Talk Your Book: How to Hold the Biggest Winners

0:00Today's guest, Bill Mann, is the Chief Investment Strategist of Motley Fool Asset Management, an asset management firm that offers six, three passive, and three active exchange traded traded funds, or ETFs. Motley Fool Asset Management's three passive ETFs attempt to track separate proprietary indices of the Motley Fool LLC or TMF. TMF is a separate legal entity from Motley Fool Asset Management. All six of the Motley Fool Asset Management funds are managed independently from TMF and will not necessarily align with the holdings in any of TMF's proprietary products. No TMF analyst is involved in any investment decision making or daily operations of Motley Fool Asset Management.

0:36Today's Animal Spirits Talk Your Book is brought to you by Motley Fool Asset Management. Go to fooletf.com to learn more about the Motley Fool 100 Index, ticker TMFC. Again, that's fooletf.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

1:13Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

1:21Welcome to Animal Spirits with Michael and Ben. Michael, one of the things that I'm constantly reminded of in working in the investment management industry is how many gigantic companies there are. Some that you've heard of, some that you haven't heard of, that you just go, whoa, they made it how much money? Or they do this as well, and they also do this. There's many such cases, all right? Motley Fool is one of them. Were they, I was first introduced to them, I don't know if it was through Yahoo Finance or what it was, but they were really, I mean, they were ahead of the game in terms of the content stuff, right?

1:58Because they started it in the 1990s. And they're synonymous with growth stock investing. And it was these write-ups on individual companies. And now they've expanded into so much more to where the fact that they now have their own asset management. They have for a while now, but just way bigger than you would assume. It's just interesting to see how these companies grow and morph. So on today's show, we talked to Bill Mann, who is the chief investment strategist for the Motley Fool Asset Management. I've been trading emails with Bill for years now. I think this is the first time I've actually talked to him in person.

2:30Oh, yeah? Yeah, for a long time. And so we talk about the Motley Fool 100 Index. It's kind of interesting. I guess I would consider it something like, it's kind of like a marriage between the S &P and the NASDAQ 100. Is that fair? Yeah. Okay. What did you ask him before? What did you ask him about it? I'm not giving it away. Listen to the show. Okay. All right. Well, we get into kind of the history of The Motley Fool and The Motley Fool Asset Management, and then some really good stuff on investor behavior, too. So here's our chat with Bill Mann from The Motley Fool Asset Management.

3:02Bill, welcome to Animal Spirits. Hey, thanks so much for having me. So you've been with The Motley Fool for a very long time, is that correct? How long have you been there for? You're just calling me old, right? Yeah. I started in 1999. I was in the telecom industry in the regulatory space and found that pretty boring, but also found telecom to be something that seemed like it was going to take over the world, but was destroying capital. And we kept getting business plans on our desk that each of which said they were going to take over just 2 % of the entire industry. And I had 50 of them on my desk.

3:39That's pretty much everything. So I thought that was a pretty good time to get out and go do something else and moved over to The Motley Fool, you know, really started in the, you know, as an analyst in telecom. The Motley Fool is such a gigantic organization today. What was it like when you started? And bring us forward to today. I think, I don't know how people think about it, but I think it's a lot bigger than most people realize. Yeah, so today we have the publishing business, which is what most people know. And you can get us everywhere from on the World Wide Web to newspapers still. We've got podcasts.

4:19That's the part that most people know about. But we also have an asset management arm, which we started in 2008, which is a pretty important date in terms of why and when you would start an asset management division. We have a venture division and we have a wealth management division and we also have a charitable arm. So it's a pretty extensive company. We have operations in the United States, Canada, Australia, the United Kingdom. So, yeah, it is a much bigger company. It kind of feels like that proverbial elephant where people know one part of it. Like, oh, yeah, I know this or I know that. But yeah, it's a pretty dynamic company.

5:06So was the company still a startup effectively when you joined back in the 90s? Because I mean, that's when it really ramped up as a firm from my recollection of it. Yeah, we were very much like a college dormitory where people were pulling all-nighters. And so I started in 99, which was a time in which you could write about any company that ended in dot com and, you know, you would you would get a huge amount of attention. You know, again, I came in as a telecom guy and I came in as a bit of a skeptic. And so that was a little bit of a tough, you know, that that was a little bit of a tough entry.

