The Chief Rule Breaker: David Gardner on Beating the Market

0:00David McWilliams: On the podcast today, The Motley Fool, a quote from Shakespeare, yes, but much more importantly, maybe the best financial stock picking magazine in the world. The newsletter, we have the co-founder and editor, calls himself the chief rule breaker, and that's what he is, David Gardner, on the show. If you've ever wanted to invest in stocks, this is the show for you. It's all coming up in a couple of minutes.

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1:46David McWilliams: This podcast is powered by ACAST. Now you're doing there, it's time for a podcast. And the podcast this week is going to be a real little gem. If you have ever invested, if you ever want to invest, if you want to play stock markets, if you want to understand financial markets, if you want to make your money go that little bit further, you'll know that my natural, natural economist disposition is slightly cautious. But equally, prudence and caution never really get you anywhere. You have to take risks, have to seize the moment, and you have to back yourself. And our guest today is a man who's done that.

2:29David McWilliams: His name is David Gardner. He is the chief rule breaker of The Motley Fool, one of the funniest, most impressive, most insightful financial newsletters. I first came across it many, many years ago, and I am completely and utterly delighted to have David on the show. So let us go to North Carolina and talk to David Gardner. Now on the podcast, one of the great joys, and it really is a great joy, is every now and then you get to speak to somebody you have admired for many, many years. And our next guest, I have admired having first read The Motley Fool, my God, it's going way back when I worked in emerging markets, 1998, 1999.

3:10David McWilliams: I was working in a big bank. Big banks spent their entire time bamboozling their clients with graphs and charts and explaining to people that if they didn't invest the stock market through them, well, then clearly they couldn't invest at all. Then out of America comes this bizarre publication called The Motley Fool. And The Motley Fool basically said, you don't need the big banks. You don't need the brick brokers. You don't need Wall Street. You can do this thing yourself. And the man who founded it, David Gardner, is on the line. David, welcome. I have been a fan for many years. This is a real treat for me.

3:53David McWilliams, I am most honored to appear in your podcast. And I do feel as if we're kindred spirits because the great sense of humor, the democratizing of such an important subject, a love of history and a focus on the future are all things that I see in you and that we share. And we're also, I think, the exact same age. And I have more gray hair than you do. So that's our only difference.

4:17David McWilliams: No, it's just the camera angle. It's just the camera angle, you know. It's the 60-year-old club. Yes, exactly. And you're joining us very soon, John, as well. I am. I'm a few months behind you. Exactly. Well, listen, David, let's go. So I'm telling the listeners there, I was a young fella in the mid to late 90s, working in a big investment bank in the UK, over in Russia, emerging markets, that part of the world. And then the insider club, the Wall Street, what they used to be called the bulge bracket big firms were very much an insider club. And they were basically saying to people, if you want to play this game of stock picking or markets or investing your money in a way that you feel that you have some sovereignty, you really are fooling yourself.

5:05David McWilliams: You have to come with us. You then come out with the motley fool. And I would advise listeners who've never seen it, just Google the motley fool. Tell me about the genesis of it. Tell me what was the impetus of it. And tell me what the consequences of it. the genesis of it started really when we were young children, because our father, who was not a professional investor, he was a lawyer in Washington, D.C., loved investing as his father had before him. And so we would go to groceries for Saturday morning, grocery run with dad. And dad would say, hey, kids, look, chocolate pudding. We own some of the company that makes that chocolate pudding through the stock market, of course.

5:45Let's go get more chocolate pudding. And so as young kids, we were immediately baptized into the ownership culture that we are so blessed and fortunate to have in many countries, the free countries of the world. And that is economies that are built on ownership, on entrepreneurs starting things, and us getting to own, be part owners through the stock market, the miracle of the stock market of products and services that we appreciate. And so from an early age, David, we learned and were raised on the stock market in that way.

6:16David McWilliams: So we, it's you and your brother. So your brother and yourself set up this amazing service to investors, to small punters, to people who have five or six grand, maybe not a lot. And they're just saying, like, how do I start this? Maybe it's two or three grand. Okay. So tell me, yourself and your brother, your father steeps yourself with this idea that, hold on a second, there is a way of making passive income through investing in stock markets, and you don't need to work in a Wall Street firm to do that. Please elucidate that. Explain, because I know a lot of Irish listeners, particularly our younger listeners, feel locked out of the housing market.

