7 October 2021

In today’s episode, Trey Lockerbie sits down with David Gardner. David is an accomplished investor, author, and entrepreneur, who co-founded the well-known financial advisory company, The Motley Fool.

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  • How to identify Rule Breaking companies.
  • Why optionality is a great indicator of a company’s future success.
  • David’s 25 point system to identify risk.
  • What is Conscious Capitalism and why it should become a focus for your portfolio.
  • And so much more!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Trey Lockerbie (00:00:02):
In today’s episode, I sit down with David Gardner. David is an accomplished investor, author and entrepreneur, who co-founded the well-known financial advisory company, The Motley Fool. In this episode we cover how to identify rule breaking companies, why optionality is a great indicator of a company’s future success, David’s 25-point system for identifying risks, what is conscious capitalism and why it should become a focus for your portfolio, and so much more. David’s optimism and passion is palpable and contagious, and I know this episode will get you fired up in the best way. So without further ado, please enjoy this refreshing take on investing with David Gardner.

Intro (00:00:44):
You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected.

Trey Lockerbie (00:01:05):
Welcome to The Investor’s Podcast, I’m your host, Trey Lockerbie. We have a real special treat for you guys today. We have on the show with us, David Gardner. Welcome to the show, David.

David Gardner (00:01:15):
Thank you, Trey. It’s great to be with you. I don’t know why it’s a real special treat, but let’s try to make it special together.

Trey Lockerbie (00:01:21):
Well, it’s a special treat because I wouldn’t say I’m intimidated, but it’s not often I find someone who is not only a great investor, but a great businessman, and also a great podcaster. So I’ve really got my work cut out for me today.

David Gardner (00:01:34):
Yeah, right. You’re actually a professional, I’m just an amateur just trying to make it work for one week to the next with my podcast, which I’ve loved doing. But you know that word amateur, which as you may know, I remember this still from my undergraduate, that’s the only degree I ever got, just an undergrad English degree, but it comes from the Latin for love, and what do we love doing? And so I really am an amateur when it comes to investing and business, and podcasting too. And so I think it’s really important to have that amateur mentality and keep it in play your whole life.

Trey Lockerbie (00:02:06):
I have to agree. I think as soon as you slap the expert label on something, you’re done growing, I think. I love it. Well, you have an approach to investing from, I would say, the traditional path, but you found this niche for yourself, this own style, your own authentic style that’s worked really well for you and worked for a lot of followers of The Motley Fool. I would say the core tenet of it is around this idea of rule-breaking companies. And you seem to be going against consensus as a means of finding potential competitive advantages. So before we get into rule-breaking businesses, I’m curious where your contrarian nature comes from, and if you think contrarianism is a learned skill.

David Gardner (00:02:47):
I’m generally somebody who tries to think that almost anything can be a learned skill. So I’m not going to say it’s not, but I do think it’s more of a viewpoint, an angle. And that’s not necessarily a learned thing, it’s more something that you either start with or roll into. You can choose it intentionally, choose to call yourself a fool for example. But I do think some people are just naturally funny or they’re comedians than others. I’m not sure how much comedy is a learned skill. So this one’s probably closer to comedy than not in the sense that, I guess I just grew up when everybody took one side, I just could not help, but take the other.

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David Gardner (00:03:24):
And in particular, I think of, what are examples from my youth? Well, I was a huge baseball fan and I was a big Bill James fan. And back in the day, and I’m talking about the 1980s now… These days, Bill James and his ideas have been mass adopted, baseball can be done smarter, better-using numbers more effectively. That was written in a book called Moneyball by Michael Lewis, turned into a great movie with Brad Pitt playing the lead. But the heart of it, Bill James came from outside the industry and he challenged the conventional wisdom that Baseball People, that’s with capital B, capital P, had been operating off of for decades.

David Gardner (00:04:02):
Things like, you know what, if it’s a tie game, seventh inning, you get a run around first, you’re going to bunt. You’ve got to move that runner forward to second base. And if you didn’t do that as a manager, you’d be asked by the media after the game, “Why didn’t you bunt?” Because that’s what the book says, that’s what everybody does. And so Bill James comes from outside of baseball and he basically questions that conventional wisdom, uses a black box in this new digital internet era that we live in, use computers to gather data and discovered it’s actually a dumb move to bunt the guy from first to second.

David Gardner (00:04:32):
It sounds smart and a little bit conservative, but it actually results in fewer runs net-net when you run the numbers. So I loved that. And yet, James himself was not wined and dined by baseball people back in the day, he was shunned, “You never played the game, you’re just a journalist, etc.” So I can think of examples, really geeky examples in my life like that. For example, Lord of The Rings. Lord of The Rings was so geeky, and then all of a sudden, it became a multi-billion dollar sensation and wins all the Academies awards for its last movie.

David Gardner (00:05:03):
So I’ve watched things that looked like they were not mainstream. Video games, another great example, our whole lives long really… Well, I’m older than you, Trey, so I’ll say my whole life long because my first computer game was Pong. And truly, it was being demeaned as a new medium, kids are wasting their time, it’s addictive and bad, and it’s ended up being amazing, I think, interactive entertainment, and it’s bigger than Hollywood today. So I’ve watched things that were outside the norm challenged the norm, and when they win, they win spectacularly.

David Gardner (00:05:33):
I’m wrong a lot too, and we’re going to talk about that I hope in this hour together, but that’s my overall feeling, is that if you have that natural angler viewpoint that you just want to challenge, you want to play devil’s advocate to your industry or to the world, it can really help you unlock new approaches, and I’ve seen it in entertainment, sports, etc. And just to come full circle on that then, the biggest conventional wisdom that I think I was raised with, but actually fortunately against, by a dad who didn’t agree with it, is that you and I can’t beat the market as investors, we should just index everything. I call that big dumb money.

David Gardner (00:06:10):
We’re in an age of big dumb money because everybody’s just indexing and big money is sloshing around willy-nilly, going to all the good companies and all the bad companies, all the also-rans and all the leaders. And we’re told by academia, as a powerful force in this area, that that’s the right thing to do because you couldn’t really know which one would actually do better than the others. That would just be luck, monkeys throwing darts, and I totally disagree with that. And so that’s another great example.

David Gardner (00:06:38):
I was raised with this idea that we should buy stocks by a dad who never bought a fund. And so these are all examples from my youth of things that I observed from a different viewpoint and then challenging that wisdom. And then when you’re right, by the way, you’re not always, when you’re right, boy, does that feel good. And it has felt really good for 28 years of The Motley Fool.

Trey Lockerbie (00:06:59):
Yeah. I think there’s a theme here that I’ve been learning over the years, which is that being too clever can come back to bite you. You can really simplify and not overthink things. Going back to your bunting example. It sounds smart and there’s so many things about investing that sounds smart, but there’s a lot of things that are just simple and straightforward that actually end up working, and I love that. So let’s talk about rule-breaking companies, you’ve narrowed this down to six attributes about finding what it takes to find a rule-breaking company. So I’d love if you could highlight a few of those attributes for us.

