June was a great month on the podcast. In fact, it will be a hard month to top! But we can top it off, sure enough, with your top-notch questions, comments, and stories. From market caps to optionality, tune in to this episode of Rule Breaker Investing and pay attention to the scuttlebutt.
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This video was recorded on June 30, 2021.
David Gardner: I called it maybe the greatest month in this podcast’s history, from my final five-stock sampler, to Morgan Housel joining me for his five greatest quotes, from Aaron Bush, telling a story at the start of the month, to once again, Aaron Bush dominating the Market Cap Game Show last week, he scored eight. Did you beat him? Did he beat you? Plus, five weeks in this month, so five podcasts. I don’t think we’re going to top this month very often. For the remarkable month that it was, let’s hope I can produce something like a remarkable mailbag to close it out. June 2021 mailbag, only on this week’s Rule Breaker Investing.
Welcome back to Rule Breaker Investing, delighted to have you with me here at the end of June 2021. One thing I like to do is summarize where we were, which ports of call the ship of the Rule Breaker Investing Fools hit this particular month. But I think I am going to do that through the tweets that you sent us throughout the month. Let’s try that, this particular mailbag. The first week of the month, well, it was June 2nd, Telling Their Stories, Volume 3. I had Aaron Bush on and I had Tim Beyers on. This is a format that I’ve used. I think you enjoy it, I like it too. We’re going to keep using this format where I invite some Motley Fool Analysts, well-known personalities around the Fool to come on and tell their stories in three parts. The first is the story of your life in exactly 150 words. The second is, if you were to trace out the graph like a stock, the stock graph, but not of stocks, but of your own life, and then you were to speak to the highs and lows, well, that’s part No. 2. Part No. 3, the three key moments that have made you the investor that you are today. Again, thank you to @aaronbush100 and our friend Tim Beyers for joining me earlier this month.
Jamie Luca, you said, “RBI podcast this week was maybe the Rule Breaker Investing podcast that has meant the most to me, @aaronbush100 story is similar to what I aspire to achieve in my young stages of life, and his story helped me be more optimistic about my aspirations. Thank you, @aaronbush100 and @DavidGFool.” Well, thank you. Jamie and Jason Moore, @Jimjilika, Jason, you’re quoting Tim Beyers here. “It’s about taking a look at the world a little bit differently, being willing to do that, being willing to be wildly wrong, and just keep going.” That was a sentiment that, as you said, Jason, any Rule Breaker can probably see the Foolishness in that. It was Tim talking about the successful mindset of the Rule Breaker investor.
Erick DeVore, @erickdevore, on Twitter, “I just listened to the whole thing, incredible show. I loved Aaron’s and Tim’s stories. I actually thought I got in late to control my financial future,” said Erick, “But have really just now begun to understand how long of a journey it is. Never been more excited to be a Rule Breaker.” Erick, coming from you, that means a lot. I clicked into your profile on Twitter @erickdevore, and I see that you are a very talented composer. You’ve brought us some amazing trailer music, some video game music from the movie version of Need for Speed to Gears of War 3, the video game, and lots of other work besides. Thank you, Erick, and you’re right to remind us, it really is never too late to start investing, if you’re really playing the long game and making a whole life commitment to the stock market, we’ve had some amazing stories coming in from members in just recent weeks, members just started at the age of 70, and now, here they are 10 or 15 years later in their early to mid 80s with remarkable results and they are writing us in.
By the way, stories.fool.com is a URL you can use to come and tell us your story anytime you have one, we love them. Of course, I feature that story in this podcast all the time, but we also use them in member gatherings, member marketing, etc. Anytime, you’d like to tell your story, stories.fool.com. The second week of this month, Great Quotes, Volume 13, a Morgan Housel edition, was on June 9th. @eugeneing_VCAP wrote, “Save like a pessimist in the short term and invest like an optimist in the long term,” is rocking one of Morgan’s quotes right there. “Do it both together at the same time all the time,” says Eugene. “My biggest takeaway from this week’s @RBIPodcast with David and Morgan.” @MFindianthony, thank you for this, Anthony. “It’s such a great podcast between David and Morgan on @RBIPodcasts that I had to listen to it twice. Morgan and David never cease to amaze, especially when they’re conversational powers are combined, stellar.” Well, Anthony and everyone else said to Morgan at the end, we have to do this again sometime and I know that we will. I’m glad you enjoyed it.
Week No. 3, it was Five Stocks Pursued by a Bear, a couple of lovely comments here. Craig Edwards, @CRXinvestments, thank you so much for this, Craig. This is so kind, “I’ve loved every minute of these Rule Breaker podcasts, but this one is now my favorite. @DavidGFool you’re a true legend and the world’s best investor. I’ve no doubt that most Fools would agree. Glad to say, I bought Axon in the $20s and The Trade Desk in the $30s and don’t intend to sell.” Well, Craig, that is very kind of you. I will say that the word legend if you look it up, sometimes legendary can mean of dubious authenticity. I will try not to be that kind of legend, but that was so kind of you and I’m delighted to know that you have stocks I just picked, once again, freshly two weeks ago. You have extremely low cost bases in these, and I think it’s because you’re a Rule Breaker member and I’m so happy for you. @CarrelDan, thank you for this, Dan. “Great episode. Thanks for sharing your knowledge and perspective. I especially appreciate your optimism, amid a financial world full of pessimism.” I’m going to say a little bit more about that five stock sampler and one of the Rule Breaker mailbag items later, so I’ll park that there. But it was delightful, and so far quite rewarding for me to be optimistic about the five companies I was a couple of weeks ago with so much pessimism swirling around them and the world at large.