6:57David McWilliams: It's got too expensive. They're getting nothing on their deposits. They're earning decent wages. They're caught in a limbo. They don't know what to do with their money. Explain the journey, the routine that you guys got into, and then explain how other people can get into it. Sure. So we had the good fortune of having that father who was telling us that we co-owned a chocolate pudding company be investing in stocks for us in shares as we came of age. And at the age of 18, he said, here you go. I've been investing for you since your birth. This is all you're ever getting from me. So don't screw up.

7:33And he was teaching us about the stock market and making it very understandable. David, in the same way that you have made economics and other subjects that people find very complex, understandable, intelligible. That's what we've been doing with the stock market. Much smaller thing than economics, but an important thing as well. So as we came of age, then we had our own portfolios. And the first thing that I did was I moved it from the old line bank, where it had resided since he started, to something crazy at the time, a discount broker. And at the time, these were upstarts, and they were charging a much smaller middleman fee for buying or selling a stock.

8:12And so right away, I think my father wanted me to make it my own. And the first thing that I did as the eldest child of our family was to move the account and to start. And then I got hired as a young journalist by Louis Rukeyser, who is a famous commentator here, sort of the David McWilliams of a past generation in the United States on public television. So Lou Rukeyser, I wrote for his newsletter. And he was basically all about making it understandable for people. So there I was getting to write the back page of that newsletter. And I was allowed to pick subjects that I thought would be helpful to average people like me, investors who felt like it was somebody else's game.

8:52And I was like, no, it's our game. And the first thing I wrote about was discount brokers. I said, you too could open up your own account. Have you saved money? One thing the Irish I know we're very good at is saving money. There is a lot. There are billions of euros stored up, saved, not being invested probably. And I know that's a coming topic. But that's also true in the United States of America for people who don't feel as if they're part of the game. But once you start recommending them, you know, why not buy shares in this company? In Guinness, if you like Guinness, or in Nike, if you like Nike, or Netflix, or Amazon.

9:28And so that's what we were doing, David and the internet showed up just a few years before you first found us. That's the only reason we ever got to be seen by you was that the internet emerged as we started our publication with Shakespeare's phrase, The Motley Fool. Because of course, we love the court jesters. We love the tellers of truth to the kings and queens. We love the fight against conventional wisdom, of course, the humor. And so those characters appealed to us. And so we named ourselves and our publication, The Motley Fool. And we were a print newsletter. But all of a sudden, one year after that, the internet showed up and a lot of it started from there.

10:05Here was me thinking that you were a fan of Motley Crue and you were named after them. I will say this, John. Yeah. Well, John, let me say that for years, text correction, auto correction on our Apple iPhones, whenever we would type in Motley, it would put an umlaut over the O. And about seven or eight years after we started The Fool, it stopped doing that. And we knew we had come of age.

10:32David McWilliams: I love it. I love it. Now, let's go to the tricky and quite difficult area of stock picking, because that's what you do. So to make the distinction, let's say, David, will you explain to the listeners the distinction would be sort of macro investing and StockPick. And then we'll talk about StockPick. Yes. So I don't know Ireland nearly as well as I know the US, but I'll assume that generally people understand that there are a number of ways that you could invest your money if you're thinking about playing the long game of investing for life and trying to find a good return. And I was raised already, I mentioned, in a family where we just bought stocks.

11:13We would buy Amazon. Love Amazon? Buy Amazon. And the list went on. And we would always have 25 or more stocks. And we just build out a portfolio, keep adding to it, tending to always buy and not sell too much and just keep building that. And that's what I've done. I'm now 60. I know I'm not the only one in this conversation. So it's been working for the last 40 years really well, just as I was taught that it would, just as I believe the next 40 years will work as well, David. And yes, there are ups and downs. And of course, one year and three, the market drops. But for most of us, we don't feel comfortable.

11:47We're told you shouldn't buy stocks directly. And in fact, my company, The Motley Fool, is one of those proponents that for many of us, you don't have to buy stocks directly. So even though ironically, I co-founded it with my brother, we're often telling people, you don't have to buy stocks. Because the truth is, you can just put your money into an index fund, funds where your money is distributed across hundreds or sometimes thousands of stocks. So if you put in a thousand euro, one euro is put in a thousand different stocks. And that means you have every stock in the market just about. And so you get the market's return.

12:22And because it doesn't take much more than a computer algorithm to do that for you, it's very different from those Wall Street fat cats of the 1990s. They're all gone now. And it's been replaced by computer algorithms and good news. It's a lot cheaper because now you pay a tiny, tiny fee to have your money automatically invested like that. So David, and all of our noble listeners, please know that that is a perfectly valid way to approach investing. Do it your whole life. Many of our Irish friends aren't doing that yet. Often their money is just sitting at very low interest rates, not being invested.

