#63 – The Fool

BOOK RECOMMENDATIONS

When a guest has written a book, we normally don’t ask them for a recommendation but David was keen to recommend a book. His own book, Rule Breaker Investing (like The Smart Money Method, published by Harriman House) is highly rated by Steve who reviewed it in his Substack.

Rule Breaker Investing: How to Pick the Best Stocks of the Future and Build Lasting Wealth by David Gardner.

Get it on Amazon and donate to our featured charity.

David really enjoyed The Score: How to Stop Playing Someone Else’s Game by C. Thi Nguyen whom he described as a philosopher of games. The book explains how everyday life has been gamified, for example in social media, and how to avoid playing someone else’s game.

Get it on Amazon and donate to our featured charity.

How Steve Knows the Guest

Steve met a colleague of David when he appeared at an event in DC. Steve asked for an introduction but in spite of several emails, it never came. Fast forward a year and Steve had reviewed David’s book and connected with David on LinkedIn. It turned out that David was speaking at a conference in Europe and was passing through London in a few weeks so the appointment was made and we recorded a podcast. Steve reckoned it was one of the most fun  conversations he has had – normally, it’s all quite serious, especially if guests are anxious; but David treated the whole thing as a fun exchange and they both thoroughly enjoyed themselves.

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Chapters

00:02 – Introduction to David Gardner
11:40 – The early days of investing
20:27 – Traits of successful investments
29:59 – Valuation and market trends
40:35 – Portfolio construction insights
52:42 – Beating the market explained
01:05:54 – Lessons from 40 years
01:18:07 – Conclusion and key takeaways

Transcript

STEPHEN CLAPHAM: Hi, I’m Steve Clapham, and welcome to the Behind the Balance Sheet podcast, where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors’ strategies and tactics.

STEPHEN CLAPHAM: Behind the Balance Sheet is an investment training consultancy. We help professional investors up their game in financial analysis. And we have an online school. Over a thousand students, professional and amateur, have taken our courses.

STEPHEN CLAPHAM: Our flagship Analyst Academy helped one young analyst land a dream job as a partner of a major London hedge fund and helped another, a successful entrepreneur, improve his investing confidence. He made a seven-figure sum in year one.

STEPHEN CLAPHAM: Check out the school on our website, BehindTheBalanceSheet. Com, where you can also find the show notes to this podcast. And while you’re there, don’t forget, sign up for our popular and free weekly sub stack. Hit the sign up button on the top right of the homepage.

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STEPHEN CLAPHAM: My guest in this episode is David Gardner, founder of The Motley Fool and author of Rule Breaker Investing, destined to be a classic investing book. Gardner practices the art of VC investing, but in public markets and has outperformed consistently over a 30-year career, Helped by not one but two 1,000 baggers.

STEPHEN CLAPHAM: His cost basis for both Amazon and NVIDIA is just 16 cents. We talk about the book, about why he likes to buy stocks after they’ve gone up, why he gets even more enthusiastic when critics tell him a stock is grossly overvalued, why picking the top dog and first mover in an important emerging industry is his number one stock tip, and how he assesses exceptional management.

STEPHEN CLAPHAM: Gardner admits it’s not easy, but thinks that any interested investor can outperform the market if they direct their efforts in the right area. We joked around in this conversation, and it sounds less serious than some of the other episodes, but I can promise you it’s as rich in content as any. You’ll enjoy our conversation.

STEPHEN CLAPHAM: So, David Gardner, welcome to the podcast. I normally start these conversations by asking did you always want to be an investor? And I want you to answer that, but I also would love to hear why you and your brother started The Motley Fool, well, 30 odd years ago, what you hope to achieve. I’m guessing you wouldn’t have dreamt of the success that you have achieved.

DAVID GARDNER: Well, you’re right. And even if we’d had almost no success at all, it still would have been more than we were expecting when we started a print newsletter. The only people who would pay us $48 a year back in 1993 were our parents’ friends who felt sorry for us. And so we started, but it was called The Motley Fool.

STEPHEN CLAPHAM: $48 was a lot of money then.

DAVID GARDNER: Well, you’re right. It went a little bit further back then.

DAVID GARDNER: Pulled the name from Shakespeare, scene seven of As You Like It, A Fool, A Fool, I See, A Fool, The Forest, A Motley Fool. It’s probably the greatest scene of all Shakespeare. Oh, come on. Celebrating the fools. Celebrating the fools. All right, okay.

STEPHEN CLAPHAM: I’ll give you that.

DAVID GARDNER: But I might even go the greatest scene in all of Shakespeare for me.

STEPHEN CLAPHAM: Oh, really? But you were an English major.

DAVID GARDNER: Yeah, but it’s a beautiful scene. Invest me in my motley. Give me leave to speak my mind that I may through and through cleanse the foul body of the infected world.

DAVID GARDNER: Lots of great lines from Jakey’s The Seven Ages of Man. If you know, that’s all in that same beautiful scene. But anyway.

STEPHEN CLAPHAM: I don’t, so this is an aside, and we’re doing this at the start of the podcast, which is forbidden. Everybody’s going to switch off. But I was curious about this, because I didn’t realize you were an English major. And I was asking myself, do they teach Shakespeare in school in America? Because I’ve just found out that they don’t teach geography in school in America, and I was thinking.

DAVID GARDNER: We’re not as good at that.

STEPHEN CLAPHAM: Because the school I went to, we did two Shakespeare plays a year, and we did a tragedy and a comedy, the comedy in the summer, and one term, the tragedy.

DAVID GARDNER: Sure.

STEPHEN CLAPHAM: As you like it. I didn’t like it.

DAVID GARDNER: Absolutely brilliant.

STEPHEN CLAPHAM: Yeah. Oh, that’s interesting. Sorry, I interrupted you. Go on.

DAVID GARDNER: Yeah, no. So there it was, the Motley Fool newsletter. And we made a good go of it in the first several months. And then I found myself spending the other 29 days of the month, since it took us two days to put together the newsletter, online. And America Online, the decade that America came online, was what? I was regularly dialing into.

DAVID GARDNER: And I just found myself spending so much time there fascinated by this new medium as a writer, that instead of just writing off cover letters and sending pieces that would be rejected, I could instead type it up right there online and instantly have feedback, reactions, comments, and community around the topic that we loved, which was investing. And Steve, we were taught the stock market by our father.

DAVID GARDNER: So shares came very naturally to us. In our early teens. And as we graduated university, even though neither my brother nor I took any business or investing courses, nevertheless, we felt comfortable investing our own money. And as I’ve sometimes mentioned, and I’ll mention it here, when I turned 18, my father said, here you go. This is all you’re ever getting from me.

DAVID GARDNER: I’ve invested this for you from birth. Anything I have left when I die goes to your kids. Don’t screw up. And so we were investing from the earliest days. Without knowing it, thanks to a father who was compounding returns for us. And so we felt, again, very comfortable with the long term.

DAVID GARDNER: It never would have occurred to me to invest in mutual funds. We were this idea that you would just become a part owner of good companies.

DAVID GARDNER: All of those things were, as the Motley Fool business started, thanks to America Online, we got written up in the Wall Street Journal for an April Fool’s joke that we played, inventing a made-up penny stock, hyping it in order to lampoon pump and dump meme stock investing, which was very popular even back then.

DAVID GARDNER: And so having been written up in the Wall Street Journal and Forbes For Our April Fool’s joke in 1994, AOL said, would you guys want to take this thing, your newsletter, whatever it is, Motley Fool, and bring it on to AOL? And that was, we said, yes, that was a good nerve.

STEPHEN CLAPHAM: Yeah, it was a very good… When did you realize it would become a real business?

DAVID GARDNER: Probably about four months later, because we launched in August of 1994. And we were written up in the New Yorker magazine in a very popular section of that magazine called Talk of the Town.

STEPHEN CLAPHAM: Oh, yeah.

DAVID GARDNER: And so we were the Talk of the Town in November, just a few years after launch. And so we found that we could hire our first employee in January of 1995. We incorporated them.

DAVID GARDNER: And we were on a whirlwind growth.

DAVID GARDNER: Period era for five or six years again people who loved business loved the stock market but had no entrepreneurial background other than we did have two successful entrepreneur grandfathers so we did have some family understanding of of business but we learned so much in our 20s and the portfolio your father gave you when you were 18 what was in it yeah it was it was full of 20 or so companies you And it would be like Cap Cities, ABC, Harcourt Brace, Jovanovic, Washington Post was the number one holding.

STEPHEN CLAPHAM: And what made you comfortable about managing that yourself? Because you had an experience.

DAVID GARDNER: Well, first of all, when it’s just a windfall, I mean, that’s just great on its own. So it was not something.

