“Rule Breaker Investing” Highlight Reel

0:00This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales, using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Last year around this time, I let you know I was nearing completion of a book, my final stock market book. The title may sound familiar, Rule Breaker Investing.

0:42And then at the start of this year, I told you that with each passing week of this podcast, I would randomize a few sentences from somewhere in the book. Yeah, random. That's sort of maybe a teaser, a preview. And since I was randomizing, I myself didn't know which page would be coming next as we did page breaker previews week in and week out. Well, now just days away from the book's debut, I thought it would be fun this week to take all of my page breaker previews done this year and reorganize them into the actual sequence in which they appear in the book and now reshare them one final time in this new, more logical format.

1:26And if I do my job right, this week's podcast will be like a mini audiobook version. Or if you're a golf fan, one of those flybys where the drone camera runs from the first tee through the course, providing a good look at what's ahead prior to anybody playing the course or reading the book. This special edition I'm going to call Rule Breaker Investing Highlight Reel, only in this week's Rule Breaker Investing. It's the Rule Breaker Investing Podcast with Motley Fool co-founder David Gardner.

2:04And welcome back to Rule Breaker Investing. I really enjoyed doing last week's podcast. Thank you again to Rick Munaris for joining me to look back at five stocks we picked 10 years ago last week. It was really fun to talk about what happened to each of them. Some of those companies aren't still around anymore, but the dollars you would have invested in them are. And we scored each of those picks all the way through the 10 years. Rick helped us understand why each stock had done what it had done. And you should know that that was the start of a new episodic series, as I mentioned last week, because every 10 weeks for six years on this podcast, I picked five more stocks toward a certain theme, whatever felt right to me during that, I don't know, that quarter or so.

2:51So every quarter or so, about for a year, we did a five-stock sampler. And the 10-year review we just did last week was the first. There will be 29 more coming in the weeks, months, and perhaps years ahead as we look back and learn at a really great vantage point, 10 years, which is much more what a capital F foolish investor does, I think. It was fun to pick the five-stock samplers for the three-year periods, sort of the gamification that we had going for each of those five-stock samplers. But for most of these stocks, we owned them well before I ever picked them on the sampler. And for many, I hope you still own them well after the final review of Palooza for each of those samplers, typically three years later.

3:36So yeah, 10 years later kicked off last week. Next week, it's the Market Cap Game Show, something else that recurs around four times a year. In fact, exactly four quarters a year, we have a competition where we see who gets a seat in next year's March Market Cap Madness. So two talented full guest stars will be appearing. You will too, because you play along. It's the Market Cap Game Show coming next week. And yes, something else happens next week too. And I think you know that. It's the debut of Rule Breaker Investing, a book I wrote last year, and I've been sitting on my hands for the better part of a year now, waiting for it finally to make it to readers and listeners, because the audiobook version I also recorded, and that's out next week as well.

4:26It comes out hardback. It also comes out e-book form for the Kindle and, of course, an audiobook as well for those who enjoy Audible. I could not, of course, be more excited. This is my final stock market book. If you haven't pre-ordered and if you're interested or excited by this news, I really hope you will pre-order. That helps a lot for bestseller lists and buzz. So I would appreciate any and all pre-orders. And perhaps today's podcast will inspire you to do so if you haven't already. because as I mentioned at the top, I am going to be flying by that book in abridged form, bringing back all of my Page Breaker previews reordered in proper order now, sequenced as they occur in the book.

5:11So this is a one of a kind podcast this week. As I mentioned at the top, it's in the title of this week's podcast. It's kind of a highlight reel of Rule Breaker investing. And yes, I've been kicking off every podcast this year with a page breaker preview, but this week I'm not going to do it anymore. The book comes out just days away. This whole podcast is in effect a page breaker preview. Let's get started. Now, the only page breaker preview I did not randomize was the one I presented back in the first week of January this year. I intentionally wanted to pull right then from the first page of the book, which is the frontest piece.

