GARDNER: ENTERTAINING INVESTING TRANSCRIPT

September 5, 2014

Can investing be a lucrative game? Brothers David and Tom Gardner founded the online investment advisory service, The Motley Fool, in 1993 to help people become better investors while having fun doing it. 20 years later their Stock Advisor growth and value portfolios have beaten the market by a wide margin. We’ll talk with “Head Fool”, Co-Founder and CEO, Tom Gardner, about their unusual approach and impressive track record.

CONSUELO MACK: This week on WealthTrack, what explains the ageless appeal of the Motley Fool? Like its Shakesperean namesake, The Motley Fool’s co-founder Tom Gardner believes the wisest investment advice both instructs and entertains. Why it has also beaten the market is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack.

Since our founding ten years ago WealthTrack’s mission has been to help you and us build financial security through long-term diversified investing.

We have carefully chosen our guests to make sure they are among the best in the business, based on their philosophy, process, performance, appraisal by independent sources, peer recognition and reputation for integrity. We also have to like them. There is a no jerks rule here at WealthTrack. We know that technology has radically changed investing. We have access to more news and financial information than ever before…

For better or worse we can respond to it instantly and much more cheaply. But has it made us better investors?

20 plus years ago, two brothers David and Tom Gardner took advantage of new technology, the internet and started an online investment service called The Motley Fool. According to them, it’s now the largest online investment advisory service in the world. Their goal: to make their audience better investors. Now, I have known about The Motley Fool for years, friends and family members were subscribers. But The Fool was not on my radar screen because I don’t pay a lot of attention to stock advisory services. I mostly talk to mutual fund managers whose portfolios and performance I can track over periods of years.

So why am I making an exception with The Motley Fool?

One reason is, I really like what The Motley Fool has done: create an online community of investors and provide them with first rate research and recommendations.

How do I know its first rate? I looked at their track record, which is readily available on their website. Since 2002 their Stock Advisor service shows both David and Tom have outdistanced the S&P 500’s 50% plus gains by considerable margins. David Gardner’s swing for the fences growth approach has buried the market with its 200 plus percent advance. Tom Gardner’s more cautious value approach has handily beaten it with 80% gains.

Mark Hulbert’s Financial Digest which tracks more than 200 investment-advisory newsletter services has given Stock Advisor and several other Motley Fool newsletters top marks over the years. And The Motley Fool now has three mutual funds. The oldest, Motley Fool Independence is rated four-star by Morningstar and its 5-year track record puts it in the top fifth of its world stock category. It has handily beaten the market and its peers.

Motley fool Great America fund, rated five-star is near the top ten percent of its mid-cap growth category. I recently started reading their flagship Motley Fool Stock Advisor newsletter co-written by the founding brothers. Well it’s fun, easily understood and similar to WealthTrack takes a long term approach to investing.

So I reached out to the company and younger brother Tom accepted the invitation. I started by asking him for his 20 year perspective on what makes us better investors.

TOM GARDNER: I think the first thing is our time horizon. So if every investor out there just doubled their time horizon right now, their returns would be better. They would be more tax efficient. They would learn to focus on finding things that have staying power, great businesses or great investment products that are proven over time to do well. They would chase fads less and, therefore, they would do far less selling at the bottom and buying at the top. They wouldn’t worry about where the market was and what trend was happening now. So time horizon would be the number one. I’d say number two, a diversified portfolio. Obviously there are truly great investors, and Warren Buffett has said put your eggs in one basket and watch that basket, and there are some great investors that invest that way, but I would say for the majority of the population, making sure that you have a portfolio that’s not going to bring heart-wrenching moments for you when there are down periods, and you can look down periods by industry or even your entire portfolio. If you have 40 stocks in your portfolio, when the market’s down, you realize, gosh, the whole market’s down. It’s just the way it is. If you have only four stocks in your portfolio or six, you may really overreact emotionally in a bad time.