STEPHEN CLAPHAM: But why did you not gamble away? Because that’s what most 18 year olds would have done.

DAVID GARDNER: Yeah, well, I mean, I certainly it wouldn’t occur to me to gamble it away because. It had been so well invested for me.

DAVID GARDNER: And I could see the performance, right? Looking on paper and seeing the Washington Post with Warren Buffett on the board, compounding over the 18 years of my life thus far, I didn’t want to disturb that. Although I did early on immediately move the account from a more expensive traditional broker to a discount broker, which was my first move in my late teens.

DAVID GARDNER: And then I did eventually sell Washington Post Company in order to buy. America Online Stock because I just felt like that was where the world was headed. And that was a good move too. And by the way, many other bad moves as well. Bought a few penny stocks, had some fun here and there, but only with tiny percentage, tiny allocation to speculation.

STEPHEN CLAPHAM: The $50,000 full portfolio was incredibly transparent. So talk about why you did that, why you were confident enough to put your own money and the reputation of this new business. On the line because you were still quite young and quite inexperienced? Or is it because you were still quite young and quite inexperienced that you didn’t recognize the risk?

DAVID GARDNER: Well, I think that there wasn’t as much risk as one might see looking backwards. Now that we think about we have an enterprise and it’s something that people have heard of and we have a business today, it does seem like it was a riskier thing. But back then, we were really just transitioning a print newsletter to this exciting new medium.

DAVID GARDNER: And so that $50,000… Was really important for us. So we took our own money and we said, we have been raised in a world, we live in a world today, and I would still say in 2026, we’re still in that world where the vast majority of people believe that it would be lucky to beat the market averages. This is, of course, something that academia has tightly held for decades.

DAVID GARDNER: I completely disagree with that. I think that that’s always been wrongheaded. Most of the studies are looking at sort of assets as they’re invested in 1997. And then do you keep winning in 1998? And then do you keep winning in 1999? But there are very many fewer longer form studies of how to beat the market over time, which of course, involves finding great companies and holding them for long periods of time.

DAVID GARDNER: And that’s how I was raised. And so we said from the day one, August 4th of 1994 in AOL, watch us. We’re going to put $50,000 to work. We’re going to pick stocks just directly, no funds. Also, we’re going to let you know a few days ahead of time what stock it is. So you can front run us, dear listener, dear viewer, dear online AOL customer. And I’m happy to say that that portfolio did fantastically well.

STEPHEN CLAPHAM: What was it worth today?

DAVID GARDNER: So, well, today it’s gone multiple directions, having transitioned as we moved from a free online site on the web. In the late 90s to premium subscription around 2002. But I mean, you can see all the positions as we closed it down in 2002. And it’s been incredible because Amazon. Com, our cost basis is 16 cents.

DAVID GARDNER: So it almost doesn’t matter what else we picked there, but we had Starbucks, we had Amgen, some EBay, we had some other great companies. At its height, And again, do remember 2001, where everything came tumbling down, including this portfolio got hit. But at its height, it had gone just above a million dollars. So we had 20x the portfolio. In six years. In six years.

STEPHEN CLAPHAM: So that’d be February 2000.

DAVID GARDNER: Yeah, that’s right. And so I’m happy to say that even though we then laid off a lot of employees in 2001. As Amazon itself went from 95 down to seven. You remember those years, Steve. It was a really hard time. Dot bomb, as they say these days.

STEPHEN CLAPHAM: Actually, it wasn’t a hard time for me because all my stocks were going up.

DAVID GARDNER: Well, how about for our society or our country? And obviously being slightly serious for a minute, 9-11. There were just so many bad things that happened. The stock market closed down for a few days.

DAVID GARDNER: It was a dystopia.

DAVID GARDNER: And it was very hard for us, but we did transition because we’re always playing the long game.

DAVID GARDNER: We love business. We love the Motley Fool. We love the game of investing. So we retrenched 2002. As I mentioned, we shifted from being a free online site at that point to becoming, would you like to subscribe for $100 a year for our stock picks?

STEPHEN CLAPHAM: So the price has gone down at this point.

DAVID GARDNER: Well, we now have a range of prices, but I would say our most popular offering is. What we call an epic bundle, which bundles together a couple of our services for about $400 a year.

STEPHEN CLAPHAM: I love the way you did a quick ad for it in there.

DAVID GARDNER: I mean, you can take it out. I’m not here to be a front man for my company.

STEPHEN CLAPHAM: We’ll leave it in. No, it’s fine.

DAVID GARDNER: I love to explain what we’re doing and what we’ve learned.

STEPHEN CLAPHAM: I meant it had gone down because you were charging $48 a year for the print and $100 a year for the online. That’s right. And in the meantime, there’d been a bit of inflation. It’s true. Well, you know, $3.99 now.

DAVID GARDNER: Yeah, okay.

STEPHEN CLAPHAM: So let’s start with that.

DAVID GARDNER: We’re trying to keep up with the times.

STEPHEN CLAPHAM: So you said it wasn’t risky, but you went on TV and tipped Starbucks, and it promptly fell 30%, and they invited you back.

STEPHEN CLAPHAM: Did you think it was risky then? Talk about that.

DAVID GARDNER: So I really don’t think that much about risk. And I think that something is disconnected in me that in most human brains is connected. But I am willing to suffer.

DAVID GARDNER: Loss. I’m willing to say something publicly like on a podcast and be wrong. And perhaps it’s because I’ve given myself license to do so as a fool.

DAVID GARDNER: And because many of our members also refer to themselves as fools. Or if you go to a gathering of our members, they’ll say things like, when did you become a fool? So once you start having that in your head and in your blood, then I think you’re willing to take above average risk, which is what I’ve always done.

DAVID GARDNER: So So. The View, which is a popular daytime television show still in the United States, did invite us on to pick a stock. And it was it was July of 1998. And the stock was Starbucks.

DAVID GARDNER: And Starbucks by six weeks later had lost one third of its value. And they had us back on. And we were sad about it. That was we said, we hope you’ll have us back. Sorry that we picked Starbucks six weeks ago that lost a third of its value because Howard Schultz was being kind of under promise over deliver with that earnings report. So it said he said the year had may not be as good.

DAVID GARDNER: And there was also the Asian contagion, for those who remember that summer. So there were a number of bad things happening that caused Starbucks to lose a third of its value six weeks after we’d said, buy Starbucks on TV.

DAVID GARDNER: But it’s now up 39 times in value from that original price, even including the 33% drop. So I think it was good advice. We’ve never been back on The View since, though. I’m sure the producers have all changed over. Nobody remembers this.

STEPHEN CLAPHAM: You must write. You must write to them and tell them how well you know. But the, so. Why did you pick Starbucks? We’re a gung-ho in the middle of a dot-com boom. You pick a coffee shop.

DAVID GARDNER: You know, even Starbucks itself was trying to play there in the pond of the internet. I remember Howard Schultz, who, again, is a brilliant founder, leader, and still somewhat active in the business today. But Howard was saying, well, we’re also starworks.com, and we’re also a music venue. We’re like a place to come and enjoy music, original music. And so.

DAVID GARDNER: I mean, everybody was trying to figure out, sort of like today, Steve, everyone’s trying to figure out how AI matters to their business. And if you can truly, authentically make AI matter to your business, you enjoy a much higher valuation than if you don’t. And certainly it was true of the Internet back then. So even Starbucks was promoting Starbucks. Com.

STEPHEN CLAPHAM: So I do recall those days. If you weren’t an internet business, you’d…

STEPHEN CLAPHAM: You didn’t get the rating so one of my stocks had an internet business which today is is worth a lot of money because it’s been separately floated okay and when i pointed out the valuation i forgot i’ve forgotten the numbers but it went on the front page of the financial times wow that you know Stephen Clapham says and the stock didn’t move and i and you just think well the stock market It can be very funny sometimes.

STEPHEN CLAPHAM: I love that you encourage people to own individual stocks. That is a belief that I wholeheartedly support and share.

STEPHEN CLAPHAM: Can you talk a little bit about this? And I wonder if you agree with the premise. I had Bill Nygren on the podcast a couple of years ago, and he was making the point that the S&P 500, the index, has become a risky growth stock.

STEPHEN CLAPHAM: Now, I know you like risky growth stocks, but when people invest in an index fund, an S&P 500, they assume they’re getting some diversification, which they’re no longer getting. Not so much. With 40% being the top 10. Yeah. And with the hyperscalers now making these very significant investments in capital expenditure and AI, which may or may not pay off, and they may be burning quite a lot of capital.

DAVID GARDNER: We’ll know in 10 years.

STEPHEN CLAPHAM: We’ll know.

