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It’s been about a year since David stepped away from the service, so today we’re checking back in on our namesake. Tim Beyers is here to talk about what has changed and what has stayed the same.
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This video was recorded on July 13, 2022.
David Gardner: Rule Breaker Investing. That’s this podcast appearing with at least one new episode every week since July of 2015, and counting, since it’s July again, that means we are now in our 8th year of Rule Breaker Investing, but Rule Breaker Investing goes back a long way before that. The investment frameworks and approach were developed in the 1990s, and then in 2004, Motley Fool Rule Breakers, the Fool’s investment advisory service, exhibiting this approach, was born October 2004. Last year I handed over the reins of that service to the Rule Breakers team, most of which has been together from the start, 17 years later and one of my former analysts now functions as Senior Analyst and Lead Adviser, Tim Beyers. Tim dropped me a note a few weeks back. “Can we talk about Rule Breakers on Rule Breakers? It’s been awhile.” I said, of course. So fellow Rule Breakers, pull up a chair, and stay awhile as I talk about Rule Breakers with a Rule Breaker, only on this week’s Rule Breaker Investing.
Welcome back to Rule Breaker Investing in the late 1990s, operating first exclusively from AOL. Remember, AOL, the 1990s where the decade that America went online. First exclusively from AOL, then increasingly from the web and fool.com. I was investing out front of anyone who would sign in picking stocks, comparing our results to the market, sharing the wins, and the losses, and beating up on the market averages. There were ups and downs, good times, and bad. But all the way through starting in my 20s, I was building a new investment approach. My investment approach founded on breaking the rules of what to me was the conventionally wise investment approach that the majority were following, call them Goliath. Well, my name’s David, and I decided that I played the game by Goliaths’ rules, by his conventional wisdom, I wouldn’t win. We had to break the rules, and break the we did, and in 1998, our third Simon and Schuster Bestseller, The Motley Fool’s Rule Breakers, Rule Makers as a book was born.
I put forward my six traits of a Rule Breaker stock in that book. They’re the exact same ones we still use today, 24 years later. For some of you regular listeners, you know these things. You may have been with us back in our AOL days, but for many others they may not know all of these things. More of the point this week though, in October of 2004, six years after the Rule Breakers book came out, we launched this stock-picking advisory service, Motley Fool Rule Breakers. I headed it up for 17 years, and then as I announced on this podcast a year ago, I mentioned I was handing over the reins, refocusing so much of my own time on new things, not so much stock-picking. Well, one of the people who took over leadership of Rule Breakers is fellow longtime Fool, Tim Beyers. Tim dropped me a note on our corporate Slack history will show it was at 11:23 AM Eastern on Monday, June 27th, and this is exactly what it said.
Hi David, can I run an idea by you? How would you feel about an RBI podcast interview talking about Rule Breakers, where it is now, what’s similar, what’s different, etc. Tim went on, I want people to know how much of the product means to me personally, and to all of us as a team. It may also just be fun to talk through some of the past lessons learned that we’re applying now as we build out the scorecard, do you think that would be interesting and or valuable? The answer, welcoming back Tim Beyers, Tim is yes, and I’m delighted to have you spent a little time with us right in the middle of summer, and talking about something that means a lot to you, and a lot to me, and lots to those who are listening to us right now. We have a lot of Rule Breaker members, subscribers. A lot of people who or probably hearing about it for the first time. So I thought, let’s talk about it. How are you doing, Tim?
Tim Beyers: I’m doing well, David, it’s really great to be here, and to talk about this because it has been 17 years. I mean, it’ll be 18 years, next year of my life where I’ve spent time with you, and so many other great. I immediately go to Karl Thiel and Rick Munarriz who are still on the team, and who have been with with me on that journey as long you as since the beginning. But there’s Aaron Bush, there’s Matt Argersinger, there’s Maria Gallagher, Emily Flippen. There’s so many others who have been on Rule Breakers over the years. So it’s been a real journey. I’m really glad we’re doing this because it gives me a chance to be a little bit diffusive about this product. It sounds sappy, but it does mean a lot to me. It means a lot to me. It’s where I got my start.
David Gardner: Thank you, Tim.
Tim Beyers: If as a professional investor, I started literally in Rule Breakers because philosophically it was the place found I like investing, but when we laid out what Rule Breakers is like, that’s me, got it. [laughs] That’s where I live, and so that’s been the way that I invest in my own way for all those years.
David Gardner: Well, thank you Tim, and thank you for your leadership as well on for reaching out, and wanting to join in. Obviously, it’s been a crazy year for the stock market, and nothing that I would have expected or predicted, and I know we’ll talk about that a little bit, but there’s a third voice on this week’s podcast. It’s one that long time listeners will be familiar with, cameos here and there. But I thought it’d be great to have my own Rick. It’s Rick Engdahl. It’s our longtime producer, and Rick, the reason I thought it’d be wonderful to have you joining in is just an equal participant this particular week is because you have been a subscriber to Motley Fool services, even though you happen to be an employee of ours, you’ve been a user of our content, our stock picks for years and years. So I just thought it’d be great because I think you really have the voice, and perspective often of a member, him or herself, and I tried to do that a lot too, but I don’t do it as well as you. So Rick, welcome, great to have you appearing once again on Rule Breaker Investing this week.