David Gardner (00:07:31):
Well, I’ll just go straight through them really fast. And then we can talk about any that you’d like to. So the first attribute is probably the most important one, being a top dog and a first mover in an important emerging industry. So I love to find the companies that are the leaders, if you’re not the lead Husky, the view never changes. And so we’re always asking, who’s the leader? But not anywhere, not in big oil today or telecom, I love important emerging industries. That’s where most of the great stocks come from, the ones that make you money for 20-plus years.

David Gardner (00:08:03):
I’m going to be invested for at least 20 years in your company, generally, when I buy it, so that’s why it’s important to me. So that’s number one. Number two, we’re looking for a sustainable competitive advantage that takes many different forms. Examples would be, we’ve got Jeff Bezos, you’re down. So the founders, the human capital and companies. Certainly within the world of biotechnology, there’s patent protection for 20 years for your successful new drug, that’s an example of a competitive advantage. And others’ competitive advantages, if everybody else is inept and you’re not smartest guy in the room, kind of a thing.

David Gardner (00:08:35):
And Reed Hastings is proved himself that within the area of entertainment. It used to be DVDs through the mail, which I certainly remember back in the day, not so long ago, although it sounds awfully old school, as I say. And so there are lots of forms of sustainable competitive advantage, but Trey, if you’re going to be investing for years, you need a sustainable competitive advantage. It can’t be something that looks like it’ll be hot this quarter or next year, it’s got to be a sustainable competitive advantage.

David Gardner (00:09:02):
Number three, strong past price appreciation. This one goes against a lot of people’s instincts, and even my own human instincts initially. We love stocks that have been amazing already. Number four, we’re looking for good management and smart backing. It’s the people in the end, not the product, not the service, not the industry or the competitive set or whatever, it’s the people that are making the decisions. You know this because you’re a successful entrepreneur on your own and you’re a successful investor here, we are talking with each other, so you know it’s about the people.

David Gardner (00:09:33):
There’s no better way to learn that than to actually start a business yourself and realize what a human endeavor it is. Number five, we’re looking for companies with strong consumer appeal. I love to find the great brands. Turns out Starbucks, yeah, Apple, yeah. The great biggest brands of our time are also the greatest, biggest performing stocks if you really look at it over meaningful periods of time, and that is not luck, that’s a one-to-one. So the strength of creating a great brand, really a good thing to look for in your stocks.

David Gardner (00:10:04):
And then number six, the final one, is we’re looking for companies that people think and call out as over valued. Again, that goes against our instinct, just like trait number three, which we talked about strong past price appreciation, we’re talking here about the stocks. A lot of those six attributes I just shared with you are about the company, not the stock, but number three, and number six are looking at the stock. And the more people who think that a company is dramatically overvalued, if it, to quickly review, is a top dog and first mover, an important emerging industry, with a sustainable competitive edge, it’s got strong past price appreciation, good management, smart backing, and strong consumer appeal, and some guy in the front cover of Barron’s is telling you it’s crazy overvalued Tesla, that’s often an incredibly good signal.

David Gardner (00:10:51):
There’s a powerful reason why that’s the case. We can talk about that more. But there’s a quick short course on the six traits that we’re looking for in rule-breaker stocks.

Trey Lockerbie (00:11:01):
As you were outlining those, I noticed that four out of the six attributes are essentially qualitative components. How are you filtering down a universe to find these stocks based on qualitative metrics? Obviously, we all know how to filter through quantitative, but how are you distilling down from this wide universe of stocks to find these treasures in the rough?

David Gardner (00:11:24):
Well, thank you. First thing I’ll say to that is that I don’t actually distill down. What’s funny is, that comes from a deductive mentality, where you’re starting with everything, Sherlock Holmes, and then you’re deducing down to who done it. And that’s what people do when they screen for stocks. But I’ve never done that. I don’t have a screen that I use. And you’re right, I try to avoid numbers in a lot of cases, which we’ll talk a little bit more about. But what I do is the opposite, I induce. It’s an inductive approach.

David Gardner (00:11:51):
So it’s grassroots, flip up a stone, look what’s underneath that stone. Oh, that’s interesting. And once you flip up enough stones, you start to get some pattern recognition about what’s working and what’s not, or what are the interesting companies or what’s not. So it’s just one stone after another that you’re flipping up because you’re learning, you talked about that earlier, you’re learning as you go. It’s so helpful always to be learning machines in this world. So you’re learning a lot, but I will say that it’s really important to me not to try to deduce or be the really smart guy, because it sounds so smart, Sherlock Holmes sounds so smart, but it’s not really a way to successfully invest, I don’t think.

David Gardner (00:12:29):
At least for me, the style is inductive. And then how did I arrive at that? How did we build that up over time? Well, I think we’re living in a world today that is numbers crazy, and I celebrate that. We talked earlier about baseball and Bill James, man, are there amazing analytics, not just for baseball, but for all major sports today, they are so much more advanced than how people were thinking just 20 years ago, let alone 100 years ago. These are sports that have been played for decades, if not hundreds of years in some cases.

David Gardner (00:12:57):
Look, all we ever had to do was ask smarter questions and give better answers, and that’s how we’ve gotten smarter about baseball and so many other things. But the problem with that, at least from a stock market angle, is that at this point, so much of it is a numerical exercise for lots of people, it’s algorithmic, they’re programming their computers to trade inside of a second, and I am not going to be doing that. I’m an amateur, I’m not going to ever spend time trying to make money within a second. And if I did, I would always lose to the computer if we’re playing head to head.

David Gardner (00:13:29):
So the way that I think we can not just survive, but thrive is just as true today, by the way, as it was 50 years ago, but the way we can thrive today is by looking at the qualitative factors and by getting some wisdom, horse sense and savvy in our minds, and that’s what my six traits are trying to do, they’re trying to get you to ask the really important questions. Because truly, a sustainable competitive advantage means so much more to me than an attractive looking price to sales ratio. It’s so much deeper, it’s harder to earn, and it’s so much less ephemeral. It will stand the test of time in a time where people are memeing stocks up and down like silly, and it’s all so short term, and it’s not really going to create sustainable wealth for people playing short-term games.

David Gardner (00:14:14):
While some people may be good at that, I never will be, and I don’t think most of us want to spend our time and life that way. So yeah, I think the qualitative is with a capital Q for me, Trey, and it’s an important reminder of how to thrive in an age that’s increasingly going to be fast and robotic,

Trey Lockerbie (00:14:30):
Well, one of the most contrarian attributes on that list is the overvalued piece. So you’re essentially saying, if someone’s saying this stock is incredibly overvalued, that is a buy signal. Walk us through your thinking around this and how you’ve come to adopt this.

David Gardner (00:14:46):
Well, I think it’s really important, first of all, to integrate that with the previous five, which is what I tried to do in my shaggy dog answer I gave a few minutes ago. Because the whole framework hangs together, if you just isolate one of those factors, like that last one you mentioned, it doesn’t work every time. There are things that are crazy over valued and that you wouldn’t want to buy, but when you’re seeing the full integration of the model and you’re saying, “Yes, yes, yes, yes, yes,” in those first five, and everybody’s saying it’s overvalued, that really does work.