Then, last week’s Market Cap Game Show, a game I can never get enough of only four times a year, which is in part what keeps it special. But @kodakMac you said, “My money is on @aaronbush100, no offense to @flippen_emily.” That would be, of course, my two talented contestants, Aaron Bush and Emily Flippen. “But always surprised by how knowledgeable Aaron is,” said Kodak Mac, and I loved that Emily herself responded on Twitter by saying, “My money is always on @aaronbush100, never bet against the Bush.” Well, that shows Emily’s humility and also her wonderful sense of humor and dedication. Both of them performed really well. One of them scored quite a bit higher and would’ve out scored me certainly. But both of them are such talented Fools and so much fun to have on this podcast. Thank you again, Emily, and thank you, Aaron. Thank you for playing along at home after all, as I take pains to say every quarter, this game is played for you. Yes, I do have two guest stars as contestants, but I’m hoping you’re playing and learning right along with us at home. Seven items ahead this week.
Rule Breaker mailbag item No. 1. This one is from Adam Nelson, “Hi, David. I appreciate the moment in the sun you provided for me over the last couple of quarters following my Market Cap Game Show suggestion.” New listeners should know that Adam is a long time and I would say brilliant listener, who took the time to share a suggestion that made us improve the Market Cap Game Show. Here, he is now writing in. Adam goes on, “You will be happy to hear that the fame has not gone to my head. The regular mentions on the show had made me more grateful for what you do and to carry you poured into Fools everywhere in your career. I continue to be an avid listener each week, and I love the zero lower bound range that Aaron Bush gave for Moderna, ticker symbol MRNA, this week.” That’s right, Aaron, in playing the game, one of the ranges he selected started with zero, which wasn’t innovation. Adam’s noticing that here. He goes on and says, “It seems that he found a hole in the logic and a good way to make an exact guess. After all, forcing the guesser to choose quotes higher or lower than his upper bound. Now, on a related note, can you comment on how you think about market caps in portfolio construction? I would guess that you don’t pay too much attention to it generally. But do you avoid any companies that are either ‘too large or too small?’ It was fairly recently that the financial media was publicizing the race to the first trillion-dollar company. Do we all remember that? It only took another two years for Apple to reach $2 trillion, doubling in value in that short time from August 2018 to August 2020. If winners win, then sticking in the larger market caps seems like a good idea.”
Well, thank you for that, Adam. Let me mention, first of all, as I said on the Market Cap Game Show, I will no longer be mentioning your tweak by name in each of the future Market Cap Game Shows. But I do want you to know I consider you a hero among humanity. If you ever run for mayor anywhere, you have my vote. Now, let’s move on to market caps themselves. Do I have any upper or lower limits? Yes, I do. As the stock picker and investor, I would typically put a floor in somewhere around $1 billion. If a company these days is sub $1 billion, it’s unlikely to me to be enough of a world bidder that I’d be excited about buying and holding it for a long period of time. Now, of course, there are exceptions. But for the most part, I think a lot of people make the mistake of thinking they need to find some stock that no one else has heard of. It may sometimes be a penny-stock and they think that’s the way to make money with investing. In fact, I think an awful lot of people, especially people who have not invested before, think that by default. They think it’s about finding some secret company nobody else knows about, that’s probably priced in the pennies, and that would be the stock you’d want to buy. I’ve always felt pretty much the opposite. If you want to make money over time, you need to find great companies that are helping shape the world for the better. Those are going to be companies that don’t have really small market caps. After all, that has a tiny value on the company. It’s probably making a tiny imprint on the world, and by the way, sometimes little acorns do grow up to be great oaks, but I’m more than happy to find my acorns once they’ve crossed the $1 billion market cap. I realize there’s some specialists who are really good at micro-cap investing. Friends of The Fool, like Ian Cassel, who has a good following on Twitter, and other people who love micro-cap, I certainly understand the purpose of it. But for Rule Breakers anyway, and Rule Breaker Investing, I don’t really go much below $1 billion these days. These numbers changed over time. 30years ago, the dollar was worth a lot more. That is adjusting for inflation. I’d probably would’ve said something like, I want to find companies with a minimum market cap of $250 million. That number goes up over time along with inflation. But that’s my number and I’ll close out by saying that a sweet spot for me is often companies somewhere between, let’s say, $3 billion and $20 billion, somewhere in there, you’re still finding companies at early stages. Most of them that have high growth rates, that have market caps there. You’re finding them quite early. If they are companies with important products and services in this world that your family and friends are starting to comment on, because they are noticing them. It’s not just for […] stock investors, like you and me, have found some obscure company. We’re talking about real-world products and services that are starting to come into sight of those around you.
Now, I’m an early adopter type myself. I think that’s helped me a lot as an investor, but once I start hearing friends and family mentioning company names, that’s often a point where I start thinking, “Okay, that’s a stock we should more seriously research now.” When we can find them sub $20 billion, if this is a company with real possibilities, there is easily a chance for 10X or more for that company held overtime. I don’t think that there’s any magic number, and I do not screen for stocks, I don’t screen for market caps or any other attribute, I’m a bottoms-up investor. I think the last part of your question, I should speak briefly to the maximum market caps, and I don’t even really think about that. I think one of the blind spots a lot of investors have is, they imagine that there would be some upper limit, and so as the stock starts to hit their limit, whatever it is, they start thinking about selling it, because it couldn’t get much bigger. Now, I’ve made this joke in the podcast before, but I’m always reminded, if you were working in a company like Apple today, with approximately a $2 trillion market cap, or Amazon, you’ve got some of the brightest, most well-resourced people in the world. Do you think they’re all throwing up their hands saying, “I don’t see how we could possibly grow from here. How could our stock go up anymore from here?” You have hundreds of thousands of really smart people working really hard. I think it is going to go up from here, and that’s the way I felt for a few decades now as an investor. I was always saying, “You just wait for the first trillion-dollar company.”
