#281: David Gardner’s Guide to Finding Life-Changing Investments and What Stocks He’s Buying

0:00Emmet:If you could only buy three small companies before heading to a desert island for 25 years, how about we say small cap, mid cap or any cap? If you could only own three companies before heading off to this mythical luxury island in the Pacific, what would you choose and why?

0:23Emmet:Hello, listeners, and welcome to a very special edition of Stock Club. As you may have heard a couple of weeks ago on the podcast, in 1999, I got excited when I noticed that Dell shares had increased 1 ,600-fold during the previous decade. So I set out to find the next Dell and soon after bought shares in Netflix, MercadoLibre, Chipotle, Tesla, and loads more, each climbing dozens or hundreds of fold in value. Horizon is built to find the next mega winner. It's my life's pursuit. For a short time, we're offering it for over half price off. That's$500 off, 199 bucks. You only pay 499 bucks and there are only 100 spots.

1:18Emmet:Now, we're repricing to 1 ,999 in 2026. So lock in the$499 price point now. And to existing members, once you're in, you're in. You will remain on your lower pricing. And to all of you still considering becoming a member, sign up today for what is effectively one and a half grand off next year's$2K ticket price. That's$499. And I will find a Nextel in there. In fact, I already think I've found one, but that's another story. Okay, on with the show. Ladies and gentlemen, back in the late 1990s, I came across a quirky little site called fool.com. It was unlike anything else at that time, part education, part entertainment, and it was completely fresh in how it talked about something that was new to me, which was stock investing.

2:19Emmet:And its mission was very simple, to educate, amuse, and enrich. And I remember showing my dad the site, and he became a fan too. And the following summer, he brought me home a copy of the Motley Fool Investment Guide, which he simply signed, Barnes & Noble, Cape Cod, Hyannis, 15th September 1999. Well, since then, I've had the privilege of calling its author and co-founder of the Motley Fool, David Gardner, a mentor and a friend. And for at least 30 years, he has inspired millions of investors all over the world, not only with his extraordinary stock picking, but with his generosity, his optimism, and his unwavering belief that investing changes lives.

3:06Emmet:He certainly helped change mine. And here we are 26 years on since dad brought me back that book. And David is joining me here today to talk about his new book, Rule Breaker Investing, How to Pick the Best Stocks of the Future and Build Lasting Wealth. David, welcome to Stock Club. Thank you, Emmett. And I'm truly pleased to be mentioned in the same introduction with your dear old da, who I know was a remarkable man. And truly, I love that story. I did not know the origin story of how you found your way into fool.com, but you've really been such a friend and such a charmer and such an intelligent Irishman as well.

3:47From our forums back in the day in the 1990s to all of the people that you've helped toward financial freedom ever since. I'm honored to be here. Thank you, Emmett.

3:55Emmet:Well, the honor is all mine. David, I'm going to open with a whimsical question that's going to make you think I'm not only Irish, but I'm a stalker, which I assure you, I absolutely am not. A little birdie told me that on your mother's side, both of your grandparents are of Irish descent, and your ancestor fled from Ireland to America in the 18th century after shooting his own horse, rather than turning it over to an English soldier who demanded it. Is there any chance that rule breaking of any type could be genetic? I do think that it is. And we are a union of Murphys and McIntyres, County Cork and County Clare.

4:35It was the 19th century where we shot the horse, not the 18th.

4:38Emmet:Oh, right. The only fact check I have for you, but that is, that is the family lore. I think those who have Murphy on the back end of their names might, might be able to relate to that story, but I, it's, I've been to Ireland a number of times since our children have been and gotten to see. We had most recently went to Killebeg's where we have a portion of our family. It's not, it's, it's off the beaten path. I'll say that. It certainly is. But yeah, but you know, I, I've, I've loved Ireland. I think I've visited six or seven times. I look forward to the next. David, actually, coincidentally, Matthew Broderick and his wife, Carrie Bradshaw, the actress from Sex, they have a house up in Killy Bags.

5:19Did you know that? I had no idea. There you go.

5:22Emmet:David, you pioneered Rule Breaker Investing, which is a strategy that identifies innovative companies way ahead of everybody else, buying shares and holding them long after everyone else has sold. So for those just starting out today in the springtime of their investing career, can you describe what does it take to be a successful rule breaker investor? Well, I think, first of all, a willingness to take some risk and to be accountable for it. And not everybody has to be able to check both of those boxes, Emmett. Truly, most of the world is content with just, at least in the United States of America, we have the 401k plan.

6:00I know you have similar plans in Ireland and the UK and Europe, but the retirement plan where for a lot of people, even to contribute to it is a heroic act because it means you're saving and that's great. But many people are content to index, to send their money off and diversify broadly using exchange traded funds or index funds as we call them here in the US. But that is the majority. That is what most people do. I think that if you're willing to buy shares directly, become a part owner. I know My Wall Street has helped many in this direction over the years. You truly are, I think, taking accountability.