Rick Engdahl: Always happy to be here, and it’s hard for you to fill that role because you need a lot of ignorance to sit here, and be looking at the service from the perspective from [laughs] the outside. You need to actually not know what you’re doing, which is me. [laughs]
David Gardner: Well, and that is of course, why Rick is so capital of Foolish. That is the humility, and perspective of the Fool beginner’s mind, and that’s why it’s a wonderful contribution this weekend. Tim, as we talked about this conversation, you came up with a good simple outline. We’re going to use that, so you had three sections, and that’s roughly how I’m thinking about the conversation this week. We’ll see where we end up. But the first one is just about breaking the rules, the power of breaking the rules, what it means, why we love it, why it’s natural for you, and for me. Breaking the rules, that’s Section 1. Section 2, the Rule Breakers service itself. How is it changing? What elements endure? I can imagine since there are some changing elements that will get a lot of questions back.
So I can picture already, Tim, that I’m going to want to have you on this month’s Mailbag at the end of the month. Because dear listener, we really are trying to elicit any questions or perspectives that you have. I tried to do that every week on this podcast, but probably particularly this week for either members of the service itself or people who might be interested in joining the service. So that is Section 2. In Section 3, we got to talk stocks, so we’re going to close it out with talking stocks. So Tim, thank you for just organizing our conversation that way. Tim, you, and I, we’ve talked about this offline before the podcast, but you also like to zig when others are zagging, and you are giving me an example recently of something that you did as Lead Advisor in Rule Breakers that was a little bit of a zig because we’re always breaking the rules. What did you do?
Tim Beyers: One of our recent recommendations, the ticker is XBI, which is a biotech ETF, and this came from a conversation, was one-off conversation I had with Karl, and every month, one of the things that has not changed is we always solicit ideas from the team. You are great at this, I used to be throwing in ideas, we would all throw in ideas. That process hasn’t changed, just the ideas coming to me and then I making the final call, that’s the only difference, and so one of these times, Karl, and I had asked him, said I really want to get because biotech is such an important industry in Rule Breakers. I want to figure out how to do more, and he said, well, you could always go with XBI, and I asked them to expand a little bit, and it turned into a Zoom call.
It just brought me so much joy because it felt very old school. [laughs] In two ways, first it was we were reconnecting, and going through why this was such an interesting idea. I knew that it was, it was zigging when everybody else is zagging. The idea would be, well, let’s see if we can pick the very best biotech at a time when the market is such that you could be the best biotech. But if the money spigot turns off suddenly for reasons having nothing to do with your business whatsoever. You could just die. Karl came up with this idea of well, there’s still so many. So why don’t we just bet on all of them? You had done that before. You’ve done that in the past for clean energy. So we’re like, that is so perfect.
David Gardner: It’s true, Tim. It’s true because I was about to say we didn’t start Rule Breakers to pic funds. But you’re reminding me that I’ve done that before, and indeed in this first section, breaking the rules, I think you put up pretty well before we got on the podcast, you said, you should expect the unexpected.
Tim Beyers: We expect the unexpected from us, yes.
David Gardner: As a member of Motley Fool Rule Breakers. Rick, is a biotech ETF what you expect as a member of Rule Breakers? Have you have you bought XBI yet?
Rick Engdahl: I have not, and I try very hard not to expect anything in particular. [laughs] But I am not as likely to buy any ETF, although I probably should especially in the biotech space because I’ve tried a few biotechs, they seemed like they have a good idea or whatever it based on the write-ups and I’ve never been very successful with it. I’ve learned to stay away from them altogether. Maybe the fund would have been a smarter move on my part.
Tim Beyers: Let me say one last thing on it and we can move on from it. This is one of those things. What we’re always looking for in Rule Breakers, which I think has always been part of the service, is something that the market or the public is looking at. You get the, you know your dog, your dog is adorable and gives you the sideways looking like, oh funny human, what is it you’re doing? I don’t really understand. If you get that reaction, to me it always feels like you might be on to something. You can’t be sure that you’re on to something, but you might be on to something and I love that. We do that a lot in Rule Breakers.
David Gardner: Something that we did back in the day. I don’t think we’ve done it the last year, Tim. My last five years, I don’t think we did at Rule Breakers. But another example of breaking the rules is that we would vote a stock out of the service. It wasn’t the team, it wasn’t you and me who decided.
Tim Beyers: No, it was the members.
David Gardner: It was the members. We basically said, Hey dear members, you all are smart, which you are, listeners, and here are all of our picks. You remember the service, you can see them. Which one are we getting wrong? Every time we would do that. We did it not every year, but we did it a bunch of years. We would act on it. I always gave myself final discretion to say, heck, no, you’re not going to be able to sell this. Members voting you crazy people, but they weren’t crazy. It was not a mob or mob mentality. I think it did pretty well, but the ones we sold, we should have sold. I would say another example of us being the unserviced taking a different approach.
Tim Beyers: I would agree with that. I remember that. We had a specific name for it.
David Gardner: It was called Take That.
Tim Beyers: That’s it. It was Take That.
David Gardner: Because it was partly precipitated by an encouragement to members to come onto the discussion board on the forums, and really pound on something, Take That. Usually in one to three frustrated paragraphs because they taken our advice, bought the stock that they don’t like, and now they want it out.
Tim Beyers: Yes, I remember that. There was something really great about getting that. I know we do this partially for fun, but I want to make sure we make this point because what makes Rule Breakers work as an investment philosophy is that you are looking for whitespace in the market where the consensus is X. There’s a really good chance that X is not true and Y is actually true. When Y is true, the rewards of Y being right are so good that mathematically, Y doesn’t have to be right very often for you to profit. We don’t just do this needlessly or to needle each other. There’s mathematics behind this.