I’ll now say, “You just wait for the 10 trillion-dollar company, because the numbers you’re going to keep going up over time.” That for me, Adam and everybody else listening, reminds me not to really worry about any market cap that looks “too big” to others, because while it may look like that to them, that will cause them not to buy the stock. Meantime, I’m happy to buy the stock, and I hope to watch it go up over time. That’s a little bit of a dark cloud I can see through. The concept that a market cap would just be so big. How could it go much bigger?
Rule Breaker Investing mailbag item No. 2. This one comes from return correspondent Frank Eriami, thank you very much for this note, Frank. “Hello, Rule Breakers podcast. I will make this brief. I hope David gets a chance to see this. You actually brought one of my emails up on a previous mailbag. I was the financial advisor who had a client who bought Amazon around the time when it went public, and I never did.” I’ll pause there to say I do remember that note that wasn’t too long ago, Frank. I love that story that you told. As a financial professional, Foolish, a humble, submission and admission on your part that you’d had clients who, in some cases, done better, simply by buying early companies that you would have avoided back then, and of course, a classic story would be, anytime you have a client who says, “Buy Amazon for me. I don’t care what you think.” If that person kept holding, which in your case, he did, it creates a remarkable outcome and story. Anyway, here comes Frank back with, “David, I want to wish you well on your next mountain. I’m a new subscriber to both Stock Advisor and Rule Breakers, probably around the beginning of this year, and I’ve learned a ton. I’ve started building that portfolio. Now, in the meantime, I watched as many videos as possible that you’ve been in, as well as binge the RBI podcast. As I said to you in the email, which you spoke about in the previous mailbag, I have been a financial advisor for 25+ years, and I’m trying to expand and grow my circle of competence toward your style.” Well, thank you for that, Frank. “I just had two things I wanted to get out to you here. One, I have not heard of you, until I saw someone tweet about you at the end of 2020. Now, I’ve been a voracious consumer of financial media over my career,” says Frank, “Always looking for that edge, something that would help me advise my clients. I don’t know for sure, but I think maybe The Fool’s Marketing Strategy is geared toward individuals, and not folks like me. Well, the point I’m trying to make is that I should have known who you were. I’m always trying to learn. This is maybe something you could bring to your marketing team, and help your company do even better.” Now, for a No. 2. “You’ve already had an immense impact on me, nothing to do with actual portfolio results yet, but the way you approach life is awesome. Your optimism and zest for life is so easy to grab from your podcasts and your videos. I just want to thank you. I don’t know you personally. I sincerely appreciate all you’ve given to the world thus far, and know that whatever you do in the future, it will dwarf what you’ve already accomplished.” Well, that’s very kind. “I know that one day I will meet you in person. It’s a goal of mine at this point, whether it’ll be just a handshake or for a cup of coffee at Starbucks, on me,” says Frank, “I don’t know which it’ll be, but it will get done at some point. The image of you walking through a crowded room, making your way to see Jeff Bezos, is the image I have of me one day going for that selfie. LOL. Again, I wish you only the best, and know that you will impact the world in the most positive way. Fool on, Frank Eriami.” Frank includes a P.S. “P.S. to show you how far I’ve come on your recent Stock Advisor recommendation of Amazon, my final Motley Fool Stock Advisor recommendation coming out for me was Amazon.” Thanks, “As I bought a position for myself, something the old Frank would have said, ‘No, Frank, you missed it. Look for something else,'” so he said, “Learning again. Thanks.”
Well, Frank, I just want to speak to what you said about only having discovered us near the end of 2020 and maybe our marketing department can do a better job. I think our marketing department has done a pretty good job over 27 years getting our name out there. There have been many eras of The Fool. Frank, I know you’ve been doing the work that you’ve done for more than 25 years. Well, it was 1996 when my brother Tom and I were on the cover of Fortune Magazine. That was pretty good marketing for The Motley Fool. A lot of people found out about us back in the AOL days. I don’t know if you did or not. But even if you did, another era shows up, 2001, the whole market goes down. A lot of people lost the taste or heart for investing. Again, as an investment professional, I suspect you did not, but we certainly had a lot of fans early on and then people didn’t invest for a few years, it seems in the early odds. But ever since, I think The Motley Fool has done a pretty good job getting our name out there through the Internet, through search engine optimization. When you search various phrases that are the key to investing, I think and hope, our company and fool.com will pop up for you. But I guess, I’ll just say to anybody listening, whether we reached you in 1996, or 2006, or 2016, or darn it, right here in 2021, we reached you. I’m delighted to welcome as many as possible aboard this ship of Fools. It’s bigger and better than ever before.
The stock market has certainly been our friend, especially these last several years, although not these last several months, which reminds me to move on to Rule Breakers mailbag item No. 3. This one comes from Brad Lownsbury. “Hi, Dave and team Rule Breakers. I became an investor in the last year and have subscribed to both Stock Advisor and Rule Breakers and have enjoyed the Rule Breakers and other Motley Fool podcasts. Below is a message I received from someone at Axon. A little background on this message.” Brad writes, “I work for a steel fabricator in the Twin Cities. We provide the large steel beams and columns that hold up buildings, as well as the steel stairs, and railings for projects. Now, I believe this person from Axon stumbled across my LinkedIn profile and saw I was in the steel business and sent me the message about Axon trying to get their body cameras into the mining industry. I wrote him back, letting him know my company isn’t involved with that kind of work, but I also let him know I’m a stock owner of Axon, thanks to Rule Breakers. As a stock owner, I’m happy to see them trying to branch into new industries with their technology. Thought you’d guys would be interested as well. Thanks for all you do for so many and Fool on, Brad Lownsbury.” I really love this note. Brad, I am going to go ahead and read. I won’t name the Axon employee who wrote to you, but I will read the note that you got and forwarded onto us and then make a few points about this important exchange. This one comes from a guy at Axon who says, “Morning.” This is again written to Brad, our corresponding here, “Morning, Axon is rapidly expanding into precious metals and mining to see how body-worn cameras and video audio data can add value to day-to-day operations. Your company is a partner that we would love to build a long-standing relationship with to explore new and innovative ways body cameras and video data can provide significant value through uncovering new use cases together within our free pilot program. A few use cases we’re testing,” the Axon employee goes on to say, and I won’t read them all but, “prevent losses in refinery or pit operations, proof-of-work video assets to solve for he said she said with customers/staff, etc.” The note closes, “Is this interesting enough to schedule a 10-minute call? Please, let me know.” Well, I’m going to end the correspondents there and now speak to a few points about Rule Breakers mailbag item No. 3.