12:55On average, at least the US stock market, the biggest one in the world, and all Irish have access to it, has returned a 9 % 10 % annualized return. That's way above 1 % or 3%. And again, you're riding every up and also every down and we take it all together. It's about a 9 % annualized return. And I'm going to put an asterisk because this is already too long an answer, but I do want to just add that I like that very much and I try to beat that. Most of my work is premised on the notion that you and I can do better than the mere average because they're buying all the bad ones too.

13:32David McWilliams: So this is the alchemy. So the plain vanilla is you decide, okay, if I put my money on deposit because the rate of inflation has been higher than the rate of interest for quite some time, I'm actually losing money. There's a destruction of my wealth. So if you value going out to work, working hard, making money, putting it aside, the most responsible thing to do is then say, well, hold on a second. I'm actually being taken for a ride by the banks, passively, not really explicitly, but passively. So I say, okay, well, what do I do? Well, then maybe I should buy this index, as you say, and then I'm exposed to the stock market.

14:11David McWilliams: That's the first thing. The second is you're saying, go deeper and try and figure out a way of beating the stock market. How do you do this? So let me say, before I say how I do this, that nobody has to do what I'm about to say. I think you can lead a very happy life and do well and have a retirement that you've saved for. And you can do very well without ever trying to buy an individual share directly. And my entire career has been premised on only buying individual shares. And I've led many Motley Fool members to earlier retirements because they were willing to step out of line and buy stocks directly and not just put a euro into everything.

14:54Yeah. All right. So with that said, my approach, I call rule breaker investing. And I would say, writ large, there are two schools of thought that I encountered as we began The Motley Fool 30 years ago. First one was what we've already talked about. Don't buy shares, just index. In fact, it's gone further than that, as I think you know. And that is that much of academia, at least here in the US, contends today and has for decades that it's luck to beat the stock market. It would only be luck. A blind monkey throwing darts in a random direction has a better chance of beating the market or just as good a chance as you and I do.

15:31That is the conventional wisdom of our time. And one of my favorite questions to ask at a water cooler or a happy hour or a cocktail party is, you know, John, David, what is something that you believe that most people don't believe? and come up with your own answer there. Where do you want to start? Exactly. And that's curious mind, right? That's somebody I want to hang out with at the water cooler, David. So yes. And for me, I realized as an older person that the question, that the thing I believe is that you can beat the market averages. And most people, including much of academia, says that would just be luck.

16:10And I think that's completely wrong. And so now to quickly answer your question, I believe that looking for the great companies of one's time and diversifying into 25 or more of them and being willing to be wrong and lose, both in short-term periods when the market goes down, like 2008-9, which was a disaster that I know you foresaw in some ways, looking at the Irish Celtic tiger market. But on average, the market drops one year and three, historically. And that'll happen, keep happening in future. So that's one way to lose. you also have to be willing to be wrong and think, you know, I thought that company, that share was going to be a success.

16:47But in our example, in our country, Peloton, which was a very successful company, you're doing on an exercise bike and you're watching video with other people. Yeah, I remember. I remember. Zoom for exercise was a very strong company. It trebled during COVID and it's lost about 90 % of its value since. And that's one of my recommendations. So you win some, you lose some. I regret that. And I do not fear that. And I will keep doing that again and again, because many people are unwilling to lose. But the truth is, the most you can ever lose, math, is 100%. And what's the most you can gain? The answer, math, is infinite.

17:29Infinite.

17:29David McWilliams: Yeah, no, absolutely. But tell me, people listen to the show now, and they're saying, look, I'm not an economist. I'm not an investor. I'm not an accountant. I'm doing something else, but I'm interested in listening to David and John. And now we've had another David on the show, very interested in, could this possibly be for me? I don't know how to read a balance sheet. I know I shop on Amazon. Okay, so yeah, I use Amazon. And I know, you know, I watch Netflix. Okay, so I'm a consumer of Netflix. So I buy them. You know, I shop every day in supermarkets, so I buy stuff. But, you know, I don't understand balance sheets.