David Gardner: Tim, sticking with Breaking the Rules, I think a lot of our listeners listen to this podcast because that’s an attractive notion to them. Being a rule-breaker, going against the conventional wisdom. Steve Jobs’ famously Think Different. There is a lot of value there, but I think part of it is that not everybody does that. In fact, if everybody did do that, that would be the rule. You need to be in the minority in order to come at things from a Rule Breaker perspective. Briefly, was there some aspect earlier in your life, maybe as a boy or earlier in your professional career, where that rule-breakery tendency began to take root in you?
Tim Beyers: Yeah. I used to call this a little bit of out there. I would actually call it a little bit of my crazy because sometimes the way I would be thinking, and I know this now because the way I’ve learned a little bit more about how my brain works. But sometimes the way I would describe it is like for some people, one plus one equals two. Sometimes for me, one plus one equals a space shuttle. I’m just thinking about things very differently. This does come natural to me. I tend to go backwards, so I tend to invert naturally. For a lot of people, you have to force yourself. You do the Charlie Munger test and you say well if you want to know how you’re going to get someplace, start by inverting. I always started out there. I started thinking about, let me give you an example of a company that is on the Rule Breaker scorecard, where it’s a good example of how I’m inverting led me to that company and why I still believe in it, which should be Snowflake.
There is a future that is observable where there’s going to be so much data, because the compound annual growth rate of data today is about 53 percent. It’s overwhelming. There’s an overwhelming amount of data out there. If you were to invert from, let’s say 10 years out. Let’s not assume that data is going to keep growing at that rate. But at some point, there has to be a tipping point where you find a better way to do more with the data that you have or you choose to not do anything with any of the data. Let’s assume for a minute that not doing anything with the data is a bad choice. That’s a cost-bearing choice for you to make. You want to do something with it. If you want to do something with it, then there has to be some platform by which you capture it and have a way to share it and utilize it.
Snowflake has some really good tools that are economically attractive for a customer to make use of data. I’ve heard you say this many times before David, which is invest, I’m probably butchering your words here, but invest in the world that you want to see. That future, where Snowflake exists, is an interesting future and it has a very big role to play there. The model by which it plays gives it an outsized portion of the data that exists and can be served into that world. It makes me really like the company a lot. Now there’s way more we could go down the path of Snowflake. But just inverting where the company could be, is natural to me. I think about that quite a bit.
David Gardner: I think that’s a critical aspect of being a Rule Breaker and being a Rule Breaker thinker, is to do that probably by nature. If it doesn’t come to somebody by nature and it doesn’t all the time come to any of us by nature, a lot of the time. Our habits, our habits of thought, we don’t instantly question or flip things around. But even if you don’t find yourself doing it naturally, you can do it with intention. You can flip things around. We’ve often done that. For any bull case, we tried to keep the bear case as well, as writers, editors, publishers, analysts. That’s always been a Motley Fool thing, Rick Engdahl. The bull and the bear. That’s an example of having to invert your thinking and thinking about things from a different direction.
Snowflake with a lot of the market, we’re going to talk about this later, is certainly down. I can’t remember what our cost is, but since the stock is around 150 as we talked today and wow, it IPO’d at around 300, just two years ago. It’s been about cut in half. We’ll talk about the market. But Tim in particular, as we start to shift from Rule Breaker talk onto the service itself now, which is where we’re shifting the conversation. But as we leave that by, I want to give you some props because somewhere in 2008, ’09, you were bringing to the team this new word, this new concept, like what you just did with data right there. It was Cloud. You were like, it’s about the Cloud. It’s going to be about the Cloud. I guess because I’m in the circles, I’d somewhat heard of it, but didn’t really think about it or hadn’t grokked where things were headed.
I think I was still ahead of a lot of the rest of the world even knowing about it. But Tim, you were there seeing ahead of time kind of the need. In some ways, it’s all this data you’re talking about even now. A couple of decades later. But the need to shift from hard drives on our local PCs, the incredible cost advantages and benefits, etc., from the Cloud. Boy, if that hasn’t ever come to be the case. Well, The Motley Fool and it’s services, in a sense, exist in the Cloud and that you use your computer to tap into a Motley Fool Rule Breakers and it’s up there. We have that stored probably with Amazon Web Services somewhere. But Tim, if I’m new to Rule Breakers, why am I subscribing to Motley Fool Rule Breakers? What does the service offer?
Tim Beyers: We are looking at high-quality companies that are disrupting the incumbents in their industries. They are breaking the rules in some meaningful way. Sometimes that leads to tech companies, sometimes that leads to biotech companies, and sometimes it leads to great consumer companies. Sometimes it leads you to really unexpected places. I’ll mention and see if Rick remembers this, a profitable Rule Breaker from many years ago that was an airline. Rick, do you remember what it was?
Rick Engdahl: I’m going to guess Southwest. Was it Southwest?
Tim Beyers: It was not Southwest. David, do you remember? I know you remember it, David.
David Gardner: I think I do. I’m going to go with Virgin.
Tim Beyers: It was. It was Virgin bought by Alaska Airlines for a very healthy premium on the Rule Breakers scorecard. You never know where the rule-breaking is going to happen, you never know where the disruption is going to happen, but that’s what we’re looking for. We’re looking for a business model, a technology, an idea, a clinical drug, something that is fundamentally disruptive and has a chance to generate an extraordinary amount of benefit to the world and wealth to investors.
