The Stock Picking Philosophy to Find the Next Amazon with Motley Fool's David Gardner

25:44Discuss. Yeah, well, thank you. These are some of the traits that I'm looking for in stocks. And I think before we start this, Barry, I should just again underline, I believe it is a worthy thing to choose stocks. I really want to find the best companies of our time, and I want to own them for a long period of time. And actually, for many people, it's actually easier to find Amazon or eBay back in that era or NVIDIA more recently, but to actually hold them, to hold them, to allow them to multiply in the way that they will if you do. In my experience, that's hardest for most people. Let's talk about that because Amazon, after the dot-com crash, plummeted to single digits.

26:27Apple has had more near-death experiences than I can count. NVIDIA, go down the list. Google, Facebook. Tesla. Facebook's IPO was a disaster. It got cut in half within a few months of that, And then they kind of unlocked mobile and it was off to the races. Yeah, Tesla. These companies trade more like cryptocurrencies than companies. How do you find the confidence and the commitment to stay with something down 40, 60, 80 percent? So thank you. And I would say, first of all, it's not worth doing that for every investment. Certainly, if it were some dodgy crypto, I wouldn't be holding. But you used an important phrase a minute or two ago.

27:11You said top dog and first mover. So when I look at important emerging industries and I see a company with a large customer base, they may not be profitable yet, but they're doing good things in this world, a world I want to live in. And their stock's down. Their stock's been cut in half. What's the reason? Sometimes it's the CEO like Howard Schultz back in the day with Starbucks was just occasionally conservative. and the analysts were surprised as he under promised. And then the stock drops 15%, you know, in a week. You told the story about this going on The View. Yeah. The stock ends up down 30 % and that was your last appearance.

27:50And then what happened to Starbucks? It went up 30 times the value. We've never been back on The View. But, and by the way, I'll return at any time. We'd love to close the loop on that story. But yeah, that was 1998 early TV appearance. We picked a stock for the ladies of The View. and then it was Starbucks. That's the punchline, by the way. I shouldn't have given that. But yeah, the stock dropped 30 % in just a couple of months and we went back on the show to update the story and they booed us good-naturedly and they're like, oh, well. And we're like, keep holding though, keep holding. And then they've never invited us back since and it's gone up 33 times the value from our first appearance, not even including the 33 % drop.

28:30So, I mean, that was an iconic moment. I didn't realize it at the time, But as I wrote Rule Breaker Investing, I was just thinking, that's my story. Because that's what most people miss. Most people are following the headlines instead of following real progress. And they're chasing stuff. And if you just look and ask, who are the movers and shakers delivering products and services? Electric cars, robotic surgery, coffee houses, better fajitas. The list goes on. So I'm thinking Striker, Chipotle, Tesla. Yeah, well, actually intuitive surgical. Okay. Yeah, yeah. But yes, you're thinking exactly the coming.

29:07I'm using the robot that did my surgery. Ah, very happy to hear that. And when I recall walking into the surgical theater and looking around and saying, oh, this is where the future is. I've just gone 20 years forward because this whole thing is, here's the big robot with all the, like, oh, now I understand. Like the rest of the world, we're living in the past. this technology is as cutting edge as it gets. It's really amazing. I love that. And I'm so glad to hear that for you in successful surgery, which is what we all want, robot or human. But yeah, it turns out there are lots of advantages to robot assisted surgery.

29:44And Intuitive Surgical has really been the pure play small company. Striker is a more bigger diversified company. Yeah, anyway, but for each of these, like - I just happen to remember what the little logo on the side, the last thing I saw - That's a good thing to do. They're like, this'll help you relax. And then the next thing I know, I'm in recovery. But the last thing I saw was the Striker logo. Great story. And, you know, so it's funny you mentioned the future and feeling like you're living the future. That's generally where I try to be as I pick my stocks. And just for the fun of it, one of my best stock picks in the last 15 years has been Tesla, which I picked in 2011, still holding.

30:19And I bought, I've owned a number of Teslas since. And I was driving around in Tesla in 2013. My license plate in Washington, D.C. is future. No one else thought of it. So I'm watching out for the future in Washington, D.C. And I'm driving around going, I really am inside the future. And I'm surrounded by not just other cars that aren't yet, but a whole industry, gas stations, et cetera, of things. There's not as much maintenance needed. So that's a great iconic example of, for me, whether it's Starbucks back in the day, which was questionable for a lot of people because it looked like a fad. That was the big rap on Starbucks early 90s.

30:56Where have coffee houses ever come from in America? There's no background for this. This is such a fact. Paying five bucks for coffee. Are you serious? Right. So AOL was all just chat rooms. So all going to be hype. No one will ever give their credit card over the Internet. Tesla electric cars will never work. Intuitive surgical. Why would you have a robot when humans can do it just as well? Dot, dot, dot. The list goes on. All the way around. Why would you have a human when a robot can do it? That is indeed more. Not only just as well, but more consistently. Yeah. And it doesn't matter if they had a bad night.

