Lessons Learned From 20 Years of Investing

On March 8, 2002, The Motley Fool launched its first subscription service, Stock Advisor. To celebrate, we’ve gathered three members from our investing team (Andy Cross, Asit Sharma, and Emily Flippen) to share some of the most important lessons learned over the past two decades, including:

The idea that sometimes the best place for new money is a stock you already own.
Importance of diversification.
Putting money into the stock market on a regular basis.
The challenge (and payoff) of letting your winners run.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on March 8, 2022.

Chris Hill: After the worst day for the stock market in a year and a half, we’re taking a step back so we can share a few lessons we’ve learned over the past 20 years and possibly air a bit of dirty laundry. Motley Fool Money starts now. I’m Chris Hill. Thanks for listening. Today’s not going to be the usual Tuesday episode. Allison Southwick and Robert Brokamp have the week off because today, March 8, is the 20th anniversary of Stock Advisor. Our flagship investing service at the Motley Fool was launched on this day in 2002. So we wanted to look back at some of the important things we’ve learned from 20 years of investing successes, as well as mistakes. Yes, there have been investing mistakes. I know subscription services are all the rave now for movies, TV, digital news, and more. But as someone who was working at The Motley Fool back in 2002, please believe me when I tell you the launch of Stock Advisor was a watershed moment for the company. The idea that we would produce monthly stock research and recommendations and sell that research for an annual subscription of $99 was, at the time, pretty radical and hotly debated within company walls. Someone else who is there from the start is Andy Cross, now the Chief Investment Officer at The Motley Fool.

He’s been involved in helping to expand the service from its origins to include more features to respond to our growing member base. The Stock Advisor starts as a monthly newsletter. Members get two recommendations: one from Tom Gardner, one from David Gardner. Over the years, that scorecard starts to pile up with all of those recommendations, and one of the big innovations in the service is, I want to say it was 10 years in, we added the feature called Best Buys Now, which is a way of helping members make sense of all of these recommendations. To me, Best Buys Now is a great example of the idea that we talked about, and it’s not the sexiest idea in the world, but it can be lucrative for investors. The idea that sometimes the best place for new money is the stock you already own.

Andy Cross: Chris, Peter Lynch said it himself that sometimes the best stock to buy is the one that’s already sitting in your portfolio, and as Stock Advisor started to grow with recommendations, even before Best Buys Now, we started adding in some rerecommendations and some rankings to try to give our members, who were reading the content, different ways to invest their money and other ideas besides what was just the current new recommendation. Then as you mentioned, we decided, I think it was [inaudible 00:03:07] David Gardner who realized that a lot of questions we get is, “Of your existing stocks, which are the ones that are your favorite to buy right now?”

Just that simple question kicked off this initiative to try to figure out the best way to provide that answer, and along with the rankings that we were doing at the time, we added the Best Buys Now, which, as you said, is from the two approaches of investing, Tom side, the Everlasting side, and the Rule Breaker side started off with David’s, is we started providing a monthly Best Buys Now, which is looking through the current recommendations and identifying the ones that the team and the advisors think are good places that you can put new money, if you’re investing besides just the existing recommendation that’s carried all the way through. As you said, it was an evolution of the service, but a very important one, and it is one that a lot of our members find very valuable as they read through Stock Advisor.

Chris Hill: It also ties into something we talk about frequently on this show, which is the importance of having a watch list, which can feel like a homework in some ways. But it really is important to have that short list of stocks for when you have an opportunity to deploy more money.

Andy Cross: Sometimes those stocks are the ones that you already own. I combined my watch list, as I think about the ones that are already owned plus the ones that I’m researching for the services or other services I have recommended that I have interest in. So that can be a combination, and it is good to have that, especially just all the market volatility we’re seeing right now, Chris, stocks are in a position that they’re just lower than what they were a few months ago, pretty much across the board and that gives you an opportunity to buy some businesses at cheaper prices. Understanding which ones you may want to go with at a certain time that you’ve learned about is a good idea, and members can use Best Buys Now, along with the recommendations, to help build those lists out.