18:02David McWilliams: I don't understand maths. I don't understand accountancy. People talk about depreciation. I have no idea what that is. I don't even know what a bloody stock is. I don't know what a price earnings ratio is. You're describing me, Mike. I don't know what EBITDA is. I don't know what EBITDA is. What about that girl or boy, that man or woman? I know many of them. And my immediate question back is, do you want to? Okay. Do you want to understand that? And I would contend that the majority of people who are busy with their own lives, they have kids, they have a job to hold down, etc. They're going to say, no, I don't really want to.

18:41And I would say back, great, index. The Motley Fool, our first book, The Motley Fool Investment Guy, which came out in 1996, just a couple of years before you found us, David. That book said, go ahead and index your whole life. By the way, for most people, they didn't even know about indexing, or they were being sold a bad share or an overpriced fund by a financial professional. So just getting them to the index fund was a gift, I think. And we've now 35 years after we started our business, we have people come back saying, I've retired. Thank you guys. I love the Motley Fool. And by the way, I've never bought a share.

19:16I just bought, I did what you guys said. I bought the index, right?

19:19David McWilliams: So my question back to that person is, do you want to learn those things? Are you interested in being able to read a balance sheet? And by the way, being able to read a balance sheet is helpful. It is not necessary for being an investor, at least to start, but it's awfully helpful. And I'm a big fan of education and learning things. And so to me, it's about your curiosity and the time and energy that you have. And by the way, some people start feeling that more as they grow up. They're distracted by other things when they're 19. And I understand that. If they could focus on investing, the gift of seven decades ahead is a timelessly beautiful gift.

19:58If you do start, the younger you start, the better the compounding will be for you, as you guys both know. But it's also true that many of us find that we're more interested in maybe in the middle of our lives, that we start understanding the world more. And maybe toward retirement, we get a fancy around investing. A lot of people spend more time as an older person with more to have at that point investing. So I would just say a lot of it comes down to your will. And if you say, yes, I would like to learn those things, then I would say, great. In that case, let's talk about how to invest. And I look for six things in stocks.

20:33We can talk about that if you like. I have six traits that I look for in stocks. Give me the six. Give me the six. Here they are. The number one and most important one as I look for a share. Look at this. I've got a pen. I'm having a pen myself. So number one.

20:46David McWilliams: You're never too old to learn. Trait number one, which I believe is the most important when we're talking about beating the market over the long term, is to look for what I call top dog and first mover in an important emerging industry. And so those have been at various points in time, Amazon with e-commerce. I'll go with a company fewer people know, but Intuitive Surgical, which is a company that in medical devices has led the rise of minimally invasive surgery with robotic assisted surgery. Fantastic company that we bought in 2005, still holding. That's one of my catchphrases, David, still holding.

21:25Because the big secret to investing is it's one thing to say I bought Apple back in the day. It's another to say I still own Apple or I still own Alphabet, Google or Tesla. before the list goes on. So these are all top dogs and first movers in important emerging industries. And if you confine your investing to that one pond, that is a stocked, pun intended, stocked pond for market beaters over the course of the rest of your life.

21:51David McWilliams: So number one, try and find where the world is moving and try and find the company that is either the first mover or the best mover, as far as you can see in that area. That's right. And industry is widely defined. I'll give another quick example. Axon Enterprise. I'm guessing most people don't know that phrase when I say it. But this is a fantastic company. It's been around for a couple of decades. So Taser, which is a non-lethal form of law enforcement, it's a weapon. John uses it regularly in his family. There we go. So if you've been tased, you should definitely own this share. But this is a company that invented that technology.

22:29And it was controversial because there would be stories about how somebody got tased and died. And sometimes they were on some crazy drug or they had some preexisting condition. And this would always dominate the headlines because, as you guys know, if it bleeds, it leads. But the reality is that it's so much safer than shooting bullets at people. It's such a better approach to law enforcement. Spoken like a true Southerner. Thank you. As I am. As I am. I'm in North Carolina as we speak. Exactly. Exactly. The southernmost northern sounding place in the world. And I love it. So that company also now merged with the company that does body cameras.

23:07So at least in the US, please flip on a camera before an incident and everything is transparent. You're seeing what they're seeing. And all of that video is also a third business for Axon Enterprise. Up in the cloud are all the videos of all the departments. This is a fantastic company. And if you've never heard of it, good news. There are other ones out there like that. So So we're not just talking about the biggest names like NVIDIA, where I have a very low cost basis, or Amazon, ditto. We're talking about Intuitive Surgical and Axon Enterprise, and there are many other companies. A lot of them, admittedly, are US because we do really feed technology.