31:28it's fine the next day. And minimally evasive. And speaking of the next day, you're walking home the next day. That night. As opposed to two days. Oh no, same day. You walk out of the hospital. It's kind of terrifying. Although you're still on a lot of drugs at that point. Yeah. Well, one of my heroes is Clayton Christensen, who wrote The Innovator's Dilemma. And he's somebody who helped me understand and think about disruptive innovation. And I've always invested in the innovators. And back to your earlier question, Barry, I can keep holding my Netflix when it loses two thirds of its value, when I believe in Netflix and I see visible proof every day of how important Amazon back in the day, Netflix, Tesla, the list goes on, the companies we've mentioned.

32:07So that helps me hold these companies. If you follow the company as opposed to the zigs and zags on the stock charts or the headlines, you're going to be much more patient, I think, as an investor. And that has been my that's been a superhero power for me. So walk us through your your stock picking process. How does a company first land on your radar? What sort of analysis do you do? When do you decide you're comfortable to put it on your buy list? And are there any non-negotiable checkboxes that you say, nope, that's a knockout, they don't have this? I mean, every one of those questions I could possibly fill your ears up.

32:42So I'll try to be brief. I love the questions. In reverse order, by the way, I'll say any non-negotiables. I don't invest in companies whose fundamental business is to take money from other people. And so you'll never see me recommend a so-called gaming stock. And I think sports betting is a joke. And while I think it always should have been legal, I think it is a sad waste of money for anybody who does the math. And so that would not be on my list. No Motley Fool member has ever received a gaming recommendation from me. And they have been very destructive, primarily to college-age men. Yeah. There's a growing gambling addiction problem, and these companies just, that's their clients.

33:21Yep, and I will say, I love sports. I know you do, too. And I'm happy making a bet with friends. But if you really do the math of a 50-50 prospect where the house takes out its 10%, and you just do your expected return and play that forward with all your money, I know where that goes. And you could have had nine to 10 percent annualized returns. There's a huge knuckleheads. There's a huge difference between doing a box for the Super Bowl or something. Yeah. And betting on free throws. I mean, it's it's just it has nothing to do with sports. That's just the medium by which they are tickling your adrenaline and dopamine.

33:59It's it's so. And yet these have become giant businesses. Yeah, and even something as innovative as prediction markets, which I am fascinated by, are also being turned into quick money and or sometimes questionable who can influence the outcomes of prediction markets. So these are unfortunate things where I think they're fascinating to follow. But if you're serious about your own money and you would like financial freedom one day, you're making a huge mistake if you go there. So back to your question, that's a non-negotiable for me. I don't like businesses that just fundamentally lead people who don't know math to give their money away regularly.

34:32regularly. I don't feel great about that if I'm a shareholder. So let me roll you back a little bit. How does a company typically find its way onto your radar? Is it something you're using or something you hear about? Like where do most of these ideas come from? So the ideas come from, first of all, I'm an early adopter. So I've got a closet full of things where I bought the thing early first gen and it's not really working or wasn't relevant anymore. And so, But it also meant I bought Tesla very early on, and I tried online services with my scratchy phone, that sound we can all hear if you're over 40 years old today of logging on to AOL.

35:07So I love the new. I'm excited by AI. And that's not an industry, by the way. That is a plate tectonic shift for our society that's going to create many industries, many of which don't even exist yet. Just as we were excited about the internet with Amazon, where my cost basis today is$0.16, still holding, Uber hadn't even shown up yet. Google hadn't shown up yet. I mean, it will be years before AI companies that are amazing, that are great stocks, show up. So no one should feel anxious that they don't have an AI portfolio yet. But anyway, so I'm an early adopter, and then I'm connected to a community.

35:41The Motley Fool community, our forums, discussion boards, meeting people at book signings. The list goes – this conversation right now, you mentioned Striker. I probably need to look back at that one. I'm curious how it's done. So I'm just always listening. Of course, social media is full of these kinds of opportunities. So intellectual curiosity is the flame that will burn my whole life long and in many of my fellow fools and I think my host today as well. So I think that if you're curious and you're asking questions about where society is headed and you're specifically looking for products and services that will improve our lives and our kids' lives, you're going to be looking – you're going to be fishing in the right pond.

36:18So once something falls on your radar, you have six rule breaker criteria. Walk us through those six. Yeah. Really, that's the heart of the analysis that you do, right? It is. It's six traits that I'm looking for. And that's the middle of my book. And I didn't start the book that way. And we could talk about that later if you like. But let me just rattle right now through my six traits of rule breaker investing. And by the way, I have used these now into my fourth decade. I didn't just come up with these yesterday. This is exactly what caused me to pick AOL, Amazon, Tesla, Nvidia, the list goes on.

36:49And it's some of them are so contrary, which is why I think it works. Number one, top dog and first mover in an important emerging industry. We already spoke to that one. We could go deeper. So for today, that might be NVIDIA. It might be Broadcom. It might be ASM lithography. It might be AMD. It could be any of the semiconductors or some of the software companies, Google, Microsoft, whoever. Yeah, and also, by the way, restaurant companies, retail. I mean, in every industry, I'm asking who's the innovator? I want to know who the innovator... And if you honestly just only focus your stock market attention on the biggest innovator in each industry.

