Motley Fool Hidden Gems Investing - 2022: New Learnings for Investors

Episode Date: November 19, 2022

Live from the Hawk & Griffin Pub in Vienna, Virginia...it's Motley Fool Money! Chris Hill talks with Bill Mann, Emily Flippen, and David Gardner about: - 2022 through the lens of a small business - The importance of evaluating the management team of a small cap company - How fear can be contagious for investors - Keeping an eye on inflation as we head into 2023 - Optimism around the UNC men's basketball team Check out the Rule Breaker Investing podcast with David Gardner! https://podcasts.apple.com/us/podcast/rule-breaker-investing/id1017325738 Host: Chris Hill Guests: Bill Mann, Emily Flippen, David Gardner Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

You start looking for companies at that level, that if the CEO stepped down, the company is going to be okay. You know, you saw that 100% with Apple. I'm Chris Hill, and that's Motley Fool's Senior Analyst, Bill Mann. We talked in front of a live audience at a Motley Fool event we had at the Hawk & Griffin Pub in Vienna, Virginia. This was an event we had for Motley Fool members, and we wanted to bring you part of the conversations that we had on stage. I talked with Bill, fellow analyst Emily Flippen, and company co-founder David Gardner about what they've learned as investors this year and what they're watching as we look ahead to 2023.

One of the things that I think we both love about working at The Motley Fool- Have we started recording, by the way? As far as you know. Okay, good. I think one of the things we both love is the sort of ongoing focus of learning that happens at the company. And it really has been instilled from the very beginning with Tom and David Gardner. And so I'm reminded of a phrase that I first heard it from Tom Gardner. I don't know if he came up with it, but it's the whole idea that when we don't get what we want, we get experience.

And so with that in mind, when you think about investing in 2022 as a lifelong learner, what has this year taught you? I have to thank you, because for the last four days, I have had the song Islands in the Stream rolling through my head over and over and over. And now. Goodness, why? I don't know. And now I'm going to have Are You Experienced by Jimi Hendrix rolling around in my brain. So thank you for getting me to the next step. you know we know in you know as people who are students of the market we know that there are

down times but like a lot of things you do not get the chance to feel deeply that pain and that fear when times are good so we knew going through 2020 that we were going through something that was at best remarkable you know you could pull letters out of a scrabble bag and arrange them and buy that stock and it doubled, which is, I don't know if you guys know this, that's not how that works. We knew that there was a reckoning coming. But the type of reckoning that we've had in 2022 reminds you just how psychological the market can be. It is really important to keep in mind, and to me, there's such a reminder that you are not as smart as the market says you are at any moment, and and you're not as dumb as the market says you are at any moment.

And let me tell you something. Right now, the market tells me that I am stupid. We know this anyway, but the market is reaffirming. We really need to have a sense of grace with ourselves during times like these because it is what gets you through to the good news that comes. And as David Gardner said so many times, the market goes down faster than it goes up, But it goes up more than it goes down. One of the reasons I benefit from our friendship, I don't know if you benefit from our friendship, but I do, is because every once in a

while, you will sort of pull me out of what is happening in the U.S. markets and point to something else around the world. You are very much a global investor. So, I'm curious, in terms of this year, from a business standpoint, from an investing standpoint, outside of the United States, what has surprised you? Can you all believe that in the stock market in 2022, we here in the United States have had it good? We've had it good. One of the things that makes the United States special, there's a big list, but one of the things on the list is the fact that we have the reserve currency of the world, which means that the The debt that we have, we know how much it's going to cost.

In countries all around the world, they have debt that is denominated ultimately against the reserve currency in dollars. And so you have seen situations in countries around the world where the dollar has spiked against these currencies, which seems bad anyway. But when they have to pay their debt in U.S. dollars, it makes it very, very, very painful. So one of the things that we've seen is something you never want to see, is a negative correlation from country to country. We are in a global economy, maybe less global than it has been. China seems to be pulling away. Russia, we seem to be done with them for a little while.

I think one of the things that we're going to see in the next decade is the United States and the friendly markets to the United States really, really do well. And again, if it feels like it's been bad for us, it's been bad for these markets times two. There's no experience like doing something yourself. So even though you have studied businesses for decades, recently you've gotten the experience of being part owner of a small business like this. So what do you know about small business and the challenges and opportunities of a small business? What do you know now that you didn't know, say, a year or two ago?