5:42People people were interested in in in in telecom and they were but they were really, really interested in equipment and the move into, you know, onto the Internet and onto, And I don't know if you remember things like how SIP was going to take over the world. It was just a protocol for having conversations with each other and file transfer protocols. So at the time, The Motley Fool, we had real money portfolios that we were managing. We were all advertising based. And so the thing that happened with us, and I think happened with a lot of companies that were in that space at that time is that we thought we had 7 million customers.

6:27And what we had were eight customers. It was Daytech. We had Waterhouse. We had Ameritrade. And so once the bubble burst, starting really in 2001, you saw a huge amount of consolidation in terms of those online brokers. But you also saw them ratchet back very quickly their advertising spend and their customer acquisition spend. And so that's when we had to grow up a little and become a business. That's when we launched our portfolios, our pay services. A couple of years after that was when we first launched our asset management business. So what does the chief investment strategist at The Motley Fool do?

7:08Talks to you guys a lot. So we have six funds right now, six ETFs, three of which are active and three of which are passive. We are doing some studies to figure out how to broaden out that space. So I do a lot of, you know, I do a lot of product market fit and, you know, just ensuring that people know first and foremost that Molly Fool has an asset management arm. So there's a huge amount, you know, a huge opportunity for someone like me who, you know, loves getting out and talking to people to talk about the fact that we do manage money. And we've done it for, you know, for 16 years now. We have$2.3 billion in assets under management, which, you know, for a secret business, I think it's pretty good.

7:56So, yeah, that's most of my day. Motley Fool has always been synonymous with the sort of retail investor, the DIY person. Is that retail crowd most of your ETF flows as well? Is that the sense you get? At this point, it's much less so. We are much more RIA driven, but we got our start in 2008 really because we had seen the Motley Fool's ethos was always that you were the best person to manage your own investments. And we still do think that that is true. But one thing that we've noticed about retail investors in particular is that they tend to have a pretty poor idea of what their own risk tolerances are.

8:34And so one thing that we saw in 2002, and we saw it before this and were trying to figure out what to do with it and never really hit upon what the strategy was, was that we were seeing individual investors focus on maybe the same 20 or 30 stocks. They were all invested in Cisco. They were all invested in AOL. They were all invested in a lot of companies that at the end of the day, there's that social proof, but you're not necessarily sure that that's where they should all be. And so as 2007 came along and we really saw some more concentration and we saw some amongst investors, and we saw what I guess you could describe as a financialization of the American economy, we thought, what is it that we can do this time around to help people?

9:33What can we do to help people to hold their nerve, to stay invested? And the thing that we came up with was, look, let's launch an asset management company. Let's get out there and put some mutual funds that are out there that have the same exact principles and philosophies of The Motley Fool and hopefully have that be a helping hand for investors for what we thought was going to come and which indeed did come starting in 2008. What are the investment principles of The Motley Fool? I've listened to the founders on some podcasts and it pours out of them. But for people that have not heard them speak before, how would you describe them?

10:14I would describe us as being optimists first and foremost. We are people who believe very deeply in the power, particularly of the ingenuity of the American economy and the power of the wealth-creating principles of the stock market. We are people who are fundamentally focused on owning stocks for the long term. And a lot of times when people talk about long term buy and hold investing and whether it works or whether it doesn't, I go back to, you know, April 9 of this year, you know, when in the height of, you know, the fear, people were once again saying buy and hold investing doesn't work. But, you know, so for us, the principle of buy and hold investing is it also comes along with it, a belief in power law, which is if you hold companies that have the right principles and have the, you know, have the types of characteristics that have tended to generate outsized returns in the past, you're going to make, in some ways, you're going to make the same mistake over and over.