37:26Some of them are small, emergent. Some of them are big. You're going to do so much better as an investor. So Starbucks, the third place, that was the big driver of them. Chipotle, they came up with a way to assembly line fresh food. Yeah. Better quality. The fact that it happens to be Mexican-based is almost irrelevant. You see Cava today doing the same thing with Mediterranean, and I'm sure there are dozens of others coming up. There are. And by the way, not all of these work out as stocks. I certainly have a closet full of bad stock picks as well. We could talk about that later, but that's very important.

38:00If you have sort of a venture capital mentality as you look at the public markets, which is how I describe myself, you need, just like a VC, you need to be comfortable with losing. In other words, it's you're looking for here 100 investments, 50 are going to work out, 30 will do okay, but it's the top two or three that make it worthwhile. Yeah, and I truly go into all hundreds saying, I like this company, I believe in it, I hope it works out, but I'm never loading up on one, et cetera. So top dog and first mover in an important emerging industry of my six traits, that's the most important. So number two, we're looking for a sustainable competitive advantage.

38:38A moat, as Buffett likes to say. You bet. And because we're holding stocks for a dead minimum of three years, preferably three decades, sustainable competitive advantage really, really matters. And that takes many forms. We could talk about that. Number three. So the first two are about the company. The third is about the stock. And this is I'm looking for a strong, stellar past price appreciation in the stock. In other words, you're not looking for the cigar stub, to use Ben Graham's phrase. The opposite. phrase. You're looking for something with a little momentum and where more and more investors are stepping in.

39:17There's a chapter in my book, and it was an eye opener as I wrote it and realized it, where I listed out seven of my best stock picks from Intuitive Surgical to Netflix to Apple to Amazon to Nvidia and a couple of others. And I noticed, and I only realized this in retrospect, that in the three to nine months leading up to my first pick of them, on average, they had risen 30 to 90%. And a lot of people, I think most people, when they are researching a stock, it goes up 50%. They're like, Oh, that's 30. Right. Right. Yeah. And so part of the reason rule breaker investing works is because I'm willing at that point, not just to buy it, but to actually be more excited about it because clearly the market is noticing what's happening now.

40:03And when companies rise, reflexivity starts to show up, Barry, they start having more resources. They're getting mentioned on Bloomberg Radio. All of a sudden, a lot of good stuff starts coming to them. That strengthens them. That's not a reason to look for another cigar bot and ignore NVIDIA. So that is trait number three, stellar past price appreciation in a world where most people are like, buy low, sell high. I'm looking to the 52-week low list, friends, not the 52-week high. And when I say friends, I mean, that's the average person speaking. I'm looking for the 52-week high. Give us four, five, and six.

40:36Sure. So number four, it's all about the people. We're looking for smart backing and excellent management. So it's the human capital. And this is, again, in some ways obvious. Yeah, we'd love to have Steve Jobs be our CEO. Yeah, we're glad that Jeff Bezos is our CEO or Warren Buffett. But keep in mind, and this is a really hidden in plain sight, I think profound insight that most people don't see, even though it's hidden in plain sight. there is no number to express the value of the CEO running companies. So we have a whole Wall Street world that's built on valuation ratios, generally off of earnings or cash flow, sometimes off of assets.

41:15And they're not including that Elon Musk is the CEO of the company. And by the way, there are a lot of CEOs who are subtracting value from their companies, and there's nothing to express that. And so we have a whole world driven off algorithms that increasingly is computer trading. It's not even humans anymore. And they're not noticing or caring, I think, about trait number four, who the heck's running this thing and who's backing it. That matters deeply to me, especially if I'm holding as I do for three decades. Number five, we're looking for strong consumer brands. I love companies that have raving fans.

41:50And it doesn't mean every time that they are a consumer brand, striker drilling, intuitive surgical, these are not consumer brands per se, although Intuitive Surgical with its DaVinci surgical robot, you will hear your local on your local radio. If you still listen to it, you'll hear an ad for the hospital bragging in some cases that they have a DaVinci. So there is some brand recognition there, but Starbucks, Netflix, Amazon, these are all my best stock picks and I bought them years ago and still hold them today. And they all exhibit that strong consumer appeal. And the final? Probably my favorite, secret sauce.

42:24So if you're following us, the first two were about the company. The third was the stock. Then the next two, four and five, the people and the brand are about the company. Number six is about the stock. And it's specifically that the stock is generally considered capital O overvalued by the world at large, by Wall Street commentators, by people in Barron's, CNBC, never Bloomberg Radio. So a little contrarian perspective. We are specifically wanting people to call out Tesla as ridiculously overpriced. Amazon will never make money. Intuitive Surgical, when I first recommended it over 100 bagger ago, it was at 73 times earnings.

43:04There are people, if they even do pay attention to stocks anymore, that say, I would never buy a stock with a price to earnings ratio of 73. The list goes on. So a lot of times when we see stuff, especially with a company that's relatively young, you start to see the company grow into their valuation. NVIDIA is a great example. It was a semi maker. Then it was a floating point chip maker for gaming before it did the pivot to full AI because FPUs turns out to be better than CPUs for large language models. and I don't pretend to be a wizard on that. GPUs. Then GPUs, right. Graphic processing units.