David Gardner (00:15:16):
It doesn’t work every time, by the way, and when it doesn’t work, you can lose dramatically. And we’re going to talk, I know, about losing dramatically and what that really means. I hope we’ll get to that maybe with an upcoming question, Trey, but for me, the math of it is so wildly in our favor when we can find companies that have these great attributes and everybody is not believing in, because what happens on the market is as is often said, “Great stocks climb a wall of worry.” And so if everybody thinks in 1997 that Amazon is crazy overvalued, is near bankruptcy, is never going to make it, then those people don’t own the stock.

David Gardner (00:15:53):
And so if you and I have owned the stock, over the course of the next five years to 2002, 2007, ’12, ’17, 2022, Amazon proves itself, people start signing up for Amazon Prime who would never have bought the stock eight years before, they’re seeing the convenience of it. Then Amazon Web Services shows up, which I could never have predicted myself when we first bought Amazon, and the list goes on, and those skeptics become believers and in some cases shareholders. And that’s what powers, I think, the best stocks of every generation, it’s that extreme skepticism around the early days of that entity and then the conversion that you have to let take place over time, by the way, was fits and starts.

David Gardner (00:16:37):
Because Amazon went from three when I first bought it, to 95, and then in the wreckage of 2001/2, it went back to seven. That hurt a lot. We had a 30 bagger, and then it basically lost almost all of that, but we kept holding, and we kept holding all the way through. So I’ve held all the way through and it has been an incredible front seat lesson into what really works if you take the rule breaker approach. I also want to just hasten to add that there are many approaches to investing. The one I’m giving you, that I’ve shared in many ways for 20-plus years is just mine.

David Gardner (00:17:12):
I’m definitely not here to stay my road is the only road. In fact, my road stops working if everybody becomes convinced that that’s the way to play the game. I really need Warren Buffett to be the anti Buffett. Even though I respect so many things about Warren and his crowd, I need them to say things like, “I can’t predict technology, I’m not going to buy Amazon or Apple or many of the best stocks of the last 20 years, I’m going to stick with Geico and See’s Candies. And I love that about him and that works for him because that’s what he does. And he’s become the greatest investor of all time, I think, because he’s sticking to his knitting, but I need that to exist to have my approach breaking the rules work. And so there are many different ways to approach the markets, business, and life.

Trey Lockerbie (00:17:56):
You and Bezos must be the only two people that have held through all of that.

David Gardner (00:18:01):
I think there’s some other Motley Fool… Occasionally I’ll get notes from Motley Fool members who are with us way back in the day, our AOL days, the web was only just showing up in the late ’90s. Occasionally we’ll get notes from people. I’m constantly trying to tell people to hold, hold, hold. I’m mirroring that through my podcast, through everything that we do with The Fool. It’s not just me, it’s my brother, Tom. And it’s the whole Motley Fool approach. So I think we’ve gotten a lot of people more on board with holding great companies, and I really do think we’re creating a lot of prosperity with our membership by doing that. It still remains a real fringe way of thinking about finance.

Trey Lockerbie (00:18:37):
Let’s talk about a couple of the winners, but I also want touch on the losers, as you mentioned. So this approach, again, I don’t think a lot of our retail investors have necessarily walked through a venture capital-esque model, but those models typically show that you’re going to put 20 to 40 bets out there and you need one or two to really become an outlier and break through, and a lot of the rest can go to zero and you’re still going to net out in a positive direction. This approach resembles that to a degree, in my opinion, because as you said, “You had a lot of losers, but they don’t seem to matter if you have something like Amazon in your portfolio that you’ve been holding all this time, that wipes away all of those other losses.”

Trey Lockerbie (00:19:15):
So talk to us about what you typically find is the reason something becomes a loser in the portfolio, given that you’re approaching it with the same mentality as the other picks.

David Gardner (00:19:27):
I’m never going to be the head strong guy who thinks he’s so smart that he knows the next great stock. All I’m going to do is say, “We’re going to buy a bunch of these, and within this stocked pond of top dogs and first movers in important emerging industries, etc, we have a consistent ability to find the best stocks of our time.” And there are also a lot of fish that you find that don’t taste that good or you want toss back, or you wish you could toss back but unfortunately you bought the stock and so tossing back means selling at a loss.

David Gardner (00:19:58):
So I’m very comfortable losing. Part of the beauty of losing in investing is the most you can ever lose, unless you’re doing something really silly, which I’ve never done, is 100%. I guess people can level up and they can lose a huge amount, and it’s usually somebody else’s money when they’re leveling up, and that’s unfortunate. But I’ve never done anything… I don’t buy stocks on margin, I don’t do anything silly. I’m just a very simple vanilla, common stock investor. So the worst we can ever do is lose 100%.

David Gardner (00:20:25):
Psychologists tell us that the human brain works this way, the pain of loss is three times the joy of gain, and that’s hardwired. That’s explained by hundreds of thousands of years of homo sapiens managing to survive to this point. So that’s hardwired in all of us. And people approach investing with the same way, they’re trying to avoid losers. A lot of people sign up for their first Motley Fool service, they buy a stock. It might be a bad pick for me, it’s down 10% a month later, I’m like, “Oh my gosh, this is horrible. What do I do? Do I sell?” This is often the new mentality, they’re fearing, they don’t want to lose.

David Gardner (00:20:58):
And I understand, they saved that money, that was their money. They then risked it and they lost some of it. It doesn’t feel good at all, but if you can take a contrarian approach here, if you can flip your mentality a little bit and just realize that while that’s true, the joy of gain in investing is actually infinite times the pain of loss. So it directly reverses our physical part of wiring, because of course, and let’s talk about some great stocks, we’ve already mentioned some, Amazon, Netflix. Nvidia has been pretty amazing in recent years, that’s a longterm stock for us.

David Gardner (00:21:33):
These stocks can go up 100 or more times in value, so you’re going to take the pain of loss all day long if you’re capped at a minus 100%, but you can make plus 10000%. And so that’s, again, a really important rule breakerly way of thinking that not everybody’s going to adopt or want to adopt or could really fit with their psychology, and that’s why I’m always saying this is one approach, and this is my home brew here. We’ve been building a plane as we fly it for Rule Breaker Investing over 27 years.

David Gardner (00:22:04):
But yeah, that’s the math of it, and so that’s why I’m willing, like venture capitalists, Trey, to say, “Hey, you know what? We’re going to buy 25 stocks, not one stock. And we’re going to put even amounts, fair starting lines for all 25 horses in our Kentucky Derby that we’re about to unleash as we start our portfolio.” I’m not sure which one’s going to win the race, but as I’ve often said in another context, which is, the habits we can develop as rule breaker investors, which is a separate list of six things. But one of the things that you do with your portfolio is, you can actually bet during the race, you can’t do that with the Kentucky Derby, last I checked.