CONSUELO MACK: Diversified portfolio, but you at Motley Fool have basically focused on stocks. Why are you so stock-centric?

TOM GARDNER: Well, you know, we were taught by our father when we were growing up, so that’s a big part of our story, and that’s a big part of our company’s story. We have three mutual funds, and I think increasingly 20 years in we’re recognizing that people are different, and not everyone’s looking to build a stock portfolio, but still that’s the heart and soul of The Motley Fool, and it always will be.

CONSUELO MACK: And why is that?

TOM GARDNER: Well, I think if you look at just managing fees, even an index fund is more expensive than simply buying Berkshire Hathaway and holding it for 20 years. So the cost of transactions have come down so far. So if you can buy 20 to 25 great stocks and hold them for the next 10 years and not have any ongoing expense ratio, and no one percent fee to a financial advisor, and I know advisors do other things than just recommend stocks or investments, but for that portion of your portfolio, it’s actually a lower cost alternative, and if you have the community at The Motley Fool researching companies for you, and you have hundreds of thousands and millions of people looking at each industry, you have some advantages over Wall Street that have played out for us over the last two decades.

CONSUELO MACK: And yet you started mutual funds. One of them has a terrific five-year track record. Actually all three of them have very good track records for their time periods, but let me ask you one thing because they all have “high” expense ratios according to Morningstar. They’re like almost 1.4 percent, all three. Why are the expenses so high in your funds?

TOM GARDNER: They’re high because they were startup funds, so the fees are typically higher when you have a smaller asset base, but you also have a better chance at outperforming with your asset base that’s small, but those expense ratios are coming down. They’re coming down sub one percent, and I plan for us over the next 10 years to demonstrate with our mutual fund business that we’re going to be a low-cost alternative for people who want actively managed money.

CONSUELO MACK: So tell me the story about your Dad.

TOM GARDNER: I think my Dad made his first investment when he was under 10 years of age, maybe six or seven years old, so what his father taught him, he passed on to us as children, and that started with the sort of simple, almost clichéd motley fool story but a true story that our Dad would take us in the supermarket when we were shopping for groceries and point out Squeeze Meez. That was a product by Norton and Simon. It was really a disgusting product. You would take your plastic pocket of pudding, tear it off and squeeze the pudding up and eat it.

CONSUELO MACK: Oh, sure. Okay.

TOM GARDNER: And it would spill all over the place, and I’m sure it wasn’t the healthiest alternative in the supermarket, but Dad would point at it and say, “we own shares of that company, so let’s go over and get some pudding,” and that was a very smart way to encourage investing, the game of investing, being able to see products that we enjoyed as children, and so for us in our teenage years, in our 20s, investing wasn’t a risky endeavor with obscure numbers. The stock market wasn’t rigged. It wasn’t Wall Street. All of these things weren’t even factors for us when we started The Motley Fool. We hadn’t even really thought what Wall Street was. We just knew that there were thousands of companies offering products. Some of those companies or many of them were offering products that we could see every day in our lives, and those were great places to put a little bit of your savings.

CONSUELO MACK: You have many different products at Motley Fool, and you have several newsletters for instance. You’ve written books, and there are different styles of stock investing. I mean, you’re a value investor. You’re Tom Gardner. David Gardner, your older brother, is considered to be a growth investor. You have small cap funds. You have mid cap funds. You have growth. Tell me about is there a common theme, a common approach among all of the different approaches you take with stock investing?

TOM GARDNER: I think there are a few. One of them is that we focus on the business. We’re not technical analysts. We have no interest in charts. We’re not interested in the short-term movement of a stock. We’re not focused on a quarterly earnings report. We are typically across our services much more interested in the culture of a business and the leadership. These are factors that don’t come up much in the news reporting, in the daily reporting of what’s happening in the stock market.