5:55And I quote, everyone is an investor and everyone can make a 100 bagger. i'm going to resist the temptation to provide additional commentary on each of these otherwise this podcast would be way too long this is a flyby we're having fun so i'm just going to keep moving but obviously i included that line in the frontest piece that means a lot to me and i really do believe everyone is an investor and i firmly believe everyone can make a 100 bagger in a lot of ways that's the purpose of the book itself. Next, this page breaker preview was shared from chapter zero. Yep, that's right. Since I'm a rule breaker and I've always thought some books should have a chapter zero or a chapter O, I included one in mine and I hope this quote will speak for itself.

6:51And I quote from page 13. Here's my longest sentence of the book. Apologies ahead of time, but it just feels right to deliver this in one mouthful. Even though we disagreed on one key point with Jack Bogle, the founder of both Vanguard and of the index fund revolution, that individual investors should not, he said, buy individual stocks. We say you should. We dearly love Jack as a person and what he stood for and did in this world, which was to help wipe it of bad advisors and the compensation systems that drove those people because of overpriced opaque schemes, Ponzi, but others too, that were enabled by a status quo where the average person wasn't educated about money and thus as an adult was walking into a red light district of financial choices where even some of the cops couldn't be trusted.

7:44End quote. Next, this little bit of personal finance mindset thinking that I wanted to share in the book. It's not a personal finance book at all. Rule Breaker Investing is a stock market book, but setting context ahead of time to bring everyone in and getting them to think capital F foolishly early in the book helps this from page 14. And I quote,

8:39And I quote, it took years for me to articulate what started as intuition and eventually evolved into this question. Why do the most esteemed investment books of the past often cause their readers to miss the best stocks of their own generation? I won't claim it's true of every revered book, but it's strikingly true for many. end quote and i'll just leave that one out there for you to think about the final page of chapter o sets up what comes next page 21 and i quote from early days i was inspired by my elders to study follow and figure out stocks years later our dad would give us not just stock picks but stock savvy and our own portfolios.

9:35I learned to build habits and habits are what part one is all about. End quote. And indeed, part one of the book is the six habits of the rule breaker investor. And I want to speak to that for a minute because I think a lot of people, when they pick up a stock market book, the first thing they want to know is what's the big pick? What's the next Amazon? And certainly I do my best within the body of this book to speak directly to that in a number of places. A lot of people would probably want that up front. But what I've learned being a fellow fool over the years, talking to so many of our members at member events over this podcast, mailbag, our own employees, I've learned that what a lot of people need first are better habits.

10:22because if my brother Tom or our chief investment officer Andy Cross or I say this or that stock, and we might be right about it, it might be a great stock to hold over the next 10 years, but if the person who receives that stock pick just holds it for 10 days or 10 months or is the first to back out when it drops 10%, then we didn't really do them as much service as we could have by giving them first the habits that they need in order to take in the stock market advice that they receive, the next pick. And so the first part of the book is very intentionally organized as the six habits of the rule breaker investor, habits, not yet, stocks.

11:07Jack Bogle's rowboat syndrome sets up a crucial extended metaphor that I throw down early in the book. Bogle talked about the rowboat as an example of what too many people who don't invest well do, which is as they paddle down the river of time with their money, they're looking backwards because that's the direction we're facing in a rowboat. Bogle called that the rowboat syndrome because people tend to only use the rear view mirror looking backward. And if the market's already been really good, they think, oh my gosh, I've missed it. I need to finally now get in. And when they do, guess what's about to happen?

11:45The market's probably about to drop sometime soon. It does, after all, lose value one year in every three. And so as the market goes down, they're looking backward going, I should never have got started with investing. I knew I wasn't ready for this. Look what's happened. I should just sell. And guess what's about to happen next? Well, this is Jack Bogle's rowboat syndrome. But in Rule Breaker Investing, I make it more of an extended metaphor. I think the word for that, as I recall, is allegory from my undergraduate studies. I know many of you will know that word. I turn it into an allegory with a few different kinds of boats, and that sets up a really important part early in the book.

