Rule Breaker Investing: Essays From Yesterday Volume 3

Hop into your Tardis, your DeLorean, your phone booth — whatever your preferred method of time travel is — we’re heading to yesteryear for this dose of education, amusement, and enrichment.

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This video was recorded on Jan. 5, 2022.

David Gardner: For years and years, I wrote essays in Motley Fool Stock Advisor and Motley Fool Rule Breakers, essays to kick-off the issues. So it would be May 2008. Remember 2008? In addition to our new Stock-Picks and Best Buys Now that month, the mailed issue, remember mail, of Rule Breakers led off with a page 1 essay for me. Same with the next month and the month after that for years. Recognize any old-school references? I bet you did. Mailed issues. These days our services are digital, we don’t do paper copies anymore and we don’t do opening essays. There’s no page 1 any more; they wouldn’t get the clicks. But I put a lot of time into those essays and as they occurred over a long narrative arc of history, 2002-2017, 15 years worth of them, it can be both educational and amusing to go back and see what was being said, when. The purpose of the Motley Fool is to make the world smarter, happier, and richer. That’s exactly what I was doing with those essays for years. I’ve pulled some favorites with some timeless truths and I want to introduce or for long time Fools, reintroduce you to our Rule Breaker, Thinking Over Time. But this isn’t nostalgia or about yesterday. I think it may be a fine way to educate, amuse, and enrich you today. Only on this week’s Rule Breaker Investing.

Welcome back to Rule Breaker Investing. It’s 2022. Happy new year. Is it too late? I hope not. When is it too late to say happy new year to somebody? My sidekick and longtime producer Rick Engdahl reminded me just before we started recording this afternoon, it’s probably too late to say happy 2021. But otherwise, it’s really never too late within the year to say happy new year to somebody; am I right? I think the first time I wrote 2022 just a few days ago I was noting, at the time, the results of our board game that we’re playing. It was up a little score pad. Whenever we write down the scores for this particular game I write the date. I got it right. I wrote 1/1/22. It’s always a really satisfying feeling, isn’t it? We all made it another year. We made it to ’22 this time. The fraternity I was in at the University of North Carolina had this thing about the number 22. It was a mystical number. I think it was all a big joke but every time anybody said 22, we would all snap our fingers. The idea was 22 came up much more often than 23 or 21. It was, as we said back then, mystic. I don’t know if this year will be mystical or not. But I know one thing, we’re going to start this year with Essays From Yesterday.

So with all of us looking ahead with our new year’s resolutions, which I myself have done and I may have mentioned that briefly this week or maybe in the weeks coming up, with all of us looking ahead and excited I hope about the year ahead, why don’t we put on our Fool’s cap, challenge conventional wisdom a little bit, and look backward. Because I think we might learn something by briefly looking backward. I have four essays that I’m going to present you. This is in fact the third volume in the series. But before we get into that, let me mention next week is already determined. Talk about the future. We’re going to be talking about non-fungible tokens. I’m going to have my pal Aaron Bush back. We may have another guest star we should see, but Aaron and I and you are going to hash through what we think of NFT’s. We talked about this in our besties a few weeks ago, Jim Surowiecki joining me for that conversation. We did a reinterview with Jim. Aaron was out that week, but we all were talking about our Bitcoin 2021 episode. Well, this one will be NFT’s 2022.

For some of you that’s an exciting thing that we would talk about that next week. I think for most of us we’re; wait, what is that thing again? What are NFTs? How is the world changing or not? That’s me too. I’m looking forward to having that conversation with Aaron and you next week. In fact to that same point, if you have a question about NFTs, if you’d like us to touch on any aspect or angle of this topic. Our email address is rbi@ fool.com. You can drop us an email or just @RBI podcast us on Twitter. We’ll keep an eye out for some of the best questions from our listeners and we’ll try to cover the topics that you want to see covered next week. Well now, let’s get into it. Essays From Yesterday Volume 3. This is the third in the series and we last brought you the previous episode on October 7th of 2020. That’s right. I didn’t do this at all last year.

Couple of ground rules about how this series works. First of all, I completely randomize which essay I’ll be sharing with you, so for 15 years I wrote 18 essays a year. Fifteen times 18, well that’s outside the multiplication tables which for me ended at 12 times 12 equals 144. Although if you are a quick study you could do 13 times 12. Just adding 12 to 144 and go above and beyond and know that 13 times 12 was 156. But 15 times 18 that doesn’t come as easily to my mind, maybe yours too, but I can tell you it was 270-ish essays. What I’ve done then is I’ve randomized out of those 274. I don’t know ahead of time until we planned this podcast what I’ll be speaking about since I’m randomizing. Of course, I wish I could cherry pick my best in my favorite essays. I mean, I guess I like all of them, it’s just that some of them are probably more right than others. You never know how right or wrong I will be with any of these. It is completely randomized and often I’ll refer to some stocks. We get to look them up and see how they’ve done and we’ll always have some doozies both ways. Anyway, that’s the first ground rule; we’ve completely randomized the mix.