43:44I don't know what F is, floating point unit, but GPUs, that's exactly right. But two years ago, NVIDIA was like a 75 PE. Now it's like a 40 PE and falling. Can't some of these overpriced companies just grow? Apple is another example. For the longest time, people looked at Apple in the 2000s when that newfangled iPod came out and said, oh, they don't have any profits whatsoever. Why would I want to own Apple in 04 or 05? So I think that, first of all, let's be clear. There are things that are overvalued that you and I would not want to buy. But if you're following our conversation, if you're buying a top dog and first mover in an important emerging industry with a sustainable competitive advantage, stellar past price appreciation, excellent management, smart backing, strong consumer appeal.

44:39It has all five of those things in place. And then some guy on CNBC is telling you it's blatantly overvalued. It's crazy. No one should ever buy that stock. Amazon.bomb cover of Barron's. That is the special sauce that causes me to say, bam, now we're buying. Well, the Amazon.bomb was, I want to say, January 2000. And we did see a giant collapse. What was the queues fell about 82 % peak to trough. That's a pretty big. I experienced it all the way. In fact, our cost basis, 16 cents, it had gone up. It was a 30 bagger. And again, when I'm picking stocks, this is not for my, this is not for my own portfolio.

45:20This is not, this is lots of people following the Motley Fool. These are people subscribing to us. So when I pick a good stock, it feels really good. It's not about me. When I pick a bad stock, It doesn't feel very good. It's not about me. Or a good stock that hits a buzzsaw when a market gets shellacked. Exactly. I mean, you could own anything during the financial crisis. Everything still got cut in half, more or less. It was quite a crash. You're right, Barry. And the truth is that if you follow any of these companies, I've littered our conversation with 15 to 20 company names that are really 15 to 20 generationally great stocks.

45:57Every single one of these stocks has lost 50 % or more of its value, more than once, which means that if you'd followed Motley Fool advice, depending on your timing, you might love me or not like me. You might be like, yeah, I got in there, but got cut in half and I got out. We're holding all the way through. We're buying and we're holding. So I have watched Amazon go. This is kind of pre-split. It was at three when we first recommended it, went to 95 down to seven during that 2001 era. I recall, for sure. Incredible. More splits soon after. Yeah, yeah. It's now split down to$0.16, which, by the way, is also my cost basis on NVIDIA.

46:33Thanks to the magic of stock splits, they both got me at my$0.16 cost basis still holding. But to do that, like NVIDIA just three years ago lost half its value in one year. This is one of the largest companies in the world. It was like four months it got cut in half. Yeah, right. So this is just going to happen. 2022, it really got shellacked. This is not going to happen for companies that are not dynamic. This is not going to happen so much for cyclicals. I mean, there will be some cyclicality. These are rule breakers. These are stocks that, by most popular view, were blatantly overvalued. You should never have bought Amazon all the way through, etc.

47:06And so they're going to be more volatile. Netflix was going to get put out of business by Walmart. I don't know if you remember this, but back in the day of the red envelopes, all of a sudden Walmart said, hey, you can just drop it off at your Walmart, your DVD. You don't have to mail it back to Netflix. Netflix was supposedly toast then. So AOL was going to be toast. It eventually was kind of toast, although it sold out. The merger was the problem. Yeah, but I've watched. It's such a key indicator, trait number six. When people say it's toast, that not for every stock, but for the rule breakers, that is magic.

47:39It has been for me. So I want to ask you about the first stock you purchased where you said, oh, this checks all six boxes. This is my rule breaker. It was AOL. Yeah. Definitely AOL. 1990 when? Four, five, six? We literally picked it the day we launched on AOL. 1994, August 4th, 1994. And from that point, I watched AOL. And again, we were – I mean, we were always fully transparent. People are like, wait, you guys are on AOL. Is there a conflict of interest? You're recommending AOL stock? No, we know what it is because we're on it. We see what this can do for investors and what the future of the company is.

48:18It's pretty self-evident. You're right. And yet not everybody would have felt that way back then. But it was – I mean we had no inside view of AOL. We were separately domiciled. But we watched AOL grow. And it was such an object business lesson as an entrepreneur for me. But as a stock picker, I was watching it get called out as the most overvalued stock repeatedly by august bodies like the world economic. It's not the world economic forum today, but basically all the economists in the world would get together every summer. And two summers in a row, it was like 96 and 97, they voted the most overvalued stock.

48:56And it was the stock that we had backed. And our members were like, guys, they're calling it the most overvalued again. We're like, this is an amazing company. it went up 150 times in value. And I learned so much from that experience. And as we mentioned, it didn't end there. It started to drop back and fell back and eventually just kind of got taken over and, you know, it merged with Time Warner. When people stop calling stuff over valued and every analyst on the street has a strong buy on it, that's usually when you want to be on the other side of that, right? That can be true. I will also say though - Not always, but - No, no, no.

