David Gardner: The second half is going to be to fulfill the promise I made last week
and look at not just the 7 principles for long-term investors that we covered last week,
but to add in three more that are germane to me. So, what I covered last week is really
at the heart of Motley Fool's Stock Advisor and a lot of The Motley Fool philosophy. But
the three I'm going to cover this week are much more stylistic and much more my kind
of thing. My brother might not agree, other staffers at The Motley Fool might not look
for these things. These are my three additional personal principles, not so very different
from the ones I just read that were yours. Now, I'm giving you some of mine. I have three,
and for each of these, I'm going to give some examples of companies and stocks that I think
fit within these.
Alright, let's get started. #1, invest in companies with unquantifiable greatness -- a
secret sauce that gives them an edge. Now, for consumer-facing businesses, that means
finding products that are sticky, products that fasten themselves to people's daily lives.
Me and my team at Stock Advisor, we often ask, how would consumers react if someone
took that company off the face of the Earth tomorrow? In fact, I did that in one of my
early podcasts for Rule Breaker Investing. I call it 'the snap test.' If you snapped
your finger and the company you're looking at disappeared instantly upon snapping your
fingers, the next morning, how many people would notice? How many people would care?
And if you invest like I do, you want a lot of people to notice, you want a lot of people
to be pretty upset that you snapped your fingers. You shouldn't have done that. And that kind
of speaks to the greatness aspect, of unquantifiable greatness, that phrase that I'm going to double
underline for this point #1.
Let's talk briefly about unquantifiable. What does that mean? Well, that also hearkens to
an earlier point made in Rule Breaker Investing. I hope all of you have gone back and listened
to all 18 or 19 of our episodes so far. Listen to them again if you need to, maybe especially
the first five or six, which are kind of formative stuff. But, I talked then about optionality,
about how important it is for me to think, to like, the multiplicity of possibilities
that's some of our companies, some of my favorite companies, have. I love the companies that
have 30 possible futures, not just one. That's the unquantifiable part, that's what confounds
the stock market, because when a company has that kind of possibility, it's really hard
to put a number on that, or, especially highly numerically inclined investors, people who
use screens to look for certain ratios and just pick stocks based on certain numbers,
when you can't quantify things that are important, that confounds that style of investing. The
computers with their algorithms have a hard time processing unquantifiable things, which
is why I think, as investors, we have special advantages when we find such companies. I'll
get to a couple quick examples.
I think Zillow is a company that a lot of people would miss. Now, it's not universally
known, but it is the company that puts property values on almost everything in the United
States of America today. So, you can look at your house, you can click your block, you
can look around your neighborhood. Increasingly, it's a tool used by real estate professionals
to do their business and advertise themselves there. But you know, there's a lot of value.
It's really hard to think about all the things that Zillow could do with that, the businesses
that they can enter into over the course of time. But early days, people thought, "Hey,
you know what? Zillow's actually trying to put those realtors out of business! They're
just going to start saying sell your house directly online just like you sell a product
on eBay! Why would you pay 6% sales commission to a realtor?" And it's ended up that that
has not been the case. Zillow has not really put realtors out of business. In fact, it's
increasingly a best friend of many realtors. But it does have the possibility of doing
that in some contexts in the future. That's just one example of what Zillow could do.
Another company with unquantifiable greatness -- and it's hard for me to talk about this
one just because it's a stock that has performed so poorly, especially in 2015, it's been a
loser stock pick of mine, but I still like the company, and I think it passes the snap
test. That is, if we snapped our fingers right now and Twitter disappeared overnight, I think
a lot of people would notice, and I think a lot of people would care. And it's very
unquantifiable, and that's part of Twitter's problem right now. People are asking, "How
are they going to make money? What are the ways they're going to make money? Lots of
people are using it, but how do they really monetize that was sufficient ad revenue?"
And a lot of those questions remain, and even management questions, which have been recently
solved. So, it's an example of a company that I'm talking about, but I wish everyone of
our companies were winners, and every one of my principles led to a 100% success rate.
But the truth is, we're all venture capitalists, a point I'll be getting to very shortly. At
least, that's how I think of things. We're going to get it wrong from time to time. That's
the nature of the game. So, we'll see with Twitter. I like Twitter a lot here at this
low, depressed price, though.
Alright, principle #2. Again, 2 of 3 this week. #2: Choose companies that will benefit
from undeniable long-term trends. A great example in our lifetime has certainly been
the internet, as it came to the earth, as it started to rage this amazing new beast,
shaking the planet, the internet was clearly, undeniably a long-term trend, creating all
kinds of possibilities as it was adopted, to disrupt existing brick and mortar retail,
to enable quicker payment, to allow people to connect with friends. There are so many
aspects, of course, to the internet. Undeniable long-term trend. Undeniable is a key word.