The second ground rule is they’re in chronological order from earliest two latest. For example, this particular episode I’ll be sharing an essay, the first one from June of 2006, wow 15 years ago. Then we’ll jump forward just five months later for November of 2006, then we’ll get in our time machine and speed into the year 2015 February and December of that year. A mix of Rule Breaker essays and Stock Advisor essays. That’s what we have ahead of us. We do them in chronological order from earliest to latest. Rick, if I could get please a little bit of our way back. Music. [MUSIC] Because we’re in our time machine right now fellow Fools and here we are. We’re alighting upon the month of June 2006. Do you remember what you were doing in June 2006? I have no idea what I was doing in June 2006. I have tried to keep my calendar intact since I converted over to Apple in 2008, so iCal I can go back and see what I did any given day, but I don’t remember my pre Apple days particularly well.

In my Windows and PalmPilot toting era, I have no idea what I was doing in June of 2006. But this essay helps me remember a little bit of it and maybe I’ll location something in your memory as well. Here we go. This was published on May 16th of 2006 but it was introduction to June 2006 issue. What an imaginative title. It went like this, “Dear fellow Fool. For my tenth birthday, I asked my parents for and received a chemistry set. Like a lot of kids that age, perhaps I’m describing you back then too. My growing fascination with this set involved an ongoing attempt to mix together the right combination of chemicals in no way documented by the instruction booklet that would in “blow up”. I’m pretty sure I didn’t want to blow up my house or my brother. I’m pretty sure I didn’t intend to do any damage to myself, but I’m also pretty sure I wanted some chem-tastatic fantasy mix to lead to something somehow blowing up. I nearly got my wish one day when some unremembered combination of sulfurous elements coalesced into a milky, cyan, soup that spontaneously turned brownish, bubbled, and super heated in my hand.

I tossed the test tube into the sink, turned on the faucet and ran. That was the closest I wanted to get, I discovered, to blowing anything up. Well, new investors are not so different from children with chemistry sets. We’re hoping for that fantasy mix of stocks that will cause our portfolios and our financial futures to do something wonderful too in the best sense of the term blow up. We line up our stocks in front of us like test tubes on a rack, each one containing something curious. We admire the metallic green one, the vaguely purple one, the brilliant red one. We point them out to our friends. We’re not entirely sure what each will do on its own, but we’re excited to see what happens if we start testing and mixing our money with each of these. Sometimes, of course we hit on something fantastic. Other times inevitably, we create dull or even spectacular failures. It is with these latter experiments that we toss the beaker into the sink and run. If you have anything of the Rule Breaker mentality in you, you probably want to try a few things in no way documented by the instruction booklet.

Great, welcome to our service. Our approach to investing is in no way documented by the instruction booklets because you’ll be hard-pressed to read back through the investment masters and find much clue about how to invest in nanotechnology, alternative energy, robots, or small cap biotech. Neither of these particular technologies nor a world driven by them was ever predicted or much contemplated by Benjamin Graham. Ninety nine out of a 100 Benjamin Graham fans whom I’ve have ever met want no part of them. But our world is and will be driven by them and there’s money to be made here, lots of it. Great fun to be had whether you’re a new comer twice my own age, I turned 40 this May, or both. Indeed for learning about these technologies and trends and the winning stocks behind them, you couldn’t have found a better place. Strap on your safety goggles, buy a sizable chem set, diversify into a bunch of different stocks, and come learn with us. My fellow Fools we’ll occasionally blow stuff up and some of that will be bad, but a lot of it will be good. Fool on!” [MUSIC]

Well, a few things come to mind. First of all, I still remember that test tube and its milky cyan concoction. When I added something, it’ superheated brown and I literally had to drop the beaker into the sink and run. But I think the promise and excitement of a new chemistry set is often how people feel about coming to the stock market. At least that’s how I hope you feel. I hope you feel some promise and some excitement, some willingness to experiment, and some recognition that it won’t always go your way. I did mention we’re Foolishly looking backward at the start of a new year, but that promise and that sense of excitement about the year ahead in lots of ways in our lives, I hope you also feel that with your investing. A lot of people make a new year’s resolution to really get on top of their investing. Some of you are likely hearing my voice for the first time.