6:36You're enjoying the agency of being able to choose which shares you buy. I personally love to buy all the best ones. I like to find excellence and add to excellence over time. Emmett, this is what I like to do. So I don't like to index very much because I have to buy all the bad companies and all the also-rans and the mediocre ones. So So for me, I think it's that choice that you make to, it doesn't have to be with all your money. How about just one share? For a lot of people, that would be stepping out of line in a good way, I think. And so I think it starts there with a willingness to sort of learn for yourself, intellectual curiosity, et cetera.

7:14Emmet:Yeah. Well, over the years, David, as you well know, you and your brother Tom have co-written numerous books. You Have More Than You Think, Rule Breakers, Rule Makers, The Motley Fool Investment Guide, The Motley Fool Investment Guide for Teens, Million Dollar Portfolio, and loads more. And I read somewhere that you kept notes for 15 years for your new book, Rule Breaker Investing. How did you know that the moment was right to finally write the book? Well, it wasn't kismet. It was not foreordained from the dawn of time, I don't think. I just got off my lazy duff and decided I need to finally write this because I truly had been.

7:56You know, I think our last book was published right around 2010. By the way, this is my first book in a sense because I wrote it myself. Every other book.

8:03Emmet:Oh, yeah, that's true. This is true. It's actually, I didn't, that penny didn't even drop for me. Now that you say it, I'm like, oh, yeah, that's true. Yeah, because every other book was halfsies with my brother Tom. And that was a lot of fun. In fact, it's a lot easier to write half a book than a whole book. But for me, it was just keeping notes, knowing that I wanted to write one more stock market book. And this is my final stock market book. Anything else that I write, I'm not an author every two or three years, but I'll probably write one or two more books in future. But this is all about the stock market and what I've learned over 30 plus years and what I've tried to share out.

8:37All my best ideas from an athletic standpoint for any footy fans or, you know, I try to leave it all out there on the field. So anything that I think about the stock market is in the book. And I just, you know, I thought I'd write it in 2016, Emmett, and then 18, 21, COVID. And then I finally thought I have to write this book. And so that was the year 2024, last year. It just came out.

9:01Emmet:Well, you tell a lovely story in the book that I just loved about Mr. Hodgkinson, I think was his name, your fourth grade teacher who took it upon himself to teach you and your classmates all about stocking investing, which I suspect led to your first big winner in the stock market for our listeners, which was a giant bar of Hershey's chocolate. But the bigger lesson was the importance of building habits. So David, if investing was still rewarded in chocolate bars, giant chocolate bars, what habits do you think is worth a lifetime supply. Well, I think that for me, first of all, starting early, Emmett, this is such a gift.

9:43This is something that my father did give to me, unbeknownst to me, because I was zero when I was born. And he couldn't have communicated to me that he was starting an account for me, but he did. And when I turned 18, which was approximately eight years after winning the Hershey bar in fourth grade, when I turned 18, he said, here you go, this is all you're ever getting from me. I've invested for you from birth. Go forth and multiply. And so I think that it was the power of starting early, being introduced to the stock market as really a young boy. We would go shop for groceries on Saturday mornings with dad.

10:20And he would say, hey, kids, look, chocolate pudding. We own some of the company that makes that chocolate pudding over there on the shelf because we owned a few shares in the company. Let's go get more chocolate pudding. And so for us, that made him a very popular dad. But what he was doing was connecting us with this idea that in an ownership culture, as you have in Ireland, as we have in the United States of America, as the best places, frankly, around the world have, the best places enable people to become part owners of the businesses whose products and services we appreciate, we believe will grow, we will enjoy, we can hold them for long periods of time, much longer than wall street which is i think a key thing i know we'll talk about but i really think it was that introduction at a young age to the positivity and the prosperity that is available

11:09Emmet:to all if we but save and invest yeah i took that lesson the chocolate pudding lesson and i paid it forward about 10 years ago or a little more my wife and two sons and i went to uh disney and we We went up to the castle and I said, boys, we own that brick. And that lesson was burnt into their minds. They can still recall. And that was your dad's chocolate pudding anecdote lesson brought forward because I remembered it very clearly from the first time I heard it all those years ago. I like that even more than the chocolate pudding story. We own that brick. I'd rather eat chocolate pudding at this stage.

11:48Emmet:in the opening notes of your book, you wrote something that gave me a total shot of adrenaline. And I quote directly, it said, everyone is an investor and everyone can make a 100 bagger. By that, I mean, you can invest money in a company that will grow 100 times or more. I know because I've done it myself. I've written this book to help you do the same. And then David, you go on to introduce the six habits to develop, the six traits to look for in stocks, and the six principles with which to build a portfolio. So for the reader of your new book, what do you think is the single most important mindset shift that they need to believe and act on that possibility?