So this is going to sound like I'm bragging on myself, but I'm not. I'm bragging on the man behind the bar, Tom Kylo. And especially with smaller companies, you need to know who you're betting on. Absolutely, positively. He has built most of this place by hand. I mean, that was, this was his passion project during, during COVID and passion projects don't always work out, but you know, you, you've got someone who has a good business sense, who has the ability to go through the times that are hard. I mean, you know, running a small

business in 2022 is incredibly challenging. I don't know if you all have heard about this inflation thing, but you know, it, it hits businesses as well. And in some ways, you know, with this type of business, with a razor-thin margin, getting it right really, really matters. And so, I take from this the lesson when I, you know, because my area primarily at The Motley Fool is in small caps, and then internationally, and it just really confirms to me that knowing the management and getting a sense of what they are about and whether they are aligned with you is really, really important. Does it become, I don't want to say less important as the company becomes larger. But does the burden of how good is this management, does it shift in a way to

how good are they at picking their team? Yeah, I think so. And for me, that's been one of my longtime fears about Tesla, for example, is that they go through management, the layer below Elon Musk, like they're going out of style. They need to get CFOs in packs of six, because there's that much turnover. But I think one of the more important things with larger companies is not so much the manager themselves, although they can be very, very important, it's that next layer. You start looking for companies at that level that if the CEO stepped down, the company's going to be okay. You saw that 100% with Apple when Steve Jobs had to step aside, 90% of the value of Apple has been created under Tim Cook, not under Steve Jobs.

That's a remarkable way to think about what has happened with that company, because you still think of it as being Steve Jobs' company, but it's not. Alright, I'd love to talk more, but you've got to get behind the bar, so I'm slinging some drinks here. Thank you all so much! Fool on, everybody! All right. With that, it is very much my pleasure to bring up one of the true rising stars in the analyst community at The Motley Fool, Emily Flippen. What an introduction. The bar is high now. Let me start with the same question that I asked Bill.

What's your investing takeaway for 2022? Yeah, that's all. It's a hard question to answer because 2022 has been such an unusual year. But I think if I had one takeaway, it's just that fear is really contagious. And for context for that, I'm 28 years old. So I started investing after the Great Recession, the Great Financial Crisis. So 2022, and honestly, part of 2021 as well, has been really the first time that I've seen just, I guess, what the fear looks like and how it manifests and how investors respond to portfolios decreasing day after day, and 2022 has just been an incredible year to see that reaction. In some spaces, places where investors congregate, whether it be at The Fool or on places like

Twitter, you would think the world is ending. People are saying this time is different. They've never experienced a time like this. But at The Fool, talking to you, talking to our analysts day after day. We just don't have the time to get afraid, right? You're too busy reminding everybody that it's going to be okay, that you start to believe it yourself. So I'm interested to see what 2023 has in store. If it's for another year, I have no doubt that we'll come out of it on the other side, the same way we entered 2022. But I would just encourage everybody to provide some context to what they're experiencing today, because 2022, as unusual as it's been. It's not unheard of. It's not unprecedented. No market pullback is.

Well, and that's part of what makes investing tricky, right? It's not just analyzing the numbers of a business and is this industry growing and is this business within this industry growing? A lot of it does sort of come down to, well, what is the story of this business industry? And to the point you just made, what is the story of this market? Because when the narrative every day is, the sky is falling, as an individual investor, that's kind of hard to overcome. Yeah, I will say this. I think about the macro environment approximately 0% of my time.

I don't like to spend my time thinking about inflation, mostly because it really hurts my pocketbook. I don't like going to the grocery store and seeing my bills up 50%. But really, it doesn't have an impact on the long-term thesis for the vast majority of businesses that we're invested in. So I focus on what I can control, right? focus on the business performance, understanding how the company is doing, yes, in today's environment, but more importantly, in the environment five years from now. It's the

same way when you think about investing during political turmoil, right? We just came out of a midterm election here in the United States. We're not investing for any single market environment the same way we're not investing for any certain political regime. We're investing in companies that 10 years from now should hopefully be in a better position we are today. And that depends on a lot more factors than just what's happening in this exact moment. Let's get to one company specifically. This week, our company is having its annual meeting. Part of that is not just presentations from our company's leadership to our entire company. It's also we get the chance to hear from leaders of other companies. You've actually recorded an

interview that we're going to be seeing this week with Sumit Singh, who is the CEO of Chewy a company I first heard about from you. Without giving too much away, what was your impression of him as a shareholder? How are you feeling about the business of Chewy? Like a lot of businesses, it's had a tough year. Well, let me say, I'm not a tough audience. I'm a fangirl of this company. I've been a shareholder basically since the company went public. But more importantly, I'm not married, I don't have kids, but I do have a cat. And I do treat that cat like my family. So Chewy is an integral part of my everyday life. So having the opportunity to sit down and submit has been absolutely amazing. And I will say, I'm really,