DAVID GARDNER: So I think it’s true. Certainly, there has been more concentration among the top companies in a lot of ways because those companies have been so well managed. It’s funny to think about.

DAVID GARDNER: I mean, Clayton Christensen, the Harvard professor who taught the world about disruptive innovation in his book, The Innovator’s Dilemma, pointed out how hard it is to be a really big dog and keep, or let’s not go with dog, let’s go with battleship or… Aircraft carrier and to turn that boat as the seas of technological change start to roil it.

DAVID GARDNER: And yet what we found is that Alphabet, Amazon, Apple, the list goes on of really great companies have done a great job navigating and therefore enjoy these outsized advantages with the resources that they have. And as a consequence, as Bill Nygren pointed out, as you just mentioned, Steve, they do occupy a higher percentage of…

DAVID GARDNER: S&p 500 index funds than in the past. I think that’s worth pointing out. Many people who are just checking a box every two weeks trying to save and add a little bit more pay yourself first to your own account, don’t pay attention to that or know about that.

DAVID GARDNER: And I think it’s worth raising consciousness around that. So I’m glad you’re mentioning it again. And Bill did a few years ago. There are other alternatives. One can get broader index funds, Russell 2000 kinds of funds.

DAVID GARDNER: There are total market index funds. Even those are a little bit still over-concentrated, but nevertheless, I think it’s a good investment.

STEPHEN CLAPHAM: Or you can buy the equal way, S&P 500. There you go. But, I mean, do you agree with the… Do you agree with the premise? It’s risky now.

DAVID GARDNER: Well, I guess it depends what the word, what connotation the word risky has.

DAVID GARDNER: I would say that it is riskier that there’s more concentration among fewer companies. So in a sense, that broad diversification is harder to achieve right now. At the same time, because I believe those companies are fantastic, outstanding companies.

DAVID GARDNER: One can imagine a universe of broadly diversified companies, all of which are mediocre and don’t necessarily create value, when you have these juggernauts that are churning forward in a world that is sometimes hostile to capitalism. I’m really happy as an American to think that I was born in Washington, D. C., the capital of the free world. I want the free world to survive.

DAVID GARDNER: I want it to thrive. And so I think it’s often these four horsemen kinds of Mag Seven-like companies that are so well managed, broadly owned by many people. I don’t find that discomforting to be invested in. I feel comfortable in those companies, but I understand that from a traditional viewpoint, it’s riskier.

DAVID GARDNER: Was that an answer or did I… I think I just went too long.

STEPHEN CLAPHAM: No, it’s fine. We have time.

STEPHEN CLAPHAM: You said something earlier about… It’s not that hard to beat the market. And all my professional investor listeners, I should have told you that this podcast is particularly listening to professional investors, are spitting blood.

STEPHEN CLAPHAM: And this brings us to your book, Rule Breaker Investing, which is on the bookshelf. I love that your license plate in DC is future, which encapsulates your strategy very uniquely. But talk a little bit about this. What’s the earliest point that you can recognize a potential Rule Breaker?

STEPHEN CLAPHAM: And what are the signals that it could become an exceptional company? And perhaps for the listeners that haven’t read your book, I’m sure there won’t be many that haven’t, but just explain a little bit about what you do and why you’ve been so successful.

DAVID GARDNER: So I think that for me, I’ve been abiding by traits that I decided on more than 25 years ago.

DAVID GARDNER: As a younger person. Knowing that a lot of people were following The Motley Fool, I took that deadly seriously. That $50,000 portfolio that we launched with, or the transparency of our services, all of the numerical scoring and accounting that’s gone on, where we have all these long-term positions.

DAVID GARDNER: And anybody who joins our services can see all of our best and all of our worst decisions and picks. And that’s really been important for The Motley Fool. But I think those six traits, which I’ll run through really quickly, I continue to use them.

DAVID GARDNER: 30 years later. So the 1998 book, Rule Breakers, Rule Makers, is where I articulated them. And then when it came time to write my final stock market book, which you just mentioned, Rule Breaker Investing, from our fellow publisher, Harriman House, Rule Breaker Investing has the same six traits.

DAVID GARDNER: There’s a lot more in the book than that, but I’m using the exact same approach. So here they are very quickly. Trait number one, I look for the top dog and first mover in an important emerging industry and Across every industry, that means we’re looking for the innovator. And there are a lot of industries and a lot of innovators.

DAVID GARDNER: And if you just focus your time on that stocked pond of usually the best companies of our time and just invest there, you’re going to do we have very well. So that’s the most important trait. But the second trait is that we’re looking for companies with sustainable competitive advantage because we’re always invested for a dead minimum of three years.

DAVID GARDNER: Preferably three decades. Therefore, sustainable competitive advantage, which takes many forms, is important. Trade number three is about the stock. For the first time, the first two were about the company. Trade number three is about the stock. We want companies that have exhibited stellar past price appreciation.

DAVID GARDNER: And this is the first really contrary thing that most people are not taught to do. Most people hear those harmful four words, buy low, sell high. And I’ve always said buy high and try not to sell at all.

STEPHEN CLAPHAM: I mean, this is what my friend Nick Glyden, the number one technical analyst, says. Just buy the 12-month highs.

DAVID GARDNER: Okay, great. I think, I mean, of course, I wouldn’t do so mechanically with every company at a 12-month high. For me, I’m looking specifically for top dogs and first movers with important sustainable advantages and a few other traits I’m about to mention. But I agree with Nick.

STEPHEN CLAPHAM: But momentum works. I mean, it didn’t work in July, but…

DAVID GARDNER: Right. Well, when I look at it, I only care about 10-year-plus returns. So the short-term momentum of a share price doesn’t matter very much to me, other than I specifically make it an indicator we’re looking for. We’re looking for the winners because, as I’ve often said, you know, Steve Clapham, what do winners do?

DAVID GARDNER: The answer is they win and they don’t win every time. But I think the financial disclaimer, which we’ve heard brooded about any number of times over the decades, past performance is no guarantee of future results. While I understand why we have to disclaim that is dead wrong. Past performance is usually the single best indicator we have of future results.

STEPHEN CLAPHAM: For a stock, not for a fund. That’s the point.

DAVID GARDNER: Well, I think that’s probably right. But I would also say beyond just stocks, I would say for people, for businesses. I think that noticing the caliber, the standard, the quality of someone, something, some stock is an outstanding indicator probably of the direction it’s headed over the only term that counts, the long term.

DAVID GARDNER: So while trade number three, stellar past price appreciation is typically for me only looking back the last three to nine months.

DAVID GARDNER: Yes, with Nick, I’m like, let’s look at the 52 week highs in a world that’s often looking for the discarded cigar butts. And the buy lows out there. So it’s very contrary, I think. Shall I run through the other three? No, no, please. Great. So trait number four, we’re looking at the people running the company.

DAVID GARDNER: And of course, the investors backing the company. So we’re looking for good management, smart backing. And I would say it’s only been borne in upon me since I first set these down in 1998, how right number four is. We have Jeff Bezos. You don’t.

DAVID GARDNER: Let’s play ball. We have Elon Musk. You don’t. Let’s compete in this industry. The value of great visionary, often founders, not always, is so underappreciated by people who value stocks and people who look at stock valuations, I think.

DAVID GARDNER: And so this is another rule breakery point is that it’s really the people stupid, we might say, in a world where a lot of people are just looking at zigs and zags and charts, technical charts. They don’t actually care what the company does or who’s running it. And I care deeply. About who’s running it. So that’s number four.

STEPHEN CLAPHAM: Do you want to carry on or can I ask you about that? So, I mean, management, obviously, we’ll talk about that in a minute. You mentioned smart backing.

STEPHEN CLAPHAM: So who’s a smart backer?

DAVID GARDNER: Yeah. Well, I think that…

STEPHEN CLAPHAM: And I should say, this is something I wholeheartedly agree with. And I think it’s the most underestimated tool, which even private investors can use. So… Obviously, if you’re a professional investor, as I was, by the time Chris Hohn is on the share register, it’s too late. You need to be before him. He’s quite hard to be before.

STEPHEN CLAPHAM: But for a private investor, if you see Chris Hohn on the share register, you know that he’s done his homework. And so why wouldn’t you look at that? And that’s what you mean. Yeah, sure. Who do you think is… Somebody that you’d like to have in your share register?

DAVID GARDNER: Well, it runs the gamut. I would say when I first wrote this down, and given that we’re talking about top dogs and first movers in important emerging industries, it’s often the venture capitalists. And you’re looking at the pedigree, Kleiner Perkins in Silicon Valley, when I was first writing about this in 1998, jumped to the fore for me.