12:27And I'm going to quote from page 32 now, and I quote, Now I want to extend this metaphor in my own way, in support of habit number one, because to the row boaters, I say this. toss away your rowboat and at least try a canoe because when you're in a canoe you're facing forward you recognize that what truly matters is what comes next around that bend in the river as you paddle forward paddle paddle paddle looking the right way end quote Well, from boats, we move on to baseball. Baseball is my favorite sport. It's probably the sport most analogous in many ways to rule breaker investing. Swinging at a pitch is picking a stock.

13:18Coming back up to bat over and over is your investing lifetime. And yeah, that's the time frame I think you should be investing in your whole life. You keep showing back up in the batter's box. And to continue this a little bit further, hitting home runs is our goal. And not sweating strikeouts is key. And from page 32, I quote, A single home run is far more impactful than a single strikeout. In fact, even if a player strikes out four times every single game over and over, known as a golden sombrero, but hits a home run on his fifth at bat, that player would be on the short list every year for league's most valuable player.

14:09What's true in baseball is truer in investing, where the contrast is even sharper, end quote. This next one should speak for itself. Any regular long-time listener here will understand the what and the why, but I suspect for many a new reader in the year ahead, anywhere on planet Earth, these lines may quite surprise them. From page 46, and I quote, Add up, don't double down. Make it an option only to add to your winners, to what's doing well in this world, never the opposite. Do so with the knowledge that most others, including most professionals and almost all large mutual funds as a requirement to maintain diversity, are doing the opposite.

15:01Rebalancing, averaging down, cutting the flowers, and watering the weeds as the old saw goes, end quote. Sometimes when I randomized my page breaker previews for this podcast over the year, I would pick the very next page in the actual book. So a page later, page 47, we began talking about one of my favorite lines, which holds to me such a powerful insight. from the section of chapter two entitled Dips Wait for Dips, a one-liner. And I quote, Those who inveterately wait to buy on dips very likely miss or badly have to chase the best performing stocks of this or any era. Continuing on, page 53.

15:57And I quote, Another podcast listener once threw me what I take as a high, high compliment, and he did it in so few words. From you, I learned the difference between trading and investing. I hope this book does the same for you. End quote. You know, one thing that I didn't bother with in my page breaker previews throughout this year was footnotes. My writing style lends itself to humorous asides, and so footnotes are a recurring feature throughout the book. They're there for fun most of the time, and I made the decision as an author to number them continuously from the very start of the book to the very end.

16:44A second option would be, of course, with each new chapter to renumber the first footnote number one. But as I love chatty, fun footnotes, and I feel like they're a trope in the book, I wanted them numbered from one to, okay, yeah, wow. I think it's 106. So on a small side note, the quote that I just shared with you from a listener about the difference between trading and investing has a footnote inserted in the book. And it just says, thank you, Art Burke. That's the name of the podcast listener who sent me that feedback. Art, you might be listening right now via a mailbag. So yeah, there are a few brief call-outs to you, dear listener, you and your ilk, like Art Burke, for providing some of my favorite lines in the book.

17:35For those keeping score at home, that was footnote 22. All right, back to baseball. Page 76. And I quote, Just like hitters aiming for 400 hit over 300, rule breaker investors should aim 100 basis points higher than conventional wisdom. Conventional wisdom suggests beating the market averages would just be a coin flip, 50-50, or here, batting 500. Whether or not this is true, aiming high is crucial. End quote. Jumping ahead now to the heart of the book, part two, all about stocks and the six rule-breaker traits, especially that first one, the power of Snap-Cola. Page 95, I quote, Tesla, Facebook, Intuitive Surgical, Adobe, Netflix, Axon Enterprise, Salesforce, all are top dogs and first movers in important emerging industries.