Chris Hill: Let’s face it, some of the stocks on the Best Buys Now list are there for tactical reasons. By that, I mean, because we take such a long term view. We think in terms of 5, 10, 20-year periods. But we are individual investors in a market that is swayed in the short-term by hedge funds, mutual funds, or people who are trading hundreds of thousands of shares of stock, sometimes a stock ends up on the Best Buy Now list because, in the short-term, over the next 30, 60, 90 days, maybe there’s something bearish about the business. In short-term period, you’ll say, “I don’t want this on my book for the next 60 days. I’m going to sell it,” and when you take a 10 and 20-year time horizon like we do, it’s a buying opportunity.

Andy Cross: It’s often difficult to understand that concept, Chris, especially for many new investors who they expect their stocks that they buy to, especially if you come in the past two years or so, which has been an extra-bullish time for the markets. But that is a fact. Stocks go through those cycles, like any other asset class for the most part. There are times when, when even the best businesses and the best stocks for a variety of reasons, have sold off 20, 30, 40 percent in a relatively short period of time. None of the great winners in Stock Advisor’s history have been immune to that at various points. For whatever reason, it could be just general market draw downs, like we’re seeing in this current environment with the horrible situation over in Ukraine, plus inflation, or in interest rates, or it could be something that happened maybe with the business, and it got [inaudible 00:06:54] yourself, and the business going forward may not be quite as good for whatever reason it falls down.

Yes, you’re right, Chris, so much of the trading activity in the markets today tends to be relatively short-term, driven by algorithms, driven by hedge funds, driven for lots of emotional reasons, leverage in the market that forces those funds to do some selling, and that often can be a great time. You’ll see that pop up in the Best Buys Now. Now I will say, when we put together the Best Buys Now list, we’re still looking at that five-year horizon. We’re still trying to find businesses that can be exceptional performers over that time period. It’s just sometimes the prices are just cheaper than where it was when we recommended it, even fresh to the scorecard three or four months ago. Now it’s just a more attractive opportunity because the price is cheaper, but the fundamental business isn’t so much different, if at all, from when the recommendation came out.

Chris Hill: You mentioned some of the great winners in the history of the Stock Advisor recommendations have had times when they’ve dropped 40 percent, 50 percent. Let’s face it, there are also some recommendations in the history of Stock Advisor that fell and never came back. There are recommendations that the thesis didn’t workout, the stock dropped 90 percent, and eventually got sold through the service. When you think about the Stock Advisor universe, what is a mistake from that universe that you’ve learned some investing lesson from?

Andy Cross: Why, just two quick points, Chris, before getting to just some of the learnings. I’ve learned a ton, continuing to learn a ton, and all investors should continue to learn a ton from your winners and losers. I think you can learn more from your losers than you can from your winners. But the fact of the matter is, with investing at the individual stock level, you will have those businesses. If you’ve done this long enough, and you invest in a long period of time, with the time horizon like we do, and you diversify your holdings, you will find those businesses that fall pretty dramatically and never come back. Studies show, looking across long periods of time, that maybe somewhere 40 percent of the businesses fall more than 70 percent or more from their highs, that dramatic loss, and they never recover. Furthermore, it’s the big gainers that drive the bulk of your portfolio gains over time. That’s the natural mathematics of history in the markets. We certainly have seen that in the Stock Advisor, and we’ve had such great long-term performers, but certainly some, as you mentioned, Chris, that have fallen pretty dramatically, that just never came back. From a learning perspective, I look at retail establishments like The Container Store or Stitch Fix, both recommendations at various points in Stock Advisor’s history, both were founder-led, both were trying to change a retail environment, do it differently, Stitch Fix through algorithms to refer clothing and Containers Store for home goods and storage facilities, very innovative.

The learning is that the founder-led nature of businesses, the nobility of what a business is trying to complete or accomplished as a mission, its leadership team, its founder team, those are very admirable traits for a business. But if the business is facing stiff competitive pressures or headwinds to be able to do what they want to do, especially if you’re trying to change the market a little bit, it can be very tough. Now, Chris, certainly looking at a company like Amazon or Netflix, two great winners on our scorecard for so many years, those are the opposite of that, basically trying to change environment. But you have to be careful. Learning for me is just understanding that some management teams and visionary CEOs and leaders of the businesses, sometimes, they are just facing very competitive natures that, long-term, make the unit economics of the business very hard to be able to continue to expand and grow in a way it’s going to show up for shareholder return. I’m just very careful now when I’m listening to management teams and founder stories, trying to really determine which ones are going to have the unit economics and the businesses over the next five years that are going to be able to sustain shareholder gains.

Chris Hill: Hey, Andy Cross. Thanks for being here.