49:29I definitely appreciate the sentiment and I smile at that. askance with you as well. I will say that we typically just hold well longer than whatever analysts are thinking or saying. We don't really pay attention. So you're not quarter to quarter? Is that what you say? Yeah, no. I mean, we love following business. By the way, one thing you asked me to think a little bit about is, is there anything that people should be talking more about, especially if something that troubles me? And a quick example would be, I really think we should have companies reporting every three months their financial results.

49:58And you may know there's a movement of foot to allow some companies just to report twice a year. I think that's a really bad, bad decision. And I hope we don't do that. I hope companies will self-report and choose to to be transparent on a regular basis with their results. I'm going to take it a step further than you and say, and I wrote this before AI was ubiquitous. If you want to get rid of quarterly reporting instead of going once or twice a year, make it real time and 24 seven. Really cool. Because you could update that. You could set up technology to update. Here's where we are. Here's how close we are.

50:34Here's our range. You can Monte Carlo, what we're likely to do each quarter. And so the problem is the focus on quarterly. If it was all the time, like you can look at your portfolio or your checking account 24 seven. You shouldn't, but you can. And it's made, I remember in the 90s or in the 2000s, we would be printing stuff out, folding them up, sticking them in envelopes, sending them out. And the quarterly report was when I was a junior having to do that crap in the mailroom. It was a big deal, the quarterly report. Now, nobody really thinks about your portfolio quarterly because you can access it whenever you want.

51:17It's kind of I think it's absolutely heading in the wrong direction. Yeah, well, so more transparency is, you know, the theme here. But so for me, I think a lot about, you know, what what is going to be in the best interest of armchair investors like me? Because, Barry, we are we're individual investors. And so I'm there representing anybody who is in an investment club or was given a portfolio of stocks and they're trying to figure out how to make better decisions. And I think it's so rewarding to pick stocks in a world where it's increasingly called out as crazy talk to actually buy an individual stock.

51:53So we talked earlier about stocks like Apple and Nvidia and Netflix and Amazon that have all gotten cut in half repeatedly. How do you tell the difference between a stock that's just going through sort of regular volatility versus GE got sliced in half? We look at I'm not even talking about the Lehman Brothers or the Worldcoms of the world. I mean, just stocks that their best days are behind them. How do you know the difference between just a regular stumble and beginning of the end? Well, first of all, I'd say you can't know. I mean, it would be too headstrong of me to say, here's what here's what you do.

52:33Here's how you know. So for me, I just like to keep my stocks in place and recognize some of them are going to trip. I love horse racing metaphors, and not every horse is going to win the race. Not everyone's going to make it to the race. Some get out to a great start and don't finish well. And I can't always know. But by holding, I allow the ones that clearly will win to win so grandly. You know, when you make more than 1 ,000 times your money on Amazon or NVIDIA, it doesn't actually matter that you had some dogs in your portfolio. So you can be wrong, and that's okay, because being right is so much more valuable.

53:07I will also add, though, to answer your question a little bit more directly, usually the companies that fall and don't come back are being disrupted. Earlier, I mentioned Clayton Christensen, Innovator's Dilemma. You can usually kind of see it, that the world is changing. The company might still be best in class, and it may have a famous CEO that everybody loves, but all of a sudden there's this upstart. It might be a whole industry of new players. And when I see that and a company going down, I may not want to hold on to that stock. But if Netflix, which has been ascendant now for 20-plus years, every time.

53:41If it's down two thirds of its value, which has happened more than once, including Quickster, I keep holding that one. Right. So the question is, does this company remain a rule breaker? Is it a top dog and still first mover in an emergent industry? And when it is, I'm going to keep holding that stock. Coming up, we continue our conversation with David Gardner, co-founder of The Motley Fool, discussing his book, Rule Breaker Investing, How to Pick the Best Stocks of the Future and and build lasting wealth. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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56:33I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest is David Gardner. He's the co-founder of The Motley Fool and the author of the book Rule Breaker Investing, How to Pick the Best Stocks of the Future and Build Lasting Wealth. When did you realize that Blockbuster was being disrupted by Netflix and P.S. at one point in the 2000s, Netflix tried to sell themselves to Blockbuster for$50 million and they turned them down. Yeah. It's like Yahoo could have bought Google. You love those stories. But, you know, I would say that I never really thought too much about Blockbuster as a stock.

57:14I remember we had the CEO on our Motley Fool radio show. And at that time, Blockbuster maybe had 25 million customers and Netflix had 1 million. And he was like, you know, we're watching what they're doing. It's neat what they're doing. I don't think it's not a big scaling thing. You know, it's kind of a niche thing. Do you want to mail your DVD back and forth? And that, I think it was John Anciaco, but I mean, good man probably, but wrong, he was wrong. And so it wasn't so much that I ever cared or loved Blockbuster. I just was watching this rule breaker emerge and it was doing crazy stuff. Like you can't just drop it off two blocks away at your Blockbuster.

