Bonus Episode: Breaking the investing rules. October 2, 2025

25:03Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

25:12Now, you talked about the six traits of rule breakers, and I think we won't do them here because we just don't have the time and space. And by the way, that's why you got to buy the book to find out all the details. Not really. But I'm going to ask you to do something unfair. I'm going to ask you. So your book, you have six habits of a rule breaker investor, so the person. You have six traits of a rule breaker stock or company, and you've got six principles of the rule breaker portfolio. Can I be unfair and ask you to choose your favorite child from each of those, just briefly. Would you give us one, it doesn't be the most important because I presume they're all important.

25:45They feel free to identify or prioritize, but would you give us one habit of a rule breaker investor, one trait of a rule breaker company, and one principle of a rule breaker portfolio just to whet the appetite of our viewers and listeners? I absolutely will, Scott. Yeah, thank you very much. And that is the organization, the simple structure of the book. We talk about your habits and mindset first, than what we're looking for in stocks. And then if you have habits and you have stocks, you probably built a portfolio. And most people lack any real coaching around how to build a portfolio. So I will give you my favorite child from each.

26:15And it's very easy for me to remember because it's the first one. It's the first habit, the first trait, and the first principle. So in brief, here they come. My first habit for all of us to develop as rule breaker investors, and I would say any kind of investor, but this book is written for rule breakers more than anyone, is rule number one, let your winners run high. And that means so much to me because we live in a world where people say things like buy low, sell high. That's the way to get rich stock market. And I immediately disagree because I'm like, so your third word out of your mouth is sell.

26:54So many people, so much of our financial media, we don't do this at FoolAU, but I will say so much of the world is covering the markets one minute, one day to the next. And all of the focus is on the short term. And very few people have been coached or taught to really hold positions in place. And a lot of people aren't buying shares of companies that they believe in enough that they would commit to holding it for three years at a dead minimum, which is another habit that we won't talk about this interview. But habit number one is my favorite. It's the only way you're really going to get truly rich through the stock market.

27:29You have to hold your best companies and let them multiply, let them compound over time. Rule number one, let your winners run high. The first trait of stocks that we're looking for is top dog and first mover in an important emerging industry. I said at the start of our conversation, Scott, that I used to look for small, forgotten about companies, thinking that I could find them before Wall Street would and I could make money that way. And that can work from time to time, but much more successful for me, the way that you end up with Amazon in your portfolio is you start saying, OK, what are the important emerging industries of this time?

28:03You could say these days, artificial intelligence, genomics, you could say solar, new materials, crazy polymers, interesting things happening in our society, new technologies, the bleeding edge, the important ones. and then who are the top dogs and first movers? Who are the companies that are leading us in that direction? And it doesn't always have to be a really, really big thing like artificial intelligence, which isn't really an industry. It's a technology that will spawn many industries. And even Uber didn't come along for the first 10 years of the internet. So things will be AI-driven 10 years from now as startups that will want to be buying then.

28:41But I think more than anything, we're focused on those visionary founders. Usually they're pretty young who are starting businesses and we try to buy those stocks. And that is my favorite, most important trait for finding rule breakers. And again, not everything needs to be a world changer. I'll give a quick example. Here in the US, we have a company called Axon Enterprise. I'm sure some of our AU members know about it, but this is a company that invented the taser, the non-lethal weaponry that police officers use to not shoot people, but instead zap them, not take lives, but instead temporarily pause them as you're shaking there on the ground, apprehended by a police officer who's now using body cameras here in the U.S.

29:20to be transparent, which is what we want from our police. And all of that equipment is being manufactured and distributed by Axon Enterprise. They have no meaningful competition and are increasingly going global. So not everything has to be some hot AI sounding something. You're looking for important emerging industries. The final thing I'll say is the first and my favorite principle of the portfolio. I can be quick with this one. It's make your portfolio reflect your best vision for our future. And that's my way of saying in brief that you will do much better and be much more at peace and much more knowledgeable, but much more knowledgeable.