Andy Cross: Thanks, Chris.

Chris Hill: If you would, please help me with a small thought exercise. Let’s say you bought just one stock that was recommended in Stock Advisor, and it was the only stock you bought. How do you think you’d feel? That depends. If you bought Netflix when it was first recommended in late 2003 and held those shares, you’ve got a stock that’s up more than 100 times in value. There’s a chance you’re giving the Motley Fool more credit than is deserved, since, among other things, we didn’t do as good a job as we should have in talking about how important it is to build out a diversified portfolio. Now, if the one stock you bought was, say, Charlotte’s Web when it was recommended in the summer of 2019, you’ve got a stock that’s lost 95 percent of its value, and you’re not happy with the Motley Fool, and I wouldn’t blame you because, among other things, we didn’t do as good a job as we should have to make sure you knew how crucial diversification is to long-term success for stock investors like you and me. It’s something Senior Analyst Asit Sharma and his colleagues have increasingly focused on. Asit, there’s a lot of attention paid to single stock recommendations. We always like to highlight our winners. When I say we, I mean, we as investors. It’s always great to look at your portfolio and say, “I bought this one stock, and this is the biggest winner in my portfolio.” But I think it’s fair to say that one of the things we’ve learned over the years with Stock Advisor is how important it is to not just have that one stock in your portfolio, that diversification, and the point we keep making about getting to a broader portfolio, is so crucial for long-term success.

Asit Sharma: Absolutely, Chris. If public investments were entirely within your control, in some cases, it might make sense to put all your money in one stock. In other words, if you could pick up the phone and call the CEO and say, “I don’t think you, guys, are doing a good job. You should move into this market here,” and then hang up the phone, and wait a year, the results then validate your concerns, it would be so easy. But in reality, each investment we make is outside of our control once we commit that money. Therefore, we get exposed when we have fewer positions. It could work out really well, if you’ve got a highly concentrated portfolio, but it could also turn out very badly. If you had 100 percent of your capital and divided that among four stocks, that’s a 25 percent position in each stock. You can see how that math can work against an investor if those four choices happened to be sub-optimal. There are so many aspects of diversification we could talk about, that is, moving between different sectors, having a focus that split between, say, value stocks and growth stocks, etc.

All those are great ways to think about diversification. But even before we get to those aspects of diversification, Chris, I think it’s just essential that we keep following this math because successful investing in some ways is about position sizing. For example, if I take that 100 percent that I’m going to invest and divide it between 25 stocks, which is what we’re always messaging, we call this the sledgehammer message, and I need to sledge hammer message sometimes as well, I think I’ve learned it, those positions then equal four percent each, so our exposure decreases. Now, if an investor takes 100 percent of the capital here she wants to invest and keeps 20 percent in cash, allocating 80 percent to 25 positions, each position then goes to 3.2 percent of that total portfolio. One more example, Chris. Same investor, 80 percent invested in stocks, 20 percent cash, spread among 40 positions. Each position becomes two percent of that portfolio. Now, we always say those winners are going to make up for the smaller positions that don’t work out. Huge winners, over time, drive the performance in a portfolio. But I believe as investors, we’ve got to pay attention to this basic math that decreases our risk and increases our opportunity to have winning investments over the long-term.

Chris Hill: I’m glad you mentioned the cash position because that, to me, when I think back over the last 20 years with this service, I think is one of the important lessons. This is a service that every month, like clockwork, is recommending stocks, and whether or not you’re investing in those shares, the discipline to me is the important part of that clockwork, just consistently putting money in the market. We do it with retirement plans, with 401(k) plans, and maybe that’s easier to do because on our first week at a new job, we sign up, we check the box, and we’re not thinking about it. We’ve made the choice that it’s going to happen like clockwork. It’s a little bit harder when we’re looking at individual stocks, but it really is important to have that discipline.

Asit Sharma: It is, Chris, and that’s part of the reason why we roll-out our stock picks twice a month. Theoretically, we could spend half a year or full-year researching our best ideas and come out with a list market in a really big way. The Stock Advisor list is coming out January 1st. You’re going to get 24 awesome stock picks. So our analysts have been working throughout the year to identify the greatest ideas. That would be fun, maybe now that I think about it, but it wouldn’t serve investors because this game is about continual learning. It’s about that motivation to be persistent, to be disciplined, to keep, as you mentioned, allocating your capital at regular intervals; that’s part of the theory of dollar-cost averaging. But it’s also following innovation in the economy. As new ideas are created, as new businesses emerge, you have to keep finding those ideas and allocating money toward them. It’s a never-ending game in some ways, but it’s a very fruitful and rewarding game if you can adhere to this one concept. But over time, I think we’ve tried to amplify for members of Stock Advisor.