57:50You have to mail it and keep a queue and send it back and forth. But the queue is half the value of it. Here's all the movies I want to see, which, by the way, every time I roll into Blockbuster, it's rented. And I'm not even talking about a Saturday night. Like on a Wednesday, what do you mean you don't have this? Remember those days? So instead, just working through the queue, Netflix was like. So the initial question is, wait, you want me to mail DVDs back and forth to, oh, I see how this works. but this will never replace Blockbuster to no late fees. Oh, my God. Why do I want to give anything to Blockbuster?

58:28It was super disruptive before online streaming. And as a Master of Business Administration, actually, I don't have an MBA, but I know I'm a Master of Business. Beautiful. But as students of the game, as people who love business, what actually was happening was Netflix was changing the business model of the consumer proposition in the whole industry. Right. Because as you just pointed out, Blockbuster was a transactional late fee driven. And all of a sudden you're subscribing to Netflix. You're now in a subscription relationship. Very disruptive. There was no there was really no precedent for that in that industry.

59:04So it looked like this crazy thing. And it was easy to mock. Why wouldn't you just drop it off a block away, mail it to these people? And yet it fundamentally changed the business model forever. and then we're not even talking about streaming, which we don't have to, but they keep innovating. And the interesting thing is, we were mentioning late fees. If you get a late fee from your bank or a bounce check fee or something, it's part of your statement. It's not the same thing as showing up and having someone say, give me another seven bucks. What do you mean give you another seven bucks? It was just like so annoying and alienating.

59:43Like, I think it's a good rule of thumb. Try not to really piss off all of your clients, all of your customers. Not a good long-term strategy. I have a small confession to make that Wall Street summer I referenced when I went to Salomon Brothers. We did. We had a video out from Blockbuster, and we kept it the whole summer. We just kept not returning. We were irresponsible college sophomores. And at the end of the summer, I'm not even sure. Like, we had racked up a triple-digit late fee. And the video was$20 to buy. Exactly. Just go buy another one. So we had a friend of ours who is British go in with a British accent and explain to Blockbuster that we were renting his place.

1:00:19He doesn't really know about it, but here's this video that he found. And so we kind of got out of that one. It wasn't totally above board, so I'm happy now to admit that. This is helpful for me. But, yeah, that was kind of the state of things, the anxiety, the angst around returning a video late and not feeling great, you know, from a consumer branding standpoint. So, yeah, Netflix, love them. So let's talk about rule breakers today. They're going to be in different spaces, biotech, defense tech, obviously AI. And a lot of these areas don't have a whole lot of earnings and they do have a massive cash burn.

1:00:56So how do you think about valuation in the space? Does it not matter if the growth is there? Define the modern era of rule breakers. So I would always be, first of all, looking at industries. And you just did that some. And, you know, even something like biotech, which you said, right, that's, as you know, Barry, that's multiple industries. I mean, there's so the Internet was never an industry. AI is not in this industry. So we're talking about, again, huge technologies. I was saying earlier, plate tectonic shifts for our society. And you're looking for the beneficiaries. and you're looking for the visionaries who are starting something that might sound a little crazy, like mailing DVDs back and forth or an electric car.

1:01:38And you want to get invested in those. Assuming that you agree with the vision, you think the person is great. You and I were referencing investment research circa 1980s, 90s, an annual report being mailed to you through the mail. That was about all you had. There weren't online forums or anything. These days, you can watch long form YouTube videos watching any CEO be interviewed and learn a lot about their character, which matters deeply to me. I'm a big character person. So I want to feel really good about the people I'm invested in across my portfolio. So we're looking at important emerging industries and we're not trying to force things that don't exist yet.

1:02:15There's no ultra AI stock. I mean, NVIDIA has been an amazing hold for us now, 21 years and counting. It was not an AI company when I first recommended it, but we're still holding. But, you know, these things are going to emerge. I already mentioned earlier, things like Uber, Airbnb didn't show up till more than 10 years after the Internet had really started to penetrate American life. And so for me, it's just keeping our eyes out, whether it's genomics or some Duolingo, a video game on your on your phone where you're learning languages. Again, all of these are from different industries, but they are the innovator.

1:02:53And so, yeah, we're staying focused in the modern day. Go forward on what are the companies that are going to add value to our world in a way that is consumer noticeable. And when they're called overvalued, that's even better for us as Rule Breaker investors. So let me share some criticism that you share with Warren Buffett, of all people. When I'm doing my research for this conversation, one of the things that came up was you have this really good long-term track record. But if you've been involved more recently in the past 10, 15 years, well, all those Amazons, Netflix, Apples from the early 2000s are driving most of your gains.

1:03:35from what i'm hearing from you you're implying that doesn't really hold true if you look at the teslas and the ubers and the more modern positions respond to that criticism hey if you weren't in it no three you really didn't get any benefit uh i well first of all i would say that invest every day of your life every two weeks if you can young people the first thing you should do is open an account if you haven't already save uh and with every paycheck try to put up to 10 away and and And put it in. If you want, you can index. But I think you should be buying stocks as well alongside that and learning as you go.