I think CNBC does an excellent job of covering the market for traders, but there really isn’t, there aren’t a lot of WealthTrack shows out there that are talking about business, business fundamentals, long-term fundamental investing. So that gets left to the side, and that’s really the best piece that individuals can use to grow wealth in their family over decades. So all of our services have that orientation, and then they have maybe a value bent in one direction or a growth bent. We do have an options-related service which is using options in an extremely prudent way. Actually, when the idea came for Motley Fool options service, I told Jeff Fischer, our advisor, no way. We’re not. (laughs) I mean, I’ve read the Peter Lynch.

CONSUELO MACK: Right, they expire.

TOM GARDNER: They expire, and people use them for speculative reasons and, of course, options are like a casino, and if you go to the casino table and you bet on red or black, your chances of losing are automatic over time, but if you’re the house, if you’re the one setting up the tables, you can play the options market in that direction. The more individuals learn that and to use it for long-term income generating and managing volatility in your portfolio, it’s a very effective way to invest.

CONSUELO MACK: And would you advise using puts to hedge a portfolio for instance, to basically prevent your losses? Or limit your losses I should say.

TOM GARDNER: Sure, and I mean, that is our Motley Fool options and Motley Fool pro services that do that, and that’s not a service that I run. So when you ask me specifically if I would, I’m not using options in the portfolio that I’m managing, but we at The Motley Fool have somebody and a team, and really the way to think of The Motley Fool is our whole community is engaged in this. So when I make a recommendation, it goes out to tens of thousands of people, and it’s not like automatons go out and complete the transaction. That often sparks a huge discussion about the business. There are people in our community who worked at that business who were CFOs of public companies in that industry who are retired analysts who cover that industry. So there’s a giant …

CONSUELO MACK: So they’re all talking amongst themselves.

TOM GARDNER: There’s a motley conversation, and we learn a lot more after buying a stock because of the conversations that we have, and that helps to reinforce the long-term approach. It’s not you need to buy this today because we’re recommending it and this is the single moment that you can get Starbucks. No, it’s here’s the beginning of our investment. We hope to add to it over time if we find that it’s a business that we really believe in.

CONSUELO MACK: Your older brother, David, is the growth investor, and you are the value investor, and then I have to look down at my notes because since 2002 …

TOM GARDNER: This is going to hurt me, Consuelo.

CONSUELO MACK: It is going to hurt you a lot.

TOM GARDNER: I know where you’re going right now.

CONSUELO MACK: David’s portfolio up 235 percent. You up 80 percent. However, the S&P is up a mere 54 percent. So you both beat the market, but I look at that. I’m saying, “Hmm, I’m a long-term investor, and gee, I thought I liked value, but you know what? Growth is really outperforming incredibly.” So why not just go with growth?

TOM GARDNER: Why not just go with Dave?

CONSUELO MACK: What’s the benefit? Yeah. What’s the benefit of going with you?

TOM GARDNER: Why are you stuck here with Tom? (laughter)

CONSUELO MACK: Exactly. So?

TOM GARDNER: Well, I think value investing is typically less volatile, and …

CONSUELO MACK: It’s typically less volatile. I mean, is it less volatile? If I looked at your portfolio, is it less volatile?

TOM GARDNER: Yes. Yes, it is less volatile, and so I think you’re also on average going to have a higher success rate stock by stock as a value investor than as a growth investor. If you take it to the ultimate extremes, when you’re a venture capitalist you’re not expecting to get up to the plate, for a baseball analogy, and hit the ball seven out of ten times. No way. If you’re right three out of ten times as a venture capitalist, you’re like a baseball player. You’re going to get in the Hall of Fame. For a lot of people looking at their stock portfolio and seeing more than half of their positions as losers could be difficult. So there’s definitely behavioral aspects to being a value investor, and Warren Buffett’s principle of rule number one, don’t lose money, rule number two, don’t forget rule number one, and my brother says, “that doesn’t apply to me. I understand for whom that does apply to, but in my approach I’m going to lose money. I know that I’m going to lose money, but if I have three or four failures that are down anywhere from 25 to 50 percent, and alongside that I recommend and invest in myself Amazon at the IPO and hold it all the way through, and it’s up 100 times in value, I can tell you that the mathematics of that over the long term are going to do better. So I think what you see in my brother’s portfolio is I think it’s going to continue. Better long-term performance with more volatility and more mistakes for every 10 recommendations or every 10 investments, but I don’t think David views them as mistakes. They’re just part of the process of finding great long-term winners.