Chris Hill: When you look at the universe of recommendations over the years in Stock Advisor, there are winners, there are losers. What is a mistake from that universe that you’ve learned a lesson from?

Asit Sharma: Chris, I think the one that I want to talk about is Lemonade, symbol L-M-N-D. This is a company that we recommended in December of 2020. A relatively recent Stock Advisor pick shows that we’re continually learning as we go along as well. This is a stock that got a lot of confidence in for the long term. It is an insurtech, so it combines technology with the underwriting of insurance. They have a really fun model. It is informed by artificial intelligence, super high customer service scores, and I think that, over time, they are going to emerge as a pretty successful insurance business. Now, we recommended this stock not long after it went public, and those members who bought in at that time have seen their investment in Lemonade deteriorate.

So I go back to one of the principles we try to use in investing among services at the Motley Fool, which is, you don’t have to buy a stock right after it goes public. You can take some time to study that company. Now, this isn’t a hard and fast rule. We have plenty of success with stories where we’ve jumped in soon after an IPO and recommended a great company. But this is one where maybe we could have waited a few months before recommending, and members wouldn’t be as down as they are now. Simply what we probably could have studied was their experience with underwriting their business. Lemonade is figuring out as it goes along the best way to optimize their insurance underwriting and their gross loss ratio, so their ratio which tracks losses that they incur for the business they underwrite, that’s jumping all over the place. If I had to go back, I would say, “I really like this company, let’s wait two or three quarters and see how they go.” We can wait for these numbers to smooth out and then go in with the recommendation. Patience pays in many cases, but there’s no hard and fast rule. That’s both the mystery and the fun of investing. Once in a while, you’ll come across a company that you may invest in weeks after it goes public and do perfectly well with that.

Chris Hill: Asit Sharma, great talking to you. Thanks for being here.

Asit Sharma: Thank you, Chris.

Chris Hill: If you’ve ever listened to David Gardner’s podcast, Rule Breaker Investing, you may be familiar with some investing advice he has shared for decades, ”Let your winners run,” which can be easier in theory than in practice. But Senior Analyst Emily Flippen has done the math. There are a lot of reasons to let your winners run, Emily, but one of them is the fact that, look, we’re all going to have losers in our [laughs] portfolio, and if you let your winners run, it makes those losers so much easier to take.

Emily Flippen: If you don’t have losers in your portfolio, you’re probably not appropriately diversified. You haven’t invested in enough companies because, if you’re an investor, especially an investor in individual businesses, there are going to be times when you look at your portfolio and you see businesses down, say double-digits versus the market, falling 50, 60, 70 percent, even having businesses that never recover from those lows. It can be really challenging, I think, for investors to look at those losses and ask themselves, man, what needs to happen from here for these losers to become winners in my portfolio? The math really doesn’t work in our favor when you look it just mathematically. A 50 percent drop requires a nearly 100 percent gain just to get back to where it was before the drop and that can feel like a really massive thing that businesses need to overcome. But virtually, every massive winner in the Stock Advisor universe has, at one point or another, sustained a 50 percent plus drop. It happens, businesses recover, you just need to take a long enough time horizon.

Chris Hill: To let your winners run, there are also the events happening outside, whether it’s happening with an individual business. I look at a company like Cintas which is one of the largest corporate uniform rental and sales companies in America. That’s a stock that was recommended in Stock Advisor in December of 2008. To this point, it’s up 2,000 percent. But if you think about all of the major things that happened in the financial world, you had to have held that through the Great Recession, the fiscal cliff, the flash crash, God knows how many market drops of 10 percent or more, to say nothing of a global pandemic.