you know, obviously everybody's out here, you know, selling your companies, right? I want to believe in the company that I'm invested in, but I was really impressed with the mentalities that he's brought to the company. He is not the founder, but he has been the CEO. He brought it through the IPO and he brings a really great logistical mind to the business. He understands fulfillment and infrastructure better than anyone I've talked to before, which is so vital for the position that Chewy is in today. But more importantly, I think he just has the right culture mindset. And it's a really hard thing to have, I think, when you're not the founder of a business. At The Motley Fool here, you have two co-founders that have helped create a culture that is really

unique, and we all benefit from that today. But at Chewy, going through that transition from their founder to an outside CEO, being essentially brought into the organization, it's hard to retain it. But they have created something that is really pet parent first, if I can steal some of their language here, and really focuses on building an internal culture that creates a sense of loyalty amongst their customers. And that's the reason why they have really high net promoter scores with the people that they engage with, have a really high level of repeat orders and customer loyalty. They have an understanding about what pet parents like myself and my tiny cat needs better than Amazon or Petco. I'm glad you mentioned Amazon because my memory as someone

who does not own pets, but my memory is that during the pandemic, one of the early stumbles for Amazon was with pet owners. Am I correct that Chewy sort of benefited from the misstep of a competitor there? Here's my thing. I don't like to say that Chewy won because of the pandemic. In fact, this grinds my gears a little bit, Chris. Because when I ever talk to people about Chewy, they're like, oh, well, that's a pandemic play. I was a shareholder of Chewy before the pandemic. I'll be a shareholder of Chewy now and continue in the future, I expect. But the business was set up for success because they understood their customer better than the Amazons of the world. So I don't think it's necessarily that the pandemic happened and Amazon misstepped,

right? Not understanding the needs of pet parents, not doing super well with their private label pet goods. And that was the reason why Chewy did well. Chewy has been executing on the same thesis that they had a year before the pandemic and a year after the pandemic. It was just a matter of, I guess everybody got a bit more pets. I was just going to say, I wasn't suggesting, like, that's the only reason they're doing well. It didn't make sense to me that people would be like, well, I'm just going to try this for a year, and then when the pandemic's over, you know? I clearly heard it too much. You hit a sore spot. Clearly, I did. What is something you're going to be watching in 2023? Let's move away from

Chewy, but just in terms of industries, trends, what's on your radar as we come to the end of this year and look forward to hopefully a better one for investors. Obviously, I want to say Chewy. I'll be watching Chewy along with all of my investments in 2023. But there really isn't anything I expect. I like to not enter my years with expectations about what may happen. But I do like to say that I outline things that I'll be watching. Obviously, inflation is a big one heading into 2023, how that handles it. There's been some people who are calling last week the bottom point of the market. I don't know if I necessarily agree with that, but it is interesting to think about if 2023

continue this uh few day uptick that we've seen but ultimately yeah i'm positioning my portfolio to perform much better and and 2024 2025 2026 not just 2023. thanks for being here yeah thanks for having me emily flippen please welcome david gardner thank you so let me start with With a way that I think you've been spending part of your year, sort of with 2022 being the theme here, you've been spending time with the Motley Fool Foundation. I'm curious, sort of, the conversations you've been having with people in the foundation, networking in the greater D.C. area. what impression are you getting from folks in terms of how they are viewing the market, the economy? This would seem on the surface to be a difficult time for non-profit foundations.

And I'm curious, what's been your experience as you talk to folks in this community? So first of all, just to get investing out of the way, I'm about half of what I was a year ago, just straight up. Whether or not I'm picking stocks anymore on a regular basis for the fool doesn't matter. I remain fully invested, just like I hope everybody else generally is or should be. And so, just to be really clear on that, I had the pleasure at our first face-to-face member gathering FoolFest in three years, a couple months ago, to say, maybe some of you heard me say this, I'll say it again, whoever's down, however much you're down, I'm down more. So, I have neither bought nor sold a stock since before COVID. So, I just pretty much stay fully invested all the time.

Therefore, I ride it all the way down, and usually down more than most other people in the room, in any given room, and then right back up. And that works. That really does work. Thank you for the question about the foundation. I think, Chris, what I have really appreciated about where we are in the early stages, this is an acorn. This is a scrappy startup. This This is what The Motley Fool was in 1993 as a print newsletter. We're just a few months into the foundation. And thank you for those of you who've already leaned in, contributed your fool fuel, as we like to use the phrase,

because we really are counting on our membership to fuel our foundation. We have some resources, and we're fully dedicated. Some of our most mediocre minds are focused on our foundation, but we really are counting on our fools everywhere. And I think that what I've concluded about the world, after a lot of conversations in the last 12 months, is that we need to continue to democratize money for everybody. We have done that pretty well in our own small way, in our own full way, over the last 30 years for the markets. And some of you were already investing before Chris and I were born.