DAVID GARDNER: A16Z, there are a lot of impressive venture capitalists and sources of venture capital these days. That I think I’m not going to pay too much attention to that. In the end, I really care most about founders, but I’m glad, Steve, that you like this one. It resonates with you. And Warren Buffett is a pretty good example of somebody who is very transparent with what he’s backing because of public disclosures.

DAVID GARDNER: So the public has had a 50-year front row seat as to what Buffett thinks and what he’s backing. And while I don’t take his approach typically, I admire him and I appreciate that that’s true. So fortunately, most of this is public through disclosures. And I encourage private investors to look and see who has funded that thing before it comes public.

STEPHEN CLAPHAM: And what about public market investors? Are there any that you look for?

DAVID GARDNER: Not as much me, because that was not as much my own orientation. I’m much more the sort of the early stage person looking with interest at young companies and upstarts that are coming public. So, and that’s… Even that’s a separate conversation we probably don’t have time for today.

DAVID GARDNER: But when SpaceX comes public with a valuation over a trillion dollars these days, some of the companies that I loved as rule breakers, like when Amazon came public sub $2 billion market cap, those same companies these days are waiting and getting much, much larger prior to going public.

DAVID GARDNER: And fortunately, that’s not true of every company. But I do find myself somewhat annoyed by companies that come public with 13-figure valuations or whatever they are. I-i- I’m not as interested. For example, I didn’t buy SpaceX.

DAVID GARDNER: I wouldn’t buy SpaceX at the IPO because it’s just too big. There’s not enough room for exciting appreciation over the next 10 years, even though I think it’s a fantastic company. And I hope it’s a market beater for people over the next 5 to 10 years. Just not as much interest to me.

STEPHEN CLAPHAM: Do you think it will beat the market?

DAVID GARDNER: You know, I probably would say yes.

STEPHEN CLAPHAM: Why?

DAVID GARDNER: Because I think it’s very hard to predict. All the things that Elon Musk can do with that many resources at his disposal. One of the first things SpaceX did once it came public is it bought out an AI company. And then you start hearing about XAI and the possibility that SpaceX might also be an AI company.

DAVID GARDNER: And then there’s the potential for a merge with Tesla, which I doubt would actually come to fruit. But here again, we have examples of optionality and agency. And so it’s a very powerful position to have that many resources with an innovative mindset and something. Well, people have very different feelings, both sides around Elon Musk. I generally favor Elon.

DAVID GARDNER: He’s not my favorite type of a person, but he is probably the greatest living entrepreneur today and one of the great innovators of all time at a scale that is breathtaking across multiple industries. So that would be an example of somebody who I would. Generally be backing. I’ve done very, very well with my 15-year hold on Tesla.

STEPHEN CLAPHAM: And I think he will merge Tesla into SpaceX. It makes a huge amount of sense.

DAVID GARDNER: There’s going to be some regulatory questions, I would imagine. It might be harder to do that, given some of the prevailing winds around not having too-big-to-fail companies all glom up together. But it’ll be interesting to see.

DAVID GARDNER: As a Tesla shareholder, I guess I’ll have mixed feelings, but it’ll be a gigantic company at that point.

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STEPHEN CLAPHAM: Is there a point at which these companies, they get too big that you’ll just part ways or you got your capital gains are so large that you can’t afford to sell?

DAVID GARDNER: Yeah, my cost basis for our members is 16 cents for Amazon and 16 cents coincidentally for NVIDIA. And so we’re sitting on massive capital gains. Generally, I don’t look to sell these companies, although…

DAVID GARDNER: Once something becomes outsized in one’s own portfolio and we start losing sleep at night, for anybody who does, I’d be the first to say, in pieces, sell off massive winners if they’re causing you to be over-concentrated beyond a level you’re comfortable with. Everybody’s different, so that level is different for everybody, I think, Steve.

DAVID GARDNER: But yeah, so you’re right. We’re sitting on big capital gains. And what I’ve generally done is just held. And that’s why also in the Rule Breaker Investing book, Beyond the Six Traits we’re talking about, which we’ll get back to. Close out those last two in a sec.

DAVID GARDNER: But I also have the six habits of the Rule Breaker Investor, which is actually how the book starts. And habit number one is rule number one, let your winners run high. And I think that’s what most people fail to do and why they don’t enjoy market beating gains and find themselves stressed out when I’m happy to let my winners.

DAVID GARDNER: It means I don’t have to do a lot of work. I buy and maybe I buy some more, but I don’t have to have target prices and sell out and then figure out where to repatriate the money. I just keep holding.

DAVID GARDNER: So for these reasons, eventually some of these companies, as you know, Steve, start to pay dividends, like Alphabet all of a sudden. Meta Platforms, they start saying, okay, we’ll pay a dividend. And so that’s also a wonderful outcome for long-term holders of these kinds of companies.

STEPHEN CLAPHAM: Finish the number five and then I’ll come back and talk about management and capital gains.

DAVID GARDNER: Thank you. So trait number five of the Rule Breaker. Stock is that we’re looking for companies that have strong consumer appeal.

DAVID GARDNER: And that’s my way of saying the brand really matters to me.

DAVID GARDNER: Companies that you recognize their brand name as a consumer, you just mechanically buy from them because you trust them. It’s not easy to get into a position where people trust you so much that they’ll just buy you every time. But we have some great brands worldwide. I mean, almost every country of note with an economy of note has you its own brands. And I love those companies.

DAVID GARDNER: And usually brand isn’t really being, as you know, better than I, as somebody who knows accounting far better than I, brand is really not really captured very well in the financial statements. If a company overpays for another and we can’t figure out why, and they’re intangibles, we might list it as goodwill. But really, there’s no valuation sitting on Apple’s Balance Sheet of its brand or of Amazon’s brand.

STEPHEN CLAPHAM: I would go further. The companies that do have a brand in the Balance Sheet are usually… It’s not worth owning. Aston Martin carries the Aston Martin brand at 300 million pounds in its Balance Sheet. I suspect his market cap is less than that. Wow. Didn’t know that.

DAVID GARDNER: But again, Steve, your knowledge here in this area is deep. So I appreciate that. And coming from you, that means a lot. And I would just say I’m.

DAVID GARDNER: Looking for the things that people can’t put numbers on. One of the mantras I repeat a few times in my book is there are no numbers for the things that matter most. And whether it’s the CEO of the company, no number on that person on the financial statements, the brand, the culture of the company, the innovative capacity of the company, most of these things are simply not captured in numbers.

DAVID GARDNER: And then if we’re looking at, you know, multiples of cashflow and earnings, all of the best companies therefore look. Overvalued. And that gets us to the sixth and final trade of Rule Breaker stocks and the most outrageous one.

DAVID GARDNER: And that is that I love it when people say that stock is so overvalued or I’m going to wait for the dip. I would never buy it there. You already heard me earlier talking, championing buying stocks at new highs. So, you know, I’m comfortable doing that. I’m not just comfortable doing that.

DAVID GARDNER: I think that’s an incredibly good indicator that you should be buying the stock when, again, most people are going the other direction. So that. Overvalued word means so much to me. Probably my favorite chapter in Rule Breaker Investing is where I get to talk about overvalued because there are no numbers for the things that matter most. And I know that as an entrepreneur.

DAVID GARDNER: My favorite Buffett line is I’m a better entrepreneur because I’m a businessman and a better businessman because I’m an entrepreneur. And I felt that deeply having started my own little dot com back in the day. We’re still a small company today, but we’re bigger than we were back then. And I’ve learned so much. As a consequence of being an entrepreneur that’s helped me with my stock picking and vice versa.

DAVID GARDNER: As a stock picker, I’m looking at what other companies are doing and saying, I really admire that. Have we tried that at our company? Let’s do that. So that has been extremely helpful for me. And I therefore know of the important things that are not being captured in financial statements that usually matter more at a longer term level for compounding returns than many of the things that people typically only look at.

STEPHEN CLAPHAM: Okay, so we’ve done the six traits and we’ve got the book advert out. There’s lots of adverts in here.

DAVID GARDNER: Cut it all out.

STEPHEN CLAPHAM: I hate this. The sponsor is going to be saying, what are we doing? But just I want to come back to the management and the capital gains. So the capital gains, you can now get round in America because you can transfer your stock for an ETF, can’t you?

DAVID GARDNER: This is not something that I do. So I’m, well… Well, that may well be true.

STEPHEN CLAPHAM: You’ve not looked at that?

DAVID GARDNER: No, not really. Because for me, I’m typically not really selling at all. And so…

STEPHEN CLAPHAM: I mean, you’ve got these amazing gains in Amazon and NVIDIA and all these. They must be a big percent of your portfolio.

DAVID GARDNER: They are.

STEPHEN CLAPHAM: And what is the level that you’re not comfortable with?