23:42David McWilliams: You are the monster in the room, right? The United States is, for a variety of reasons, still, and we know it particularly from technology, the home of the Shumterian process that John and I speak about all the time, which is the gales of creative destruction. You hold no hostages. I appreciate that. That's what happens in the United States. So here's your second sort of rule of thumb. So your first one is find the top dog, go for it, your second one. Second is sustainable competitive advantage. Because it's not enough to just say, I found this share, this feels like a really good company or interesting company.

24:18Because we're buying to hold, I would say at a dead minimum, three years, not three days or three months, three years, dead minimum. So when I buy a share, I'm not going to do anything with it for at least three years, but preferably three decades. And so sustainable competitive advantage is critical. And this takes many forms, but a couple of quick examples would be patent protection, which when I talk about intuitive surgical and robotic assisted surgery, that would be a great example for them. Also just R &D budget and scale, like their R &D budget is larger than any competitor's revenues. And so that would be an example.

24:56One of my favorites is the visionary running the company. So people have very mixed feelings about Elon Musk worldwide, I'm sure. I'm generally a fan because I think he's a remarkable innovator. And net net, even though I think he's very faulty. What he has done for the world is accelerate our transition to electricity across our roadways in the United States.

25:19David McWilliams: David, you should whisper this in John's presence because John has what only we describe as Elon derangement syndrome. So let me be clear. I'm just learning that about John, but John's not the only one that I know that is that way. And I'd be the first to say, by the way, this is very important to my style of investing, I would be the first to say, John, do not buy that stock, because I believe that we should be putting into our portfolios, we should be reflecting our best vision for the future. Yeah, I agree. And your values as well. Absolutely. And because your money should be in accord with your values.

25:54And the good news is, and this is a surprise to some people, I think, you'll actually do numerically and mathematically even better when you're invested in things that you know and love. So if you don't like Elon Musk, don't buy the stock. You don't need to. And if you've avoided SpaceX, you've saved a 50 % discount since it IPO'd a few months ago. But anyways, forget about, I don't even want to talk about Elon Musk. But that's another point.

26:16David McWilliams: The main point is that if you see in the leader something special, something unique, something that you think will enable that person to push the product or the company or the team forward, that's another tick box. Yes. And therefore, with with trait number two, we favor founder led companies often because these are people that are going to be there their whole lives and they're going to own a lot of stock. And so you're owning stock with them as Jeff Bezos grows up and builds out a world beater in Amazon, which is a true blue rule breaker. By the way, these are the six traits of the rule breaker stock.

26:51And these break the rules, right? These are these are David's, not Goliath's. These are the companies you already know Schumpeter. So I'm speaking with somebody who's as well-educated about economics as my father, who taught me about Joseph Schumpeter and creative destruction. And I also love disruptive innovation. And this is the heart of rule-breaking. These are the companies that come along and say, if I play the game by Goliath's rules, I will lose 10 times out of 10. Therefore, I must play the game by a different rule. And in general, that involves a new technology that brings a better product or service to market.

27:22Or if you've ever studied Clayton Christensen, you know it may not be a better, You can't make something better than a Porsche or Lamborghini with your very first car, but maybe you could make something cheaper that more people could afford that would add value to their lives and be better than the previous car that they bought. And what we've done as humans, and you know this because money is one example as a social technology, is we've been constantly replacing poorer solutions with better solutions decade after decade and century after century. And it's all accelerated in the last 300 years, but especially the last 30 years.

27:55And I want to be invested in these companies with that sustainable competitive advantage.

28:00David McWilliams: Just for listeners, you might have heard that name, Clayton Christensen. He was a Harvard professor. If you're interested, this is an amazing book called The Innovator's Dilemma, which I think is his sort of collected wisdoms of the world. And again, if this is your thing and you've a bit of time over the summer and you're thinking, what will I do? You could do worse than delving into The Innovator's Dilemma because it is very easy to read, and it is very unusually for a book. It is wise. It is wise. And I think he passed away early, I think a couple of years ago when he was really at his peak.

28:34David McWilliams: Anyway, David, let's come back. So third and fourth rules, because we want to get to the sixth before we head off. Yes. So the third one and the sixth one are both about the stock, not about the company. Okay. So So one, two company, three stock, four or five company, six stock, a little bit of pattern recognition. So number three is that it is experiencing stellar past price appreciation. David, this is very subversive. We live in a world where everybody thinks, well, I've missed it. I mean, I'm not going to buy Nvidia now because surely it's already made its run. And I realized, looking back now over 35 years of picking stocks, shares in public, for people who follow my advice anywhere on the internet worldwide, I realized, looking back at my best performances, my seven stocks that have risen 100 times or more for our members.