1:04:10And anybody who's playing the long game in the markets, as they start to hit their 30th or 40th year, which is where I am, it's always going to look like all your big winners were the first 10 years. Because, of course, literally Amazon is now more than 1 ,000 times the value for me. I'm not trying to be Amazon guy. You don't see me walking around going, I'm the guy who had Amazon. $0.16. I also have that for NVIDIA. But just by the nature of compounding, Barry, which I think you understand, as well as anyone, it's always going to look like all your big winners were early. But whether it's Tesla picked in 2011 or Shopify in 2016, these are all rule breakers.

1:04:52They're not going to hit right away. Shopify has been up and down, but mostly up. It's a great example of a rule breaker. Circa the last 10 years, not the first 20 years. But I never want people to forget we were right there at the beginning with AOL and we were picking AOL and Amazon and Starbucks, by the way, the list goes on. So I would just say compounding numbers are always going to make it look like all of your big winners are early in your career. So before I get to my favorite questions, there's just one question I'm excited to ask you. When you're looking ahead, what trends, what businesses, what ideas generally get your curiosity going?

1:05:30Well, this is, in the same way that 7up was the un-Cola back in the day, this is an unanswer because - By the way, you're talking to a generation - I know. That has no idea what that means. But you and I do, though. Yeah, of course. And we got some of our peeps listening, right? Yeah, all right, good. So, yeah. I should have just answered the question. So, I look for companies that are conscious capitalism kinds of companies. I want companies that, first of all, are doing good in this world by my perception. A lot of people think it's a tradeoff in life. They think capitalism is greedy and evil and, you know, you're abusing workers and it's all about maximizing shareholder value.

1:06:12I completely disagree in many cases. Sure, that exists in the world, but that's not the story of Amazon. Amazon is a big, beautiful, amazing enterprise that helps save lives during COVID. And yes, they'll get criticized for some of the things that they've done. and Jeff Bezos is considered an egomaniac by some. But net, net, please, Amazon is a huge value contributor. So that's an example of a company, Reed Hastings and what he created at Netflix. I mean, there's a whole 80-page slide a lot of entrepreneurs have seen about how Netflix does culture, that they just kind of share it out. And you could see why they're so successful, because how they treat their employees and the standards that they hold, where doing good actually leads to doing well.

1:06:53And again, many people think that's a trade-off or they don't actually think that's real. So I specifically want you and I to make our portfolios reflect our best vision for our future. And so every company that I already like invade against the entire industry, the gaming industry earlier, sorry gamers. But by the way, I'm a gamer, but I play video games and board games, not 50-50 and the house takes 10 % game. But I would say that you're looking for the people who are doing good or within their industry, they're admired for how they treat their employees, how they win for their customers, and how their partners and suppliers are proud to be associated with them.

1:07:28And guess what? Usually the stocks end up outperforming in a world where many people think it's too risky to even buy individual stocks. So the more there's big, dumb money sloshing around out there, Barry, the easier it is for stock pickers like me, like you, if you like, like anybody listening to us, to actually pick and discern the good companies, hold them longer than Wall Street, longer than the headlines, then CNBC will be talking about and do really well. So let's jump to our speed round, our favorite questions in the last five minutes we have, starting with who are your early mentors who helped shape your career?

1:08:04So my father, who at the age of 18 said, here you go, David, I've been investing this for you from birth. This is all you're ever getting from me. And I've taught you out of value line, that big black tome, the numbers of investing. And I know you love sports statistics. Another of my mentors, Bill James, the awesome baseball statistician. Actually, he was a journalist, but James who influenced Moneyball, of course. Of course. So who I've met before. But, you know, these these are early people who convinced me of the fun of life and that it could be counted with numbers. I'm an English major, but there's a there's a big left brain going on with me with loving numbers and baseball stats and college basketball stats.

1:08:45Ken Palm, by the way, Ken Palm, that is a$25 subscription any sports fan would enjoy. So Peter Lynch, I'm thinking about Clayton Christensen, I mentioned. These are all people who really have helped me think about what wins. Look, you mentioned Moneyball. Let's talk about books. What are some of your favorites? What are you reading right now? Yeah. So first of all, I'm reading right now The Score by T Nguyen. And The Score is an amazing, but I think the subtitle is something like how to stop playing somebody else's game. And Nguyen is a games philosopher. So people are philosophers about ideas or art.

1:09:30He specifically looks at games and his book talks about how social media, for example, is sort of a game. Like as soon as you start imposing likes and follows, you're playing somebody else's game. You're playing Twitter X's game or Facebook's game. When you have to accept GPA as a measure of how well you've done in college and it becomes big and bureaucratic and everybody's using that, you are unfortunately playing somebody else's game. Sometimes you have to do it, but being self-aware of what is motivating you, it is an amazing book. and I highly recommend this score. I've had Tina Nguyen on my podcast a couple of times.