DAVID GARDNER: So this is an important question, and I’ll give my own personal answer. And then a broader answer. So my own personal answer, Steve, is that I have lived an adult life where my largest holding has been up to 80% of my net worth. And if that sounds crazy, it probably is. And that’s not a constant steady state for me. That’s at the extreme.

DAVID GARDNER: And if you are an entrepreneur, and there are a lot of business people listening to us right now, a lot of us, if you’re an entrepreneur, your wealth is… The majority of your wealth is tied up in your enterprise. So anybody who’s a small business person is used to a big number probably.

STEPHEN CLAPHAM: And that’s why- That’s slightly different, isn’t it? Because if you’ve got a very valuable business, then you can’t sell 10%. Well, you could sell 10%, but it’s much more difficult. Whereas if you’ve got 80% of your worth tied up in Amazon, selling a few shares might make it- Might be a sensible thing.

DAVID GARDNER: Indeed. And so just to be clear, just to restate, I, a crazy fool, have been willing at various points over the course of my adult life to have the majority of my portfolio in one stock.

STEPHEN CLAPHAM: Over 50%.

DAVID GARDNER: Yeah. Now, to be clear, I have 50 plus stocks. And the only way this ever happens is not because I loaded up on it in the first place. It’s purely through appreciation. And as something.

DAVID GARDNER: Like Amazon grows and I watch and learn it and I become increasingly comfortable with it over time and it becomes safer than if I were a small business person with 80% of my wealth in my own company because Amazon at this point is such a big, important company worldwide.

DAVID GARDNER: So I would just say that’s my personal answer and I’m not putting that out as something anybody else should follow because another section of my book and the closing section is about the six principles of the Rule Breaker portfolio. So these are portfolio principles. And again, many private investors might have an inkling as to what kinds of stocks they might want to buy and maybe how they would invest.

DAVID GARDNER: Like, would they… Hold for three years or more, for example, but many people don’t have portfolio management principles in place. So I wanted to lay that down in the final third of the book. And number four of our six principles is establish your sleep number.

DAVID GARDNER: And this is how I hear this conversation. So for those of us, at least in the US, perhaps here in the UK as well, sleep number makes us think of mattresses and this new high-tech mattress where you can dial a number zero to a hundred for your firmness.

DAVID GARDNER: And then your spouse or partner on the other side of the bed can have their own number. And that’s the sleep number that’s possible for our sleep these days through mattresses. I have repurposed this phrase for investors. I actually think it’s even more powerful and helpful in an investment context, but I define your sleep number this way.

DAVID GARDNER: It is the maximum percentage that you would allow your largest holding to become as a percentage of your overall net worth. Just what you and I are talking about right now. And so principle number four is establish your sleep number.

DAVID GARDNER: Now, parsing that back to what I’ve just said, I’m saying I have a sleep number at different points of my life that’s double digits, high double digits, potentially. I would say today is a 60-year-old. It’s probably around 30. So I’m willing to have a single share be 30% of my overall portfolio.

DAVID GARDNER: As we get older, we probably should be lowering that number.

DAVID GARDNER: And yet, 30 is crazy high for many money managers. For many of us invested in broad index funds, you’re… Own sleep number is much closer to one, let’s say, or low single digits because you’re really broadly diversified.

DAVID GARDNER: So I just encourage people to think about that number ahead of time, because as you invest over the course of time, you’re going to want to revisit that. And the key is, the sleep part of it is that you have your portfolio at that percentage in that large holding, and you’re still sleeping at night.

STEPHEN CLAPHAM: It’s very funny because well before I read your book. So I have an online school and the most popular product is Analyst Academy, which teaches you everything you need to become a serious investor. And one of the modules is about portfolio construction.

STEPHEN CLAPHAM: What’s the right number of stocks to have in your portfolio? And I use exactly that analogy. Okay. What would keep you up at night? And so I think it’s a very simple and very… The interesting thing is it’s very personal. It is. And that’s why I think one of the fascinating things about investing, one of the fascinating things I’ve learned from doing the podcast is that everybody does it differently.

DAVID GARDNER: And that’s the important point because I feel as if many people haven’t been coached there or realize. And it’s even important with your, speaking of your spouse or partner on the other side of the bed, they’re also on the other side of your financial life there too. So it’s not necessarily a personal number for you.

DAVID GARDNER: If you were, let’s say in my case, I’m the husband investing. I have to think about my wife, Margaret, and what she’s thinking about as well, because we’re a team. So even if I’m a crazy cowboy wild westing myself with the portfolio, that wouldn’t make her very comfortable. And so it’s important, obviously.

STEPHEN CLAPHAM: Would she know?

DAVID GARDNER: Yeah, she knows all the way. But it’s important that we arrive at team numbers, probably not just a single number. But your main point that it’s about sleepy at night, completely agreed. Your secondary point that it’s individual is so important. And that’s why. I don’t put out a sleek number. Principle number four is establish your sleek number, which by the way can change at different points in life.

STEPHEN CLAPHAM: It’s a really important thing and people don’t pay enough attention, I think, to this whole issue of portfolio construction.

STEPHEN CLAPHAM: I don’t know, you’ve read Lee Freeman Shorer’s book, The Art of Execution.

STEPHEN CLAPHAM: Very good book. And he talks about the… You know, it’s not about getting the stocks right. It’s about the execution, about what you do with them.

STEPHEN CLAPHAM: So coming back to management, which we’re at number four.

DAVID GARDNER: Lovely. Yep.

STEPHEN CLAPHAM: Rule Breaker companies, you need outstanding management. So how do you assess the management when the company is young and there isn’t much of a track record?

DAVID GARDNER: Yeah. So I think, first of all, I listen very carefully to how these managers comport themselves. What do they say about their industry?

DAVID GARDNER: Their own business and themselves. And as you might expect, I favor people who are the smartest people in the room, in their industry.

DAVID GARDNER: Robert Frost, the American poet, wrote, it’s actually the lines on his gravestone, I had a lover’s quarrel with the world. And I love managers who have a lover’s quarrel with their industry. They come along and say, we’re misserving people or what we’re doing here, like we’re going to change things.

DAVID GARDNER: It’s going to be different now. Because of this business that I’m starting. So those are visionaries. Those are people who are marching to the tune of their own. Well, drums don’t have tunes, so we’ll go with liar. And these are people that invariably, to me, end up creating the great companies of every era.

DAVID GARDNER: And so, you know, obviously we’ve talked about names like Jeff Bezos, and we’ve talked about Elon Musk and Howard Schultz, Starbucks. They’re in every industry. I would throw out Jensen Huang. He’s absolutely phenomenal. And these are usually people who usually… Have some measure of humility, some measure of humility.

DAVID GARDNER: For one thing, they’re innovative. You can feel unmoved. Some measures, usually.

DAVID GARDNER: And I would also say that they’re people of character. And this is an older school term that you won’t see many courses about in school anymore, but I care deeply about human character. I think that underlies everything.

DAVID GARDNER: So I want to have somebody that I’m proud to be invested in because I really believe them. And I’ve met enough great people in life. That I know they’re out there and there are more coming. And so that’s where I invest.

STEPHEN CLAPHAM: But what tells you that they’re going to be exceptional and deliver rather than they’re just charismatic?

DAVID GARDNER: Yeah. Well, I think for me, a lot of it is the proof’s in the pudding. Usually if they have gotten at an early age, because usually Steve Jobs, they come out at young ages. If they have already scaled something that is providing a product or service that is usually disruptive and special and new. And they’ve scaled it to the point that they’re actually not just venture capital, but they’re now public.

DAVID GARDNER: Ty always goes to thinking that they’re probably an exceptional person. And again, I so favor founder CEOs and usually young people who’ve started something versus the typical CEOs running corporate America. I assume the same is true worldwide, where these are people who are somewhere near my age, 60, and they’re signing on board.

DAVID GARDNER: They’ve just been promoted finally to CEO, and they’re going to be around for four years. And they’re going to hope it’s a good four years, but they really, they don’t have a lot of sway over what went before. In many cases, they’re inheriting something and they’re sort of renting the leadership of the company for a few years. They hope it goes well. And then they go off into the sunset.

DAVID GARDNER: And that’s how a lot of businesses are run today. And I like the ones that are led by people who are 26 and who are shaking up the world for good based on their new product or service. So, I mean. Again, there’s no one size fits all answer to a question like how do you judge a leader or how do you pick a good CEO? But these are some of the factors that I care about.

STEPHEN CLAPHAM: So you said that you like it when the stock people think that’s way overvalued.