It’s fun then that you’re hearing my voice here from 15 years ago. In fact, that essay was published on May 16th of 2006. That was my 40th birthday, so I turned 40 as I reflected on being age 10 with my chemistry set, talking to people who were just getting started investing back in 2006. Two other quick thoughts come to mind. One is certainly that with the Rule Breaker investing approach, we’ve been building the plane as we’ve flown it from the beginning. Certainly the book Rule Breakers, Rule Makers, which I wrote with my brother Tom in the year 1998, the first half of it anyway, which was about Rule Breakers which I wrote, remains pretty much how I do still invest today. But we’ve been bolting on and as I say building the plane is we’ve flown, we’ve added a lot. I mentioned last year around this time there’s six principles of the Rule Breaker portfolio. That was a new piece. Maybe that was the tail or the radar of this plane just added in the year 2021.

So truly it’s recognition that frameworks can be built over time. It probably wasn’t perfect when I wrote it out in 1998 in our first book, it wasn’t perfectly thought through by this essay in May of 2006, but I’ve been consistent and truly building toward the same thing over many years and I think a lot of the fund has been able to see how these stocks have done, how this approach has performed for me and for so many others over the last 20 plus years. That sense of building the plane that Benjamin Graham couldn’t have ever flown because he wasn’t around when small-cap biotech became a thing, and I’m going be speaking to this in another say coming up, that sense of being highly contrarian, loving innovation, recognizing that’s where the world is going and that’s where value will be driven. In fact that’s the last thing I want to mention about this essay, the line, but our world is and will be driven by them, by these technologies.

That was true in 2006, that’s just as true here in 2022. Look around you, study the technologies that seem early on with big promise, get to know them. NFTs might be one of those, but it might not work out. We’ll see, but we’ll talk about that next week. The Rule Breaker mentality is to be open to all the possibilities that the world offers us as investors, not to shy away or shun them, and most of all I think to pay attention to technology, not to ignore it, to be highly intellectually curious about it, and willing to blow stuff up so that that stuff to close up can sometimes, in the best way, blow up your portfolio. There was essay number 1, introduction to June 2006 issue for Motley Fool Rule Breakers. It’s time to proceed forward in time, Rick Engdahl. [MUSIC]

We’re back in our time machine, but we’re not going that far forward because we’ve only traveled five months and we’re headed right back to the same service, Motley Fool Rule Breakers. This was the introduction to the November 2006 issue, which I will now read. Dear fellow Fools, there is no I in team, the old sir goes, to which the WAG in this case, my brother Tom Gardner may be hard to reply yeah, but there is an M and an E. While the concept of I and team are on my mind as I sit down to write this month’s introduction to Rule Breakers and it’s easy to see why. Looking over our scorecard, we now have three picks up 200 percent or more since the launch of our service. The best thing about that achievement is that three different Fools picked them. Our own Tim Beyers picked Akamai, now a four-bagger and the biggest gainer in Rule Breaker history thus far.

Next up, yours truly picked classic Rule Breaker archipelago, which got scooped up by the New York Stock Exchange Group as the New York Stock Exchange itself began to break the rules. Hello, Europe, and biotech expert Charly Travers rang the triple gong first of all with his selection of Vertex Pharmaceuticals. You know how good it makes me feel to write the last paragraph? Way back when we started this service, one concept on the drawing board was “All David Gardner all the time”. But from the get-go, I want to Rule Breakers to be about a team, not just the M and the E, and now to know that two of the three most successful picks have come from others.

Stepping up big reminds me of what I think makes The Motley Fool great in the first place and that’s our community. You’re in the Rule Breakers community and I am too, and so are Tim and Charlie and so is Rick Munarriz with his 100 percent gain in the knot of fourth team member with a double and a whole host of others besides like wonderful rider and research analysts, Carl Teal, our service editor, Rick Silverman, our service manager, Tanya Carlson, just to complete this inside baseball sentence and leave it at that, heck, even last summer’s intern, Glenn Brandeis was great to work with and today he’s in the top 25 in caps. We have a very talented and engaging online teams strolling our discussion boards too. Breakers Beth and Brian and Dan and Java and Orion and Tinker and who’s next?