29:30And shockingly, as I wrote my Rule Breaker Investing book, I looked at the graphs of each of those shares in the three to nine months leading up to when I finally picked it. And in every case, it rose 30 to 90%. In other words, it was very common for me just before I finally picked Tesla or Netflix or Amazon. Amazon literally doubled in the two months before I picked it. I was writing up my analysis. I was saying, I think it's more than books. I know they're Earth's biggest bookseller, but I think it's more than books. And I was writing that up slowly, not furiously enough. And the stock doubled and I picked it finally after that double.

30:15And -

30:16David McWilliams: Did you not get the heebie-jeebies when it had gone up to double? Did you not think, oh, I've missed the whole thing? Yeah. It doesn't feel great until you start to realize that's actually pattern recognition for this type of company. Not every stock. Some stocks are cyclical. Some stocks go up and down and never come back. But we're talking about top hot dogs and first movers in an important emerging industry with a sustainable competitive advantage. Therefore, you want their shares to be going up. It's actually a buy signal. And that's trait number three. We can talk more about that. But trait number four is that we're now talking about the people.

30:50Because trait number four, you want to have good management and smart backing. It's about the people, not the product, not the industry. It's about Jeff Bezos, Elon Musk, Reed Hastings started Netflix, Steve Jobs. I think people have heard of him. when you find these people, these are incredibly valuable people. And one of the remarkable things and one of my rule breaker thoughts for those who want to fight conventional wisdom. And you know what? I can't remember if we're just an audio podcast or not, but I'm bringing my jester cap off the shelf. Put your jester cap on. To make this point, because if you find people of this of this caliber and value, the remarkable thing is there's no expression of them on financial statements.

31:39There is no line on the income statement, the balance sheet, or the statement of cash flows that says we have Jeff Bezos. Therefore, the market is smarter than that. While most people who ever value stocks are taught not to even think about that, I realized as a young fool that these are the most valuable things you can have. Steve Jobs. We have Steve Jobs. You don't. Let's play ball. And so I started to realize there are no numbers for the things that matter most. And my favorite example, there are four examples, and we won't do them all, but my favorite is just the CEO. Because you both know, you've worked, you know that there are genius people out there that add so much value.

32:20There are also value destroyers. There are CEOs of public companies that are undermining the value of those companies.

32:28David McWilliams: No, no, you're absolutely right. It's like watching, you know, over the last couple of weeks, we've been obsessed by, because we're Europeans, the World Cup. And everybody concluded, and everyone accepted, that the difference between Argentina and everybody else, until the final, was they had this magician called Messi. And he was the creature. Like, there was 11 professional footballers. They were all amazing. In any world, they are going to be the best footballers you've ever played against, you've ever seen. But they just had one creature who was in a different league. And he almost brought an average team to the top twice, which no footballer has ever done.

33:05David McWilliams: So it's a sort of Maradona moment you're talking about here. Yeah. And the difference between that example and finance and the stock market is that we actually all acknowledge that Messi is incredibly valuable. But at least for a stock market and punters and investors, most of them don't even care or know who the CEO is. Of course, you may have heard of Steve Jobs, but you can't name the CEO probably of Axon enterprise or intuitive surgical. And yet that is so important. And it's not expressed anywhere on the financial statements. So people who then run ratios and say, well, I would never pay more than 25 times cash flow or earnings are not even factoring those things in.

33:46And therefore, as a fool, I start going, you know what really matters? The people running the company. And I realized a lot of people on Wall Street only look at stock graphs. They're looking minute to minute for zigs and zags and they're looking for patterns, let's play the same game completely differently from them. Let's not even care about the near term game. And let's ask about what really builds value in life, which everybody, whether you can read a balance sheet or not, we all experience we you can look at messy and see the value and you can do the same thing without being a professional investor and beat the market.

34:16So number four, and I know we have two more, and I don't want to be too long on these things, David. But number four is it's the people stupid. they matter so very much. You need to feel lots of confidence and appreciation for the people running the company. If you don't know who the CEO is, shame on you, because you can Google it these days. You can look them up on LinkedIn. You can see untold YouTube videos with them, and you can decide, is this my gal? Is this my man or not? And that is really an important question to answer for each of us.