1:10:08Love the guy. I mean, we just can geek out about board games, but that's what I'm reading right now. But, you know, when I think about books, I mean, it's a motley array of books. No pun intended. Barry, indeed. I mean, The Inevitable by Kevin Kelly is a great book about the future. I'm a big Kevin Kelly fan. He founded Wired Magazine. He's a genius. I enjoy Arthur Brooks' columns in The Atlantic. He writes about happiness. I really loved his book, Love Your Enemies, talking about the divisiveness in our country and how to solve that. And I would love to see more of that. Steven Pinker and all of his data accumulation around technologies, trends in our culture.

1:10:43It seems always to be smart to be a pessimist. You always sound smarter when you talk something down. And yet pinch yourself that you're living today. I know we have a lot of problems. We have many, many better problems. There were many worse problems over human history. Steven Pinker reminds us of that. Right. Our world in data. Yeah. Hans Rosling. Same. There you go, Barry. Exactly. I was rudely using my phone to get the exact name of a book that I'm going to recommend to you because it's sitting on my desk. And the author is Danny Funt. Everybody loses. And it's all about the tumultuous rise of American sports gambling and why it's so glad he wrote that.

1:11:26So it's literally waiting for me to it's next up this giant thing. But it's writing your writing your M.O. Yeah. I mentioned earlier some streaming time. We've been talking about Netflix and Amazon. So tell us what are your favorite Netflix or Amazon Prime videos or what podcasts are you listening to? Thank you. I you know, I really enjoyed Apple's Pluribus. If you saw that. It's also in my queue. next up. It looks great. Totally recommend that. That's just season one. I mean, we have a lot of British comedy fans in my family, so shows like Mitchell and Webb, the comedy duo, their clips are all over YouTube, but IT Crowd, hilarious show.

1:12:12Streaming, totally recommend that. Not as funny, but very British. All creatures great and small. Just an absolutely delightful... Very interesting. The vet, early 20th century. Exactly. Just such a... Slow Horses, great show. Apple and or Sure, I love sci-fi. I love all the Marvel stuff. By the way, Marvel's been an amazing stock for me. It got bought out by Disney. So these days we have a very low cost basis you couldn't have gotten because when Disney bought Marvel at a huge premium, we Marvel shareholders, we happy few buying a rule breaker that looked overvalued. Right. We've ended up doing really well.

1:12:44So, but you know, and are obviously Star Wars and I love brands and I love family entertainment. So those are some that come to mind. I just flew back from San Francisco and on the flight, I rewatched Deadpool and Wolverine. And it's like, I forgot how much fun that movie was. Yeah. Really, really a blast. Our final two questions. What sort of advice would you give to a recent college graduate interested in a career in investing? Well, I would first of all say that you should pick individual stocks and you should pay attention to the game and you should love it. You should have a lot of fun. I mean, I love sports.

1:13:17We've talked, I know you do too. We've talked about that a lot. People follow their sports teams day to day. I follow the markets day to day. And the difference is you actually can make serious money by learning and following the market in a way you never will as a sports fan. And I love sports. And, you know, sports can be a little bit more fun day to day. But the markets are open every day. Your NFL team only plays on Sundays and starting to figure out what wins in the marketplace. And why is that app on your phone not somebody else's app? What's in your fridge? What are you wearing? Noticing the things that go on around you.

1:13:49This is going to lead to riches. But it's also going to open your mind to awareness of what's happening in our society. And I do think that people who are taught to index and not really care are kind of walking blind in society when they could be poking their feelers up, seeing what's happening in genomics or robotic surgery or whatever. And I'm an English major and I care about these things. And profiting is a consequence. I would also say that any young person start investing yesterday. And our final question, what do you know about the world of investing today? might have been useful back in 1993 when you were first getting started?

1:14:23I would just say that when I first got started in 1993, investing was more of a math exercise for me. I was taught by a dad. I mentioned value line, lots of ratios that we know. I never learned financial statements until I bought how to read a financial statement. The year after I graduated college, thinking, you know, I kind of missed that. I never really did that. And so I was very numerically driven. I think what I've realized is that using your right brain in a world where many people are just using their left brain is where the real value is added. My favorite chapter in my Rule Breaker Investing book points out that most of the things that win in business are not actually on the financial statements.

1:15:05We've already talked about a few of them. Who's running the company? That is incredibly important. How about the brand value of a company? Most of those are never expressed anywhere in the financial statements. the culture of the company. Can it innovate? Those four things are the bedrocks. As an entrepreneur, I know, I see it in my own company, when we fail and when we succeed, none of those is being captured in the financial statements. And we're living in a left brain driven algorithmic world. And so I think here now I see, and I only think longer term than I ever did before when I was 30 years ago.

1:15:37I think longer term today at the age of 59 than 29. And I use my right brain. David, thank you so much for being so generous with your time. This has been absolutely fascinating. We have been speaking with David Gardner. He is one of the co-founders of The Motley Fool and author of the book. Let's see if I can spit this out. Rule Breaker Investing, How to Pick the Best Stocks of the Future and Build Lasting Wealth. If you enjoyed this conversation, well, check out any of the 627 we've done over the past dozen years. You can find those at YouTube, Spotify, Apple, Bloomberg, wherever you get your favorite podcasts.

1:16:19I would be remiss if I didn't thank the crack team that helps these conversations come together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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