We’re growing, we have so many wonderful readers from whom I’m learning so much from database Bob to KB Edwards to GeezerRob to Ocean Blue LA. Really, the list goes on far longer than that. I name those wonderful contributors off the top of my head. If I truly tried to list all the people who educate, amuse, and enrich me on a daily basis at Rule Breakers central, this paragraph would run on and on and as you can see I’m already near the end of my page, so please forgive this month, slightly narcissistic introduction. I think I may be a bit giddy since together we weathered a very bad stock market over the summer. Sure I am, especially as I look at the future of the companies already ringing up profits on our scorecard and the ones we’ll come upon next, including the two recommendations on the pages that follow for them and for you too as a member of Rule Breakers, as a member of our team. Fool on! [MUSIC]

A few reflections about that one now as we reenter the present day, the first one is, my brother Tom is the one at least in my life who came up with the great response to the line there is no I in team by saying while there is an M and an E. Now, maybe the Greeks realized that although I don’t think they were speaking English. Maybe we’ve known about this for decades, but at least for me in my context, I’m used to hearing tough guy coaches when we were schoolboys going through schooling. The tough guy coach would stand in front of the team and go, “There is no I in team.” Leave it to the WAG maybe the guy in the background sheepishly raises hand and saying so many whispered words, “But there is an M and an E.”

My brother, Tom, is that person in my life and I love that about him. It was two years into our service that I wrote that essay. It’s fun to think back. We were making two picks a month, so that’s 24 picks. Three of them have already gone up 200-plus percent. I’m happy to say we have a lot more stocks than that today in Rule Breakers and they’ve gone up a lot more than that. But it was fun to know that they were picked by three different Fools. In fact, all three of those Fools and many of the others mentioned at essay, are still at our company 15 years later. If you’re a Rule Breakers fan, you know who Tim Beyers is, you know who Rick Munarriz is. If you’re a Motley Fool Asset Management fan and follower, maybe you’ve heard them on our podcasts. Charly Travers continues to be a wonderful Fool. He was very focused on biotech back then he’s much broader today, but it’s just a delight for me to read that picked at random and remember how many of those friends remain friends and active Fools today. That really speaks to the power of our community. I do feel compelled to update the numbers, of course, calling out those three stocks back in November 2006. Akamai, which was the first one and at that time a four-bagger the best performer in Rule Breakers history early on, Akamai ended up going down from there. In fact, I repicked it in February 2008, not a great time to pick any stock really, but we ended up selling in 2011.

The first position which I referenced in this essay, which I said was up four times in value, that’s a 300 percent gain, it ended up closing out in 2011, six years later with just a 94 percent gain. Now, there were some brutal years in there, and doubling your money over that period of time wasn’t so bad, but that second pick was down 27 percent, and ultimately, we just exited Akamai. I’m sorry to note, it has tripled since 2011. Overall, it’s been a pretty good performer. Certainly, a company like Fastly, which has added a lot of Rule Breaker portfolios at different price points lower and higher. Fastly, also a Tim Beyers’s favorite within the same technology to speed up the Internet technology that had it’s allure for us back in 2005 when we first picked Akamai. That was Akamai. The other two stocks referenced, well, one of them was Archipelago, which was quickly eaten up by the NYSE Group, as I mentioned in the essay. Later, it rebranded itself to Intercontinental Exchange and that remains an active Rule Breaker pick today. First picked on January 19th, 2005. Here we are 17 years later. It’s about an 11-bagger. The market’s up about 471 percent, that stock is up 1,091 percent.

So it’s continued to be a steady Eddie. This is a company behind some of the biggest stock exchanges in the world. Archipelago was a technology player that got eaten up by the New York Stock Exchange Group just before it began merging with European stock markets. Today, this is a real significant player, of course, a Pepsi and Coke relationship with Nasdaq, where Nasdaq is also, of course, running the platforms for some of the most important stock exchanges in the world. Interesting to see what Archipelago became. Then really the best performer of them all was Charly Travers’s pick, Vertex. I was bragging back then and that essay was up 200 percent, now it’s up 2,023 percent. It is a 21-bagger and still an active pick for Motley Fool Rule Breakers. In fact, Vertex Pharmaceuticals and Intercontinental Exchange are two of the three oldest, longest-held Rule Breaker picks. A delight to see in that essay, we just kept holding them. Even though Akamai ended up being a disappointment that we sold too early, really, as a small portfolio of three, that was an outstanding performer over the succeeding 15 years. Fun to look back on those stocks. I’ll just mention two quick more things about that essay. One is, I really loved the sense of a spree to core that I felt for our members in early days.