David Gardner: Well said for somebody who is not yet a Rule Breakers member, if they are interested in the conversation we’re having this week. Anybody can order a Motley Fool service simply by going to.
Tim Beyers: Fool.com/services.
David Gardner: Forward slash services so fool.com and even if you just go to fool.com, you’ll probably find our services. But if you go to fool.com/services, you’ll find all the Motley Fool’s different services, and one of them is the one that we’re talking about this week, so as we move to Part 2 of our conversation, Tim and Rick. I think Tim, part of your inspiration for Slacking me a couple of weeks ago was to talk about aspects of the service that endure and aspects that are changing. I’ll let you dive in wherever you want with that setup question, but that’s what we should talk about now.
Tim Beyers: Yeah, let’s talk about what’s the same. Because one of the things I love about rule-breakers is the process. I think it’s easy to think that what we’re doing is going for the craziest growth companies and just putting them on the scorecard since the beginning, the format that you set up for us, David, was we had this disciplined set of meetings once every month, once every quarter, and then once a year, and then once a month is called Stock Talk, and that still exists, and so the team gets together and we are pitching around stock ideas. What I loved about it, and inevitably I always used to love this when we would invite in analysts from other services and they came in to see the no-holds-barred deathmatch that is Stock Talk.
I use that loosely, but it is like that, and I do love this. It would be fun, Rick, if you came in on time because there’s the clock and you’re on the clock and you have to make your best case in, let’s say. I mean, there were times when it was three minutes, really not so much like that anymore, but I think generally like five minutes. But you have to make your best case. Nothing clarifies your thinking than having to be on the clock, and make a good case in five minutes or less. Knowing that hard questions are coming not just from the lead advisor, but from your teammates, and this continues throughout the meeting so I think it’s a wonderful mechanism, and I used to love it when we would have analysts who’d come in if be like. I only get five minutes. What do you mean, I only get five-minute? I really think it’s one of the great clarifying processes we have. It does not mean that you can come up with a great stock, idea in five-minute. It just means you’re focusing in on the point that, I would have written a shorter letter if I’d had more time. Right. It’s just a bad idea.
David Gardner: Yeah. As I as I once said or wrote, great stocks don’t make you think. Often, the ones that standout most as the generational stocks are doing really big evidenced things in the world. It shouldn’t take some elaborate long 48 Slide, convincing, I think to buy, I won’t say every great stock, but a lot of the great ones that we’ve featured and try to feature at Rule Breakers.
Rick Engdahl: Do you ever lose a good idea because you flubbed the five-minute presentation? It seems like a lot of pressure on the presentation rather than the stock itself.
Tim Beyers: I would say I have. I would say, how long did it take me to get to make a convincing argument? I do remember this because it took me a while. In fact, I remember you gave me credit for this at one point David, where I just could not let it go with HubSpot. I just couldn’t let it go. It’s like a rabid dog and not let it go.
David Gardner: One of the things that I was doing back then, Tim and I’m sure it works somewhat similar today, but I won’t speak for it is I would encourage each member of the team to bring one or two of their best ideas. If you were recommending a stock this month, this upcoming month of Rule Breakers, what would it be? I generally would encourage people to bounce it around a different stock from one month to the next so I had an ever-changing set of ice cream flavors. But sometimes in this case, Tim would just keep going. Vanilla, vanilla. Next month, vanilla or whatever it is, we can say pistachio, pistachio and so HubSpot was an example of that for you?
Tim Beyers: Yeah.
David Gardner: It made the service and it made our members some good money.
Tim Beyers: But to answer your question, Rick, like I just was not breaking through, and so yes, sometimes that does happen. But I think overall, the clarifying nature of stock talk is really great. We give a little bit more time now because it used to be back in the day you could bring or you are encouraged to bring in any given month. I think at one point, we had the terrific three’s, then we went to the terrific two’s, then we went to the wonderful one.
David Gardner: Exactly.
Tim Beyers: Now, we’re bringing one new idea month for each team members so there’s a little bit more space to make your argument, and I think that’s actually a little bit better because the scorecard is pretty big.
David Gardner: You know what’s fun. This is an inside baseball talk. I’m certainly enjoying it. I hope our listeners are too, but you’re describing our internal processes now, most of what you’ve just talked about in the first five minutes or so here, Tim are things that we do or continue doing internally that a member like Rick may never know or hear about the phrase terrific three, which is a ridiculous phrase that I invented, was in an era of Rule Breakers where Tim and Rick and Karl and others were asked to bring their best three ideas every month and write a certain point. I decided they’re working too hard. I’m working tomorrow. We’re only coming up with one or two new stocks each month. Why am I getting 12 new? We just go with six, so we went with terrific twos, which is easier to say and also easier to do than terrific threes, but maybe Tim, maybe speak to where the services today facing members, a member like Rick, what continues and I signed in today, the screen looks different than it did last time I signed in so they’re obviously at least some visual improvements happening.
Rick Engdahl: It’s not orange anymore, it’s supposed to be orange. I want to file my complaint here, it’s not orange edition.
Tim Beyers: Yeah. I know people can’t see it, but I’m wearing my Orange hat because I always considered this my Rule Breakers Fool hat. I sometimes word on Fool Live, but yes. Things that are similar that members continue to see. We have a new recommendation on the second and fourth Thursday of every month. The second Thursday, that’s a rerec that has not changed, and then the fourth Thursday is a new stock. So you’ll see that the cadence continues their level a few stocks every month, and I like keeping the rerec David because as we know, very often, especially when you have as many stocks as we have in the Rule Breakers scorecard, you’re going to find a lot of great ideas inside of what you already own, and so I’ve been delighted that we’ve been able to rerec recently Alphabet, because the price is ridiculous considering just how much growth is embedded in that business. We rerec Arista Networks recently. I like going back through the scorecard to surface names that are interesting so that remains the same.