18:47These Snap Cola examples are not just correct answers on a Rule Breaker Investing Chapter 7 pop quiz. These Rule Breakers have offered the best investment returns of this generation, and all seven are stocks I picked early and continue to hold years later. They help power market-beating results that some academic observers will dismiss as luck, end quote. Well, since this is a highlight reel episode of the podcast Rule Breaker Investing, we won't go deeper into Snap Cola for now, but yeah, key phrase. Page 98, and I quote. Clayton Christensen, one of my academic heroes, formed his theories about disruptive innovation largely by examining competitive advantage.

19:42He noticed the irony that the larger companies get, the more vulnerable they become as they focus on sustaining their advantages while upstarts, I call them rule breakers, quietly revolutionize their industry from the ground up. End quote. Page 102. And I quote. quote, Tony Hsieh turned his shoe company Zappos into a billion dollar enterprise bought by Amazon. His understanding of the power of happy employees made Zappos the envy of its industry. Tony was asked once, how do you get all your employees to smile? And he deadpanned, easy. We just hire the applicants who smile, end quote. That's from the chapter on sustainable competitive advantage.

20:36And yes, in my experience, having employees who smile when the competition doesn't can be a great sign of a sustainable competitive advantage. Let's move on to page 141. And I quote,

21:21I would never ignore or underrate brand, leadership, culture, and innovation. End quote. That from chapter 12 may be the most important insight in the book, especially for those for whom valuation is paramount to their investing, and yet who seem to keep missing the Amazons and NVIDias because their valuation-focused investing causes them to say, Overvalued. And so they never buy Amazon. Not in 1997 or 2007 or 2017. Probably not in 2027 either. And it's been the greatest stock of our time. Overvalued. It's a key and recurring line here, which actually never got randomized into my page breaker previews, but here it is.

22:15There are no numbers for the things that matter most. page 148 provided the page breaker preview I just shared with you randomly last week. It's about my seven historic 100 bagger picks for Motley Fool members. Maybe one or more of them for you, perhaps, dear listener. From page 148, I quote, What matters most to me about this list is making it not just imaginable, but real for millions of people. Each row is special. The prices have fluctuated since the publishing date, and these stocks will go in and out of favor. Some may fall from the 100-bagger ledge, while others near but not on the list, like Shopify, Salesforce, or Chipotle, may arrive.

23:13In the end, there is no specific magic to the number 100. Heck, I prefer 1 ,371. End quote. That last bit reminding us that even sweeter than a 100 bagger would be, yeah, any number greater than 100. And thus far for Motley Fool members, I have picked two 1 ,000 baggers plus. Page 171. And I quote, Probably the biggest driver of portfolio purpose hinges on whether there will be new money coming in or not. In my parlance, I ask, is it an Odyssey or a Phoenix? End quote. For now, I'll just mention that anyone listening who knows about Motley Fool Supernova will probably get what I just shared. If you don't, well, I hope you'll read the book.

24:12Okay, moving on. as an English literature major in college at the University of North Carolina at Chapel Hill, I especially enjoyed my Shakespeare classes, and I have a lifelong love of language. And I hope that comes through constantly and persistently throughout your reading of this book because I loved to write it. And highlighting the language we use as investors, as business people, it's just people going through life. Well, I like us to think hard about the language we're using, And maybe imagine from time to time how if we were to change our diction, you know, put a different or new word in place of another, an old one, how the course of our own destiny might change just from words.

25:00Page 173, and I quote, what's in a name? Shakespeare's Juliet says, that which we call a rose by any other name would smell as sweet. But I think names are more powerful than that. In fact, had she named her plan to fake her death, Project Rebirth, and shared it with trusted allies beyond just the Friar, that name alone might have changed Juliet's fate. Page 178, and I quote,

25:58to. End quote. As you might expect, I quote Buffett a bunch of times in my book. In fact, I count 31 citations altogether, which may be somewhat ironic since my rule breaker approach to beating the market probably strikes many all out Buffett fans as heretical. Well, I like to think that I borrow liberally from the Oracle of Omaha all of what I consider his best stuff and Circle of Competence is certainly one such example. From a page later, page 179, and I quote, way back in the book's introduction, I mentioned the most common question from new listeners of my Rule Breaker Investing podcast, what's the right number of stocks for my portfolio?