David Gardner (00:22:40):
But once secretariat is out front, you can be investing in a secretariat at every Furlong, all the way to the finish and winners win. That’s my experience more often than not. I see it in sports, which I love. I see it in life, business, and yeah, stocks too. And so the beauty of this is we can invest in the winners, we can add to them. We don’t need to be so in fear of losing, which so many people are.

Trey Lockerbie (00:23:05):
I love it. And I’d love to dig in on Nvidia a little bit more because it has been a huge outlier, as you mentioned. And I think as I read, you bought it around $6 a share. So it’s obviously done very well, but then again, the whole year of 2019, it was in a slump. So that’s where people can get really antsy. Walk us through what you saw in something like Nvidia at $6 a share and what constitution had to be in place during that year of a slump where I’m sure people were emailing you all the time saying, “Should I still be holding? Should I still be holding?” So walk us through that mentality.

David Gardner (00:23:42):
Well, I love that stock and that company, I’m delighted that we’re talking about it. And I will just mention, not trying to brag here, but our cost is actually $1.63, because there was a four-for-one split a couple of months ago. So our cost is $1.63 with the stock, somewhere rocking, I don’t know, $222 as we speak. So it has been an absolute monster. It’s one of those companies, and there are many of them actually, not the only one, that we’ve held for long periods of time and made 50, 100 plus times our money on, which astounds most people, but it’s so easy. All we’re doing is buying and holding. Amazing, isn’t it?

David Gardner (00:24:16):
But Nvidia isn’t just a great one-year story, it’s actually a great, for me, actually 16-and-a-half-year story. And I’ll just talk you briefly through the movements of the stock. April 15th, 2005, I picked it $1.63. So April, 2005, by October, 2007, two and a half years later, it’s gone from $1.60 to 10. Amazing. Felt great. Five bagger. You may remember 2008 wasn’t a great year for the market or for stocks. Nvidia then dropped from 10 where we had a five bagger to below $1.50, i.e, we lost all of our profits and we’re underwater, and this is now three years after we bought the stock.

David Gardner (00:24:59):
Six years later, we come out of the wreckage of 2008/9, Jensen Huang, one of the great underrated CEOs of our time, the stock has made it back to five. We’re now back to a three bagger, $1.60 to five at the end of 2014, we’ve now held nine years. It then crosses 10 in 2016, so it doubles again. And in 2016, it closes out on a run, from seven, it goes to 23 and becomes the top performer on the S&P 500 for the year 2016. So it’s now at 23, our cost of a $1.60, we’re now in year 11. It’s very important, for me anyway, to add to winners. So I’m never trying to double down.

David Gardner (00:25:46):
As soon as I find out a stock is the top performer in the S&P 500 for a year, you might think, “Well, that’s the one to rotate out of in the following year.” But for Motley Fool members, I said, “My new best idea, January, 2017 is Nvidia, which is now at 22 or so. It closes 2017 at 52. So it basically more than doubles again.” And to bring this long story to a quick ending, 2018, tough year for Nvidia. This is before ’19, and it stalled out. It dropped from 70, where it had gotten up to, down to 30. So the stock gets more than cut in half. This is a world-beating company. This was during the period in 2018 where a lot had been invested in AI and crypto and Nvidia chips were making those things happen.

David Gardner (00:26:36):
All of a sudden, those things slowed down, especially the crypto market, and the company got hit. Now, it wasn’t its results necessarily, it was Wall Street’s perception of Nvidia. But now the stock of course, has gone from 30 where it sat there at the end of 2018, more than cut in half that year, didn’t feel good, it’s gone of course from 30 to 222. So now we’re sitting on our $1.63 cost basis at 222. And I’m fully prepared for it to get cut in half again and, or to double again, because I’m not looking at the numbers or playing a jump in, jump out, what’s my target price, kind of a game, I am in it to win it, because this is one of the great companies of this era.

David Gardner (00:27:18):
I never know when I first invest in them whether it will be, but we get smarter watching the companies as they go and grow. This is obviously one of those. And so we have a consistent knack, using the Rule Breaker Framework, to identify these companies early on as upstarts that people don’t believe in. And then the ones that work out become monsters and the ones that don’t work out become irrelevant as they vanished away into small cost basis, I shouldn’t say small allocations within our portfolio, because we’re not adding to those. So what I’ve tried to mix in here is some combination, Trey, of telling the full story of the long hold and what that feels like and looks like for an investor.

David Gardner (00:27:59):
And then also, I want people to know that it’s okay to stomach volatility and to realize that you’ll have some losers alongside these kinds of companies. But as you said earlier, when you have a stock like this, it powers your portfolio to market beating returns on its own. So this is really what investing is. And to me, this is Rule Breaker Investing, and this is often not taught and certainly not practiced by most of the institutional traders today. And it’s just one approach, but I can’t think of a better one.

Trey Lockerbie (00:28:28):
Well, you can’t teach the feeling of something dropping back down to $1.50 after it’s gone over 10, and I definitely understand that. I’m guessing that when it was at $1.50, you were reassessing and noticing that the underlying story really hadn’t changed, the CEO is still great, the product’s still great, they’re still ahead of the pack. But I guess what I’m getting at is, how did you come to identify that it had not become a loser and it was still just under priced?

David Gardner (00:28:58):
It’s because I probably wasn’t analyzing it that deeply because this is one of a bunch of stocks that I follow and that I’ve recommended, or for all of us in our portfolios, I hope you have at least 20, 25 stocks, at least, for most of us. And so, which ones do you want to go deep on and how much time do you want to spend? So I probably just simply had my head under my pillow at the time, lapping up my losses and hiding from the world because it hurts when you watch a stock like Amazon go from 95 to 70, you held it all the way down, or Nvidia here from 10 to $1.50. That really hurts.

David Gardner (00:29:28):
And it isn’t just those companies or stories. It was 2001, it was 2008, it was the whole market, systemic problems that were in place. But you’re right, it’s that focus on the business, not the stock that always steals our confidence or helps you in times of need, looking at the company’s real results. Netflix got absolutely waxed in, I think it was 2011, when they had the whole Qwikster incident. Self-Inflicted gunshot wound in a lot of ways, but the stock got really badly hammered.

David Gardner (00:30:00):
And yet, if you look back, while Netflix lost about three quarters of its value in about one year’s time, and as a long time, Netflix bowl is my largest holding, that also heard a lot. At the same time, if you actually looked at their membership numbers, at their worst moment, they had gone from something like 24 million to 23.2 million members. It’s not like everybody canceled Netflix because of Qwikster. Actually, many people signed up for Netflix probably and some canceled. And they had a brief net loss in membership, which was like the first time that’s happened in Netflix, and it’s very, very rare. So the markets certainly didn’t like that.

David Gardner (00:30:39):
But at the same time, let’s look at the numbers here, that’s a tiny percentage of overall lost clients. And Netflix still had so many great assets in place, we don’t have to talk about them today. But that’s a great example and a reminder to look at the business, not so much the stock. And when the stock is going crazy either direction, the business is what really is the ballast for our thinking. It gives us the basis, I think, for me anyway, for holding through hard times for companies like these.