David Gardner: I’m glad to hear that because I admittedly always been kind of a cult of the new person and so what’s the new trick? What’s the new stock? But really it is true, Tim, years ago we did shift to this new model that you’re describing, and I do think it’s a reminder that sometimes your best stock isn’t some brand shiny new thing, Rick Engdahl, it’s maybe the one that you brought to the dance in the first place that might be a little bit better off than when you first bought it because we often like to add to winners, Rick.
Rick Engdahl: Well, it’s also the fact that it’s a rerec from you doesn’t mean it’s not new to me. I don’t buy everything you pick, and so if I’m looking to buy something, I want to know what’s best. I don’t really care if you’ve rec it before.
David Gardner: Right.
Tim Beyers: Yeah. In a lot of cases, there’s real delight for me personally in rediscovering a business that has changed for the better and in the case of Alphabet is a good example of a business that’s changed for the better or Google Cloud has become a real meaningful player. When we first recommended it, there was no Google Cloud, there was no Alphabet, there was just Google. [laughs] I think David, that rec goes back so far that there wasn’t even multiple shared classes for Google yet.
David Gardner: Yeah, and I wish there still weren’t. Alphabet, one of the companies that started to say we need to have two different shared classes end up with two different ticker symbols Zillow, Google. Anyway, but that’s a whole separate topic, but yes, part of what that reminds me, Tim, it’s just how long we have tended to keep these recommendations in place, often for our very best companies and I think that’s what leads to winning investing. I think a lot of listeners know that and a lot of members have appreciated that, speaking of appreciation we’ve had a lot of depreciation in value over the last year because of this crazy market that we’re living through. That we’ll move to in a bit, but let’s stick with the conversation a little bit more. Tim, what feels new to you? Would you like to preview or mention anything that’s changing about the Rule Breaker service?
Tim Beyers: Yeah. One of the things that are changing is you’re seeing now the way the site changed, there’s a lot more unification across all of The Motley Fool services.
David Gardner: Wonderful.
Tim Beyers: You’re seeing some nomenclature that’s going to be similar across all services and one of those changes is rankings. Rankings is a term that Tom Gardner likes a lot. He does like to rank things. In fact, I think Tom could rank like tacos if he wanted to like 1-5. [laughs] I think he ranks everything which is fun that he does that. I’m not the biggest believer in ranking stocks because it’s hard to tell sometimes the difference between Number 1 and say Number 3. There may not really be much difference. Number 3 may become Number 1 before too long here, so you don’t want to over-index that. However, the way we’re doing it, we’re keeping the back-end structure on Best Buys Now and so without going too far down the rabbit hole here, the way we always did Best Buys Now is we voted on them and we have either eight or nine contractors and the whole team who votes.
Everybody brings in their ideas and they put a certain amount of weighting to each idea. If that sounds like something, you could actually do some math to come up with the rankings list. You are correct. That actually really works. We keep the spirit of everything we always did with Best Buys Now, in other words, everybody brings their best buys. Everybody provides their weighting and then we do some math to create a 1-10 list. Going forward, it’s not going to be a Best Buys Now list, it will be largely quantitative, although all have some veto power in those 1-10 and then we’re going to use it as a mechanism. That’ll be like, hey, here’s a list of conviction stocks. Stocks that we think through these businesses are really interesting and if you don’t own them, you may want to take a look at putting some money to work in one of these businesses and then we can use that 1-10 list.
Rick Engdahl: What I’m hearing is that Best Buys Now is now called rankings.
Tim Beyers: It is called rankings. [laughs]
Rick Engdahl: Is it as simple as that? As a user, is that what I need to know I used to look for Best Buys Now, now I look for rankings.
Tim Beyers: Now you look for rankings. As a user of the service, I would not encourage you to buy all 10 stocks. I think that’s a misuse of it. What I would say is on that list of 1-10 if one of those 10 you don’t own and you have a regular practice of putting money to work in the stock market, the one that you don’t own, maybe a great opportunity to add a new stock to your portfolio. Then how we’ll do it the other way will make this a usable tool for members, Rick, is in those 10 there may be like two that we haven’t really looked at recently or were there may be some news and we’ll use the release of the new rankings to take a look at it. I’m going to just throw out a random name. Let’s say Veeva Systems makes the next Top 10 list. Great. We haven’t published anything on Veeva Systems in a while, let’s take a look at it and write a few grafts about it. As a mechanism to give members a way to put new money to work and remind them about stocks that they may not know anything about the ranking system can be a very useful tool. That’s how Best Buys Now is shifting but I want to shift it in a way that is useful to the members, but also keeps all of the mechanism and spirit that was great about the Best Buys Now voting process.
David Gardner: Thank you for that. As you have that exchange, it reminds me to mention to our listeners that we’d love to hear from you. Of course, the mailbag at the end of every month is an opportunity for anybody listening to drop us a note and offer an observation question, poem, rule-breaking thought the list goes on what we get every month in the mailbag. But I bet we’re occasioning a lot of questions this particular week. I can imagine we’ll focus a fair amount of this month’s mailbag, Tim, if you’ll come back at the end of the month on questions that we get arising from this very conversation. That’s just my quick reminder to listeners. Our email address is rbi@fool.com. By the way, just mentioning again, another quick way to find Rule Breakers is rbioffer.fool.com. That’s a quick easy URL. If you’re not already a member of Rule Breakers you would like to try it out for free, rbioffer.fool.com. Tim Beyers, before we move on, is there anything else you’d like to add about the Rule Breakers service?