29:59But I'll go back again to you will do much better mathematically. Dollars, dollars, y 'all. If you go ahead and buy companies that you know well, that reflect what you want from our world, that are companies that when they prosper over the next 10 years, you believe the world will be better, which doesn't mean that Scott Phillips would believe it or David Gardner would believe it necessarily, because we all see different parts of the elephant. But we want each of our AU members to be really one-on-one in touch with the stocks that they own, feeling comfortable, not just comfortable, excited and believers in those shares of enterprises that we esteem.

30:33So that is the first principle of the Rule Breaker portfolio. Thank you, David. I love it. There's so much more there. Can I say again, please buy the book, just buy the book. The rest of it is in there. It is beautifully written. You're going to learn an absolute truckload out of it. I continue to learn from David, if not daily, certainly weekly through the podcast and other places. So do please, please check that out. Can we talk a little bit about, you talked about top dog and first member and important emerging industry. And I think there's a real question. You don't see, because of a tech investor, you and I sat there and did a video for our members.

31:04Oh, man, it must be eight, nine years ago now. And I don't know if I asked the question or you made the point, but either way, you made sure I was very clear. You're not a tech investor. A lot of your companies that you've invested in are absolutely harnessing technology, inventing, innovating with technology, but you're not a tech investor. And often we get these labels, capital G, growth investor, capital T, tech investor. You're a rule breaker investor. So can we break that down a little bit? Because you even need the examples you've given our technology companies. But you would be at pains, I'm sure, to point out where it's not just a case of the label, but rather what it's doing and how it's doing it.

31:39The language that we use matters deeply to me, Scott, even as just a fellow human being. But in investing, I've really benefited from questioning labels that people are using. I'll give a quick example. Do you all say in the AU that when the stock market goes down, that's a correction? Is that something that you'd say? Yeah, I think that's the wrong word. It doesn't make any sense. The stock market, the idea is always whenever it drops, that would be correct because we're always overshooting. So we need a correction because it would be correct for the market to drop. But our whole conversation today has pointed out the stock market goes up over time.

32:13And so if it's correcting, if it's inaccurate in the first place, then isn't it correcting to the upside an awful lot when it goes down? It's the wrong phrase. And sorry for the mini rant, but these are the kinds of things that I care too much about, I guess. So, yeah, the phrase tech stock, I've never liked. I don't think that it means anything. My first appearance on CNBC back in the 1990s wearing my jester cap. I think I was saying something like, I don't know what a tech stock is. Could you please explain to me what you mean by or growth stock? What is a growth stock? Right. I don't think these are the right phrases.

32:46Specifically, I believe that technology runs through everything. And so to say something is a tech stock. Maybe some people mean you're manufacturing technology. But even then, I would say, well, is Netflix a tech stock or not? I don't know. is Mercado Libre, which is Latin America's Amazon of the Amazon. Is that a tech stock or not? And, you know, Walmart itself has used technology for decades to be preeminent in the US. Is that a tech company? Probably not. But what exactly is that? So you won't hear me saying tech stock. You also won't hear me saying growth investor, because I don't think that means what people think that it means.

33:24They also say value investor, which I also question, although that makes a little bit more sense to me than value stock, which doesn't make a lot of sense to me, but it would start getting really pedantic if we went too much further down this rabbit hole, Scott Phillips. And I love a little Princess Bride illusion on the way through, David. Thank you. I do appreciate that. I don't think it means what you think it means.

33:47Your point about tech is wonderful. You think about some of the so-called tech companies, Amazon, Apple, Facebook, NVIDIA, all tech companies, but they're not really. There's a consumer products company there. There's a retailer. There's a social media network. There's a chip maker. Are they all technology? Yes, but none of them are. And then the term just becomes meaningless. And people say, the tech sector or even the NASDAQ being the tech sector index, the idea that, I mean, they do tend to move together sometimes because other people think of them that way. The benefit we have, the opportunity we have is to think differently, which is a nice segue, way, back to what Rule Breaker Investing is about.

34:24Why do you reckon Rule Breaker Investing succeeded? What was it about the approach with that 26 years of history you mentioned? What was the observation? And I guess the follow-up question for anyone watching now is, will it still work? Or was it a point in time where you saw a move in the zeitgeist and maybe it's been done? Maybe it's too late? Well, we can never say never or know anything for certain, But I'm very, very confident that Rule Breaker Investing will work for every era. And I really do mean that. I've really made great use of it over the last era. But the whole point of my book is to enable people in the next era to do something that most people aren't doing.