First of all, Brad, I really appreciate you sharing this and it reminded me of point No. 1 of one of the better books I’ve ever read on investing. I think I’ve only read four or five investing books, I certainly read Peter Lynch’s One Up On Wall Street and his follow-up back in the ’90s, which was, I think, Beating the Street. Maybe that was even late ’80s, early ’90s. But certainly, Peter Lynch inspired me so much as a very young investor. Another was Philip Fisher and his book, Common Stocks, Uncommon Profits. While this book was written several decades ago, even a few decades before Lynch’s book, so in some senses would be very dated, nevertheless, he has some great thoughts in there that additionally influenced me as a young investor. In particular, I remember him talking about Scuttlebutt. That’s basically what Brad just shared with us. Philip Fisher championed the little guy, the individual investor, you and me, who has insights based on our job, or our hobbies, or friends that we know who work at certain companies and we hear certain things. Fisher called that scuttlebutt. He said that is something you should pay attention to as a mom-and-pop investor. Now, don’t take a single piece of data and say, “Sample size of one, this is going to happen or not.” You should definitely be understanding the context of what you are being given and factor everything in, but Philip Fisher said in an age where institutions drive so much of the trading, and certainly, as the decades poured forth, computers increasingly started doing the trading. You and I as fellow humans and what we can share with each other as scuttlebutt is an edge.
As we started the Motley Fool on AOL in the 1990s and then transitioned to the web, and over the last 25 years, I think of our discussion boards, which are still so active today, which we’ve benefited so much from. I’ve learned so much from some of you and the postings you’ve made, the Motley Fool discussion boards, certainly back in the day, AOL chat rooms, we used to host chats like the Industry Focus podcast that we have today. As a Motley Fool podcast, we used to have industry-based chat rooms. All of these were ways to use the Internet to start getting access to scuttlebutt. We never would have heard before the Internet. In a lot of ways, as we started the Motley Fool, Tom and I were saying, you know what we’ve created here, we created the world’s biggest investment club. Investment clubs are often popular. There are a lot of female investment clubs especially, but typically they are geographically based. They’re going to be your hometown or almost a social club in some ways. But in a lot of ways, the Internet provided an opportunity for all of us to join this amazing growing investment club that continues to grow today, that is The Motley Fool. Brad, what you’ve just done is right in that very tradition. An Axon employee reached out to you because you work within the steel and therefore, adjacently the mining industry. We just learned that a public company, a stock I picked in the five stock sampler earlier this month, which I’m going to talk about in a sec, is thinking about optionality. I think I have three things I wanted to say to your note, Brad, and that was the first one, the importance of scuttlebutt and some credit out there to Philip Fisher.
But now, let’s move to point No. 2, a word I have used a lot, not just on this podcast, but over my decades picking stocks, optionality, which I loosely define as when you have lots of options. I love to find companies with optionality. You think about a company like Google, which today is Alphabet, and just the power of its base business, advertising with people. Googling things millions of times every day around the world gave Google not just a lot of profits, but a lot of adjacent businesses it could enter. How about Amazon? Starting with books, turns out it wasn’t just about books, optionality. Some of the best enterprises show optionality. I sometimes see it in biotech. A biotech pharma company will have its new drug approved for something, but that it turns out it works in some other way, and all of a sudden that opens up another avenue for possibilities and profits. When you find a company that has a channel that could expand to more channels, or a technology that could morph into more technologies, you have found optionality. What we’re seeing with this particular note from Brad is we’re seeing potential optionality for Axon. My investment case has always been based on its relationship with law enforcement, which started with the Taser non-lethal weapon, which I’ve always liked quite a lot and that was the company’s name back in the day, Taser, but then as they merged, bought Axon and added body cameras, all of a sudden, they kept broadening and that’s been the main focus, and I really liked the stock just for that alone, but now, we see that management is thinking about optionality, adjacent opportunities. What about body cameras in mining? Maybe other things too, whether or not that even works or whether it’s just a head-fake and they’re not even going to invest in that, we see that they are looking and thinking about it. This is a beautiful demonstration of the importance of optionality and looking for that in our Rule Breakers.
Now, moving to my third and concluding point, thinking about Axon Enterprise, of course, most recently, I’m thinking about Five Stocks Pursued By A Bear, my 30th and final five stock sampler picked on June 16th of this month. We’re taping the afternoon of June 29th. Just 13 days later, I want to share some results, because this has been a remarkable turn in the market, at least for these companies. The stock market, the S&P 500, is up 1.3% over the 13 days since I picked my final five stock sampler. The worst performer so far is Zillow, up 14 .1%, 13% ahead of the market. Axon Enterprise is also up 15%, basically 14% ahead of the market. These five stocks, as a sampler, my final one, the market averaging 1.3%, they presently averaged a 19.7% gain in 13 days, 18% ahead of the market averages. Axon Enterprise, Peloton Interactive, The Trade Desk, Unity Software, and Zillow Group. Now, I hope you know me well enough by now, dear listener, if you’ve listened for even more than a month to know I’m not going to over celebrate short-term results. I’ve had past moments where things that started really well didn’t end so well. We’re not going to declare a victory in a three-year minimum game after less than two weeks. At the same time, I think there is something to be said for recognizing the right theme and picking it at the right moment. Each of the five companies that I shared two weeks ago on a podcast, if you didn’t get to hear it, you can still listen to it and I still like them today. Remember, dear listener, you never really missed anything. If you were excited about these stocks, but didn’t get around to buying them yet, I’m fine with you buying these same stocks next year, this same month. It’s not about timing per say, except that each of the five was selected because they’ve all gone down around 30% or so in just the last three months, creating a lot of pessimism and frustration for people watching great companies go down, which indeed great companies go down all the time, but then they rise again. I certainly have not expected them to rise this fast. To see the Trade Desk already up over 35% in less than two weeks from where we picked it is really fun to see.