CONSUELO MACK: Failure, losses are part of the process of investing. But if you’re talking about…I should have a diversified portfolio, so should I kind of divvy up among your and David’s stocks? Should I have some value stocks, and should I have some growth stocks? I mean, is that just a prudent way to make me a better investor?

TOM GARDNER: I think that’s a good way, particularly for some. I mean, obviously you’re down the line toward very sophisticated as an investor. Many people are coming to The Motley Fool, and this is their first experience buying stocks. There are a lot of people that come with heartbreaking stories of having worked with an advisor whose interests weren’t aligned with them, and they didn’t realize that. So they come to us and the first thing they hear from us is buy a passive index fund from Vanguard or the equivalent ETF. Buy a low-cost scorecard tracking. Essentially get your benchmark out there.

CONSUELO MACK: That’s the first thing they hear from you.

TOM GARDNER: Absolutely.

CONSUELO MACK: At Motley Fool.

TOM GARDNER: Yes.

CONSUELO MACK: Get a core, low-cost ETF or index fund.

TOM GARDNER: And if you don’t want to do that, that’s fine. Just know that it exists. Know that you can pick up the phone, order this fund, get exposure to the entire market, every industry, essentially every stock with huge international diversification, everything you would need at basically the lowest price it’s available on Wall Street, and all of your equity exposure, all of your stock investing is taken care of in a single phone call. Very few people on Wall Street are going to tell that to you. In fact, Vanguard doesn’t say it very much because the way they hold the price down is they’re not marketing. So people don’t know how sweet the solution is out there, and our first statement is you need to know it and understand it, and then if you want to get in the game of trying to beat it, there’s a lot of evidence out there that it can be beaten. I’ve spent a lot of time with Jack Bogle. I love Jack. He’s a hero of mine, and we agree to disagree I think in a very pleasant way that I believe that it is doable. I believe that Warren Buffett is not the only person that has done it, but if we just held to Warren Buffett and then to the other people in Benjamin Graham’s classroom in the wonderful speech and essay that he gave, The Superinvestors of Graham-and-Doddsville, Buffett showed it’s not just random coin flipping. There’s a discipline here that can lead to long- term out performance, but it’s not going to be random behavior, active trading and a lot of things unfortunately that people are doing on Wall Street.

CONSUELO MACK: You and your brother have beaten the market since 2002, and so good for you, but most of us are investors for 30 or 40 or 50 years. Why should I …

TOM GARDNER: Believe. Why should you believe in those results?

CONSUELO MACK: I mean, how do I choose? Why should I believe in active investing?

TOM GARDNER: Well, Ii think first of all you have to come to the conclusion that it’s worth even trying. So for many people it’s not. So the question is, why? The answer is that there are some key factors that I think even carry over from Buffett to many other great investors, many of whom are in circles around Warren Buffett, and they are business-focused, time-holding, long-term time horizon. When you see a fund that is turning over its portfolio 100 percent in a single year which is the average mutual fund today, you can bet that that fund is going to have a really difficult time beating the market after taxes. How? I mean, they’re delivering short-term capital gains taxes to their fund holders. There are so many inefficiencies in the way the mutual fund industry is being run mostly because the mutual fund industry is a marketing industry. Why are there more mutual funds than there are stocks today? Because there’s money to be made managing mutual funds. So I would say an observation I have is it gets more difficult for a mutual fund to beat the market because they have that annual expense ratio. If you and I are just buying stocks, we’re holding that fee down. If we’re deferring, our holding period is getting beyond a year, hopefully beyond five years on average, we’re deferring those taxes, and we’re starting to learn how to focus on businesses. And then to me … I don’t know if I’ll be able to convince you of this in our conversation, but it’s relatively easy to beat the market. It’s relatively easy once you get those core principles set correctly, because then you see companies in different ways. You see a business like Starbucks. One of our favorite Motley Fool stories is we were on the TV show, The View, in I think 1998, and one of their new co-hosts was starting a portfolio, so they brought us on to recommend a stock, and we recommended a company, and we were brought back six weeks later to discuss the results of our recommendation.