12:34I think the number one, there's more than one, as you well know, Emmett, but not too many, not too many. But I think the number one is being willing to buy and to hold patients. because truly everyone can make a 100 bagger. And you too, we have helped many toward that, toward their first. And really it only takes one for a lot of people to create a great deal more financial freedom than most people ever expect. But we've done it a number of times now. And the truth is that you can find a great share like Amazon, but if you don't hold it, if you don't hold it for five, 10, 15 years, if you're not willing to sit through the inevitable bear markets that over 15 years will happen multiple times, and if you're not willing to watch your Amazon stock get cut in half more than once over that 15-year period, you probably won't have a 100-bagger.

13:32And that's why I really start the book with that first habit. The first habit of the rule-breaker investor is rule number one, let your winners run high. And I think that is probably the most important thing. By chapter three, which is habit number three, Emmett, as you'll know, I begin talking about the derivation of the word invest. Where does it come from? What does it mean? And I hope once readers are introduced to that, if they don't already know the Latin root, they'll begin to understand that most of the world is not investing. And yet most of the people who ever make a 100 bagger are investing.

14:13There is a big difference between investing and trading. And most of the market commentary, most of the financial news, most of the institutional managers are not investing. And they are geared toward the short term and trading. So I think that's the number one thing that you need to learn and take away. And I put it right there in chapter one. You do.

14:34Emmet:I have to ask you something because you've done something that to me is akin to black magic. And let me explain. So in and around the year 2000, I did an email based rule breaker course with you that described the six traits of a rule breaker investment. I still have the notes in a folder somewhere over my shoulder. I love it. Thank you. I remember it. And incredibly, here we are a quarter of a century on, and those rules have been comprehensively proven with time and with data. So my question to you is, how on earth did you come up with these rules in your late 20s or early 30s or whatever it was, only for them to be so durable and predictive?

15:17Emmet:And basically a generation later, we can all go, he was right. Right. So I often went, how did he know that? How did a 28, 29, 30 or whatever you were, know that this was the case? Did you realize at the time you were putting your finger on something timeless or has their staying power even surprised you? Well, it has surprised me, their staying power. And it was a pleasure as I wrote this final stock market book, Emmett, to in the middle of the book, speak to the six traits that we look for in Rule Breaker stocks. And as you know, spoiler alert, they're the exact same six that I wrote about in our book, Rule Breakers, Rulemakers, published in 1999.

15:55So I will tell you, as I wrote that book back in 1998, because it takes a year for a book to come out, you write it like last year, and then it finally comes out this year. As I wrote that book 27 years ago, I would not have understood exactly how the world would play out. At the time, I don't think Google existed yet, at least in the popular consciousness. Netflix wouldn't show up for another five or eight years. Things like Airbnb or Uber wouldn't show up for another decade plus after that. There was no way to understand exactly how the future was going to play out. But I will say that there was a period of rapid learning and growth that I had to undergo because when we started The Motley Fool and all of a sudden we were online and we were on America Online AOL back in the day, the decade America went online, but that's now quite a long time ago and AOLs no longer exists as it once did.

16:47But as we found people plugging their computers into ours and communicating with each other in that seminar you and I shared in the year 2000, 25 years ago, I had to learn because a lot of other people were reliant on what I and my brother and others among us, and now you as well, are saying. It forces us to be accountable because when we make a stock pick, and I've always been fiercely insistent that we score everything. I try to score every good and bad pick that I've made over the course of time, whether it's me or my team's services that I'm connected with. Even on my podcast, I pick stocks for quite a while.

17:24I score everything. So I always put things in spreadsheets. And I'm not very good with spreadsheets, by the way. I don't understand most of the Excel functions, but I do know enough to simply watch percentage gains and losses over time. And it was that learning that I underwent, that I changed my mind a few times early. And I'm happy to say that, you know, based on what I settled on, it's been a combination, Emmett, of looking at the companies themselves, mostly because we're business-focused investors. So usually greatness doesn't change when you're looking at companies. But then valuations of stocks and stocks themselves are always shifting.

18:04And so a portion, of course, of the six traits, two of them are about the stock itself, not the business. But anyway, I'm absolutely delighted that it stood up and held up over time and that it's led me to winners and those who followed me. And here's the good news. I think it's going to work over the next 25 years as well. It's not dependent on the late 1990s or the aughts or the year 2025. I think we're looking at something that will stand the test of time and will work in every generation. I won't be around to see it, but I hope that's true.