35:01Most people are not buying shares directly. They're just indexing. We live in a world of big, dumb money that sloshes around and doesn't have any discrimination between this share versus that one. So if you're a fool, capital F with Scott and me and buying stocks, most people aren't doing anything like that. And I'm not sure they're about to anytime soon. I don't see a huge revolution of a whole bunch of people who are all of a sudden stock pickers. So I believe very confidently that this will continue to work. Also, you know, what we're looking for is winning in every era. And that is, if I had to boil it down, Scott, to one word, I might say the innovators, innovation.

35:38That's really at the heart of every great rule breaker. And it isn't always Internet or artificial intelligence as innovation. Sometimes it's a business model innovation. For example, Netflix in the early phase when it was a fantastic performer for us, but this is before streaming. they were simply sending dvds we we as consumers sent dvds back and forth through the mail to them uh and it seemed really clunky compared to just dropping off a dvd at your local blockbuster or whatever we're doing in the au and and yet what happened there was actually a business model innovation reed hastings the ceo of netflix said everybody hates late fees blockbuster is transactional uh let's do something different let's be a subscription business model and all of a sudden, rather than have late fees, you just mail back your DVD and we'll send you the next one.

36:30And so it wasn't any tech innovation. It was a genius switch of business models. So I love Steve Jobs. I love his line, think different. It's a phrase that arguably built the largest, most successful company in the world and one beloved by many for its brand and what it's done in the world, making computers usable for people in an increasingly complex age. I difference. So, Scott, I think it's the innovators that we should be focused on in every industry. So in any given industry that anybody's looking at, I would say to you, who is the innovator? Who really impresses you? And often it's not Goliath.

37:08Goliath loves the world as it is. Goliath doesn't need to innovate. Goliath just wants everybody else to conform to the well-worn pathways that Goliath has carved out for everybody on the way to Goliath's house where you're going to be paying Goliath. I like, and no pun intended, my first name, but I like the Davids. I like the companies. And the only way that David can defeat Goliath is not by playing by Goliath's rules, but instead by breaking the rules and doing things differently. And so every great innovator from that early AOL, which by the way, just this week closed down for good, it's dial-up service.

37:46It was still operating here in 2025. But, you know, that was such an amazing innovator in its time. And not every innovator is for all time, but a lot of them last way longer than most people think. And not all of them sort of fade away like AOL. Some of them just keep getting bigger and more relevant, like meta platforms or Alphabet or, yeah, Netflix today. These are world beaters that aren't going away anytime soon. So, Scott, I think it's about the innovators. And so that's why the subtitle of my book is How to Find the Best Stocks of the Future. We're using the past to learn and we're celebrating it because we've owned those stocks through the past.

38:29And they have been the best stocks, the rule breakers that you could have owned. But I'm focused on the future. And that's where we want to focus ourselves as investors and readers. I love that. I also love the Steve Jobs, the old Apple ad, here's to the crazy ones. It could have been here's to the fool. So there's some asymmetry there as well, I would imagine. You know, his most famous line, maybe from a speech, was at Stanford graduation when he said, stay hungry, stay foolish. And if anybody hasn't spent just a few minutes on YouTube watching Jobs give that Stanford commencement, you just fast forward to the very end.

39:01It now sounds like one of the great advertisements we ever could have not paid for for our company. But he had the same simpatico, sees the world the same way that you and I do. and the world is to the rule breakers, the different thinkers, the fools, in my opinion. Not everybody's going to be a fool and not everybody needs to be to win, but we're winning. And winning very nicely. You are very well known for some of the lines that you've, as I've started saying, the lines you've repeated regularly have become part of fool folklore, hopefully part of our members investing experience, the podcast listeners get the same thing.