CONSUELO MACK: Six weeks later.

TOM GARDNER: Six weeks, and you know this is TV, so we came back on, and our stock after six weeks was down 33 percent. So we were booed and, in fact, one of my brother’s friends called who is a regular viewer of The View, and she said, “You are the first people I’ve ever seen booed on The View.” That stock was Starbucks, and that stock since 1998 has been a massive multi-bagger, but viewed through the lens of six weeks, it was a loser, and viewed through the short-term daily news coverage of the markets, it’s a loser, but looked at with the basic business principles and long- term investment principles, there are some things about Starbucks that were relatively obvious. They have excellent positioning in terms of pricing power. They have their founder who is still involved even to this day. He could have stepped down from Starbucks 20 years ago and had more money than anyone would ever need. So why is he staying and working every day, even today? It’s because he cares so deeply about the business that he’s created. It’s more than a business to him.

CONSUELO MACK: And that’s what you look for as well.

TOM GARDNER: Love to find that.

CONSUELO MACK: That kind of leadership, founder.

TOM GARDNER: I think if you just blindly invested in owner-operated public companies, you’re going to have some incompetent leaders. You’re going to have some fraudulent leaders. You’re going to have some mistakes, but the overall portfolio will beat the market. I think the data shows that, and that’s a simple way for somebody who wants to do the work of finding the owner-operated companies which we spend a lot of time on at The Motley Fool, but that’s why I love a company like Facebook.

CONSUELO MACK: Give me two examples of a growth company and a value company that exemplify the way that Motley Fool invests.

TOM GARDNER: Sure. I mean, I mentioned Facebook, so I would obviously put that in the growth category. What an unbelievable growth story it’s been. It had a controversial IPO which, of course, essentially what’s happening there is people are questioning a fundraising moment in a long-term business story. So everyone took their eyes off the ball, what was really happening at Facebook which was massive growth in user base, huge usage. I mean, 750 million people are going to Facebook every day. It’s never happened in human history that so many people would gather in one place, and it creates so much data and so much opportunity for Facebook. Plus you have Mark Zuckerberg who could have retired almost after the first fundraising round as a private company, but he’s still there, and in 20 years Mark Zuckerberg will be Jeff Bezos’ age, and I expect him to be working for Facebook those 20 years passionately.

CONSUELO MACK: And how’s he doing with Facebook?

TOM GARDNER: It’s been incredible. The performance has been, from a business standpoint, it’s been fantastic, but let me highlight a different stakeholder. Facebook is the most highly rated public company to work for with the most highly rated CEO of a large public company. So the movie, The Social Network, came out and people thought, well, this guy must be a jerk.

CONSUELO MACK: A jerk, right.