There was no question in my mind, and I hope in yours, that the internet was and is here
to stay.
I think, next one here coming down the pipe, I love it when new media are created: virtual
reality. It's not really out there yet, but there is no question in my mind that it is
a major new medium that will greatly change the world over the course of the next several
decades and counting. So, we're still early on, and there's not a lot of obvious plays
here for investors. A company like Facebook acquiring Oculus is one example. Paying 9
figures to buy early-stage technology, Facebook has made it clear, Mark Zuckerberg agrees
with us here on Rule Breaker Investing. So, I think it's undeniable. And I think it's
a long-term trend. So, I think we should be looking at these kinds of things.
I'll just give two more quick examples of, to me, undeniable long-term trends. One is
genomics, that we're going to get better and better at figuring out your genome and mine,
and learning from that, creating personalized, customized solutions that work for you, that
heal you, that improve your life, that are pertinent only to you, because of your unique
DNA. To me, a company like Illumina, which has been a wonderful performer for us in Motley
Fool's Stock Advisor for some years, benefits leads because it makes the machines that to
a lot of that genomic decoding. But, genomics is a big thing. Like the internet, there are
a lot of players. There'll be a lot of beneficiaries, especially you and me, because we as individuals
will benefit. There will be some lack of benefits. Some loss of privacy, some questions about,
if you have a really bad gene, and I'm your insurer, what does that mean for our relationship
together? These things are not easy to talk about or understand or predict exactly how
it will play out. But undeniably, this is a long-term trend, and one that is net-net,
a great trend.
Another one is the so-called -- I kind of don't like this buzzword, but we'll go with
it anyway -- Internet of Things. There's just no doubt that we're putting chips it everything
today, it seems like. You might even have one in your ladder, or in your light bulb.
And we're using that to allow our devices to work more in concert with each other. So,
for me, an early example is just driving down the highway, in the Washington D.C. area,
we have the E-ZPass. This is just, rather than stop at the toll booth, you just blow
right through. I bet you have this in your area. This is not new technology anymore.
But, it's basically a chip that you have in your car and it blows by the toll booth that
has a chip, and it just, kaching, charges, and it adds convenience to your life, it adds
steady source of revenue for your local government. Undeniable long-term trend, the Internet of
Things, and companies like Skyworks Solutions, which we have in Rule Breakers, or Sierra
Wireless, which we have in Stock Advisor, these are all companies that will benefit
from that. Are they all winners? Will they be? No. There'll be a lot of losers. But tend
to favor companies that are in undeniable long-term trends.
Finally, this week, #3: Get in early on a great business and don't haggle on the price.
Boy, have I learned this one over and over again, and most of my best investment moves,
I was recommending a stock that had already done really well. This is hard for a lot of
people, because we hear buy low, sell high, so we think we need to look for things that
are beaten down or near their 52-week low. But, when I recommended Amazon.com in 1997,
perhaps my longest term recommendation at this point, still in there, the cost was $3.21
-- Amazon had doubled in the six weeks leading up to that pick. It was hard to make that
pick at the time. But I didn't haggle on price. AOL, certainly one of the greatest stocks
that I'll ever pick, no longer a big of a world leader as it was in the 1990s, but in
the 1990s, that was the decade that America came online, benefiting from an undeniable
long-term trend. And AOL, I had watched as a user go public in around 1992, and go up
4x in value, with me just sitting there on my hands going, "Agh! It's up again? I still
haven't bought it?! I use this! I believe in this! But now, it's done so well, I ... "And
finally, I decided, you know what? I'm just going to go ahead now and buy. And the company
went on from that point, again, having quadrupled in the two years that I was watching it with
increasing frustration, it went on from there to go up over 100x in value further over the
next 7 years.
So, get in early and don't haggle on price. Don't haggle on price, to me, means don't
act like a venture capitalist. Not a lot venture capitalists sit there and go, "What's the
price to earnings ratio of this? And what are some of the other traditional valuation
metrics that people would apply that I'm going to apply to this early stage situation?" No,
that's not how a venture capitalists think. They basically ask things like, "What is the
total addressable market of this? What could this grow up into?" That's why I prefer numbers
like market cap, market capitalization, as opposed to price to earnings ratios. I don't
want to spend a lot of time haggling on price. Again, if we're getting an early, the price,
probably, at that point, almost doesn't matter. And certainly, looking back at the Amazon.com
cost basis I mentioned, I barely even remember it. It doesn't matter much to me. Instead,
it's that we found and that we bought Amazon.com, or maybe for you, Apple. Or, how about Pixar
in 2003? Pixar always looked expensive, but was a great company. Of course, eventually,
it was bought out by Disney. But these are all examples where we got in early and we
didn't haggle on price.