I’m happy to say my 30th five stock sampler probably won’t be my best, but it’s looking awfully good when I would still call the top of the first inning in this nine-inning ballgame for this particular five stock sampler, five stocks pursued by a bear. But yeah, Axon Enterprise, ticker symbol A-X-O-N, is one of them. We just got some scuttlebutt about potential optionality. Brad Lownsbury, duly noted.
Rule Breaker Mailbag item No. 4, this one’s from Derek Lanham. Thank you, Derek. “David in 1996, I read The Motley Fool Investment Guide and since then have varied between Foolish and foolish, but more recently decided to be a focused Fool. In December 2019, I was confident I could improve my returns by moving from S&P 500 index funds to individual stocks. Over the next six months, I did just that. My purchases were recommended by Fool services, 108 to date. Total return is 89% despite dropping over 25% earlier this year and then recovering some. I monitor each purchase against the S&P 500 as you do with your five stock samplers and on average, each position is 31% ahead of the index. Thank you and your team. However,” Derek then goes on, “I cannot keep up with 108 stocks. The Gardner Craftsman Continuum would suggest I should have 48 stocks. I heard one particular Fool in their 50s suggest they had 55 stocks, which might have been yourself, and insert myself in this note,” you’re correct, Derek, that’s me you’re referencing. “Yet another younger Fool, Derek, continuous in her early 30s, had over 100 stocks. Anecdotally, this does support the fact that women can multitask better and are smarter than those of us that are men. My question, what do you consider an appropriate amount of research to keep up with the stock? As a Rule Breaker member, it would seem that it might just be sufficient to pay attention to the Motley Fool published articles and monitor sell recommendations, but is it FOMO or is it good diversification? The Fool simulators suggest holding about 40 individual stocks is sufficient diversification. Adding more than 40 stocks doesn’t significantly change the performance results or variance. However, I’m limiting my ability to keep track of these companies by holding so many. I don’t think that was the point the simulator was trying to prove and I may be overreaching to a conclusion.”
Well, thank you very much for this note, Derek. It’s one we’ve heard certainly a lot over the years and understandably, so I’ve always thought of Motley Fool services as streaming you. Netflix streams you entertainment, we stream you stock picks. For those who want to binge on any of our services, they can end up with a lot of entertainment in their stock market portfolio in the form of many different positions. That’s why over the years, I’ve tried to help my fellow Fools with the framework I’m briefly going to rock right here. Now, I want to say, I think I first presented this on this podcast on April 5th of 2017. It was the opening of a new episodic series we call Old, New, Borrowed, and Blue. It’s right at the start of that podcast if you want to go back and Google it because that’s the old point that I make because it’s one I’ve made in years past. That’s why it’s an old point, but I’m going to represent that framework right here, right now. I think for most of us, the number of stocks you’re investing actually doesn’t really matter very much for the purpose of monitoring them, because regardless of how many stocks you have, 20 or 200, they’re going to fall in three buckets. The first bucket, I like to call extra time. That means you’ll be spending extra time researching these companies. Yes, you should pay attention to the quarterly earnings report. It is helpful to pay attention to what management says when they speak publicly, whether it’s on an earnings call or in an interview on CNBC or with the Wall Street Journal, you’re going to be giving these companies extra time. Which companies fit in this bucket? The answer is, any stocks that are 5% or more of your portfolio, I think you should be giving extra time.
Now, by definition, the most stocks that could ever qualify for extra time is 20, because 5% 20 times equals the 100% of your fool portfolio pie. However, most of us don’t have 20 stocks that all make up 5%. We probably have maybe three, four or five holdings that represent 5% or more of our portfolio. Keep in mind a lot of very diversified portfolios don’t have any. They have that extra time, but to that group, bucket No. 1, 5% or more of your portfolio, we call that extra time and yes, that’s time well spent. The second bucket, I like to call regular time. Now, the regular time from one person to the next is different. Some of us are avid and enjoy keeping up with the technologies and developments of our companies. Regular time for you might mean weekend research. You work hard during the week. You enjoy this as a hobby on the weekends. Maybe you devote some time every Saturday to looking over your companies in your portfolio. That’s regular time for you. Now, for some other Motley Fool members, regular time for them is, “Hey, guys, just tell me what the new pick is.” That’s why they subscribed to Stock Advisor, Rule Breakers or other services because we tell you what the new pick is and you could just spend about 10 minutes, come in, check it out, and buy it for that month and just keep going on your merry way. Regular time is very subjective for each of us. But whatever regular time means for you, I think companies that make up 1.5% of your portfolio deserve that regular time. So 1.5% is bucket No. 2, as you might imagine. Using the power of inference, I bet you’ve figured out that bucket number 3 is companies that are less than 1.5% of your overall net worth or portfolio. I like to call those not extra time, that’s the first bucket, not regular time, that’s the second bucket. I like to call this downtime. The reason I like to use the phrase downtime is because a lot of times these are companies that are down. When I put 3% of my portfolio into a stock, it gets cut in half. All of a sudden, less than 1.5% of my portfolio it’s down and I’m going to be giving it downtime. It’s a reminder not to spend a lot of time with these companies.