We were a much smaller service and the discussion boards were a much bigger part of the overall service offering back then. You hear in that sense, appreciation of community and the team, there is no I in team, there is an M and an E, but you heard that in that essay. You also heard me mention that I liked the two stocks we were picking that particular issue. How could I not go back and see what they were? The first is a company I’ve completely forgotten about that flamed out after 14 months. It was a horrifically bad biotech stock pick. It was Panacos Pharmaceuticals, ticker symbol PANC. One of my worst picks ever, down 89 percent from the point at which that issue was published. Fourteen months later, it went down to $0.82 when we sold in 2007. I was just checking, by May 16th, 2011, my birthday again, this is now 10 years ago, it hit zero, finally, $0.00. Ticker symbol PANC, we did sell out at $0.82 before it cratered all together four years after that. But wow, what a dog that was. Happy to say though. The other stock pick that particular issue was Baidu.

Baidu was Rick Munarriz’s selection. Our cost basis in Baidu is $8.34. To see it today, around 150, makes me really happy to think about the performance, the 17 bagger that we’ve gotten from Baidu. As I am often want to say, if you take those two together, you see one of the worst stock picks we’ve ever made, and one of the better stock picks we’ve ever made. Even your worst, can’t even hold a candle in terms of how important it is to your overall net worth if you’re letting your winners run and not adding to your losers. The worst you can ever do, as I’ve often said on this podcast, is you could lose 100 percent. You should never do worse than that unless you are leveraged and I don’t think you should be doing that. The worst you can never do is lose just 100 percent. It’s not that bad because the best you could do, well, Baidu is up 1,688 percent, it’s a little two stock portfolio. That particular issue knocked it out of the park, even though one of those two stocks was one of the worst stock picks I ever picked. Well, before we hop back in our time machine, let me mention that this week, the last six years, I’ve done what I call David’s Biggest Losers, volumes 1 through 6, where I would spend this particular podcast to kick off the year, looking back at my worst stock picks of the previous years.

This is the first year that I haven’t done that for Rule Breaker Investing and anybody who is been listening to me for a month or a year knows why. Because I’m no longer actively picking stocks. I’m not picking stocks at Rule Breaker Investing or five-stock samplers here. Even though it was something I loved doing, and of course, I continue to reflect on these things and share with you new learnings and insights and conversations with all manner of wonderful people, you won’t be hearing David’s biggest losers for me again, and yet I’m happy to share with you my biggest losers all the time in investing and in life. You just heard about one of them right there, Panacos Pharmaceuticals. I didn’t even remember the name of the company when I looked at the ticker symbol in preparation for this podcast. But PANC, which is now a delisted ticker and a truly horrendously bad stock pick.

Again, I picked at similar over $10 a share, and 14 months later it had dropped to $0.82. That’s part of Rule Breakers history and certainly one of David’s biggest losers. We’re going to go nine years forward. You’re ready? Wow, here we are. It’s January not of 2022, although it is, it’s January of 2015, January 28th. In fact, this was for the February Rule Breakers issue. Nine years forward, we had started titling these essays. We’re no longer calling it introduction to blank blank. This one is entitled, is your portfolio risky enough? As I prepare to read this one, it’s just a reminder, I tried to write these to make just as much sense in 2015 as they would in 2006. I hope this makes just as much sense to you in 2022 as it did when I wrote this seven years ago. Let’s start off the year talking about a subject important to every investor, no matter how adventurous, risk.

David Gardner: We’ve created our own risk rating index at Rule Breakers to give members our read on how risky we perceive each of our stocks to be. It runs 0-25. The higher the number, the greater the chance of a substantial loss. Which is how we define risk here not volatility, but loss. Rule Breakers is particularly well-suited to this measure for two reasons. First, we own many risky stocks and that’s by design to paraphrase a movie franchise that made a lot of money for Motley Fool Stock Advisor members. With great risk comes great returnability. That’s in line with the very words I wrote in our first book, The Motley Fool Investment Guide, and I quote, “the greatest lease mentioned risk of all is not taking enough risk.” The best way I know to beat the market averages by substantial sums over time is to buy stocks about what’s your friends, and sometimes your stomach are saying, “Wow, that’s not exactly a sure thing.” Often followed by, “They could get crushed.”

Zillow could get crushed by the real estate industry. Keurig, Green Mountain could get crushed by Starbucks. Mercado Libre could get crushed by bad Latin American governance, and LeapFrog could get crushed by free apps on the iPhone. While you’ll note that of those four, one has gotten crushed, LeapFrog has lost two-thirds of its value since we picked it three-years ago, including another setback after a bad earnings report this holiday season, which we’re reviewing in this issue. I sprinkled that one in next to some of our winters to remind you that you always have to be ready to take the bad with the good. This leads to the second reason that risk ratings are app for Rule Breakers. We’ve had a lot of new members to the service in the past 12 months.