Trey Lockerbie (00:31:06):
Can you provide any other examples of something that you had to sell and why? Did something fundamental change? What drove you to sell? And maybe the one that stands out the most for you.

David Gardner (00:31:18):
I do sell. I don’t do it very often, I don’t think I’ve sold a stock that wasn’t bought out that I had to sell out for a few years now. And I’m just talking here about my own personal portfolio. I basically do in public what I do privately, which is, I just find great companies to buy and hold them. When do I sell? I sell when thesis is broken, I sell when I love the company still, but somebody else came around with something better. There’s a better mouse trap or a new approach, there’s disruption happening. I’m a big Clayton Christensen fan, The Innovator’s Dilemma and that thinking.

David Gardner (00:31:48):
Of course, disruption is what a lot of rule breakers do. I’m also, by the way, a big fan of Malcolm Gladwell’s work on how David beats Goliath, which some listeners will recognize. You can read his book if you like, or you can just read The New Yorker. I think that’s free, The New Yorker article that spawned the book. But it’s, again, a lot of the principles we’re talking about. These are the things I’ve lived as a stock picker or as an entrepreneur for 20 years. So I love that he said them and articulated them because I think they’re true. At least they’re true to my experience.

David Gardner (00:32:17):
And so taking that different angle, you have to be comfortable winning and losing, and you have to recognize, especially, that loss is overrated if you’re willing to show resilience and if you aren’t doing silly things. And I earlier mentioned not trading on margin, a lot of people are doing crazy stuff or they have everything in one stock. I’ve often talked about the importance of knowing your sleep number, which I define as the percentage of your portfolio that you would put in your biggest holding, that you would allow your biggest holding to occupy as a percent of your allocation and still be able to sleep at night.

David Gardner (00:32:55):
And again, here too, there are people with wildly different sleep numbers, and most mutual funds are 1% because they have to remain broadly diversified. But we as individual investors can allow our portfolios to be taken over by great stocks if we want to, if we’re comfortable and can sleep at night, not everybody is. Anyway, I think I got off track there because I just think so much about winning and losing, about rules and breaking rules. By the way, rules are important. I love to break the rules, but you also have to have rules.

David Gardner (00:33:25):
If you’re going to be anti-Buffett, you have to have Buffett and you got to love rules and love Buffett, but you also can recognize the benefit of breaking them. Do you ever play the card game of bridge, Trey? No one plays this game anymore. Do you ever play?

Trey Lockerbie (00:33:38):
I’ve never gotten into it, honestly. I love other card games, but not that one.

David Gardner (00:33:42):
And I appreciate that. Bridge is a lot of ways, the lost art, I still go to bridge events, I’m 55, everybody’s 20 years older than I am. And part of it is because there’s a whole bidding system which you have to learn. And so there’s a big hurdle to entry to actually just even play bridge, let alone be really good at it. But the key thing I’ve always learned as an observer of the game of bridge for a couple of decades is you have to know how to bid, you have to know the rules to even be able to play, but if you want to win a tournament, when everybody else is going by the book and the conventional wisdom and the rules, you decide, I’m not going to do that in this context. And that’s what wins tournaments in bridge.

David Gardner (00:34:19):
So as a gamer, I often think of that as a great example of learning a whole system and respecting the system in order to break the system at the right moment to win.

Trey Lockerbie (00:34:29):
Well, I have to highlight some similarities I’m hearing right here to Buffett, because you did mention, you never read a book on Buffett, which I definitely appreciate, but there are a couple of similarities, not only is he a master bridge player, but also that what you’re talking about in my opinion, is this idea of owning a business, not owning a stock. You come across to me as someone who really thinks and has basically synthesizing that idea. When you buy a stock, I imagined you, in your mind, I’m thinking, “I am an owner of this company.” And that is probably the differentiator with a lot of other retail investors. Does that sound accurate?

David Gardner (00:35:05):
I would certainly agree with that. And I won’t even speak about other investors because some will totally get this and some will totally not believe in it, and that’s fine too, but for my own part, yes, that’s how I think about it. That’s how I was raised by a dad who understood that. Our big stock as kids that we watched blow up in dad’s portfolio, as he taught us, was The Washington Post company, a newspaper company, these days is asleep your business, but back then, a big brand, and Buffett was on the board. Katherine Graham has had a movie made about her, the grand family, multi-generational family that steered The Washington Post to huge returns.

David Gardner (00:35:41):
It was a beautifully managed business, and we watched our dad with a low cost basis, let that stock run up for him. And we saw it was a product we knew, was delivered to our door every day. We knew it, trusted it. It was about the business, it was about what that company does in the world. Footnote again, conscious capitalism, if we want to talk about it, but so important to me that I be, and you be, invested in things that if they prosper, we feel great about that future. Make your portfolio reflect your best vision for our future.

David Gardner (00:36:15):
I might have that on my gravestone or somewhere nearby, because that’s what I’ve tried to say to the world and what each of us should be thinking about as we build our portfolios. So it’s not about a ticker, not about a chart. For some people it can be, but you’re really missing it if you don’t realize that you’re actually causing something to thrive when you buy from it, when you buy its stock. And if you don’t buy from somebody else down the block or ignore this other stock, it loses a little value, a little power, because you didn’t care enough about it.

David Gardner (00:36:43):
And that’s exactly what we’re doing at a human level every day, computers are doing it too these days, but we’re buying businesses. And so, yeah, that’s how I think about it, and I think that’s how everybody should think about it. And there’s no substitute for being an entrepreneur and seeing that and feeling that as you build your own business. And again, Trey, I’m talking to a guy who understands kombucha and who understands how to manage the national brand. And so you know all of the efforts that it takes to go from the light bulb overhead to real product or service that is improving people’s lives.

David Gardner (00:37:12):
And once you see that, you see what an entirely human endeavor investing, I think, should be, and it’s always about the businesses, not so much the stock.

Trey Lockerbie (00:37:22):
Attribute of businesses that’s popped up on my radar only recently, mainly after I was interviewing Jim Collins, who brought it up is this idea of optionality. And I’ve heard you talk about this as well, but I’m curious, this is just not been on my radar, maybe circles back into video somewhat because chips can be very versatile. And I understand that to a degree, but I haven’t factored that into my analysis very often saying, what is the optionality of this company? How broad can it really stretch its wings to even grow its TAM? So maybe talk to us about how you identify optionality, especially in the early stages of a business.

David Gardner (00:37:58):
Thank you. Andy Cross, our longtime chief investment officer at The Motley Fool and firstly, a great friend Tom and to me, Andy once said about me. He said, “You know, David, what I realized is Buffett is looking for companies with one future and you know what it’s going to be. It’s still going to be car insurance, five, 15 years later. It’s still going to be chocolates, it’s still going to be The Washington Post back in the day. He loves the certainty that this company is going to do its thing. And you are looking for companies with infinite possible futures as a directly different approach.”