Now, a lot of these are not companies that are down, they’re just small initial positions that you took. It can be exciting to build those positions over time into larger and larger positions. So I’m not implying that you shouldn’t pay any attention to companies that are 1% or less of your portfolio, but I am telling you that you should be selective and not spend much time there at all. To end this answer here, Derek and my fellow Fools, think of those three buckets: 5% or more of your portfolio, extra time, regular time for 1.5% of your portfolio, and finally, downtime for ones that are about 1% or less. I really believe we’ve just helped your portion however much time you want to give appropriately to your portfolio. Again, some of us are in retirement and we have hundreds of hours, arguably dedicated to our portfolios. Others of us, if we could find 100 minutes in a busy month, that would be great for our stock market portfolio. I’m used to speaking to people from all walks of life and all areas of the world and I recognize the importance of context, but nevertheless, I hope by realizing it’s about the time that you spend and where you should be placing that time the number of your stocks really doesn’t matter that much.
Before I move onto mailbag item No. 5, I will again out myself as the approximately 55-year old with approximately 55 stocks and that’s pretty much where I’ve been for years now and probably will stay for years going forward. I’m happy for that to be 75 stocks or 105 stocks and I’m not looking to whittle it down. If I had twice as many stocks as I did, I wouldn’t be stressed or sweating it. I’d recognize at that point I’m like a mutual fund. All of my stocks, if I have over 100 stocks, they’re all somewhere around 1-3%, which means any one of them is not going to sink me or probably help me swim on its own if you’re running that diversified portfolio. That’s a choice we can each make, but it also means, I don’t think you should feel like you have to keep up with everything because it doesn’t make that much sense to me to do so when you’re not that invested. All right.
We move on to Rule Breaker mailbag item No. 5 from David [..]. “Hey, folks, just a quick thought. I hope the Motley Fool Foundation can work to create new Rule Breakers in our high schools. My son David Wright, just became treasurer for his high school.” Congratulations to the young fella. “It is interesting how much money kids raise and then spend 100% on fun trips, dances, clubs, etc. There are no required high school personal finance classes that cover investing. From what I can tell, very few of his friends who work have any idea what a Roth IRA is or how to invest at all, especially, for the long term. Rule Breaking is not just about finding companies that break the rules, David Wright, but also about having an investing mindset that breaks the rules as well. It may be that some of these teens’ first experience with earning money is via school fundraisers, where they are taught to spend it all down, by the end of the school year. It would be quite a benefit if kids could learn early The Fool’s philosophy when they start earning their own income, as well as doing high school car washes and big sales, if while they are raising money for prom, they could be guided and helped into putting some into a high school endowment, they could manage to benefit future classes and students and the community.” Boy, do I love this idea, David. “Maybe Fool Wealth Management could provide a low-cost service to high schools to create endowments. For the kids who do have jobs, they can start to invest personally in their future and make it a habit. Stock market games may be fun, but they don’t deal with real money and probably encourage too much risk, they make investing look like buying lottery tickets. In conclusion, if students could be guided so that some of their fundraising money is put to work for them and their peers, it would help make our high schools smarter, happier, and richer. It would be an invaluable lesson for young teens personally, on saving money that they make so they can watch it grow. Hope your foundation can start programs and high schools and encourage investment while teaching the lessons so many Americans may have missed. Probably not a new idea to you all, but it crossed my mind and I wanted to share a thanks, David […], Stock Advisor member.”
Well, just a few brief comments back, David, I totally love your idea. I agree with you that it’s impressive how hard often high school kids work. They work summers, hot summer sometimes, mowing lawns, they do car washes, they bring a lot of their energy to raising money either for their school or themselves, but wouldn’t it be a better world if a default mentality was 10% of all that money raised would be invested toward the future. I especially love the idea that maybe it leads to a kitty or a fund that’s kept at high school that’s built one-year after another, by one class after another, and can increasingly grow and show everybody the benefits, not just of saving, but of course, investing and growing and playing the long game and thinking long term. I’m certainly never going to gain-say the stock market games, which sometimes get to kids in seventh grade or sometimes juniors in high school, where they learn for the first time about the stock market, admittedly, kind of a silly game, often short-term and the person who wins probably got lucky or over allocated to a penny-stock. I’ve never really liked that aspect of those games, but I still, I’m not going to gain-say it because any awareness we can give the world of the benefits of the stock market at any age is going to be a net good over time. But I especially love the idea and I know some universities do this pretty well and we’re going to close this mailbag with one such story coming up very shortly. I think at the college level, the concept of a fund that you would help manage briefly while you’re a college student, you maybe would help build it or grow it by fund raising or adding to it. But building something for the long term is, I think, something that college students often can start to learn, but the earlier this starts the better.
The reason I wanted to share this as mailbag item No. 5 is that many of my stock market oriented questions, a few of them have already been covered this week. Those applied to anybody interested in the stock market, and I always hope everybody will be, but I know many people unfortunately are not, but we’re all connected to high school students, we’re all connected to schools and institutions. That’s why you’ve inspired me, David […] to think about and help all of us think about whether we could actually build something that lasts through these efforts the high school kids make. You did reference the Motley Fool Foundation as the Board Chair of the Fool Foundation. I’m very interested in these kinds of topics and financial literacy, I will also say that the Motley Fool Foundation is thinking pretty big about this. It’s not just about stock market classes or financial literacy for kids, those things are important, but it’s also about looking at the whole system and trying to solve for everybody. That’s kind of our positioning right now, at least in the summer of 2021 as we start the Motley Fool Foundation. Anyway, thank you very much, David, for your thoughts and I hope I’ve inspired many others to think and act better and truly help create a world that is smarter, happier, and richer.