Tim Beyers: Yeah. Since we’re asking for feedback and questions, there are other things that have changed like shortly after you left David, a long-held tool that was unique to Rule Breakers. Well, I guess not unique to Rule Breakers, but it really started with Rule Breakers went away and that was where the risk ratings, and sometimes I hear that there is a desire or a longing to bring those back. If you send in your question, let us know. I personally want to know like do you miss this Rule Breaker risk ratings? I mean, I will tell you my view of what they did for us. David and I would love for you to actually love for both of you to weigh in as whether or not you thought they were useful? Here’s what I thought they were useful for. I thought they were a useful mechanism for deciding how much was an appropriate level of capital to put to work. So like for example, if on a scale of 25, if the company was like a 20, meaning it wasn’t quite an eggshell in terms of hardness, but it was really risky. If it avoided getting crushed, this was the stock that had even better than 10X potential to lose just potentially unlimited. It could be crazy, but the odds of it going to zero were also pretty high so that’s the company you don’t necessarily need to put a lot of money into.
David Gardner: Yeah, I think that’s a nice way of articulating what risk ratings we’re doing. In fact, the word we were using was crush-ability. We tried to make it understandable to anybody even if they don’t care about the stock market, and so it’s a lot easier, as you just mentioned him to crush in eggshell than it would be carbon steel. We tried to translate the number of the risk rating and it did take numerical form into a crush-ability index so people could go, wait, is this more like an eggshell or like a car? I think that that was a useful feature I can imagine because I’ve done some podcasts here about risk ratings. You’ll probably get some people who say, yeah, I’d love to have it back. But one thing I always respect so much about our company is that we have all the data. I might think something is amazing or I might think something’s horrible. Whatever I think, I like to check and see the data so usually the decisions that we make at The Motley Fool are very data-driven, and if something seems cool and it’s not getting any clicks, or if something seems, uncool, but for some reason everybody is clicking it that really does influence our developmental decisions. Rick, do you have any thoughts, anything to add?
Rick Engdahl: Yeah. Specifically to the risk ratings? Everything I know about them is from the shows we’ve done on the podcast episodes that we’ve done on them, and I love the methodology. I love the fact that there’s an actual definition for what risk is and how it’s so well thought through. Personally, as a member, I don’t necessarily need to see it. I’m just glad you guys do it, and I’m glad that is reflected in the way you talk about and you review the stocks. There’s at least for me personally.
David Gardner: You don’t need to see our homework.
Rick Engdahl: I don’t need to see your homework. I just like to know it’s been done. I’m an easy teacher. [laughs]
David Gardner: Well, it is something and again, listeners who’d like to just Google Rule Breaker risk ratings, Rule Breaker Investing podcast. You’ll see, I think I did one last year, just updating, putting it back out there for anybody who wanted to see the framework, it’s a 25 question, yes or no framework. The same framework is applied to every stock, obviously, as it’s Inventor in some ways, I love it. But I’m also more than happy for anything that I’ve stood up to be tweet, change, knocked down or invested in. A lot of these things are tools, and the real question is, who wants to pick it up and use it at any given time? Does it make sense? Does it help the world invest better?
Rick Engdahl: You’ve told to us so we can do it ourselves if you want to. I mean, it’s there on the podcast, but more than anything, it’s just like there’s a term like risk is something that’s often thrown around without anybody really defining what they mean by it and I love the fact that the risk ratings really defined what you mean by risk.
David Gardner: Thank you, and that really was the spirit and is the spirit of it and I really do appreciate your point, Rick, that you’re counting on us to do it with. Surely we do. In fact, Tim, you’ve been talking about processes that are part of how we do what we do at Motley Fool Rule Breakers, which continue. But a lot of them are not member-facing. We’re going through all these motions just like we always did, and I think having a good process is so important.
Tim Beyers: Oh, it’s huge and there are other tools that a member does not see, but we still use them with one of our quarterly meetings is upcoming, which is the penalty box meeting, and there’s another tool that we have there that you invented. Again here, David called the box somatic and we still use the box somatic. It’s a cute name. It sounds like it’s a little toy, but it’s not. It’s like a 19 question tool in which we go through to see, is this company fulfilling what we hoped it would be? If it isn’t, then maybe we need to put it in the penalty box, or in some cases, we need to sell it. It’s not always that a sale is preceded by running the box somatic, but I will tell you it’s happened very often that the box somatic has been something we could refer to, say, yeah, this one’s not working and we got rid of it. Tools, I’m a process-driven investor and I love that Rule Breakers always had a pretty rigorous process, and so the Rule Breakers that exist to this day still has rigorous processes that will always, as long as I have to say that we’ll always be true because your process will help determine your results.
David Gardner: Yeah. Well, you’re talking to another process-driven person and somebody who for whom that was necessary because to pick five Best Buys Now, or 10 ranked stocks, or a brand new stock, or a rerec, stock, month-in and month-out and beat the market over years. I think you have to have ways to do that to make you the most effective you can be and the most efficient with that, and I think for me anyway, it’s much more likely to happen with process than licking our thumb and holding it up in the wind the day before we need to make a pick and hoping the wind is blowing the right direction well. Tim and Rick, thank you for that portion of our conversation. Let’s close it out. With Stock Talk. We’re not going to formally do how we do stock talk.