Welcome. For many of you, we may be guiding you into your first foray buying stocks. If you are just dipping your toe, consider using our risk ratings, not just a measure risk, but also to seek out relative safety. Our lowest risk stocks in Rule Breakers, all risk ratings of six or less. Our Google American Public Education, Intuitive Surgical, NetEase.com, Under Armour, IPG Photonics, Imax, LinkedIn, Ellie Mae, PriceSmart, Five Below, and Veeva Systems. Now, how many of these 12 stocks do you own? Only to our losers for us on an absolute basis, that’s a very high hit rate, and the losses they show are as nothing compared to the massive gains. If you’re new to investing and you want to start the new year right at rule-breakers, own as many of these companies as possible. Just head to our scorecard and sort by risk for a quick guide to our whole slate of stocks. That was the end of the Rule Breakers intro essay February 2015. We’re looking way back, but wow, that’s looking way back and I hear a DeLorean somewhere there. All right. Well, my first reflection now back in 2022 is to remind you that the risk rating system we developed at Rule Breakers continues to this day to be something that I cherish and something that we use. It’s not universally used at The Motley Fool, I don’t think it’s become a fool’s tool.

But certainly for me as an investor, I continue to love the 0-25 point system. In fact, on May 19th of last year, I did a full weekly podcast with my friends Alicia Alfieri and Maria Gallagher. We went through two companies and took them both all the way through the 25 point system in order to compare and contrast the companies for the record were Toro and Chegg, two very different companies headed in different directions as it turned out. So for anybody who wants to refresher or as never heard about our 25 points of risks, I can talk you through that whole thing in one podcast, I highly recommend that. A second thing that jumps out to me about that essay is, with great risk comes great return ability. Of course, I was punning off of the spider-man line with great power comes great responsibility. But I do think with great risk comes great returnability.

But I also think there is a misconception sometimes what we mean by great risk. I think a lot of people think the more risk you take, the better you’ll do, that’s definitely not always the case. I think you need to take risk in great companies, those are great risks. What I was championing in the sad just shared with you seven years later was looking for the lowest risk Rule Breakers, the ones that had risk ratings of six or lower. I listed 12 for you and I thought it’d be fun to go back and see how they’ve done. So let me briefly account for all 12 of those stocks in order real fast. Google was at 500, Alphabet was at 500 that day. It’s 3,000 today up six times. American Public Education has dropped from 35 to 23 a loser. Intuitive Surgical has gone from 50 to 350, that’s a seven times gain, the best performer of all 12 of those stocks. But NetEase.com not far behind it, 22 to 105, a five extra. By the way, I should mention that the stock market some pretty well, it’s up a 140 percent since seven years ago. But as you can see, any one of these performance Intuitive Surgical’s a seven bagger on its own would carry this entire group of 12.

Let’s keep going through them real fast Under Armour, a real disappointment, 37 back then seven years later, just 21 today. But IPG Photonics from 75 to 175, that’s a double. Imax, should I blame COVID? Should I blind people not go into the theaters anymore? Or was Imax already losing it before that? I think it’s the latter. But anyway, Imax was at 33 back then when I had judged it, a pretty safe Rule Breaker today it’s 19. Just about cut in half. Linkedin and Ellie Mae, both respectively would be bought out within 1-3 years of the podcast, neither is still a public company. But LinkedIn from the day I wrote that essay would go onto drop from 220 to 190 before it got bought out by Microsoft overall for Rule Breakers, by the way, it was a great stock, but that short period wasn’t great. Ellie Mae went from 44 to 99, that’s another double. PriceSmart, Five Below and Veeva Systems over the last three. PriceSmart over the last seven years from 80 to 88, up but well behind the market. Five Below a superstar performer from 30 to 205, that’s a six-bagger. Veeva from 35 to 253, that’s just about a seven bagger. When you take those 12 stocks, I haven’t done all of the math.

Anybody who wants to replay the last three minutes, this podcast to write-down the numbers themselves, you can calculate it. But we destroyed the market with the lowest risk Rule Breakers on our scorecard at the time. Again, using specifically the Rule Breakers risk ratings, which continue to be available in different ways to members today. Of course, I love the system and then sometimes been pointed out by members of our community. Sometimes it’s not just scoring risk, it might also be a pretty good look into what resilient companies will be winners over the course of time. So yes, I originally devised this years ago to measure risk in a world where I thought risk isn’t being measured well for stocks than it should be. But in some ways it’s also measure of quality, and sub-consistently, true rule-breakers stocks with low rule-breaker risk ratings, ain’t bad place to start. At the start of a new year, if you’re starting a new portfolio or looking to add a bunch of, I hope, 7-plus year winners to your portfolio as well. The one other final thing I want to say about this essay, I’ll just reread the line again. The best way I know to beat the market averages by substantial sums overtime is to buy stocks, about what’s your friends and sometimes your stomach are saying, “Well, that’s not exactly a sure thing.”