STEPHEN CLAPHAM: So I understand the logic. Talk a little bit more about this. Maybe you got a couple of examples of things where it’s look stupid. And do you I mean, is it one of these things that it feels a little bit uncomfortable? For you or you just don’t care?

DAVID GARDNER: Well, I mean, first of all, it took me a while to finally understand and learn this. We launched, as we mentioned, The Motley Fool as a newsletter in 1993. Therefore, as we wrote our Rulemakers 1998 book, that was five years later.

DAVID GARDNER: And therefore, at that point, I’d had people following what we’re doing online. And when we would announce a new stock pick, that stock would open up the market next morning. We wouldn’t be buying it for another two days ourselves because we set it up intentionally so the people could front run us.

DAVID GARDNER: And so I was I was on the one hand comfortable putting out my opinions in the real world, starting with that $50,000. And I also felt a lot of responsibility. And so and that was all developing in my late 20s and early 30s. So I think that the importance of finding…

DAVID GARDNER: Great companies and the great people behind them and investing in them early and holding them for long periods of time. Whenever, because I picked a lot of bad stocks, Krispy Kreme, the donut company, which is a very simple company. Somehow I managed to lose 94% for our investors because I picked Krispy Kreme at the wrong moment.

DAVID GARDNER: We could talk more about Krispy Kreme if you like, but you know, this is a very important point and probably a key section of my book, Losing to Win. Where I point out that I have actually made more bad stock picks than anybody in Motley Fool history.

DAVID GARDNER: And this goes right in line with sort of my venture capital mentality, where I’m willing to lose and lose again and look silly in order that we might find the great companies of our time and hold them to points where you don’t even care about your losers anymore. Because when Amazon has gone up as over a thousand times for us, it wipes out every loser I’ve ever. Made and leaves money on the table.

STEPHEN CLAPHAM: Have you had more losers than winners?

DAVID GARDNER: I would say it’s probably about… 50-50. I mean, I’d pick so many different stocks over the course of time. I mean, most formally through the Stock Advisor and Rule Breaker service, where I think my hit rate was something like 55%. And that’s to beat the market, by the way. If we talk about just if the stock goes up or not, it would be a higher percentage.

DAVID GARDNER: Yeah, I know. But I premised all of my work at The Motley Fool on beating the market averages. And so I aim for a 60 percent rate. And that’s what I try to convey to readers or thinkers ever been listening to us today. I’m not this gunslinger who thinks like it’ll work out one in 10 and who cares about the other nine.

DAVID GARDNER: With every single stock pick that I make, I’m trying to beat the market and I’m thinking that it will beat the market. And I just recognize that that’s only going to happen usually for what I do at best six times out of 10.

DAVID GARDNER: And by the way, that’s a good hit rate because as you probably know, market studies show that the majority of stocks underperform the market averages. So if we’re even at 50-50, we’re probably doing better than average. But the key is not that percentage. The key is the return that you’re making off of the stocks that you’re buying that are beating the market.

STEPHEN CLAPHAM: Sure. And plenty of professional investors happy with a 55% hit rate.

DAVID GARDNER: Well, indeed. And, you know, I want to circle back to something you said earlier because you said you said they’re spitting blood here as I’m talking about how easy it is to beat the market. And I want to just speak to that briefly because, Steve, first of all, I don’t want to make it sound like it’s easy. All the time.

STEPHEN CLAPHAM: Well, that’s a sunbite. That’s a sunbite we want.

DAVID GARDNER: Well, good, good. Because I have experienced heartbreaking loss watching, you know, positions that I’d held that were of eight times in value and I’m selling them at a 90% loss. 3D Systems, ticker symbol DDD would be a good example of that 3D printing company. And as I’ve already mentioned, you know, we held Amazon, NVIDIA, Netflix through huge losses. Like Netflix lost two thirds of its value in six months.

DAVID GARDNER: And this is not uncommon for these kinds of companies. So I want to make it clear that I don’t want to make it sound easy or be glib on this point. I recognize the heartbreak that I’ve experienced as an investor on the way to market beating returns. And I also want to say that a lot of professional investors have a handicap relative to the rest of us private investors.

DAVID GARDNER: And it’s really worth underlining is the professional investors already know this, but those who are listening to us who don’t, who aren’t, may not. And that is that I, as a private investor, can allow a position to grow outsized in my portfolio without being forced by regulation to sell it down to a certain percentage point. Further, I don’t have anybody coming to me saying, I need to sell right now.

DAVID GARDNER: I don’t like the market. And therefore, I have to liquidate positions that I had that I might even appreciate as a professional investor because my clients are forcing me to do so. I don’t have any of those handicaps. I’m in the Peter Lynch School. Peter Lynch wrote some great books after he finished Fidelity Magellan and his great run there. And he said, I had so many handicaps as a professional investor.

DAVID GARDNER: And I felt very empowered in my early 20s as a young man by Lynch’s pointing this out, saying, you don’t have these disadvantages as a private investor. And I’ve always taken advantage of that as a private investor myself. So I agree that it’s very hard. It’s harder for professional managers to beat the market relative to. Private investors who know what they’re doing.

STEPHEN CLAPHAM: And you think for a private investor who is competent, who understands the stock market, I mean, it’s perfectly possible to beat the market.

DAVID GARDNER: I would say it’s likely, especially if you’re allowing positions to compound over time, because that’s really the secret to beating the market. And because there aren’t as many studies, because to do a study over…

DAVID GARDNER: 30 years is a lot harder to do the study of an annual performance kind of a thing. And so much of our financial media, as you well know, is so focused on what happened today or what the markets did today or this quarter.

DAVID GARDNER: There’s just so little attention paid to the long term, whether it’s the media that covers the markets, many of the investors who are in the markets that I would say they’re not investors, they’re traders. Of course, there are people trying to use algorithms, making money inside of a second. All of these are players in the same game that you and I can play.

DAVID GARDNER: And I’m just playing it completely differently in a way that I think favors me and my ilk. And that’s why I think The Motley Fool has grown over the years, because we have helped grow out a base of people who are usually very savvy. They’re retired business people themselves. They love the market. They believe in business.

DAVID GARDNER: And they think that you can pick a stock and say, that’s Chipotle is going to do better than Taco Bell. I mean, And Starbucks will outperform any other coffee company. To me, these are, it’s easy to say now looking backward, but we were saying this then looking forward. And I think we’ve been proven out. At the same time that I’ve made a lot of bad stock picks as well.

DAVID GARDNER: But the key, and I hope one thing that will come through this interview, I’ll say it right now, is that most humans, we know this from behavioral economics, experience loss as three times more painful than equivalent gain. The joy, the pain of loss is three times the joy of gain. And that’s now hardwired, that’s been hardwired into our bodies as human beings for thousands of years.

DAVID GARDNER: And yet, of course, for investors, at least Rule Breaker investors, the joy of game is infinite times the pain of loss. And a lot of people never get there because they don’t hold positions long enough, but they don’t realize that the worst you can ever lose sounds horrible is 100%. You wouldn’t want to lose all your money, would you?

DAVID GARDNER: Except that if you lost all your money in three stocks and the fourth one went up 10 times in value, if you’re mathematically inclined, you would do that every single day of the week and on Sundays as well. And over and over, week after week, year after year, your whole life long as an investor. So that’s really what I try to do.

STEPHEN CLAPHAM: So letting winners run. I mean, that’s a core facet of your strategy. Yes, sir. Why do people get this wrong? What causes people to sell great companies, great investments too early?

DAVID GARDNER: So it’s a variety of factors. I mean, a lot of people just have never been taught or coached to do otherwise. They haven’t taken your courses. Steve, they haven’t tapped into Fool. Com. They don’t really know. There are a lot of people who just operate off of some old saw they heard. Like they’ll hear somebody say, hey, if the stock doubles, sell half and you’re playing with the house’s money at that point.

DAVID GARDNER: And they just sold out half of their Apple that they could have held for 30 years. So there are things we tell ourselves in our minds, little rules that we invent that I don’t think have a lot of backing if you actually look at the implications of them. I also think that human emotion is such an important factor.

DAVID GARDNER: And there are some genius people who, while they have a much higher IQ than you or I might, they actually have a much lower EQ. And they’re not well suited to holding and showing patience in the face of loss. And so resilience is not equally distributed. And so I think that’s very important. If you’re going to take this style approach to investing, by the way, there are many ways to approach investing.

DAVID GARDNER: I’m giving a very… Angled one, mine, since you happen to invite, and thank you, Steve, inviting me on today. But I’m the first to say there are a lot of other approaches to the market. I don’t use Warren Buffett’s approach just about at all. I benefit so much that so many people have lionized Buffett to the point that everybody thinks that’s the only way to invest.