David Gardner (00:38:32):
And I was like, “You’re right, I am looking for companies that have lots of possible futures.” That means they have usually lots of irons in the fire, you think about Alphabet. It was initially Google, but these days, it’s Alphabet partly showing the optionality of one powerful business idea and what else it can lead to. But you see companies morph over time when they have possibilities. It takes two things primarily to have this kind of optionality, which is the word that we use, I use a lot for describing this. The first thing it takes is capital. You don’t have a lot of optionality even if you have a cool new app or a cool business idea, and you don’t have any money in the bank, you don’t have cash on the balance sheet or you’re beholden to lots of debt.

David Gardner (00:39:15):
So the number one thing you really need to be optional and to have new possibilities is you have to be able to screw up a bunch because that’s what we do as innovators and humans, we screw up a bunch. You need to be able to spend the money through that, to get to the right idea or the next hill to take for your business. And so that’s the first thing you need. Of course, the second thing you need is you need an open-ended context. The internet is an incredible platform for optionality. For The Motley Fool, we could just launch with one service, but then it didn’t take a lot of effort necessary for us to open up another service in Australia.

David Gardner (00:39:54):
And so international optionality, like which American brands can really live globally like Starbucks, and which you’re much more confined perhaps to the USA? I don’t know, let’s go with Chick-fil-A. Although Chick-fil-A, I think it’s mainly a domestic private business, I don’t think I see a lot internationally. Maybe it doesn’t have international aspirations, or something that’s really Americana isn’t going to do so well in Europe or Asia. So, one form of optionality is, how many different places could you take your widget, but then could you morph your widget? For a lot of biotech companies, they’re initially approved by the FDA for one indication, but all of a sudden, they discover it also works for this other indication, so optionality.

David Gardner (00:40:37):
That open-ended context I’m always looking for. Now, it’s not going to be true of every stock I recommend or every stock you and I should have in our portfolios. It’s wonderful to have companies sometimes that they’re just steady eddies and get it done. But especially I think about technology constantly changing and speeding up. You need to, if possible, even if you’re, let’s say, Old Dominion Freight Lines, which is a longstanding trucking and logistics company based in the State of Virginia, which has been a wonderful performer for a first public market investors and Motley Fool members as well for years now. But you’re a trucking company, but what’s your edge? Your edge is your logistics, and what drives your logistics? Your use of technology.

David Gardner (00:41:17):
So if you’re running a less than truckload business, that means that you’re not just taking your big tab behind you and it’s full of just widgets and you’re taking it from place A to place B, you actually have a few tubas, you’ve got some food to deliver in another place. And this third thing in the back of your truck is well, we’ll just go with, I don’t know, we already went with perishables and musical instruments, how about let’s just go with some Nvidia chips. So you’ve got all three of these things and you’re going not just from A to B, but from A to B, to C, to D, and then to E.

David Gardner (00:41:48):
That’s a much more complex business, and the reason Old Dominion Freight Lines has been a winner is because it does that so well, it’s using technology. So we need to be able to picture in that open-ended context, I think, making use of technology, ever-changing technology not being threatened by that or hostile toward that, but being open to that. Those are a few of the conditions, I look for an optionality. And we can talk more about this if you’d like, but I love the companies that transform themselves, Amazon, Earth’s biggest book seller. In fact, for those watching this, if this is on video, I don’t even know, on YouTube, here’s my mouse pad, earth’s biggest bookseller, it says at the bottom.

David Gardner (00:42:23):
This is my Amazon mousepad I’ve been rocking, Earth’s biggest bookstore, it says, since about 1997. And wow, it’s a lot more than Earth’s biggest bookstore today, isn’t it? And so that’s because Amazon has optionality, and recognizing that infinite possible futures is a big part of Rule Breaker Investing.

Trey Lockerbie (00:42:42):
I love it. I’ve been collecting, I would say, different people’s definitions of risk over the course of this show, or at least how they go about measuring it. You have developed a 25-point system for risk. And while we might not have time to go through all 25 points, I’d love it if you could just highlight maybe a few that come to mind.

David Gardner (00:43:02):
I’ll just briefly explain about, we’re definitely not going to go through the 25, but I’ll just briefly explain that I wanted to create a tool that anybody could use that allows you to rate the risk of a stock. Now, I personally don’t think that there’s any really good defined way of rating the riskiness of stocks. We do that a lot with debt these days, and there are whole firms, Moody’s that rate the debt of things, the financial viability, but to actually look at a stock and say, “What is the risk of that stock? The unsatisfying answers I’ve often seen in the past, our medium, low to medium.

David Gardner (00:43:32):
I’m always like, “What does that even mean?” So for me, we first have to define risk, and I define risk as the chances that holding this instrument over a long period of time, you would suffer in the end a dramatic loss. That’s the risk that I try to avoid. If it’s just beta, like how much does the stock bump up and down, I don’t think that’s a very satisfying approach to risk. That’s like using batting average, going back to baseball, to evaluate who’s a really good valuable hitter in baseball. It’s intuitive, in some ways understandable, but how much does stock bounces around, is not really, to me, what risk is about.

David Gardner (00:44:09):
So I first tried to define my term and then I tried to build a simple system that’s 25 points. They’re actually questions, and each one is simply a yes or a no. So for each of the 25 points, well, it’s a question, it’s a simple yes or no answer. It’s a binary question. And every time you say yes, that’s good. Every time you say no to the question, that’s bad, and you add a point. So if you have 25 nos, that’s 25 points, that’s the riskiest imaginable investment. So again, higher the rating, higher the risk.

David Gardner (00:44:46):
I’ll give you a few examples of the yes or no questions we ask. This is really off the top, I haven’t really prepared this, but how about number one, the first one we ask, was the company profitable during the previous quarter and past 12 months? Yes or no. Now, does that mean it’s a good stock or that the company is a good company or not? No, not necessarily. It’s connected, those things matter, but none of this is a litmus test in the end for the company or the investment, we’re just accumulating answers. And again, every time we say no, we’re like, “That’s looking a little riskier to me and I probably would favor things of less risk.”

David Gardner (00:45:26):
I’ll give you a couple more examples and then the key insight that I have from this risk rating system, which anybody can use by the way. Another example is, does the company maintain a high standard of disclosure consistent with SEC guidelines in the US? Actually even better, that’s number eight, number nine is, would an intermediate level investor find the company’s financial statements and management ownership disclosures relatively easy to sift through and understand? So, how transparent is this company? How easy or not is it to read its financial statements? Is that an all or nothing litmus test for the company or how good the stock’s going to be? No.

David Gardner (00:46:02):
Is that a helpful thing to think about and say yes to, or no to? Yes. Another example, number 13, moat. We talked about sustainable events, Warren Buffett calls it a moat, would potential new competitors face high economic technological or regulatory barriers to entry? Yes or no. Yes. Yes is good. Hard to mess with them, big moat, no is bad. So as you do this, you end up building up a risk rating and rather than say, low to medium or a high risk, you can say four or 16, which to me is a much more intelligent answer, a way to talk about it, even though it’s up too initially, where it’s not transparent to somebody if you see say eight and answer to the question, but then you can explain that the aid is based on eight nos, and you can give the exact homework that you did to explain why it’s an eight.