Mailbag item No. 6, this one comes from Shana Elson. Shana loves this note, “Dear, David Gardner, I heard you’re stepping away from stock-picking. I listened to your entire podcast of Road Less Traveled In 10-and-half Chapters. My first and admittedly selfish reaction was, oh, no, there goes my down payment on a condo.” I don’t mean to be laughing, but that’s really lovely and that’s sad and I know it’s not true. Shana goes on, “Why? Well, because even though you’ve spent almost 30 years teaching those who work at the Fool and the rest of us, your Foolish investing philosophies and stock-picking techniques at the end of the day, you’re just naturally somehow better at it. It’s a gift you have.” Well, that’s very kind. There are so many other people who share that gift. Thank you, Shana, let me keep going here. “A little background on me. I’m a 45-year old woman who has been a Stock Advisor and Rule Breaker member on and off since I was in law school in my late twenties. I started a Roth IRA back then and used Fool recommendations to invest the small amounts of money I put in that account yearly. I have not been a particularly active member and at different times have had more and less time to pay attention to Fool articles, recommendations, the stock market as a whole. My career was turbulent. I did not enjoy being a lawyer and spent periods unemployed 2008-09, searching for my desired practice area and generally feeling unfulfilled. I did not accumulate the excess income of my peers from law school. However, I did manage to pay off my student loans, discover a love for baking and pastry, go back to school for an MBA, win the first place $25,000 prize in a new venture pitch competition for women entrepreneurs, and decided to launch a unique, customizable chocolate bars on the spot concept at retail. Just five months before the pandemic hit, it’s called Top This Chocolate and you bet, Shana, I’m going to give you a plug here, Shana Elson, everybody, go to topthischocolate.com. You’re going to see Shana’s site. It’s a beautiful looking site. It’s called topthischocolate.com in Ventura, California. Despite the pandemic, it’s going very well. The location in a tourist outdoor shopping center/harbor was key for the first time. I’m feeling happy and fulfilled in my career as I build something. I am also now finally ready and able to save more than an IRA contribution and try to grow some capital. As the new entrepreneur, I’ve spent the last several years working over 100 hours per week. Now that I have staff to alleviate some of my own burdens, I can focus on what was neglected. In the meantime, like my finances, I promised myself last month that I would rebalance my IRA, likely for the first-time, pay more attention to Fool guidance, and with your help, focus on finally growing a new investment account toward a down payment on property, so I will no longer be a renter. That’s when I heard your big announcement and my heart sank. Of course, I understand that you want to move onto new chapters in your own life and believe me, I understand needing to step away, not feeling constantly obligated and pass certain torches to others. But surely, you love picking stocks all those years and don’t want to completely step away. I heard you loud and clear when you said 13 picks per month is a huge commitment, but what if you cut back to just one per month, maybe just the Stock Advisor pick? I know you’ll still be paying close enough attention to provide that much insight just as I’ve trained my own employees to think the way I do and provide excellent customer service in my absence, my store doesn’t just function quite as well when I’m not there. With The Motley Fool, well it’s admirable that you want to focus on charitable work, but competent people with experience can be hired to help with that. You were unique in your ability to pick winning stocks and help ordinary people achieve financial goals that were more attainable for previous-generation. Please, once you’ve taken some time to figure out what you are gravitating toward and what activities you enjoy and find fulfilling, consider coming back, at least partially to pick a stock every once in a while for people like myself who fell a bit behind the curve and are hoping to catch up prudently over the next several years. All the best, Shana Elson, Chief Executive chocolatier, topthischocolate.com.”
Well, first of all, boy, if I don’t love that story of career change, Shana, you find what color your parachute finally was and then go forward. As an entrepreneur, I love that you took that up. You won a prize, $25,000 in a pitch. Here you are off and running a beautiful website. But for those who are in or near Ventura, California, go over to Ventura Harbor Village Shopping Center at 1559 Spinnaker Drive and maybe buy some premium customizable chocolate. I love the story and what you’re doing and, boy, does it look fun and colorful. Congratulations on what you’re doing. Just with regard to me, I think what I’m proudest of about my Motley Fool stock picking career is indeed all of the people that I inspired to do it themselves and to do it well. That goes for many people hearing me right now, you’re not a Motley Fool employee, you’re not even a financial professional or in this industry at all, and yet I hope that you are obtaining results that are better than you ever thought you could get measured over the only term that counts the long term, not just 2020 and not just the first quarter of 2021, a really good and a really bad time, but over all of the years. Whether it was Aaron Bush, I love Emily’s line earlier in this podcast, never bet against the Bush, who’s taking over some of my responsibilities at Rule Breakers. So many of our analysts and others who do work at The Motley Fool are people, Shana, just like you in the sense that they were inspired to study, learn, and go for it and have become really good investors. They are not just going to be taking over my positions at Stock Advisor or Rule Breakers, but they’ve been running real money. The Motley Fool has billions of dollars under asset management that are invested very well and not just here in the U.S. Thinking about our Lakehouse Australian entity, we have lots of amazing investors all around me and I have had a small part in at least some of their stories of inspiring them to go for it, stick with it during the hard times, and find the best companies. I really am confident in that succession that we’ve announced. Shana, it’s unlikely I am going to come back anytime soon. I think I’d only feel a need to come back if I felt like we’d made a huge mistake or if the market got really bad or something like that. But I am very secure and confident in the fool team that we have at The Fool, and I’m talking about The Fool at large. I want you to know I’m here though, I’m here every week. I’m keeping my podcast going indefinitely.