TOM GARDNER: And in fact, he’s the greatest employer as a CEO of any large public company. He’s created a dynamic, incredible environment there. So Ffacebook would be the growth story. The value story? Maybe I’d go with a company like Markel which is a specialty insurer in Richmond. The family has been involved. Their Chief Investment Officer, Tom Gayner, is a brilliant long-term investor. They use the basic principles, many of which we have already discussed, and their results have been outstanding, and that’s another stock that I would happily hold for five plus years, and both of those are investments of mine, to make sure that I disclose that, and I believe in both those businesses, and one’s value, one’s growth. A story that has been very prominent on The Motley Fool over the last five years is Netflix, and just think what’s happened with that stock. I mean, I recommended Netflix at 19. It went to 300. When it was about 120, I was talking with my team, saying I’m now worried about Netflix and the competition of Amazon, and my team was like, no, no, no, no. No. We’re not going to let you sell this. It went from 120 down to 50, so I recommended at 19, 300, 120, 50, and it’s now at $430 a share, and I think the …

CONSUELO MACK: And you stuck with it.

TOM GARDNER: Stuck with it because of my team, and what I’ll say is that’s a founder-led company that’s changing the world. It has excellent financials and could have failed, but alongside enough other companies like that in a growth portfolio which is again more of my brother’s approach, the number is out, and it’s not just since 2002 for David. He’s been doing this since we started in 1993 and before. So the beauty of The Motley Fool is every recommendation we’ve ever made going back to 1993 is still on our site, and that means we have to eat our mistakes. We have to sit and eat crow and remind ourselves, gosh, I believed so much in this company in 1995 or in 2007, and it’s still published out there. I can’t hide from it. I can’t shuffle it to the side. I need to be open to learn from that mistake.

CONSUELO MACK: One investment for a long-term diversified portfolio. We ask each of our guests that. What you have us own in a diversified long-term portfolio?

TOM GARDNER: I’m going to say Starbucks. It may sound boring to everyone to think, and of course actually the first thing probably many people think is, really? I mean, they’re everywhere, and the joke is the new Starbucks will be opened up in the men’s room of an existing Starbucks. That’s their future growth opportunity, but there is so much international growth for Starbucks, and it’s such a well-managed business, and Warren Buffett, one of his top factors that he’s found that match up with his greatest investments in his lifetime that I observe to be true among a lot of great investors is that those businesses had pricing power. So we can make that cup of coffee for a lot less at home, but there’s something Starbucks is doing that’s causing up to get up and say, “I’ll have a Starbucks today,” and we’re happy about it, and Starbucks’ decision to partner with Arizona state so that all of their employees can get a college education…the greatest businesses to own for the long term have correspondingly a great internal culture where people love to go to work and are proud to be a part of that organization. So Starbucks checks all stakeholders on my checklist of evaluating them across all their stakeholders, and that means they’re set up for sustainable growth for the long term now. Obviously it’s a $70 billion company now or a $60 billion company. So you’re not going to get the kind of growth rate out of that investment that you’ve gotten over the last 20 years which has been about 24 percent a year, but I think you’re going to beat the market with Sstarbucks going forward.

CONSUELO MACK: Tom Gardner, I hate to leave it here, but we’ve got to. So thank you so much for joining us, and it’s just delightful to meet finally one of the cofounders of The Motley Fool.

TOM GARDNER: I’m honored to be on your show, and it’s a great show. So thank you.

CONSUELO MACK : At the close of every WealthTrack we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s action point picks up on Tom Gardner’s first piece of advice to us on how to become a better investor. He said double your investment time horizon. So this week’s action point is: extend your holding periods for stocks and mutual funds. The biggest mistake investors make is in market timing, selling too soon and then not getting back in soon enough. The Motley Fool actually looked at what would happen to their portfolios if they did not sell anything- ever? Guess what? Both David and Tom would have done even better by not selling a single stock! Since 2002 David’s average stock return would have been 261% instead of 210%. Tom’s portfolio would have improved by 30%!

Sitting on your hands clearly pays off.

To see more of my interview with Tom Gardner go to our website wealthtrack.com and click on our EXTRA feature. And while you are there take a look at our WealthTrack WOMEN series which has financial advice specifically for women in different stages of their lives from women financial advisors. Thank you for watching! Have a great weekend and make the week ahead a profitable and a productive one.


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