11:22Because when you're playing a pattern recognition game, there are a lot of companies that will fail those patterns over time. But one of the things that we have done is when we have identified companies that have some of those characteristics of the biggest winners over history, we've bought them and we have held on to them really no matter what. And sometimes that has turned out to have been a company that has done really great for a while and then has faded away. But then sometimes you end up with these businesses that you have identified as having superior economics. And they go on to be 50, 100, in the case of some of the biggest companies, 500 to 1 ,000 baggers.

12:12You just have to be willing to hold them long enough. So when you talk about the fact that you have a mix of active and passive ETFs, how do you put that investment process or that ethos into these different funds? Perhaps I can describe the, we have six funds. And so we have the three passive funds. We have two domestic large cap passive funds, TMFC and TMFE. And then we have a mid-cap one, which is TMFX. Then on the active side, we have a small cap and a mid-cap and then a go-anywhere fund. I tend to think of investing now as moving away from really active versus passive or how we do it and being more programmatic versus discretionary.

13:00Right. So all of the types of, you know, all of the types of investments that we have, you know, are ones that we have, you know, that we're identifying through pattern recognition. On the active side, it really is more, you know, it's really more how do you trade it and how do you build the portfolio? On the passive side, we're, you know, we are we have a proprietary set of data that we get from our sister company at the, you know, the Motley Fool Publishing. But then we go through and say, you know, which of these companies are actually ones that have those highest, you know, those highest factors amongst the largest companies that they hold?

13:41And which of, you know, and how should that portfolio be assembled, you know, to generate the best portfolio characteristics? So they all really do come from the same exact philosophy. philosophy, it's more of a thought process of how do you put the portfolio together as to whether it is more, I guess, what you would traditionally call active versus passive. So Bill, today we're going to be talking about the Motley Fool 100 Index ETF. The ticker is TMFC. And I'm very curious and excited to get your take on the large cap growth space because you've been doing it for a long time. We are at a very interesting period in history.

14:23But before we get into the meat of it, as I'm looking at this, I say, you know, this looks a lot like the NASDAQ 100. Not that there's anything wrong with that. There are a lot worse places where an investor could have put their money over the last 10 years. Thank you, Michael. Yes. In fact, I wish that I put all of my money in the Motley Fool 100 index when you guys launched it. I would have a lot more money today than I do. And so as I'm thinking about this versus that, well, I suppose the proof is in the pudding. There is$1.5 billion in the fund. There is a five-star Morningstar rating for what it's worth.

14:57What is it about this fund that has attracted so many dollars versus some of the, is it contemporary is the right word, versus some of your pure funds that might do something similar. Talk about that. So you started by mentioning NASDAQ 100. I would say that the primary difference between us and NASDAQ is that we do go across, you know, we do, I would say that the NASDAQ 100 is much more technology focused as its core based on the simple fact that the NASDAQ index and the NASDAQ stock market is so heavily technology-focused. We can go to the New York Stock Exchange as well. We have plenty of New York Stock Exchange companies within - Richard Hathaway.

15:48Yeah, for example. I'd say that's maybe a primary example. Eli Lilly would be another that you can't access if you're simply buying the NASDAQ 100. Now, every fund and every fund company has to set their boundaries somewhere. So the fact that NASDAQ has a NASDAQ 100 that's limited to NASDAQ companies, that's not necessarily a knock on them. The reason that we look a lot like them at this point is simply because we were very, very early in a lot of the companies that are now dominant within the NASDAQ 100 as well. So I would say that we look very much like them now. We don't look like them as a matter of policy.

16:36We happen to because the area that has been most successful in the market mimics the area that we have already been playing in. So people have been worried about tech stocks for a long time. I think Mark Cuban, I don't want to call out somebody's name, but like 2015, he's like, this is another tech bubble. Michael Biden in 2011. People have been saying this for a long, I mean, I think Scott Galloway wrote his book about the, he called them like the big four. It was Apple, Google, Meta, and Microsoft. Whatever the, yeah, probably. And that was like 2017. So, I mean, this has been going on for, I think a lot longer than anyone could envision.