David Gardner (00:46:56):
And the key insight about this, to close my answer, thanks for asking me about the system, I haven’t talked about in many interviews, but it’s something that we’ve done for years for my picks in Rule Breakers and Stock Advisor, the two services that I picked a couple of decades. The key insight is this, people think that risk equals reward, I disagree. I think this is another example of conventional wisdom. They think, “Oh, the greater the risk, the greater the reward.” Actually, secret, some of our great performers have had low numbers. So it turns out you can have your cake and eat it too.

David Gardner (00:47:31):
You can buy a low-risk company that becomes one of the great performers in our markets over the following 25 years. The biggest challenge for most people is they’re not willing to hold it more than a year, let alone 25 years. So the key insight is that it’s not always higher risk equals higher rewards, sometimes it’s the opposite.

Trey Lockerbie (00:47:52):
Shifting gears a little bit, you’ve actually mentioned conscious capitalism a couple of times, and you’re on the board of a nonprofit called Conscious Capitalism and John Mackey as well, he actually wrote a book on conscious capitalism. That was one of my first business books I ever read that inspired my own company, but talk us through the importance of conscious capitalism, what the differentiation is there and what this organization does to help businesses?

David Gardner (00:48:19):
For me, it’s just a better way to practice capitalism. Capitalism is much maligned and there are all kinds of examples of excess and failure and greed that have been part of the American story. And the worldwide story of capitalism run a mock in years past. And Enron, which was a stock that I had in one of my portfolios at one point would be a good example of poster child a lot of us can relate to, but there are many examples of failed humans who are running businesses or failed enterprises. And that’s not what we’re talking about when we talk about conscious capitalism, because most of those failed enterprises were either really short-term oriented, which tragically Enron really was, just trying to look great for a little while.

David Gardner (00:49:01):
But at the heart of it, at the heart of conscious capitalism, to talk about why I love it, and the good form of capitalism, there are four tenets. We won’t go over them right now, but two I’ll highlight for our conversation, and Trey, you already know them because you read the book and I love that. And by the way, John Mackey’s on our board, and I think he’s one of the great business minds of our time, but two I want to highlight are the first one, which is purpose over profit, companies that have a higher purpose. You can see it in their statements they make about themselves.

David Gardner (00:49:27):
Does Tesla say as its purpose, it wants to make one heck of a lot of money and glorify its founder Elon? Well, some of that has happened, but no Tesla says, it’s trying to accelerate our adoption of sustainable energy for our future. That’s basically the purpose of the corporation. That’s why it’s about more than just cars, it’s obviously about solar panels, etc. It’s about a mindset. And that’s a great purpose statement. Amazon for years, of course, Jeff Bezos to be Earth’s most customer centric company. The Motley Fool statement, to make the world smarter, happier and richer.

David Gardner (00:50:06):
None of those statements says anything about trying to make a heck of a lot of money or make shareholder and maximize shareholder value, it talk about the purpose of the enterprises. And the ones that really get that and do that well, I would say the conscious capitalism enterprises out there, the employees know that and feel that. It’s authentic, it’s not green washed or pasted on by a CEO or a private equity firm that bought the company. It’s why it was started, it’s why you started your business, Trey, out of a vision of making the world better, a product or service, a guy who had a light bulb and the guts to start something.

David Gardner (00:50:38):
And so, higher purpose is what drives so much of us in life, purpose-driven leadership. There are many examples of this, but it happens in business too. And you can see it. When I go to the Conscious Capitalism Summit every year, as I’m about to in Austin, Texas, is October. Once again, I regularly shake hands with hug, people who are doing amazing things, small businesses and large, because they’re going for higher purpose. And just like if you search for happiness in your life, you probably won’t find it, but if you search for doing something meaningful, you’ll be happy, the same thing is true of profit in business.

David Gardner (00:51:14):
If you’re starting a business to make a lot of money, you’re probably not going to make it, you’re probably not going to be happy. If you’re starting a business to improve the world or the lives of people in your neighborhood, or your state, or country, you’re very likely to get profits. And ironically, the companies that search for profit least, often have the most. That’s a critical thing for many people, especially people who are just investors, they’re not entrepreneurs, in many cases, these investors just look at technical charts.

David Gardner (00:51:43):
They don’t actually care what the company does, they’re not noticing that or feeling that, that’s why they miss or don’t hold these great companies because they’re looking at a chart or a screen set of ticker symbols and their computers trading for them. Meanwhile, life has happened and real entrepreneurs are creating great enterprises, and the greatest, go for higher purpose. I said I was going to mention too, I think I went a little bit long on that one, but the other one is just as beefy and just as important. These things are known by different phrases, I use conscious capitalism because that’s the board that I’m on.

David Gardner (00:52:13):
And John Mackey, his book was entitled Conscious Capitalism. And I love that phrase. It causes people who’ve never heard that before to go, “What’s that?” which I love about it. It’s like The Motley Fool name, what’s that? Why would they call themselves that? People are inquisitive. But anyway, the second critical aspect of many of the best capitalistic enterprises today is that they’re not trying to create a win for just one stakeholder, because that’s the story of 20th century, capitalism, especially the part, the random luck. It was regularly taught in business schools, Fortune 500 CEO letters would say the purpose of the business, Milton Friedman, is to maximize shareholder value.

David Gardner (00:52:52):
That is the purpose of a corporation, to maximize shareholder value. While some companies did that well, a lot of others were just trying to max it out for the shareholders of whom they often were shareholders and they were not necessarily helping our environment, in some cases, their customers, maybe their employees really didn’t like working there, they’re hosing their employees, all to in “maximize shareholder value.” So this other aspect of conscious capitalism is that you state who your stakeholders are and then you try to create a win for every one of them.

David Gardner (00:53:28):
It’s not, “We’re all doing this just for those guys over there, that’s why we exist.” Nope. You exist, I think, for your employees. They’re the ones that are coming to work, trading their precious time over years and years of their lives every day for a salary or some form of compensation you’re giving them. You definitely want to be, I hope, enriching their lives. You better be making things really great for customers. Those are going to be the businesses that win, otherwise, why do we have a business? So customers or employees are two obvious stakeholder groups, but others might be, well, certainly your partners and your suppliers.

David Gardner (00:54:03):
It sounds like in your business, Trey, you are a supplier maybe to Whole Foods or maybe to some other grocery stores and supermarkets out there. So you are a partner and a supplier, and the companies that people love to work with are when they treat their partners and suppliers well, they’re not just trying to hose them or jack down prices on them. And a couple other examples might be the environment. That doesn’t make that much sense for The Motley Fool, we’re a digital brand. The environment doesn’t enter too much in, we’re actually all about being wherever you want.

David Gardner (00:54:32):
We try to do good things for the environment, but for some businesses, that’s a huge stakeholder. Again, the great CEOs, the great for-profit corporations of our time are creating wins intentionally so for all of their stakeholders, not just one group. So I’m glad we had a little time to talk about conscious capitalism. I don’t have that much more to say about it unless you want to talk about it some more for now, but that’s what the world needs. And in fact, that’s what the world’s getting because the world is turning more and more consciously capitalistic than ever before.