34:44David McWilliams: Excellent. Excellent. By the way, guys, the reason that David's on, he's about to talk in Dublin. So I'm going to give you all the details in a couple of minutes. And if you are in Dublin the last week of August, as you can hear from this conversation, this is a speech, an engagement, a conference, a festival not to miss. Five and six, Dahi. Thank you, David. Number five is strong consumer appeal. Something that is very important to me is brand names of companies. Again, much of this is not expressed in the financial statements. If you're a professional investor, I'm speaking to you now, Now, try to find the value of brands in a company's financial statements.

35:23Occasionally, it's expressed as goodwill. If a company buys another company and overpays for the physical assets, and you can't figure out why they're paying that much, sometimes they'll say, well, that's the brand value or the goodwill. But there is no acknowledged asset that sits on the balance sheet as a company's reputation or brand name. And yet, are many things more important than that in business? I don't think so. I think trust. There's nothing more important. As you well know, history of money, trust is really in some senses implicit in currency. Trust is also implicit in stock market valuations.

35:55And yet people who are taught that it's a math problem based on a multiple off of earnings don't see things like brand. And that's why we win and by playing the game differently by acknowledging this. So strong consumer appeal means that people will mechanically buy the same orange juice next time when they go back to the grocery store or the same beer because it's the one they grew up with and they know it. and think about the value of that for any business that can achieve that, which, by the way, is not trivial, not easy to do. So strong consumer appeal. I favor B2C companies. That means businesses selling to consumers.

36:27I love really well-known brand names, Amazon, Apple. These are among the most valuable brand names in the world. And by the way, these are among the best performing shares of the last 30 years on the market. And those things are directly tied to each other. So that's number five. And then number six, which is my pièce de résistance. This is the moment that this entire conversation has come down to. And yet maybe I won't be worthy of it. But here it is. Number six, the sixth trait of the Rule Breaker stock. And I mentioned that the third one and the sixth one are about the stock. All the others are about the company.

36:59Here we go. It's that the stock be considered overvalued, maybe wildly overvalued by well-known financial journalists, publications. It's just put out there that it is totally overvalued. And while you might think, especially if you're inexperienced, you might think, well, I shouldn't buy that because the guy on the telly said, it's totally, honey, it's totally overvalued. That's exactly what they said about Apple, Amazon, Tesla, Netflix, the list goes on. All of the best performing companies of the last 30 years and the next 30 years will be, have been considered, in quotes, Overvalued. Sorry for the air quotes on the podcast.

37:40This is offensive. Air quotes are all good. Okay, good, good. So that's it. Overvalued. So that, for me, brings it all together. When somebody starts saying, Amazon will never make money, that stock is so overvalued, I will never buy that, I get even more interested. In fact, that is the final moment for me.

37:58David McWilliams: Well, it's interesting you should say that because I was reading something this morning as I was mooching around about the said Elon Musk and about SpaceX and about one of Elon Musk's ideas was, look, you know, we're going to be bringing data centers and we're going to bring them to Mars and we're going to be out of space and this is going to produce trillions and trillions of dollars. And this, I think, in one of those very, very respected journals, maybe the Wall Street Journal, the New York Times, I can't remember, one of the American ones I was reading this morning, was like, oh my God, this is it.

38:27David McWilliams: This is the moment of madness. This is the moment that he leaves the normal world and sends into a lunar world where, you know, But are you saying that's the moment to strike when The Economist, New York Times, The Financial Times, all those reputable JP Morgan, Goldman Sachs, when they say it's overvalued, go in and hunt? So I am saying with the companies we're talking about, right? I am the first to say there are meme stocks, there are bad rigged up schemes, there are lots of things that are indeed overvalued. There are real estate properties that are overvalued. Things are overvalued that you and I wouldn't want to buy.

39:06But quickly to review, David and John, if we've just found a top dog and first mover in an important emerging industry with a sustainable competitive advantage, excellent past price appreciation, good management, smart backing, and strong consumer appeal, if those things are all there and people are saying, that is so overvalued, I would never buy that, what they're often doing is they're looking at expensive valuations that in the near term look eye-popping. And they're not playing the game you and I are, which is we're invested for a minimum of three years. And indeed, in my experience, because I picked NVIDIA at 16 cents per share now, including splits.

39:44I picked, ironically, and this is all because of splits, Amazon at 16 cents per share. So these are my cost bases, not for myself, although yes, but for Motley Fool members, for people in 1997 when I picked Amazon, or 2005 when I picked NVIDIA. And the other companies that I've been mentioning, which have rung up returns of 100 to over now 1 ,000 times for both Amazon and NVIDIA. Those were all called overvalued as I recommended them. And my own lived experience at this point, I have to point this out so we all understand that that is what it sounds like when a true blue rule breaker shows up and starts to change the way the world will work.