17:13And it's gone straight from, you know, high margin, free cashflow producing businesses, tons of scale because of the internet, right into the AI now. I'm just curious, what would cause you to become concerned about these companies? Because anyone who's been concerned in the past has just been flat out wrong. Yeah, and it is obviously a very unique place. The fact that the stock market as measured by the S &P 500 is so deeply concentrated in the top seven, the top 10 names, the top 20 names, however you want to divide that, and that so many of those are within the same industry. As far as we are concerned, I think that that is obviously something that is a structural concern.

18:06When you're talking about TMFC, NVIDIA, for example, as a 10 % position in the portfolio, it still maintains those same exact characteristics that we were looking for when we first recommended on the publishing side NVIDIA 15 years ago. So I guess there are two different conversations. One is the market dynamics. And the market dynamics, I would describe as being something that we don't spend a whole lot of time really focusing on in terms of how we make our moves, with the exception of the fact that we are making calls from time to time when we are seeing areas of the market that are maybe underrepresented.

18:57But we're going to stick to our knitting that way and keep looking for the types of companies that have driven the S &P 500's success and, you know, in some ways, let come what may. And, you know, over time, I think that, you know, that we would naturally move away from those types of companies if it, you know, if it comes to pass that they have, you know, less economic power than, you know, than they have at this point. What causes you to make a change in the portfolio? And how often is there turnover? Since this is technically indexed. And I like your point earlier about the fact that discretionary versus sort of rules-based.

19:42And I completely agree. That seems to be the way a lot of people are thinking these days. So within your rules-based process, how often are there changes to the portfolio? So the turnover for TMFC is about 24%. So you can extrapolate that, you know, that we turn it over about, you know, each share about once every four years. TMFE, which has a slightly different role, has a slightly higher turnover. And that's simply because it's meant to be, you know, it's got a smart beta factor placed on top of it. So it has, you know, a little bit of a lower threshold in terms of the max size that we can have and some other rules that we have in place.

20:29I think that ultimately, you know, I tend to think of maybe maybe I'll answer your question in an incredibly bizarre way. But have you ever thought of the S &P 500 as a portfolio manager? Yeah, I guess not really. That's a good point. It seems like it's just this entity that occasionally makes changes, right? Exactly, exactly. I would view us as being kind of the same way, and this is how I get to flatter us very kindly. The S &P 500 has, in the last 90 years, had about 25 ,000 different names in it. And, you know, you had a guest on a couple of weeks ago who was talking about a study that showed that over those last 90 years, a very small number of companies have accounted for the majority of the gains of the S &P 500.

21:22Which, if you think of the S &P 500 as being a portfolio manager then, that would suggest that their slugging percentage is really good. But their hit rate is awful. You know, you've got 25 ,000 companies, most of which have been sold at a low because, you know, the reason that most companies leave the S &P 500 is because they are no longer one of the 500 largest companies. You know, occasionally you have ones that get, you know, that get merged out. But generally speaking, the S &P as a portfolio manager holds too long. And yet, the proof is in the pudding. The returns of the S &P 500 have nearly beaten almost any portfolio manager that you can think of.

22:09And I take that lesson very seriously. I take the lesson that you don't have to be all that clever about your moves if you are good at identifying and holding on to the companies that win because they will in fact – again, the power law would suggest that they will in fact carry the day. Yeah, I've always said that index funds themselves are nothing special. You could take what index funds do and kind of apply them to your own process, just the whole tax-efficient, long-term, buy-and-hold-ish nature and fit it to your own investment process. Yeah, we just all want more exciting stuff, right? Like ultimately, an index fund, it just sounds so proletariat, right?

22:55But in actual – and to your point, it is. But if you think about an index fund as a portfolio manager and then look at the returns and look at the results, it's pretty remarkable what the mythical guy or gal who's run the S &P 500 have done all of these years. And doing things in ways that the average portfolio manager would say, no, that's a terrible way to run a portfolio. Bill, I know who I'm talking to. I know that your investment philosophy, as is ours, is not to time the market, certainly not to use your intuition to time the market. Okay, with that out of the way and understanding that this is a long-run, et cetera, et cetera, where do you think we are in this unbelievable market that we're in?