39:38I've written down just some here, dips by dips, which I always have quite loved. add up, don't double down. Buy high trance, all you've already talked about, losing to win. I might get you to just quickly talk about losing to win. That sounds, again, a little bit foolish, but we'll say capital F foolish because there's some real, well, lowercase w, wisdom in it. Thank you very much, Scott. This is maybe the most important thing that I can say, this whole conversation. I said earlier I wanted to talk about our losers. You've now given me the opportunity to do so. As I started wending down my stock picking career at the Motley Fool in 2021, I looked back and I looked at the last 20 years of making stock selections every single month, month in, month out, one or two at a time for Motley Fool Rule Breakers.

40:21And I counted 369 separate picks. And I went back and I checked, and this is a horrible, horrible truth. Of those 360 some stock picks, 63 of them not only had lost, 63 of them had literally lost 50 % or more of our money. And every one of those I picked, every one of them I felt good about at the time. I never go in thinking I've got it right. I never have that attitude. I'm always playing the probabilities and thinking about how the world can play out. And sometimes you get black swan moments, you can't do anything about them. But truly, Scott, one in six of my selections had lost 50 % or more of its value.

41:07And that's shameful. And I hate talking about that, except that it was also true at that point that the 63rd best selection for Rule Breakers was up about 400%. And if you do the math with me, the worst you can ever do for those really bad stock picks was minus 100, and I never quite did that badly. and the best you can do is unlimited on the upside and in fact the single best selection at that point in rule breakers history was tesla and tesla is still up now more than 200 times for our members but that on its own think about it a single stock up 200 times the value literally wipes away all 63 of those minus 50 percenters and leaves a lot of profit on its own on the table.

42:01In between my top pick, Tesla, and my number 63 pick, HubSpot, 400 % gain, 200 times gain, were stocks that have gone up between four and 100 or more times in value, 61 others. And that is why I think Rule Breakers is one of the great advisories of all time. And we lost so often and so poorly. And so this is my way of saying we're not for all. Some people don't have a mentality or even a life circumstance that would allow them to lose in the way that we do to win. But if you are, especially if you're younger or if you are more of a risk taker without being a crazy man, because I'm a fool, but I'm not a crazy man.

42:44I highly recommend feeling not bad about losing and not living so in fear of stocks going down, but recognizing the unbelievable upside in front of you, if you will, but buy to hold. My goodness, that's a great story, David. And if you think about that, you've made it perfectly clear, but I'll add my two cents in the sense that if you had, David, decided, you know what, I'm going to try and minimize the number of losers. I'm going to shave off some of the rough edges. I'm not going to take those, you call them risks, I'll call them calculated investments, but they're the same thing. I guess I think it's a positive thing, but the idea of you could have maybe reduced that 63 down to 40.

43:24And then of those top 40, maybe you might've taken out Tesla, So you might have taken out the NVIDIAs or the Amazons or the Apples or the Marvels, the Disney. Those things may, you may say, well, I'll take that risk. I'll take that risk. What you've shown very clearly is by doing it the way you've designed it, the rule breaker investing philosophy, yes, you've got to make your peace with the occasional, maybe even more than occasional loser in the process, in the journey towards finding those winners that mathematically play out. And I love to use the word probability because we kind of think about it as maths.

43:55We think about it as a gambling. investing at its very core is the idea of probabilities, buying something for less than it's worth, not as a capital V value, just the idea that I think this will be worth a lot more in future. And if I'm right more than I'm wrong, and when I'm right, I'm much, much more right than I am wrong when I'm wrong. The maths is just the maths. And it's a shame we don't sort of share that more. We do at The Fool. Shame people don't share it more broadly because that is a really, really important insight that you just shared with our listeners and viewers. Thank you very much.

44:23It took me a while to get to and, you know, you had to live it to start to realize it. But in the end, it's just simple math. And there are people who are much more mathematically inclined than I am, even though I love numbers. I'm a literature major from university. But I truly have recognized now that this goes against our human instincts. psychologists say the pain of loss is three times the joy of gain that has been proven through behavioral economics many different studies all pointing toward a three to one ratio give or take and you know that is why we're all on earth today because our ancestors thousands of years ago were the ones who ran they're like but what if it's really bad and so it's hardwired into us to to experience loss as three times more painful than the equivalent in gain.