40:27And you and I will be invested from early days. And friends, it doesn't always work. So please don't think that every one of my stock picks goes to the moon. We already talked about Peloton. I have many underperforming stock picks. I also have a lot that have just returned 10 times the value or 20, not 100 or 1 ,000. But back to math, we're willing to lose 50 % all day long when we can make 500%. In fact, we're willing to lose 50 % eight times if we can make 500 % once and be ahead of the market. Now, I'm never losing eight times, but I really, this is so important because psychologists tell us behavioral economics, the pain of loss is three times the joy of gain.

41:10This has been lab tested. This is hardwired into all of us. And so most of us just don't want to lose. We hate losing. Something was disconnected in me. I don't know, DNA or at some point in my teenage, misspent teenage years, I'm not sure, but I'm okay with losing. I actually recognize that the joy of gain is infinite times the pain of loss when we talk about your money if you're playing a lifetime long game in shares. And that's the secret that I have in my book, Rule Breaker Investing, guys, because, and I could only have it if I've lived it. And I needed to be 60. And you too, David, for us to have this conversation, because when we were first writing these things in the 1990s, people were like, well, you guys are young guys.

41:53I mean, are you sure? Like, show me your history. And I was saying, well, I'm not sure, but I'm doing this and you can score it. Let's watch it together in public. And now I'm here 30 years later saying it's going to work again over the next 30 years. And the 30 years after that because of these human factors we're talking about, where people don't want to lose, and they think all the best things are overpriced.

42:15David McWilliams: David Gardner, what a tour de force. Tell me briefly, when are you in Dublin, and where can people go and see you? Well, I'm just delighted to be returning to Ireland for maybe the ninth or tenth time in my life. We do have a lot of family ties. There's a lot of Murphy and McIntyre in me. Those are my grandparents' names. But To answer the question, David, I will be at Investicon, which is a one-day conference for people who love the conversation that we've just had. And the day is August the 27th, which is, by the way, a Thursday. And I will be there throughout the day. We'll have conversations like the one we've had this hour together, whether you're new to the stock market and you're interested in what you're hearing, or whether you're an old hand like me and you just love and want to play this game your whole life.

43:02That's Investicon in Dublin, August 27.

43:07David McWilliams: David, wonderful. Absolutely wonderful. Thank you so very much. That was great stuff. Well, it's my delight. And thank you so much. Again, I feel as if I'm among fools, John and David, and I'm so pleased to join with you. Thank you for suffering this fool gladly. Listen, we're all fools together.

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45:40Mac, I thought that was absolutely fascinating. So much so, when he was talking there, I was genuinely thinking, Jesus, maybe I should, you know, have a little punt. Not that I've much to punt with. But what did make me laugh was the Taser story, where the company Taser merged with a body cam company. So that was like bringing law enforcement and entertainment together in one.

46:02David McWilliams: Perfect. I'm going to invest there. D.I.I. No, don't worry, John. It's never too late. But what is interesting, though, Mac, is there is a very distinct difference in mindset between the American mindset and its attitude towards market and investing and risk taking. And the European mindset, I mean, I think it was you said before, whatever the percentage of Americans who are involved in the stock market compared to the Europeans, which is kind of tiny in comparison. It's a totally and utterly different mindset. The Americans have, to a degree, what I would call a frontier mindset. And it's the mindset that pushes them, that animates them.

46:44David McWilliams: It's the shining city on the hill. It's American exceptionalism. It's this idea that they are relentlessly restless people. They move more than everybody else. They move house more. They move job more. America is one large continent of restless drivers. Europeans, on the other hand, don't move. Don't change jobs. Take long holidays. Know the difference between good barata and bad barata. Like wine. You see what I mean? It's a totally different mindset. But I think if you could fuse the best of both together, you're onto something. And that, I think, is the objective of all of us, right? A little bit of that American restlessness, ambition, get up and go, season the day.

47:37David McWilliams: Yeah, that sense of that anything is possible. But also fused with the European sense of perspective. You know, it's basically you're matching the past with the slow, the impulsive with the considered, to a degree, the animalistic American side with the more intellectual European side. And if you can achieve that, we'll get down to McEnnis for a scoop. Only if you're buying. All right, Bosco, I'll talk to you later.

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