26:48I said, then, no such number. We'll talk about this later. Well, later has arrived. End quote. There I am talking about talking about you again, my RBI podcast listeners. In this case, we're now into part three of the book, The Six Principles of the Rule Breaker Portfolio. All of my thoughts written down and organized for you to start and maintain your portfolio. You know, that thing that we're all managing, though, in my experience, most people don't have frameworks or coaching or good guidance as to how to build and maintain their portfolio. Page 189, and I quote, as an entrepreneur, my biggest holding is ownership in the business I helped found.

27:41It's both a luxury and a curse that so many other small business people can appreciate. Your own business is very likely the greatest source of your wealth. That fact alone has allowed me to take more risk in my equities portfolio than I would have otherwise. End quote. That one's about why entrepreneurs are sometimes more overloaded in their asset allocation than we think. Page 190, and I quote, many investment advisors in much of the regulated fund industry when facing imbalance, rebalance. This is the practice of automatically selling positions that have risen in order to reinvest the proceeds into those that have fallen.

28:32It enables various investment instruments to achieve their objective to remain well-balanced across their holdings, end quote. And yet, as Peter Lynch taught the world back in the 1980s, though I'm sure it goes back to the Greeks, ultimately, when you water your weeds and cut your flowers, you will underperform what you could or should have earned if you'd done the opposite. As Lynch said, water your flowers, cut your weeds. Except if you just invest in mutual funds, you'll never gain control over that dynamic, right? That, and in the book, I decide that the flowers and weeds comparison and has maybe gotten a bit threadbare at this point in history.

29:17So I introduced some new language possibilities, new words to say the same thing. Fuel your rockets and ground your anchors. Feed your tigers and starve your snails. Light your stars and dim your lanterns. Build your castles and abandon your ruins. polish your gems and ignore your pebbles or the one i ended up using which comes from the world of horse racing all right let's move on now to page 198 and i quote sports betting by its nature is zero sum and your expected return is always negative the handicaps are set very effectively whether we're talking about a six and a half point favorite in basketball or seven to five odds at a horse track, one better will win.

30:16The other will lose and the house will always take its cut over time. Almost all consistent sports betters lose money and quote full stop. Really? I mean, I, I had to speak to sports betting because of its oncoming popularity, which is a huge mistake for everyone, really, except the gambling industry, and in some cases, the media businesses that are supported by the advertising money from the gambling industry. Those media businesses, of course, by their very nature, are helping greatly prop up the gambling industry. As you might imagine, I'm not a big fan. As the book nears its end, I begin to wax more poetic because much of the work of Rule Breaker investing, especially all the stock market bits at that point, have been accomplished for the reader.

31:13So in the final pages, it's time to think of even bigger things like like why we invest and about how some things mean more than money and what they are and about who are our heroes and what can we count on in this world. So page 200, and I quote,

32:00men's souls. End quote. Of course, I had to speak some more to selling and when to sell, even near the end of the book. People are always going to ask about when to sell. Page 205, and I quote, last chapter in discussing when to sell, I noted that it's not always as simple as trimming a position back to your sleep number or dumping a loser to zero out a capital gain. Sometimes your quarterly review asks a tougher question. What will you sell to buy that new stock you're excited about or to fund a down payment on a home, which is why we invest in the first place? End quote. More bigger picture thinking, page 209.

32:51At the end of his landmark work, Candide, Voltaire offers a timeless reminder. In five words, he tells us that while we can't control what happens in the world at large, we can shape our own circumstances. End quote. For now, I guess we can just leave that as a literary quiz for you, dear listener. Do you know, in five words, Voltaire's great closing to Candide? Some of you will know my brush with Jeff Bezos story. Most probably won't. It still makes me smile. Page 218. And I quote, There were so many people. Wasn't this place governed by fire code regulations? So many people. Elbow to elbow, it felt comic.