45:09But think about it. The stock market is exactly the opposite. Actually, the joy of gain, we've just talked about it, is infinite times the pain of loss. But we are still living in a world where everybody has the same human hardwiring. And I just try to remind us of the math. And I've tried to prove it through decades of buying and holding and sharing out Scott Phillips' stock picks, David Gardner's stock picks, fool across the world. We're all, as analysts and advisors, sharing out our best ideas. And I think the ones that work, we should let them. Let them work. Let them win. Be surprised that you could actually make 100 times your money.

45:47We've done it seven times. And part of what I'm trying to do in my book is just A, let people know that's possible. B, we did it. C, here's how. And D, it's not about me. I'm finished picking stocks. It's about you, you following Fool AU, you following your heart, or making your portfolio reflect your best vision for our future. I love that, David. I am reminded of the... I said to our members before, you do it much more eloquently. Investing well is really the ability to successfully subdue our evolutionary biology. It's that idea of being able to say, that's what we just did. Our lizard brains, our monkey brains just want to do all these things because we're on the savannah, we're running from the lion.

46:28You don't store food for 60 years when you're a caveman who's just discovered fire. And yet, that's what we have to do as investors. We have to look for you in the face. We have to plan for the long term. They are things that just don't come naturally to us. And the ability to get over that line, and that's where the book is so important. You lay out a methodology, but also a proven methodology over that 26 years, as you mentioned, which says to us, you can do this. This is what I thought we should do. This is what I did. this is what the results are and here's how to put it to work in your portfolio and you say in your life which I know you're going to come back to possibly with another book which is exciting but that for me is a really key one.

47:05May can we finish with a quote that I really like I know it's one of your favorites and I will I'll read it then you can repeat it because you're better than I do. I try to find excellence by excellence and add to excellence over time. I sell mediocrity That's how I invest. And I love that because it encapsulates what you just talked about, including the selling bit. Because you're saying you're buying to hold, which I love, not buy and hold, but buy to hold with the intention. But if the excellence becomes or is discovered to be mediocrity, you're prepared to sell. Would you unpack that quite a bit for us?

47:38I'd love to. So I think obviously I repeat the word excellence three times, which is a reminder that that's really what wins in this world the best. There are opportunities to pursue cyclical companies where you might time a cycle right once or twice. There are companies that look good but might not be great. But there are people in this world who are truly great. And there are companies that do truly great things and staying focused on the best. And not just flash in the pan best of 2025, but really the next 10 years, who's going to help shape the world for good? It's so satisfying when that happens And you were owning it And believing in it Especially when you were going against the grain Because everybody told you that was overvalued So excellence, excellence, excellence Try to find it, buy it And then of course add to it over time We don't try to add to our losers I add up This is very contrary again For most people they want to add a rebalance To things that aren't working You already know what I think of excellence I want to add to it And then, yeah, Scott, I do use the word sell.

48:45Sometimes people say, David, do you ever sell or do you at the Motley Fool ever sell? Of course we do sell. But what we're doing is what people don't do. Most of the sellers, most sellers are looking directly at the stock and a target price they have or an outcome about that stock that they don't like or the stock market overall. They're thinking about, is it going to crash? Or what about the market selling off? And they're trying to get out ahead of that. And then even if they do successfully, often they don't get back in at any time that would be successful and they shouldn't have ever exited in the first place.

49:15But I do sell. I sell when I look not at the stock chart or stock market forecasts. I look specifically at the company in the eye as best I can. And I say, do I love you? Are you still great? Do I believe that you have good days, not even your best sometimes, good days ahead of you? And if so, I stick with you. And even if you've made a bad mistake, like when Netflix announced Quickster, which is a classic mistake that is probably the stuff of business case studies here in the U.S., splitting their DVD business from their streaming and rebranding everything and confusing their customers and losing two thirds of their value with the stock as we held it all the way through and then back up.

49:56or watching Netflix, sorry, watching Amazon, which I had at$3 a share back in the 90s, go to 95 and then back down to seven during 2001. Extremely hard to do, but I did hold it. And I'm so glad I held those all the way through. So I think that we can sell mediocrity when we truly do think that a company is done. But when Netflix made that mistake, they only lost less than a million subscribers. Their financial statements were not, I mean, it was a bad decision, but stocks overreact to announcements. The businesses themselves are much stabler. Follow the business. Love it. You talk about being long-term.