18:35Emmet:I hope you are. One of my favorite quotes from the book is, with great rule breaker stocks, what goes up ends up going upper. Would you mind explaining that to our listeners? Well, certainly when we say the phrase, I assume this is true on both sides of the pond. When we say the phrase, what goes up, ellipsis, most people would automatically end that phrase with must come down. And that is unfortunately the mentality that a lot of people have when they think about the stock market. They see a parabola in their head. And so if the market's high, well, probably we shouldn't be getting in right now because that means it's about to drop.

19:16And I've always certainly agreed with a portion of that because one year in three, historically, the market does drop. And that comes after a rise, which on average happens every two out of three years. So every two out of three years, Emmett, the market rises. Every one year and three, it drops. I never predict which year we are. There's not necessarily a cycle to this. Sometimes the market goes up seven years in a row. And specifically with rule breaker stocks, what goes up ends up going upper, right? Because if you look at a great stock like Nvidia, what you see from the stock chart over the only term that counts the long term is it goes from the lower left to the upper right, which means if you follow that little graph from the lower left, it just keeps rising and making new highs.

20:06And so if you sit there going, well, it's probably high now. I don't think I'll buy. I'll wait for the dip. You're probably never gonna buy a great company, the great companies, the rule breakers like NVIDIA or Amazon. So what goes up ends up going upper. And it's worth saying not for every stock, right, Emmett? But for the rule breakers, the specific type that I love that we look at, even though they make drops, death defined drops sometimes, you have to understand that's what happens. It's not what goes up must come down.

20:38Emmet:For sure. Well, in the book, you talk about the power of optimism. And it's not just a personal trait, which clearly you have an abundance, but it's an investing edge. In a world I think that feels increasingly cynical and short-termist and no doubt polarized, how can investors cultivate optimism without drifting into naivety? Because being like Pollyanna is one thing, but being an optimist is something else. Can you talk a little bit about that? There's a beautiful book called The Rational Optimist by Matt Ridley. And I recommend this book to everybody. If you've not read it before, dear listener, I hope you will take the time because you'll get a tour through human history and you'll discover, along with the author, that almost every generation, everyone thought the apocalypse was nigh.

21:35And maybe not the capital A apocalypse, but just apocalyptic thinking. It's seductive, isn't it? This notion that we live during such an important time that, of course, things are bad and our children will not unfortunately enjoy the same standard of living that we've had. humans have thought this, not right now, but almost every generation of recorded history. And yet, when we look backwards, we see the unbelievable progress and human flourishing that I think too many of us, I'll include myself, too often take for granted today. So that's a rational view of history. It explains why you and I get to have a friendship, even though we've spent precious little time in person together, although we have enjoyed some of that over the years.

22:22But here we are seeing each other with video HD clarity across an ocean, having a conversation in real time that can be shared with anybody listening in through their smartphone, which would be hard to explain to a Viking. And all of these things are something that is just the part of everyday life for us. And even the richest people of a century or two ago would not even understand or be able to dream of the things that all of us can take for granted today. So this is very evident to me, the great goodness and flourishing that has occurred. And I think it's our part, it's our role, right, to carry that banner forward and to continue to make discoveries.

23:04Let's cure cancer. Let's start to commercialize outer space and start understanding the universe more so than we have up till now. There are so many amazing opportunities from semiconductor chips, artificial intelligence. The internet keeps coming up with new things. It's not like the internet is a fading technology. It truly is a remarkable time that we're living. And I say that even at a slightly dodgy time in US history, if you ever keep up with our headlines, which by the way, I don't spend a lot of time on because I really love business and the private sector, which is much larger than the public sector.

23:39And that's part of, I think the reason that there's been so much human flourishing over time because of freedoms, both business and financial that are enabled by entrepreneurs. And so I, this is my view. Um, it, I don't know if it sounds rational, it's definitely optimistic, but it, it served me incredibly well because most people again, think that things are bad and getting worse.

24:04Emmet:that's for sure i mean it's amazing how people overestimate the long the short term and underestimate the long term some of your biggest winners like amazon or tesla were pretty much mocked earlier early on that famous uh cover was it a forbes with jeff bezos face in a ticking time bomb and every other correspondence that started to mock these uh rule-breaking businesses um it's always a road that has a lot of rocks on it for a rule breaker um what do you think most people still get wrong about spotting greatness early you are like it's like you have a crystal ball that works um so you have a crystal ball what is it that differentiates you spotting greatness early from the next person well first of all thank you second let me say about my crystal ball my palantir if you will that uh that as i gaze into it it doesn't always tell me the truth and it doesn't always show the future with uh crystal clear clarity and so it's very important for me and i know you know this about me um to point out how many times i'm wrong and how many bad stock picks that i've made and how willing almost crazily so how willing i am to lose and to be wrong so i think that that is a very important theme and at one point one of my favorite sections in the book is entitled Losing to Win.