Often followed by, “They could get crushed.” I specifically remember a conversation I had with a family member whom I won’t name. It’s definitely not my brother Tom, it’s nobody in my direct family, this is more like a cousin who is explaining to me after I’d picked Tesla in 2011, that it was going to get crushed, it wasn’t making money, it’ll go bankrupt. I think he was saying that in 2014. Tesla has done pretty well over the 10-year plus since we’ve held it for Motley Fool Rule Breakers. So while it wasn’t listed in that group of 12, I want you to know I standby everything I’ve said about Rule Breakers and risks and is your portfolio risky enough? But I’m always talking about smart risk, risk and really resilient strong franchises, not in silly penny stocks or crazy stuff sometimes you see promoted on the internet. Risk is one of those big four letter words, but it means many different things to many different people. I wanted to make sure through this essay and through sharing that with you this week that you understood how I think about risk backed by a 25 point rating system.

All right. Well, let’s move on to number 4. Let’s jump back in our time machine, [NOISE] that is most excellent. But we really didn’t need to stay in it too long because here we are. It’s December 2015. This essay that open Motley Fool Stock Advisor that month was first published on November 20th of that year. Again, around six years ago, it was entitled “Buy high.” Before I share this last essay, let me mention that of the four, this is the only one written for Stock Advisor. The first three you’ve already heard were for Rule Breakers members, generally people who’d opted into a service that’s taking the pure rule-breaker approach. Motley Fool Stock Advisor, where I did use my Rule Breaker approach pretty much from its opening in March of 2002, but I was always conscious as I pick stocks for it, that it was for a more general audience, often for a more beginner audience. Me talking about Rule Breakers, well I always did so in the context of making sure I knew I was speaking to people for whom it might not be as appropriate, so I will try to explain myself to Stock Advisor members, why I do what I do. If you’re a regular listener to this podcast, the phrase buy high is something you will understand instantly. But if you put yourself in 2015 and the shoes of somebody who’s brand-new to the stock market and had just signed up for Motley Fool Stock Advisor, and you read an essay entitled “Buy high,” might have been a bit of an eye opener. Let’s start.

David Gardner: For those new to my investing approach, which I practice everywhere but discuss most often in Motley Fool Rule Breakers, I look for six attributes in my favorite stocks, and the sixth is my special source trade. I’m looking for my stocks to be called overvalued by financial commentators and the press. We specifically want the financial media, prominent spokespeople to say our stock is overvalued, that’s a good thing, that’s a buy signal. Three thoughts. First, the other five traits which you can find to the right and they are in a pullout box, but anybody who is a Rule Breaker listener probably already knows my six traits of Rule Breaker Stocks, and if you don’t, dear new listener, please just go ahead and google it, you’ll find it. First, the other five traits I wrote, which you can find the right, all speak to an enterprise’s overall excellence. For instance, is at a top dog and first-mover in an important emerging industry with a sustainable advantage, visionary leadership, etc? If you find these things in your research, well, that’s already a pretty remarkable company.

Somebody telling you on TV that its stock is overvalued, right now shouldn’t carry much authority in light of the company’s excellence. Second, when people say a stock is overvalued, they’re usually thinking about some very simple ratios. For example, price to earnings ratio, that are easy to calculate and which the market already knows. But what is being missed by those very simple ratios? Well, most of the important things in business. For example, the power of the company’s brand or how effectively it innovates or the CEO. Some CEOs add incredible value to enterprises and some subtract value. These two are not captured in your price to earnings ratio. Do you really want to fly blind with that? Third, if everybody has the idea that a stock is overvalued, that it makes even more sense to buy it because everybody’s money is presumably sitting on the sidelines because it’s “overvalued”. A big portion of the market is not willing to pay up to buy that stock. As the years unfold, these great companies will then convert their skeptics into shareholders and as that money comes into stocks over time, well, that’s what drives up share prices. That’s why this actually works.