There’s no timer on anybody and I’m not asking Rick or Tim to pitch anything. But I guess I should start with this, Tim. Wow, the stock market over the last year. I mean, it’s been brutal especially for Rule Breaker stocks and our Rule Breaker frameworks and investing approach. Many a time in 2022 pointed out to anybody who wants to listen to me on this podcast that I’m down about half from where I was a year ago. I say that with a straight face as a professional, and it’s happened to me before, and here’s the bad news. It’s going to happen to me again, probably more than once before I leave this earth so it’s just, I think part of being an investor, somebody who puts on the clothes of their stocks, wears those whether their team wins or loses that day they wear at the next game back to the stadium. They keep wearing the clothes, you’re going to have good times and bad.
The good news and the reason we keep the clothes on and stick with our stocks is because the market tends to go up over time, around nine percent or so. Rule Breaker stocks, Rick and Tim, have tended to do better than that nine percent and I think the history of our scorecard and a lot of our services proves that with real math and anybody who’s a member can see all of our good and bad picks and see how we’ve averaged over all. Let me just tip off our 10 minutes or so on stocks with a recent pick. I was thinking a little bit more about, I want to say before I say when I’m going to say right now, I am not actively researching stocks. I truly did step away from that about a year ago. I love it. I’ll always do it some, but I’m not really spending my time trying to figure out what the next great thing is. I really found that over the course of time just something I didn’t want to keep doing the 20 more years than the 29 I’d already done it so that disclaimer out of the way, Bumble.
It looks to me, it’s a Rule Breaker, it’s on our scorecard, but I heard something recent that made me like it even a little bit more now Bumble for those who don’t recognize that ticker symbol, BMBL. By the way, we talked about Snowflake earlier, ticker symbol SNOW. But Bumble is a social media platform, that’s a dating and matchmaking platform by women, for women. It’s a fair way of generalizing about Bumble. It’s bigger than that. But for the most part, you need to be invited in by a woman. I think that that creates a safe space, that creates, I think, a niche. I think there’s strength to that, but it got a little stronger in my mind when I heard from a female friend, and she’s new in the city she just moved to, and she said, you know what else Bumble does? It matches you just with friends. I’m not looking to date anybody here, I’m asking who are some other women who have the same interest I do. They’re using Bumble for that.
Tim Beyers: That’s interesting.
David Gardner: That’s part of the functionality. That made me start thinking, is this a bigger idea and a bigger Rule Breaker than we initially thought? You both know that I always love companies that can be transformative, including themselves. They can transform.
Tim Beyers: Absolutely.
David Gardner: As Tim mentioned earlier, Google transformed Alphabet. Amazon has transformed any number of times. Again, I really haven’t looked much at Bumble, it’s as much a question. But is this something interesting, this Rule Breaker pick? Is this something new worth paying attention to? We can leave that rhetorical, Tim. It’s not like you spent any prep time before this call, thinking about Bumble.
Tim Beyers: I think that’s fascinating. I think folks have heard me talk, no. I mean, let’s be clear. I came on to the Rule Breakers team as the guy who was bringing the dense deep tech. I’m excited about things that nobody understands guy. I’m still that person. But one of the things that translates it very well from tech to all Rule Breakers, and applies here as well for Bumble, is that when you find a tech company that is able to serve a particular niche. Then it’s like there is a great question, arguably the best question of all questions in all of The Motley Fool Investment Guide is this, how does the company make money? How do they make more money than that?
David Gardner: Thank you.
Tim Beyers: Know what that describes? That describes optionality. That’s what optionality is. How do I make money? Now, how do I make more than that? If a company is able to successfully say, well, we do this. If you are HubSpot, which we’ve talked about before, and you say, look, we’ve got this inbound marketing platform. We can help you with your sales. We can help you with building your website. We can help you with your social media. Now, if you don’t need to go out and acquire a whole bunch of companies, you would just found a way to create a lot more value for the customers that already love you. David, I think what’s interesting about what you described with Bumble is, I guess it’s an open question. Have they just found a way to create more value for the customers that already love them? If the answer is yes, boy, is that interesting?
David Gardner: Well, and this is just one example from one company. Part of what I’ve always loved about Motley Fool Rule Breakers is we have so many interesting companies. These are generally the impact players in our economy because even if they’re not all as big as Alphabet, that’s for sure. Even if they’re a tiny thing compared to AT&T, they’re often the innovator. They’re the ones who are breaking new ground. Sometimes, they’ve got blue ocean out in front of them in a way that I don’t know, the stodgy old players, the Comcast’s of the previous era don’t necessarily. Not to talk down Comcast, it’s actually evolved in a lot of ways. But maybe I should have said IBM. But even that’s not fair. But my main point is I love the smaller fry innovators. The ones, Tim and Rick, that become big from a small place, those that have been what drives our portfolio returns is Rule Breakers. Rick, I’d be remiss if I didn’t ask, do you have a particular favourite Rule Breaker, either in your portfolio or any new company that’s caught your attention?