Emily Flippen: It’s really easy to reflect on what you would’ve done a decade or two decades ago and say, of course, Cintas, or Netflix, or Amazon, of course, these companies were going to be massive winners, of course, I would have held when they pulled back, but you could even take a more recent example. The Trade Desk, for instance, a Stock Advisor recommendation, I think it fell something like 45 percent versus the market from December 2020 to May 2021. In a matter of just a few months, massive decrease in value, and there were a number of investors looking at that business thinking it was never going to recover, and it feels very real when you’re sitting down in real-time in 2021, 2022, looking at these losses. But if you know The Trade Desk since, and they’ve nearly caught up with the market from where those lows were in May 2021, it’s a business that is executing really well. So it’s easy to have hindsight and look about what you would have done with these great winners if you had held them prior. But don’t let that hindsight prevent you from looking at your own portfolio today and say the same thing. There are so many great businesses that are very likely down 40 or 50 percent in somebody’s portfolio today. There’s nothing preventing them from becoming Cintas. I won’t say Netflix or Amazon because there may be some things there, but there’s nothing that prevents them from turning into market beaters again, other than locking in those losses and selling today.

Chris Hill: We have these conversations. You have these conversations with other people on the investing team. We talk about them on the podcast in our video live team, that sort of thing. For individual investors, a lot of them are essentially on their own. Maybe they are working with a financial advisor but maybe it’s someone in their family or their friends are interested, but a lot of people are doing it on their own and that means they are subject to other opinions coming their way, whether it’s on a podcast like this, or watching financial television, or something like that. You and I were talking earlier about a conversation that took place years ago around Tesla and doing the math on, do we keep this stock recommended or do we sell it?

Emily Flippen: This was maybe one of the biggest investing mistakes in terms of losses that I made here at The Motley Fool and that had to do with the Odyssey 1 portfolio where we held a very small position in Tesla, and we’re having to make a decision. I think the timeframe was late 2018, early 2019, about what to do with these shares. I was very afraid of the losses that Tesla could potentially sustain. There was a lot of uncertainty both around Elon Musk, but as well as the business meeting their delivery targets, all of this negativity. I was convinced that we could see a huge pullback in this business. We should sell now, try to get out, prevent ourselves from sustaining massive losses, and there were periods after the fact that Tesla did pull back dramatically, but that did, by no means, make that decision the right decision by selling out of that small Tesla position. I caused that portfolio a ton in gains. I think the stock has gone up nearly 2,000 percent since that decision. While there were numerous periods, as investors know, where Tesla pulled back double-digits, that has not prevented those gains from being anything less than dramatic. It really does just go to show how much more important it is to focus on winners in a portfolio and how much they can gain. That upside is unlimited in comparison to focusing on your losers where the downside is kept.

Chris Hill: There are bunch of long-term winners in the Stock Advisor universe. There are also a bunch of clunkers. There are mistakes that were made. What is a mistake from the world of Stock Advisor that you’ve learned from and applied in your own investing in life?

Emily Flippen: One of the stats that I think is so interesting from Stock Advisor, and you can call it a mistake, I like to call it a learning opportunity, is Stock Advisor’s history of selling in the portfolio. Obviously, with two decades plus of time underneath the Stock Advisor’s hands here, there’s been lots of opportunities and many times where stocks were sold out of the portfolio. But our math always says that Stock Advisor would have done better if our team had never sold a single position, and that’s sounds to me that I shouldn’t be selling in my own portfolio. We tend to be very bad as individual investors at timing when to get in and out of businesses. That’s why it’s so important to take a long-term buy and hold, not sell approach. I see this in my own portfolio. I’ve mentioned this before, but the last stock I sold was actually Best Buy. Again, think back in 2018, I had a lot of people telling me, this is maybe the peak for Best Buy, and clearly not the case, missed out on double-digit gains there over the markets, if I just held on to these Best Buy shares. So I’d say, just looking at the selling history and reminding myself again not to focus on the losers. Don’t sell my losers. Focus on my winners and buy more of those when I have the opportunity too.

Chris Hill: You’re not the only one who made that mistake on Best Buy.

Emily Flippen: [laughs] I hope not. Although I hope I do. I hope I am the only one because I hope we can all learn from my own mistake and prevent those mistakes moving forward.

Chris Hill: Thanks for being here.

Emily Flippen: Thanks for having me.

Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So don’t buy yourself stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Andy Cross owns Lemonade, Inc., Netflix, Tesla, and The Trade Desk. Asit Sharma has no position in any of the stocks mentioned. Chris Hill owns Amazon and The Trade Desk. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon, Lemonade, Inc., Netflix, Tesla, and The Trade Desk. The Motley Fool recommends Cintas. The Motley Fool has a disclosure policy.

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