These stocks “climb a wall of worry”, some call it. Remember, first-rate companies are going to have first-rate valuations. That’s why I don’t look for cheap stuff or “buy low”. That’s why we have Amazon, Apple, Netflix, and Starbucks racking up big long-term gains for Stock Advisor members. Each of these stocks was called overvalued when we recommended it, and very often, repeatedly so in the year since on their way to big gains. That’s how the essay closed out, and that’s really how this podcast this week closes out with just a few final thoughts on that essay. The first is, I wrote down to myself and my preparation notes, invisible, greater than sign visible. Let me speak briefly about that. Things that are visible, everybody can see, including computer algorithms that trade stocks minute to minute on the Internet. Ratios are all visible. Financial statements are all visible. Many things today, in an information age are visible. Therefore, for you and for me, I think the edge comes not from articulating to the world what is already visible or acting on the visible things, but instead, getting our edge in the invisible. That’s always been the right-brained approach that I think is at the heart of Rule Breaker Investing. As I called out in that essay, we’re looking for great CEOs.

There’s no number on the CEO and financial statements. It’s invisible. In fact, it’s very subjective. Some people think Elon Musk is a genius, some people think he’s crazy in a bad way. I’m much closer to the former, but somewhere in between those two. But there’s no question, he has incredible valued enterprises. There is no number that you can put on Elon. Though ironically, such a visible person, his value is invisible. As our company brands or company cultures, how effectively companies innovate, as I mentioned, those things are all invisible. Therefore, I think you and I, by looking at those things, focusing on them and discerning them and being invested in them over the only term that counts the long term, those invisible things are what gets us so much of the Alpha, which is what we call beating the stock market averages. Every percentage point by which you beat the market averages, you’ve added one point of Alpha.

Speaking of Alpha, let’s talk about the four companies that I closed that essay with all of which were my picks in Motley Fool Stock Advisor, all of which remained today, active picks in Motley Fool Stock Advisor. I will give you here their prices as I wrote about them on that day, again, published November 20th, 2015. But I want you to know as I give you the prices from where they were that day, that all of them, we had substantially lower cost basis. We bought them way below where I was talking about them back in November of 2015. In fact, I think some skeptical readers back that may have thought, have I missed Amazon, Apple, Netflix, and Starbucks? They’ve already done so well for Motley Fool Stock Advisor. Well, on that day, Amazon was at 700, today it’s at 3300. On that day, Apple was at 30, today it’s 180, having recently been crowned this week, the first three trillion dollar market cap company. On that day, Netflix was at a 110 today, at 600. On that day, Starbucks was at 60 million, today it’s only about a double to 114. But think about the performance of those four companies.

You and I don’t need to invent a silly acronym to capture the excellence of those companies based on the first letter of their names. I think anybody who knows about things stocks and my thoughts about those know, that I have my tongue in my cheek as I say that, but think about those first-rate companies, all of which looked so overvalued when we first recommended them. They probably looked overvalued to many people seven years ago and indeed, they are the great winners of our time. The title of that essay, Buy High, is a challenge to you and to me and a reminder that most of the great things, most of the first-rate things in life and the stock market too, cost more. You’re paying up, you’re paying premium pricing for a premium product but if you really have found a premium company, that company will go on to generate multiples upon multiples of your initial investment if you bought, hold it over time. I know a lot of your smiling right now as you hear me close this week’s podcast, because you have owned Apple for a long time.

You have owned Amazon, Netflix, Starbucks, I hope not Panacos Pharmaceuticals in fact, you couldn’t have owned it very long because it got delisted shortly after I picked it. You have owned Intuitive Surgical and Google. Sure, IMAX might have under-performed for you, but you know what, you’ve got Five Below and Veeva Systems to you recognize the benefits of buying high. Well, thank you very much for joining me this week. It was a lot of fun, even though we didn’t get to do David’s Biggest Losers this year, we still shared some of my bigger losers, but I hope you can still hear the ebullience in my tone because you’ve heard the numbers, you’ve heard the facts around the performance of these companies and their performance for you, our members in our services over a long periods of time. Whether I’m right and the stock market goes up this year or not, you know that the key is that you remain invested in great companies buying high if you must, asking at the right moment, is my portfolio risky in a good way enough, applying a lot of our Rule Breaker thinking to your money, your professional career, and your life.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns Alphabet (A shares), Amazon, Apple, Baidu, IPG Photonics, Intuitive Surgical, MercadoLibre, NetEase, Netflix, Starbucks, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Baidu, Fastly, Intuitive Surgical, MercadoLibre, Netflix, Starbucks, Under Armour (A Shares), Under Armour (C Shares), Veeva Systems, Vertex Pharmaceuticals, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Chegg, Five Below, IPG Photonics, NetEase, and The Toro Company and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $115 calls on Five Below, long January 2022 $193.33 calls on Intuitive Surgical, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short January 2022 $115 calls on Starbucks, short January 2022 $120 calls on Five Below, short January 2022 $200 calls on Intuitive Surgical, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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