Rick Engdahl: I was actually just looking. Given this conversation and given the new Rule Breaker side of that, well, if I’m picking something today, what would it be? I went to that ranking site and I was looking at that. What are these companies that reflect the future that I want in my portfolio? That’s my way. I think of these big picture ways. I really buy into that idea because I’m more interested in building this portfolio over time as opposed to watching the ups and downs, which are not fun to watch right now. [laughs] But then it’s funny because when I look at those rankings, the one that stands out to me is like, well, really the big hole for me right now is that spider that you’re talking about, that XBI, the biotech. I already own Google, I already own Roku, and I already own a lot of these that are here. The one that’s.
David Gardner: Staring back at you.
Rick Engdahl: Yeah, the one that’s staring back at me like this is what our future needs. Yet, this is a big hole in my portfolio. I might have to give that a closer look.
Tim Beyers: Very interesting. I’m happy to hear that. That’s a great way to use rankings of what does my portfolio need? What is interesting to me if I have some capital to put to work? That’s a really great way to use it, Rick. I hope more people are thinking that way. I’ve got some capital, what’s staring at me in the face and making me think a little bit? I love that as a way to use the tool. Let’s go down that list as it exists today. There’s a company on there that both of you know, I’ve been bullish on this company for a really long period of time and I still am, and it’s an example of inverting here. We can do both here. That’s MongoDB that’s on the list.
It’s a loser right now, and it’s taken a real beating from the very premium valuation it had, it got to in 2020, and it pulled back significantly. But here’s the thing, when you look at MongoDB as a company, if we’re just taking that process of inverting, what are the odds? Would either of you say that the $70 billion in annual spend on database software annually is going to go exclusively to the relational database technology that was originally invented in the 1970s, and is still useful and it’s been extended over a very long period of time. It’s still useful, it’s not going away.
But for the newer waves that we are capturing and using data for things that are live, like applications that have to exist today that grapple with a lot more in different types of data, is it more likely that the old paradigm relational database is going to capture the vast majority of that 70 billion, or maybe like 90 percent of it, while 10 percent of it goes to the new paradigm, which is NoSQL, which is where MongoDB leads? I think the answer is, that there’s like a zero percent chance that the share of money that’s going to NoSQL is going to down, it’s going to go up. As it goes up, that is a net win for MongoDB. Yes, it is not cheaply valued.
David Gardner: Well, I’m glad you answered your own question, Tim. I thought I probably knew what the right answer was based on how you couch the question. [laughs] But this is an area of specialization for you, and not for me, and not for probably a lot of people listening, although we have some serious database, demigods among our membership and listeners.
Tim Beyers: That is so true.
David Gardner: We’re reminded of that every day through one of the favorite features. I’ve always loved that about The Motley Fool, which is our discussion boards and the forums that we host around individual stocks or just overall approaches to the market. Well, friends, this has been a lot of fun. All good things must come to an end. But Tim, one thing that we talked about earlier is that we might take some questions about the Rule Breakers service, and feature those on the Mailbag at the end of this month. It’s a reminder to everybody listening. if we sparked a new question for you, an occasion to thought, we’d love to hear from you, rbi@fool.com is the email address. I already mentioned rbioffer.fool.com, if you’d like to try out the service that Tim has been talking about. If you’re not quite sure about Rule Breakers but you’d like to see what The Motley Fool offers, well, that’s as we said earlier, fool.com/services, a way for you to find out all of our offerings. Rick, I want to thank you for your cameos and for being such a capital F Foolish investor. Rick, what was your first day at the Fool roughly?
Rick Engdahl: January 3rd, 2000, I believe.
David Gardner: That’s pretty specific. Thank you. Whether or not you were starting investing that first day or waited for a few years or came to us as an investor, I know one thing, you’ve been investing for a long time at this point.
Rick Engdahl: Definitely after I arrived, everything I know about it, I’ve learned from you all.
David Gardner: That’s great. Well, thank you. That’s true of a lot of people listening right now. By the way, we all have more to learn, which is at the heart of everything we do at the Fool, I think its intellectual curiosity, specifically, curiosity about the future and where it’s headed, and how we can make it head in the best place that we can. Well, again, thank you, Tim. Thank you, Rick. I want to thank everybody for tuning in here. We’re right in the dead of summer, I don’t know if that means we have three times the listenership, because everybody is at the beach, listening to podcasts, or maybe everybody is away. But I know this, I had a great time. Thank you so much, Tim, for leaning in and being with us this week on Rule Breaker Investing.
Tim Beyers: It is great. I really appreciate it, David. Thanks for indulging my question, and letting me express my long-term love for Motley Fool Rule Breakers. Long may it continue.
David Gardner: Thank you. You’re helping it do so every day. Some things will endure and some things will change. I don’t think we can expect or want anything more from life. The aim is always to be constantly improving things. I hope that’s the service experience of a lot of people hearing us today. If not, hey, drop us an email, how can we make it better? Well, I hope everybody has a great rest of your week. Talking about making it better, Fool on.
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 has positions in Alphabet (A shares), Alphabet (C shares), Zillow Group (A shares), and Zillow Group (C shares). Rick Engdahl has positions in Alphabet (A shares), Alphabet (C shares), Amazon, MongoDB, Roku, Snowflake Inc., Veeva Systems, Zillow Group (A shares), and Zillow Group (C shares). Tim Beyers has positions in AT&T, Alphabet (A shares), Alphabet (C shares), Amazon, Arista Networks, HubSpot, MongoDB, and Snowflake Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Arista Networks, HubSpot, MongoDB, Roku, Snowflake Inc., Veeva Systems, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends Alaska Air Group, Bumble Inc., Comcast, SPDR S&P Biotech, and Southwest Airlines. The Motley Fool has a disclosure policy.