And you're here tonight, and thanks for joining us. And you're amazing exemplars to your families and to all the rest of us here. Many others may have gotten started in the last three years because of The Motley Fool. And a lot of people hearing our podcasts, we have a larger audience than ever before today. So that means a lot of people have just joined in and kind of learned about the markets from The Fool and Chris. We're here to get everybody caring about the markets. But in fact, before you can care about the markets, you need to care about saving, about being invested, about recognizing the importance of not just financial literacy, teaching stock market to kids, let's say,

but of having a roof over your head, having your health, because financial freedom doesn't mean a lot if you don't have your health and what health means. A lot of these things are systemic, and that's really where we've been. In my longest answer I'll give to any of your questions, that's really where we've been leaning in. I want to go back to something Emily talked about, because I was sort of struck by this. Emily talking about fear as sort of being an emotion that she experienced en masse for the first time as a younger investor. She didn't put it this way, but I will. We're older. We've been investing for decades beyond that, so maybe we don't have the same level of fear,

or certainly are not surprised by it. And I'm curious, how you've done that over the years, to the extent that you've managed your emotions. Because I think that's part of what Emily was getting at, that fear can, in some cases, we've seen this for years at The Motley Fool, we've seen fear drive people out of the market altogether. They're investing for a year or two, they hit a bear market, and then they say, that's it, I'm out. And I'm curious sort of like how you've managed your emotions, but also to the extent that you've counseled people to sort of get through and stay in the game so i think that fear needs to be replaced by knowledge there are almost opposites fear and understanding fear and knowledge so when emily said she was 28 which is so awesome and

emily thank you for contributing so much in your early years the fool and i look forward to a long association thank you i'm 56 i'm like i'm 2x i'm glad we had this moment i'm like okay i'm exactly twice as old as Emily. But I think that for a lot of us, it is about making sure you understand that you have context. And some of that has to be earned in the market, in real downturns. And Emily spoke really well to that. But I truly believe that the people who shy are people who don't have the context of understanding that the stock market has traditionally returned 9% to 10% annualized over the last century. And that includes every horrific bear market that you can think of, some of which you could even make up in your head. It's all happened over the last

century. And you still got that amazing return. But you only got that return if you stayed invested. And so for me, with a never-sell mentality, my brother practices the same thing. I think a lot of us, I hope, appreciate that. Not everybody does. Some people like to trade, jump in, jump out. It's just not my orientation. But I think you make a lifetime commitment to the stock market, to investing. And you learn as you go. And I think that you feel less fear. I do.

Because you know more. I do know more. And yet, it still is a bummer. And I still get to say to all of you, I'm down half over the last year. That never feels good. I felt it before. and if I keep my cholesterol a little bit lower, this will happen several more times in my lifetime. This is not the last really bad market. I hope everyone's prepared for the next

one. It doesn't mean batting the hatches now. It doesn't mean try to guess when it's going to show up. Just realize it's going to happen. Losing to win is a critical theme for me in life, but investing too. I'm not going to ask you to make a prediction for the market for 2023, because I've known you too long. So I actually have the URL predictionclub.com. Why? I own it. Because I intend to make use of it at some point.

So when you say predictions, I think we need to be doing more of that in this world. There needs to be more prognostication, or at least more accountability for those who are constantly prognosticating, which is probably not what I'm about to do. What happens if someone goes to prognosticationclub.com right now? Go for it.

if you make any investment you'll be well past me i'll already be in your rearview mirror i actually i'm a member of a longtime book club that i love i think that there should be prediction clubs i think that we should be convening once a quarter or a month and make predictions with each other and then we should go back a month later a quarter later get back together and it's not just that harry made this prediction and sally made this prediction it's that you and i as members of the club need to agree or disagree with Harry and or Sally, and be accountable and score it. And I think we'll get smarter about the future. I'm a big Wisdom of the Crowds fan. So, why are we talking about predictions? I was just going to say, this becomes

a lot more compelling to me if I get to bet on either Harry or Sally. OK. OK, all right. That might be our business model. All right, we'll talk business. No, where I was going to go was somewhere that I'm sure is going to disappoint at least some of the people listening. I wasn't going to ask for a stock market prediction, but I know you are a believer in the idea that winners win. We see that in companies that succeed over decades, and we see that in sports programs.

So how are you feeling about the North Carolina basketball team in 2023? I feel as if the North Carolina basketball team this year, for the few who may care about it in this room or listening on this podcast, I feel as if this might be the best team that we've ever seen. Go Heels! Thanks for being here. Thank you. Fool on. If you're not already listening to David Gardner's weekly podcast, check it out. It's called Rule Breaker Investing with David Gardner. New episodes every Wednesday,

find it wherever you get your podcasts. If you're in Northern Virginia and looking for a bite to eat in a friendly setting, find your way over to the Hawking Griffin Pub. 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 or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.