DAVID GARDNER: If you were to invest in stocks, just follow Buffett. I’m specifically doing things opposite the Buffett school, and they’ve worked brilliantly. So I think there are many ways to approach the markets. There are also many ways to sell your position.

DAVID GARDNER: Maybe it’s just a scary headline, the Wall Street Journal, that causes you or somebody said something on the telly and you’re like, well, maybe that person is probably right. It’s time to get out. There are any number of reasons, forces that are causing people to sell and that still small voice that you could keep in your head that might say, hold, can be drowned out by too many other extraneous factors.

STEPHEN CLAPHAM: I mean, this fascinates me because in one sense, look, I cannot criticize you because you’ve got one of the best investing records of all the people I’ve had in the podcast. I mean, it’s really quite astonishing. I’ve got huge admiration and respect for you.

STEPHEN CLAPHAM: But on the other hand, I interviewed Christopher Tsai, and I asked him about Costco. And Costco’s trading at 60 times earnings. And he said, well, I’m not going to sell Costco. And I’m like, well, hang on. You know, it’s a good company. But it’s a very big company and it’s not worth 60 times.

STEPHEN CLAPHAM: I mean, talk a little bit about that and talk a little bit about how you felt when Amazon had fallen 90%.

DAVID GARDNER: Yeah. So I think that…

STEPHEN CLAPHAM: What gave you the fortitude to keep it?

DAVID GARDNER: So usually stocks are overshooting the actual business performance themselves. And so while… Well, yes. Amazon did lose almost 90% of its value over the course of less than two years.

DAVID GARDNER: It still had the same CEO in place. People were still buying things online.

DAVID GARDNER: There was an Amazon dot-bomb headline and a cover of Barron’s. So there were a lot of negative forces that are driving the stock. And then I think there are a lot of algorithms that hop on the bandwagon and sell as well. So I think that things can… Shoot up and down and overshoot in both cases.

DAVID GARDNER: When you mention Costco, a company that I’d never recommended, have great deal of admiration for, I’d be even better if I’d been recommending Costco. Fortunately, my brother and others at The Motley Fool are Costco fans. I’ve just never really… Used Costco that much as a consumer.

STEPHEN CLAPHAM: Well, you’re too rich.

DAVID GARDNER: Well, thank you. That’s kind.

DAVID GARDNER: For me, Costco represents an incredibly great culture and brand. And again, that’s not being factored in usually in that 60 times earnings. And I think that those factors are worth recognizing. I think the market’s smart. I don’t think when a stock trades at 60 times, that means the market’s gone crazy.

DAVID GARDNER: I think we’re only looking at earnings and a multiple off of earnings, but we should also be looking at just the base of customers, repeat customers. Some businesses have incredible amounts of repeat customers, follow on, like I’ll pay you even more next year. And other businesses don’t. They have one shot, hope you’ll buy the Peloton bike.

DAVID GARDNER: Maybe you’ll subscribe. A lot of people don’t keep up their exercise, right? A bad stock picket line, by the way, Peloton. So you end up with lots of important factors that are in the business itself, not just in the valuation of the stock. So. Costco has so many positive factors going for it.

DAVID GARDNER: And, you know, I would just say that I’ve seen like the difference between Apple and a generic Chinese computer company that might be making a cheaper computer is so market that you can see it, obviously, in Apple’s valuation today. But usually valuations tied back to brands, brand recognition and not merely name recognition, but appreciation like.

DAVID GARDNER: People love Apple. This is a company where people have bumper stickers on their car. It’s just on their car, but it says, you know, Apple. And so I look for those kinds of companies. Harley Davidson in the United States, which has had generally fantastic performance overall up and down in recent years.

DAVID GARDNER: But, you know, people are tattooing that brand into their skin. Like those are the customers that businesses love to have. And those are the kinds of companies, Costco is one of them, that will always look overvalued. So I, you know, um…

DAVID GARDNER: I don’t know if I’ve done a good job answering this question, but I’ll just say a lot of it is looking into the heart of the customer experience and recognizing what are the businesses that truly, the word I use sometimes is conscious capitalism, something that I believe a lot in. I’ve been on the board of that organization. Companies that are winning, not just for shareholders, but for everybody.

DAVID GARDNER: Winning for your customers, of course, but also your employees. Where do people love to work? I did a study 10 years ago or so. I looked at some of the highest rated LinkedIn places to work. LinkedIn did a study last 10 years. Where do people love to work? And then I went on to show that not only were we invested in those companies, but those ended up being the ones that went up 30 to 50 times in value.

DAVID GARDNER: Meta Platforms, Alphabet, people love to work in those companies, even though a lot of other people think, well, it’s way overvalued or they’re evil companies, even Even though Google tries to convince people they’re doing no evil.

DAVID GARDNER: A lot of people object to these kinds of companies but don’t realize the feeling of the employees that work at these places. That’s the energy you have as an entrepreneur to deploy your product or service out in the field. So the companies where employees truly love their organization, if you just fill a portfolio with those companies, you’re going to beat the market.

DAVID GARDNER: We don’t need to overcomplicate things.

STEPHEN CLAPHAM: It’s easy.

DAVID GARDNER: I mean, I don’t want to make it sound too easy, but I do want to say now, you know. Near the end of a stock picking career where I’ve done this for almost 40 years, I’ve seen what wins and I’ve seen what loses. And especially as an entrepreneur, I’ve been able to have that extra lens where I can see in my own business what wins and loses.

DAVID GARDNER: And so I just know the importance of looking directly into a company and its customer relationships, et cetera, how people feel about the brand. And of course, who’s running the company, Steve. So I’m starting to repeat myself, but these are the key factors that a lot of people…

DAVID GARDNER: Aren’t looking at when they do their valuations or they decide what stock they, if they even want to buy a stock. And thank you for leading off our conversation today by saying that you love that we both think it’s worth buying individual shares directly. I completely agree.

STEPHEN CLAPHAM: I was interviewed on somebody else’s podcast and they are a proponent of buying index funds. And we had the discussion and they did a year-end roundup and they said, I really wish I hadn’t had on that guy, Steve Clapham.

STEPHEN CLAPHAM: And there were, you know, people who have got a very entrenched, extreme viewpoint. And I think that they’re wrong. But, you know, they said, I thought that they were wrong because I was trying to sell courses. And how you, which is a fair criticism. People might criticize you for the same thing.

STEPHEN CLAPHAM: You keep talking about, oh, you’ve done this for 40 years and you sound like it’s like at the end, but you could be doing this for another 40 years.

DAVID GARDNER: Well, I love what I do. I will also say that when I wrote Rule Breaker Investing, I said this is my final stock market book. And that’s because a few years ago at The Motley Fool, I picked my final stock.

DAVID GARDNER: So I continue to be a voice on our I do a weekly podcast for The Motley Fool called Rule Breaker Investing. And and I’m chair of our foundation. And of course, I love our company and our members, and I enjoy doing interviews like this. But I’m not in there picking stocks anymore.

STEPHEN CLAPHAM: But you’re picking stocks for yourself.

DAVID GARDNER: Yeah, sure. But in my case, usually it involves not that much effort because I’m already fully invested and I don’t have that much more coming in now. And so I just continue riding my 55 horses or so of lots of the kinds of companies we’ve been mentioning.

DAVID GARDNER: And since picking my final stock in The Motley Fool. I’ve added a few new positions, and the two that strike me as rule breakers that are companies that have, you know, I think outperformed in every way, and they’ve been fantastic for my portfolio, are Palantir and Rocket Lab.

DAVID GARDNER: And Palantir, at scale, already having deployed AI and, you know, in a world where others are still trying to figure out what AI means, Palantir has been an incredible example. Also, it’s regularly called out as the single most overvalued stock. On the entire stock market. And it is. Yeah. And it’s up, you know, four or five times for us. So these things, by the way, actually fit with each other.

DAVID GARDNER: It’s not a jangling juxtaposition dissonance to say, you know, it’s overvalued and it outperforms the big point I’m trying to make, not for every stock that’s overvalued, but for rule breakers that fit the six traits we talked about. When people tell me those things are overvalued, I say, thank you very much.

STEPHEN CLAPHAM: But you love the visionary management. I mean, what do you think of the chief executive of Palantir?

DAVID GARDNER: Yeah, I mean, I have you sort of a while. Some of it’s I mean, both Karp and Thiel, who are sort of co-founders. One thing I appreciate and that caused me when my wife first came back and said, I’ve been reading about this. What do you think about it?

DAVID GARDNER: Because this idea came from her. I like that they were politically different from each other. I think that’s a message that in America and perhaps worldwide, we need to recognize that people who are different than you are not. Bad people. They are not trying to take down you.