23:47I mean, it's been a 15-year bull market now that surely overstates the ride that we've been on. There have been some really nasty corrections and bear markets along the way. It has hardly been up until the right. I think that you could very credibly argue that this is a new bull market that started and has accelerated because of a new revolutionary technology. So forget about, you know, 09 or 13 as a start date, whichever you choose. Think about back to 2022. All right. All that caveat aside, does this feel late cycle? Are we pricing in the best that's yet that's to come? Or does it feel like we haven't even begun to see the fruits of the labor of the AI or the lack of labor, I guess?

24:27If we're just CNBC, you'd be asking him, what inning are we in? Yeah, what inning is this? Come on, tell me. Are we talking cricket innings or are we talking – It's hard. And I love the point that Ben made earlier about Mark Cuban. And again, not to mow one guy down because we all sort of worry about these things all the time. talking about the four horsemen of the apocalypse. Now we're up to seven, right? We just keep adding companies that are driving the train. I don't, you know, if I look in my crystal ball, I do see other companies that could, you know, that could add, that could take over, that could be not necessarily the next NVIDIA, Yeah, but there are plenty of other areas in what is maybe, however it is that you want to call AI, if you want to call it a bubble, if you want to call it a promise not yet kept, there's a lot of money that's being spent chasing it.

25:29And that money is going to be spent regardless. And as we found out with the early of the dot-com days, some of the money that's getting spent is going to be absolutely right. And so our game is much more trying to figure out the part of the pond where the fish are, because we know that there's most likely to be fish in that part of the pond that are going to turn out to have been the ones that we wanted to have all along. So I have a really hard time. I don't know about you guys. I'm a bit of a math guy, but I'm a very simplistic math guy. So when I take the market cap of NVIDIA at$4 trillion and I just divide it by the population of the earth, which is$8 billion, that means that there is a massive amount of earnings that are being presumed by the share price of NVIDIA, even on an every man, woman, and child basis.

26:30And one of those two things has grown exponentially and the other has grown logarithmically. And so, you know, I could spin myself around a pole and say I have a hard time seeing how they're going to do it. But I'm pretty comfortable having a hard time seeing how the best and the brightest do it. I've spent 28 years of my career being dumbfounded by ingenuity. Yeah, Michael and I were just talking about this recently, that it seems like there's always something else that sort of steps in. And maybe eventually that ends up being bad stuff that steps in, right? I still remember after the 2008 debacle, people thought we were never going to get out of this mentality of a lost decade and crashes.

27:13And it took a long time for that idea to – and I'm sure it'll be the other way when the cycle turns and we do get a bad period. So I guess my question to you is you said you have a lot of RIAs that use your products. How do you go about setting expectations for this stuff? It's like, we're going to be a long-term buy and hold investor here for the most part, but there's going to be rough patches along the way. Why don't you just sell before the rough patches? Hello? That's right, exactly. That's right. We do get a lot of questions from registered investment advisors. And they'll take all of the statistical inferences.

27:54They'll take our Sharpe ratio. And they will go to a 2022 period and they'll say, hey, you kind of track the market during the downside. And it just comes from repeating the same message over and over that we are simply not trying to get out of the way of those types of moments. But at the same time, because we have pretty strict bounds around the types of quality of companies that we're looking for, they're almost always going to look expensive. I mean, it's very rare that you find a secret quality company. I wish that weren't true. I'd sound a lot smarter all the time if I knew where to find secret quality companies.

28:49Quality companies tend to be expensive. But I also know that, you know, that the activity of trying to avoid downturns has tended to be so much more expensive than actually just survive, you know, going through those downturns. Right. It feels better to have sidestepped. You know, we can go from February, February to April this year. We know that, you know, that there were a bunch of investors because the market told us who said, well, I'm I'm I'm out. and they have not been well served at all. So if the lesson really truly is that a really great time to, you know, a really great way to underperform the market is to try to avoid downturns, then it really, as hard as it is, and you end up losing people because of this, you end up, you know, having people say, I don't accept the answer that you are going to be, you know, that you're going to be relaxed about this and I'm going to sell.