While I won’t be picking new five stock samples, I just picked one two weeks ago, keep in mind, Shana and everybody else, these stocks weren’t just picked for next week or next month, that’s a minimum of a 3-year five-stock sampler. Every one of these samples, most of them are still alive and they’re all companies that I still like. If you’re hungering for a good stock of ideas and not already finding them through your Motley Fool services, which is where most of the world does find its market beating ideas, well, we’re here for you too. I’m here to help you think about the world and think forward. But I also want to say, because my focus is not particularly on the stock market as much anymore or following the latest and greatest IPOs, I myself am looking to my Fool analysts and The Motley Fool as my source of some of my best investing ideas going forward while I go on to pursue whatever the future holds for me. Shana, just sharing a little back, one entrepreneur to another, you’re right. I hope we do add something special. I’m sure your shop is never better than when you’re in it. But part of what we also do as we grow these enterprises over time, and The Motley Fool is 28 years old, is that we do grow the human capital, as the world sometimes says, around the people. We help them think better, stronger, faster. I’m very confident in the Motley Fool’s culture and our ability at scale, more so than ever before, in the next 5-10 years to make this world smarter, happier, and richer. Anyway, thank you for that reflection and the opportunity to share it with you. Congratulations on all that you’re achieving, it looks like a lot of fun.
We’re going to close it out with Taylor Miller. Taylor, the class of 2023 at Purdue University, the Krannert School of Management, a finance major. Love this note, Taylor, a great one to close on. “Dear David, Rick and the Rule Breakers investing team. This letter will be rather lengthy since it is well overdue. If you do choose to share, please feel free to paraphrase however you see fit.” No need to do so, Taylor, it’s not that long, but thank you for writing it, I will read it in its entirety. ”I am currently subscribed to Rule Breakers and listen to the podcast every week. Only 25 left until I’ve listened to them all, exclamation point. I am 20 years old, and I’ve just finished my sophomore year at Purdue University. The purpose of this letter is to thank you, David, and the rest of the team for what you have unknowingly done for me. I started investing a little over a year ago with very little knowledge. I was overwhelmed and had no idea where to start. I tried to listen to different investing in stock podcasts, but none of them enticed me. I was just hearing the same things that I would hear from financial media. I thought there must be a better way than what everybody else is doing. Luckily, I found the Rule Breakers Investing podcast through a Google search. After listening to several episodes, I knew that this is exactly what I’d been looking for. It’s shaped my investing and the way I see investing forever. After a few months of listening, I started sharing all I had learned with my brother and mom, who neither invested at the time. They each had viewed the stock market as just gambling away your money. I was able to show them the true power of finding, investing and holding on to quality companies for as long as possible, and prove to them that investing is not in any way gambling. I now help manage my mom’s portfolio and regularly suggest companies to my brother. From using what I had learned from the podcast, I also gathered the courage to join the Purdue Student Managed Investment Fund. This is a club that lets students invest a sum of money in the stock market by letting students pick and present companies to the rest of the club. Our group picked and presented MercadoLibre. The club voted to invest in MercadoLibre unanimously. The professor that oversees the group seemed impressed that we found a company like this and asked where we were able to find it. I gave the credit to Rule Breakers Investing of course. I want to thank you and the team again for all you’ve done for me. My investing style, future, and knowledge have been greatly benefited. I know there are many others just like me, so please keep creating amazing content every week putting good into the world. You and the team have truly made me smarter, happier, and richer. I am forever grateful. Thank you and Fool on, Taylor Miller.”
It is a pleasure to read through a couple of dozen pages. It seems with every passing monthly mail bag I read stories like Taylor’s or Shana’s or any of those that I shared this month or any other. Many of them I never get to share on the air because, well, we only want to spend about an hour at this each week, and we don’t want to ask for more time from you. But I’m delighted especially and always have been when I get notes from younger people because indeed the earlier we start investing, the better off we’re going to be and the world around us is going to be if we’re investing properly allocating capital to all things that truly do improve the world overtime and improve our net worth over time. I’m just so happy that just at the age of 20 you managed to find this Taylor. I also wanted to say at the conclusion of this week’s podcast that a lot of people have pointed out through things like Reddit, meme stocks, crazy trading, that a lot of the so-called young people of this next generation are learning some of the wrong lessons. As my friend, Olin Douglas, our long time Chief Financial Officer and now the head of Motley Fool Ventures has said robbing his hands together a little bit, “Well, even if they’re doing it wrong at this early age,” Olin says, “Those are the Motley Fool’s future customers.” I truly believe that what we do and have done here works. As we age and mature we start to realize at whatever age that there can be a better way. Those who are brave enough to try, who often listen to this podcast and act on what they hear, they have experienced that personally, they know the benefits of Rule Breaker investing, in being Foolish in this world. I’m partly inspired by Taylor’s note to remind all of us especially the older hands listening to me right now, that there is some incredibly bright, smart, well thinking, wholesomely minded fellow fools who are 20 or younger today, who could use a little bit of a helping hand from you or maybe a notch to do the right thing. But they’re smart and they Google things. Even if they are blowing it right now with some crazy stock that’s not sustainable, I bet over time they are going to start to learn what Taylor Miller has learned and shared out with his investing club, his professor overseeing the club, his brother, and his mom, and he is just getting started.
Well, thank you, each of you, fellow Rule Breakers for the month that was June 2021. I already know some of our programming in July, and I am excited about July. I’ll mention next week we’re going to do a review-a-palooza. We’re going to be reviewing three past five-stock samplers, Five Stocks That Passed The Snap Test, Five Stocks For America, and Five Stocks Celebrating The 2018 World Cup. Each of those three five-stock samplers, I’ll have a different Motley Fool analyst on to help me sort through the results and learn together with you, you’re going to hear some fresh voices next week. I’m really excited about that and what July holds in store for all of us. In the meantime, we bid a due to June. June, you were a pretty good month. A lot of my Rule Breaker stocks started to recover some of their losses from March, April, and May. A good month in June, a great month for this podcast. I hope it was a great month for you. Stay Foolish out there. See you next week.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Axon Enterprise, MercadoLibre, Moderna Inc., Netflix, Unity Software Inc., Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Axon Enterprise, MercadoLibre, Netflix, Peloton Interactive, The Trade Desk, Unity Software Inc., Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Moderna Inc. and recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.