50:34I often share the Vanguard index chart. Vanguard producers, I don't know if they do in the US, an index chart here of the Australian market over 30 years. And we are stock pickers. We think we can do better than the index. But I said to people, at the very, very least, look at what index investing does. If you do even better than that, you're ahead. Often I get the response. I say, but all you have to do is this chart says you bought once, you never added to it. 30 years later, here's what you had. And people say to me, yeah, but who does that? Who holds for 30 years? And my point is like, but that's the point.

51:01That's literally what I'm trying to say to you. That's what you should be doing. And what I love about the Amazon story and the other stories you share is exactly that. I'll get you to close, mate, if you wouldn't mind, with the story about the second lowest cost base on Amazon in the room, because I think this is a really, really nice description. Well, thank you. Yeah. This is near the end of my book. And so there's a bit of a spoiler alert here. I might even not fully spoil it, Scott. Please feel free to leave. I found myself in a very, very large convention room one night at a big bash in Washington, D.C., our nation's capital, with thousands of people who were there to see Jeff Bezos, the richest man in the world at the time, interviewed in front of a suppertime audience.

51:44And I had been hoping maybe to get to meet him. And I was telling my wife Margaret the night before, you know, if I do get to meet him, Margaret, I've already got my line. I'm going to say, Jeff, I think I'm the guy in the room with the second lowest cost basis in Amazon.com stock. And obviously we know who had the lowest cost basis, the man that I was hoping to address. So my dream was that night, seven years ago, to buttonhole the world's richest man and let him know that I have a pretty sure because people don't hold these stocks. Right, Scott? Who would ever hold even an index for 30 years?

52:23By the way, who wouldn't hold an index for, I hope, at least 60 years? I'm a whole life investor. I will be invested my entire life, 100%. I don't exit the market. It's not hard to hold for 30 years at all. I hope to hold for a lot more than that going forward. And did I ever make it to Bezos that night? It was an absolute zoo. There was media everywhere, security, et cetera. And I made a game effort, I'll say that. And I write about that near the end of my book. Ultimately, it was my favorite chapter probably to write in the book, Scott, because it's about optimism. And I think that optimism, I know optimism in my mind, having visited your fair land before, I believe it's part of the Australian spirit.

53:06it. I think it's part of your cultural and national heritage. And I see a lot of it always have in the United States of America as well. It's a little bit crazy right now in my fair country, but I hope that the optimism that Scott and I feel exhibit has come through in this conversation. I believe that optimism is a creative force. It's not just a state of mind. So ultimately, I wanted to write and remind my reader, whether they're Australian or American, of the beauty and power of believing, yes, we can, and how much more likely you are to get it than if you're saying no, we cannot. And that was, I had a yes, we can effort that night to reach Bezos.

53:47David, you'll be pleased to know, I just, I got to do it because I can talk about it. You'll be pleased to know that in my podcast, The Good Oil, we do interview podcasts and this interview will be part of that podcast series. My last question to all of our guests, I do a different type of interview. I interview them and I ask them my four favorite questions. My last one And as always, what are you optimistic about? That's my favorite question. So it's a very nice way to finish this particular conversation. Please go out and buy David's book, Rule Breaker Investing. We'll link to it in the pod feed.

54:14We'll link to it below this video on YouTube. If you're watching it on YouTube, go and get a copy. It will pay you back in spades. I'm not just saying that because I work for David, although I do. It is a spectacularly good book. So well-written, super readable, short, as David mentioned, but packed with so much value. You will absolutely thank me for it. I promise you it will really, if not change your life, it certainly change your investing far, far, far more than the price you're going to pay for the book. David, thank you for being so generous with your time. Thank you for writing the book.

54:43Thank you for being the fool and a fool. And thank you for joining me for this conversation. It is my absolute delight. Thank you for the invitation, Scott. And if we didn't get through everything, have me back anytime. I love talking to you. It's always a delight. And fool on to all my Aussie fools. There you go. Fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener.

55:17The Motley Fool operates under Financial Services Licence 400691.