's behalf over those 19 years or so. And what I saw that day in Lancaster, Pennsylvania has led me to my greatest secret of all. In fact, approximately three years after that day, I went on to pick America online, which went up 200 times in value from that point. And three years after that, I picked Amazon.com and it went from 3 to 95 in the subsequent few years. Today, I still hold Amazon and it's well above that. So the greatest secret of all, I'm going to keep delaying the actual story because then you're going to keep listening to my podcast. I'm just going to play it up a little bit more. The greatest secret of all presented itself visually for me that day in Lancaster because I sat down at a desk with my dad and my uncle and my uncle produced a piece of paper that showed the brokerage statement that I would be taking over again at a young age 25. But then again, for seven years, I had been used to managing my own money anyway. So I felt ready and prepared for this. But I wasn't really quite prepared for what I was about to see. It's not the amounts that I'm talking about. Clearly, I still have a desk job. But what I'm talking about are the cost bases on those stocks versus where they were that day. So as I looked up and down that brokerage statement, of approximately 25 stocks, I saw companies that I recognized, a company like Berkshire Hathaway, for example, or ABC Cap Cities back in those days was a big media company. Today, it looks a lot more like ESPN, it's owned by ESPN. I had Martin Marietta, a big defense contractor with the Washington Post Company. Companies that I generally recognize, but what I was shocked by was that in most cases, they had been held all 19 of those years. And so I was seeing the stock prices that day, I'll just make up, there'd be a stock at $98 a share and the column right next to it, what did we pay for it? The answer is we paid about $4 a share and it was at $98 a share. And then the next stock was at $337 and we paid $10 for it. And up and down that brokerage statement, I saw the greatest secret of all, which is that you just have to find excellence and hold it. The way that people really make money on the stock market isn't by finding hot stocks or through screening the market in a certain way or executing a strategy brilliantly. The greatest secret of all, largely ignored by most of the powers that be on Wall Street, institutional firms is simply to hold positions over time. So for me to see at an impressionable age, the age of 25, what a great investor does. And see the black and white of it in the numbers and see the consistency of it from the top of that piece of paper to the bottom, I realized this is what I want to start doing. Up until then, from the ages of 18 to 25, I had not been doing that. I had more of this mentality that I was going to hold a stock for about 18 months on average and hope that maybe it would rise 50 to 100% and then I'd try to move on to the next. So why is the greatest secret of all such a secret? I think it's because most people are taught the phrase buy low, sell high. We talked about this on an earlier podcast, they think it's all about buying, selling. Those words imprint themselves on us and we think as soon as we've bought a stock, we right away have to have that target price or that idea about why and when we're going to sell. And it's irresponsible not to have a "selling discipline" and one of my favorite oxymorons. I much prefer talking about buying discipline. I think understanding what to buy is much more important than how to sell or when to sell. But for understandable reasons, human nature often is preoccupied with being smart about the exit because we need to buy low, we hear and sell high. So I think the greatest secret of all, again, Googleable, just go for Gardener, greatest secret, my most recommended article ever at fool.com. The greatest secret of all remains a secret because most people largely ignore it and most of the people who have lots of money especially ignore it because they're moving in and out all the time. So it took just a placid morning in Lancaster, Pennsylvania now 24 years ago for me to realize how I wanted to invest and how I wanted to teach the world to invest and how I want you to invest and how I think we'll all do a lot better, how the world will be a lot better if more people truly invest as opposed to its opposite which for me is to trade. Jack Bogle has a great phrase. Jack is the founder of Vanguard, many Motley Fool members, we'll know of him of course, the man who basically invented the index fund. Jack Bogle has a great phrase, he calls it the rowboat syndrome. The rowboat syndrome is why most people invest poorly and it's because we're paddling down the river of time as investors and which way are we looking? Well since it's a rowboat, we're looking backward. And so as we paddle, paddle, paddle down the river of time in our rowboat, if we're an investor, we probably do something like this, especially if we're a new investor. We probably look at the market and we go, okay, I should have invested, I'm behind, I didn't invest, I'm now looking backwards and wow, look what I've missed. It might be that you waited 25 years too long, you're 55 just starting now and you wish you'd started when you were 30 or maybe you're just talking about the last two months and the stock that you were watching is now up 20% over where it had been and where you could have bought it, you're looking backward. Paddle, paddle, paddle, you finally decide, you know, things have been so good, I'm gonna buy now. I was an idiot to wait this long but I'm gonna do it finally and you buy and probably what's about to happen is in a short term since that stock or the market overall, since it's been so good, is probably about to drop maybe a little bit, maybe more than a little bit. Paddle, paddle, paddle, you're looking backward and you 18 months later go and that's the length of an average bear market by the way, 18 months, you go you know what, why did I ever do that? I shouldn't have invested then, looking backward I can now see that I've lost money and so looking backward I'm going to act in the present, I'm going to sell and I really, to tell you truth, I should never have done that in the first place and maybe this whole stock market thing is not for me. So now you know why Jack Bogo calls that the robo syndrome, a phrase we'll probably be using on this podcast from time to time because it's evocative, it's visual and it's true of so many people especially who come new to the stock market and have the wrong frame because they were never taught the right frame and so intuitively, our minds often play tricks on us intuitively, we decide that you know, we should be looking back and investing as I've sometimes said in a rear view mirror, not a great way to invest, so that's the robo syndrome and I think that's also why people have a hard time holding, why the greatest secret remains a secret because the experiences that we do have as investors, we tend to be looking backward and over transacting and deciding that you know, this is not for us. Morgan Haussel, the Motley Fool's talented macro writer and thinker and contributor had a great info graphic a little while ago where he showed how gold and stocks have done since 2011, Americans were polled in 2011, asked what will be the best long-term investment? 34% of us, I'm an American too, I include myself, I'm pretty sure I wasn't answering this but 34% of us said gold would be quote the best long-term investment and 17% of us, half, half as many said stocks. Of course the reason I'm telling this is because it was an interesting outcome and I enjoyed Morgan's info graphic and you can probably find it on Twitter if you search but since then gold is down 40% and stocks are up 100%. So I think here too we have largely what was happening in 2011, we were all looking backward at what had just happened, the robo syndrome and we decided that gold which had had a great run in 2008 and 9, the gold was going to be the best long-term investment. When the truth is as Jeremy Seagull has written in stocks for the long run and as most statisticians can easily show you with data or graphs, the best place for your money over any meaningful period of time is stocks. Way outperforms gold which has created no meaningful, tangible value inflation adjusted for 300 years now. And certainly stocks outperform bonds and they certainly outperform savings accounts. And so if you have meaningful money over meaningful periods of time your money should be in stocks and that's why we're the Rule Breaker Investing Podcast. So I hope you've enjoyed the greatest secret of all, you have a choice now, you could keep it a secret or you could share it. I would suggest you share it, I just did it with you and I think you're going to be better off if you discover this secret and not just hear it but live it. And indeed make sure that your friends and family and others around you are getting away from the incredible myopia that drives so many money decisions for too much of our society. But I'm not here to rail, I'm here to celebrate, I'm here to celebrate great companies like Amazon and AOL and the others that I mentioned earlier and that I will throughout our Rule Breaker Investing Podcast days, finding and analyzing the best companies of our time. I'm David Gardner and thanks for your time, 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]