DAVID GARDNER: They are, in fact, fellow Americans who have a different View of things. And the story of our country, I think, is working with very different people in a melting pot. And so I liked that model for Palantir. And I recognize, I mean, there are some flamboyant founders out there, and there always will be.

STEPHEN CLAPHAM: I don’t know that we call flamboyant. I think I’d have another description.

DAVID GARDNER: He’s a wild man.

STEPHEN CLAPHAM: Yeah. Yeah.

DAVID GARDNER: And look how fantastic that business has performed. And the other thing is, sometimes we’re in danger of assuming that everybody at Tesla believes in Elon Musk or is just like him or would think the same things he does. And it’s not true. There are, of course, people at Palantir who would be very different from the CEO at every company.

DAVID GARDNER: That’s true. And of course, the cultures that are at these companies are usually stronger than the people. Leaders come and go, but culture is just like great cities. Are built up over time. So I always think Apple’s much bigger than Jobs.

DAVID GARDNER: And then everyone’s like, well, how will Apple do when Steve Jobs is gone? How will Berkshire do when Warren Buffett’s gone? I always say, well, look at the culture. Is the culture strong or not? Because leaders rise. And indeed, Tim Cook has stacked on more billions of dollars of capital appreciation than Jobs did.

STEPHEN CLAPHAM: It’s a great point on the culture. Well, talk a bit about losers, Krispy Kreme, Pellison. What’s your favorite loser? What was the lesson from it?

DAVID GARDNER: Yeah. I mean, I guess I would say that I have no favorite loser because I don’t like any of my losers.

STEPHEN CLAPHAM: But what was the one that you said, oh, well, I’ve got something to take away from that?

DAVID GARDNER: Yeah. Well, every one of them. I would say really quickly, 3D Systems. I mentioned that earlier. It was an eight bagger as 3D printing took a shine to people’s portfolios. And then all of a sudden showed that it was a mediocre, lower margin company. So an eight bagger that we ended up selling at a 90% loss. Why did you wait?

DAVID GARDNER: Because I always wait. I’m usually the last one out. And the good news is when it works, nothing else matters. But when it doesn’t work, you’re always going to look like a fool, but we already know I’m comfortable with that. Okay. So, that one GoPro, this beautiful, drone cameras and a whole media company that was growing around the GoPro, ecosystem, a huge underperformer. Over the course of time.

DAVID GARDNER: Yeah, Krispy Kreme, which was fraudulent in its accounting, something that you would understand better than I, but they basically were cooking the books for a few years there. And that was the few years I recommended the company, a brand that I really admired, a company that I liked, had a great history.

DAVID GARDNER: It’s done pretty well since. I just picked the worst era for it. And a Peloton, as you just mentioned, which was, we picked it before COVID, but it ended up becoming a COVID darling. And then it ended up losing so much value from there.

DAVID GARDNER: So every one of those kind of has its own lesson, but without being glib, I’m always in danger of being glib, but without being glib, I would say that I’ve tried to learn lessons, not from the things that failed. I’ve tried to learn my lessons from the things that have succeeded.

STEPHEN CLAPHAM: That’s interesting.

DAVID GARDNER: And I think we often feel burned when we lose. And so we say things like, well, either win or I learn. And someone puts their arm around us and says, David, Steve, what can we learn from that failure? And while that’s a worthy thing to do, I would be much more interested in saying, what are we learning from what’s succeeding, winning, etc.

DAVID GARDNER: And I’ve spent my life seeking winners, trying to be a winner myself, loving success and winning, knowing that you have to lose to win. In this world. You can’t just win all the time. And yet I would much rather learn my lessons from the things that are succeeding.

STEPHEN CLAPHAM: That’s a brilliant, brilliant point. And we could close there, but I normally ask people to recommend a book, but people that have written a book, I think it’s rude to ask them to recommend another book.

DAVID GARDNER: I can recommend another book.

STEPHEN CLAPHAM: Oh, go on. Sure.

DAVID GARDNER: So first of all, I read very few investing and business books. I usually read books about technology, culture.

DAVID GARDNER: And so my book of the year.

DAVID GARDNER: Is The Score by T. Nguyen. That’s a Vietnamese-American name, N-G-U-Y-E-N. But T. Nguyen’s book is brilliant. And it talks about, well, the subtitle is How to Stop Playing Somebody Else’s Game.

DAVID GARDNER: And while he is a philosopher of games, and that’s the first time I’ve used the word in our whole conversation, when I would say the leitmotif, the thing that runs through my life that I’m most passionate about is games. And of course, I View investing as a fantastic game, etc.

DAVID GARDNER: But he is a philosopher of games, talks about scoring and the choice how to score a game, how much that matters, and then starts pointing out that our society is gamifying things where we’re setting up scores and how that sometimes is not a great idea or to be self-aware.

DAVID GARDNER: That’s why the subtitle of the book is How to Stop Playing Somebody Else’s Game. And a quick example might be in the United States, perhaps here in England as well. Grade point average. As soon as you start saying, well, what’s your GPA?

DAVID GARDNER: And you get a number that works across the whole country. And so bureaucratically, it’s very helpful. Are you a 3.7, 3.2? But as soon as you start making that the score, then you have people who start going, well, I’m just going to take the easiest courses that I can. So I get the best GPA that I can.

DAVID GARDNER: And they start hurting themselves by not challenging themselves and truly learning at university, as I know your son is right now. I would just say that being conscious about how things are being scored is what that book does brilliantly. And I love the score.

STEPHEN CLAPHAM: That’s a fantastic recommendation. I’m going to buy that for my son because I’ve been, he’s having done his first year, he was concerned about his GPA. And I said to him, and his mother said to him, just learn.

STEPHEN CLAPHAM: Just go and educate yourself.

DAVID GARDNER: Yeah, on something that you really care about, something that really interests you.

STEPHEN CLAPHAM: Yeah, exactly. That’s why you’re there.

DAVID GARDNER: Indeed. And I think a lot of people get that, but it’s amazing how we give that away. I’ll give one more quick example because I just love this. But, you know, the wine, the score of red and white wine in the United States, driven by a 100-point system initiated by Robert Parker, who, you know, meant no harm and did something good.

DAVID GARDNER: But what Tin Nguyen points out in the score is that those are now being, you know. Put on labels of bottles. It’s a 92. And what’s happening is they’re never tasting it with food. They’re just sitting there with the wine itself, one glass after another blind taste test, putting numbers on it when a big point of wine is to have it with food.

DAVID GARDNER: And so we’re misscoring wines by putting numbers that are bureaucratically driven out of a need to have marketing for an industry. And then we’re losing the nuance, which is usually what happens when you start having a single dominant number that people are. Kowtowing to. So love that book.

STEPHEN CLAPHAM: So the book is called Rule Breaker Investing. You can get it wherever you find good books. And are you on social media or where could people find you?

DAVID GARDNER: Sure. Yes. I am. The two places that I’m active are Twitter X, where I’m at David G. Fool.

DAVID GARDNER: And I’ve been there for 15 years or so back when Twitter sounded like this crazy idea. And I was like, I’ll try that. And then LinkedIn. I’m on LinkedIn.

DAVID GARDNER: Like a lot of business. People.

DAVID GARDNER: And I invite anybody to get in touch in either direction.

STEPHEN CLAPHAM: It’s been such a pleasure. I really, really enjoyed our conversation. Thank you.

DAVID GARDNER: I was looking forward to this. In fact, I traveled to London to be here for this podcast. And congratulations on your work and all that you do. You and I have a shared love of our topic and then spreading the love for that with other people to helping teach them.

DISCLAIMER: And so thank you, fellow traveler.

STEPHEN CLAPHAM: Thank you.

STEPHEN CLAPHAM: Well, I think you could hear that we had a fun conversation. I hadn’t met David before, but he has that ability to instantly put you at ease. And I’m not surprised he’s been so successful, even in. A highly competitive industry. I don’t know anyone who’s had a single, let alone two, 1000 baggers.

STEPHEN CLAPHAM: And although there’s an intellectual argument against the VC style spray and pray strategy, in investing it’s performance that counts. And there’s no question that David has put serious thought into his process.

STEPHEN CLAPHAM: I really enjoyed our conversation and I learned a lot, both from talking to him and from his book, Rule Breaker Investing. Which I highly recommend. Thanks for listening. Don’t forget to follow, subscribe, review, comment on social media, whatever. Please just help us spread the word. Thank you.

DISCLAIMER: Behind the Balance Sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only.

DISCLAIMER: Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.

STEPHEN CLAPHAM: Thank you for listening. I hope you enjoyed this episode. It would mean a great deal to me if you could please share this with just one friend and feel free to spread the word by subscribing or even leaving a review on Apple Podcasts or Spotify. Thank you for your support.