David Gardner (00:55:03):
These days, young people want to go to work for the companies that are doing good. The sense of intention and intentionality of this new generation is stronger than I think it’s ever been in human history. And how many people are like, “I want to be proud of the work that I do or who I’m working for”? That matters to people. So guess who’s going to get all the best? Kids coming out of college, the ones that actually think about creating a win for everybody and are serving a higher purpose. This is a contagion in the best form, this is a good virus.

David Gardner (00:55:32):
This is infectious, and it’s going to keep influencing American business toward the better, and the world, I think, we’ll keep getting better. Capitalism is going to be getting better from here in a world where everybody thinks… It’s like a lot of sci-fi, they think it’s dystopian, but all of that dystopian sci-fi itself was misplaced. Go back and look at Blade Runner and see what year it was depicting, it’s a year we’ve already lived through at this point. So I think that there’s a whole separate talk we won’t do today about the power of optimism and about looking at real data and realizing things are getting better not worse, even though everybody thinks things are getting worse. That’s more of the contrary mentality I guess that I have.

Trey Lockerbie (00:56:11):
We’ve touched on a couple of things. I’d love to close with one more question around this, because you’ve talked about happiness, talked about passion, mission-driven companies. I just have to note this because we’ve now interviewed Morgan Housel, Brian Feroldi, now yourself. All three of you have at least had a stint at Motley Fool in Morgan’s case, you seem like some of the happiest people I’ve ever met, some of the most passionate people I’ve ever met. So it raises the question around you as a leader of your own company and developing, cultivating a positive company culture.

Trey Lockerbie (00:56:45):
I’d love if you could just share a few thoughts about how to do that, how you’ve approached company culture and how you’ve produced some of the best people I’ve interviewed today?

David Gardner (00:56:54):
Well, thank you very much, Trey. That’s high compliment coming from you. And I really appreciate that. And those are two great people and there are a lot of others that are great. I’m happy to be here, you could have had any number of Fools. My brother, Tom Gardner has done as much, of course, for that company culture to say nothing about helping build our businesses, our CEO for his great investing, acumen of his own. So there are a lot of really great people that are circling around our enterprise, and John Mackey’s on our board, and he’s not the only one. We’ve got a lot of great people on our board.

David Gardner (00:57:22):
I think there’s something to be said about the power of positivity. I think at the heart of it, I’ve always loved the Henry… Well, it’s said to have been said by Henry Ford, but whether or not Henry Ford ever said this or not, it’s a great line, “Whether you think you can or whether you think you cannot, you’re right.” And so I really do believe, and I know I’m speaking to an entrepreneur and a lot of people are hearing me are can-do people because in general turns out a lot of the success in the world will be created by people who thought that they could create success, who actually were aspiring to success, who believed the dream, dreamed it, build it, as one of my favorite people in business, Roy Spence said.

David Gardner (00:58:00):
He wrote a wonderful book called, It’s Not What You Sell, It’s What You Stand For. He’s all about purpose. Look into Roy Spence, anybody listening to me if you’ve not seen Roy’s work before. But you realize it’s the people who say, yes, we can that actually go on to do that. Not every time, and there are sad failures along the way. And yes, sometimes pessimists add value. And I’m certainly not here to invade against pessimism, we’re just being a good realist and trying to integrate those things and bounce them, which I’m sure we all are trying to do.

David Gardner (00:58:28):
I guess I want to say one more thing about our culture, which is important, and that is that we trust, we lead with trust. And especially in the money world, you’re often taught to distrust, and a lot of us do read the 10-Ks guy, “Ah, what does that footnote mean exactly?” And I certainly celebrate that spirit of inquiry and also of holding people accountable, which is what we’re all about, especially since we’re holding our money with them over the long term, so we sure are going to be holding them accountable.

David Gardner (00:58:53):
But I think we always from the first day of our business is we hired our first cool fun friend from college because that’s the only person that we could afford to hire. We couldn’t even take out ads anywhere, we didn’t have any money, so who are you going to hire? Your cool fun friend from college. Here’s what we didn’t tell that person, “By the way, dude, you got to be here at 9:00 AM. You got to stay till 5:00 PM. Also, your first year, we’re going to give you five vacation days.” Those are all the things we never said. So from the first day of our business, we basically just said, “Hey, you call your hours, we’re not counting anybody’s vacation days.”

David Gardner (00:59:26):
“You’re here to get a job done. Get the job done and we’re hiring great talent so we have a lot of confidence in you to get that. We’ll be challenging you at various points and supporting you at others.” But it’s that mentality, that trust-based approach. And it won’t work in every company probably, but I think especially within conscious capitalism and perhaps Trey in your own company, you’re there, but that’s a really important part of our culture. So when you lead with trust and you’re willing to be wrong, if somebody wants to violate your trust, it’s going to work once anyway, because you’re going to always lead with trust and you have that optimism.

David Gardner (00:59:59):
Those things are powerful parts of our culture, as well of course, we’re called The Motley Fool. So, it better be fun or we better be doing creative stuff, otherwise, why are we calling ourselves in the financial services industry, The Motley Fool? That would be a huge mistake unless we’re owning it and living it every day.

Trey Lockerbie (01:00:17):
I think that’s a fantastic note to end on. This has been incredibly fun, David. I can’t thank you enough for coming on the show and sharing all this wisdom. It’s a refreshing approach. I learned a lot. I’d love to do this again sometime soon, but thank you so much for your time today. This is really appreciated.

David Gardner (01:00:34):
Thank you, Trey. You do great work. I love that you’ve spent time as you are learning from so many different people, and that’s what we all need to do is expose ourselves to as many different types of people and thoughts as possible. There’s an old t-shirt or bumper sticker that says, “Whoever dies with the most toys wins.” I obviously disagree. I would say, “Whoever dies with the most friends wins.” And I would even say, the most diverse friends. The more we can diversify the people that we know, the things that we’re exposed to, the richer our life will be, the better our world will be.

David Gardner (01:01:06):
And so, I really appreciate that you’re a learning machine and you’re going out there. And by the way, you and I, neither one was really raised or taught, we don’t even have investment degrees or entrepreneurship degrees, at least speaking only for myself, and I know we have some Chapel Hill, North Carolina. I’m just an English literature major, but there’s something to be said for lifelong learning.

Trey Lockerbie (01:01:28):
I dropped out of college, so you at least got that on me.

David Gardner (01:01:30):
Some of our best employees did the fool. Those are usually amazing people because they’re driven.

Trey Lockerbie (01:01:37):
David, thank you so much again, I really enjoyed it.

David Gardner (01:01:40):
Thank you, Trey. Fool on.

Trey Lockerbie (01:01:42):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app so you get these episodes automatically. You do not want to miss some of the guests we have coming up. We always love to hear from you, so please leave us a review or find me on Twitter @treylockerbie. And if you’re the kind of person who likes the more quantitative approach to validating a company, you can always find the resources we have for you at theinvestorspodcast.com, or simply Google TIP Finance, and it should pop right up. And with that, we’ll see you again next time.

Outro (01:02:11):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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