Motley Fool Hidden Gems Investing - David Gardner on Rule Breakers, Rule Makers, and Financial Freedom For All

Episode Date: April 1, 2023

Before you make the rules, you might have to break the rules.   Chris Hill talks with David Gardner, co-founder of The Motley Fool and Chief Rule Breaker, about: - How he taught his children to invest - Memorable financial lessons from April Fool’s Day pranks in the past - What happens to rule breaker companies when they grow - The Fool Foundation’s mission and upcoming online event   To register for the free online event on April 14th with David Gardner, just go to foolfoundation.org.   Stocks discussed: DUOL, AAPL, AMZN, BABA, GOOG, META, DIS, SBUX   Host: Chris Hill Guest: David Gardner Producer: Ricky Mulvey Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

David Gardner The real question is just what to make of it. I still love to invest in rulemakers, and I continue to hold that I first owned as rulebreakers, like Amazon, continue to own them as rulemakers, but I don't think they're rulebreakers anymore. I think they're rulemakers, and obviously, if they do a bad job, they themselves will be disrupted. i'm chris hill and that's david gardner on april 1st who better to hear from than one of the co-founders of the motley fool earlier this week i caught up with david to talk about rule breaker investing memorable financial pranks from april fool's days of the past and a new initiative

coming later this month from the fool foundation if you are at all familiar with david and his brother Tom, you may know their investing origin story. Their father taught them about investing when they were kids. And one of the ways he did that was by helping them connect the investing world with the products in their lives they were already familiar with. And since April is Financial Literacy Month, I started our conversation by asking if David took the same approach with his own children when he wanted them to learn about investing. I would say it was very similar, Chris, in that our dad classically, when we were little kids, took us to the Safeway in Washington, D.C., in our neighborhood and said, hey, kids,

look, chocolate pudding. We own some of the company that makes that chocolate pudding, a few shares anyway. Let's go get more chocolate pudding. From the early days, we had this Charmed sense, and rightly so, that we are all so fortunate to be growing up in an ownership culture, one in which you can be a part owner of the companies that make the products and services that make your life great. You do that through the stock market. That's what Dad taught us and showed us. Indeed, when we each came of age, he had invested for us from birth and turned that over to us and said, here you go. I've been teaching you about this over the course of your teenage years, don't screw up. That's pretty much what I've done for my kids as well.

I also invested for them from birth. I think it's a great thing to do, to give kids, especially in an era where there's a lot of student debt, to give them a little bit of mitigation against that, or a little bit of capital to make decisions on their own with. And that's definitely something I did for our kids. I would say I maybe gamified it a little bit more, Chris, because I'm even more of a gamer than my dad. We've had a lot of family stock contests, for example. Right now, this year, I'm winning our 2023 stock contest. My stock is Duolingo, which has been an absolute monster in the first few months of this year. But I finished near the back of the pack in 2022, which is often how it

felt like, for a lot of us, Rule Breaker investors, a lot of our stocks had a tough 2022. Anyway, I think that we've made it fun. We've given our kids, who are now adults, capital in order for them to invest themselves, as was done for me. In a lot of ways, Tom and I got to start The Motley Fool because we had capital from our dad, ironically, who taught us about the stock market. And so, we have been able to turn that around and teach the world, or as many people would listen to us from the world, including today's podcast, and thank you for inviting me, How to Invest. This episode is coming out on April Fool's Day. And for many years, as some of the listeners know, The Motley Fool would celebrate April 1st with a financially-oriented prank of some sort.

And what separated this from the pranks that you see from companies every year on April 1st was that there was always a lesson attached to it. There was always education at the core of whatever prank we were playing as a company. And there was always a lot of buzz and excitement at the offices when this was, you know, in the days leading up to it and even on the day itself. because the prank would happen on April 1st, and then on April 2nd, usually at midnight Eastern time, we would come out with the, okay, we were joking about this, but here's the lesson underneath the joke. We don't have the time to go through every one of these one by one, and I'm not sure how compelling that would be to listen to, but I am curious if there are one or two that stick out to you, either from the fun that we had doing it or from just the

underlying lesson that we were trying to impart? Well, I do believe that there should be an internet page somewhere that had the running history of our April Fool's jokes. We are talking about the past because we haven't done it the last few years a little bit because of the pandemic and where people's minds are. Also, there's a lot of bandwagoning. Once every other for-profit a company on the internet has their April Fool's joke, it doesn't feel as special as it maybe once did for us. But, Chris, a couple of the classics that come immediately to mind, and you know and remember these, one was simply the very first one we ever did, where we said that for years, we've been saying that managed mutual funds underperform the market averages,

but we figured out that we printed the graph upside down, we blamed our summer intern, and we went on CNBC and explained that, in fact, we'd gotten it wrong. The majority of mutual funds beat the market, and we apologize for being wrong. Of course, the joke at midnight was up. That following day, we let the world know, no, no, no, in fact, yes, the majority of mutual funds do lose to the indexes. We were joking. But sometimes people don't even hear that we were joking. They're not necessarily around at that midnight. I'll always remember that one because that's what kicked it all off, Chris. Although, arguably, there was one other that kicked it off. The whole company was kicked off by an April Fool's joke, but

we won't go over that right now. eMeringue, how could you not love the meringue company? It's not the pie or the crust. We're just going to overnight you the meringue, the top of the meringue, wherever you are. The Motley Fool is helping this company go public during the dot-com boom. We had Larry McCloskey, the CEO, on, interviewed him. Of course, it was all made up. But we got people quite excited about being there at the IPO for eMeringue. I think that was a great period piece. Well, it's a period piece. And yet, as you say this, I'm realizing that what we were making fun of is something that has played out repeatedly in years since. Part of what we were making fun of at the time, this was

1998, was how, among other things, there were businesses in the world that were rushing to align themselves with the new hotness, which was the internet. And they're saying, well, we're a dot-com, too. And we've seen that play out most recently with AI. The number of companies that have come out, even if there's only a tangential part of their business connected It's like, we have an AI division. We saw this play out with crypto. We saw this play out with so many different flavors of the month. And it'll happen again in the future. I think that these are both of the past, but timelessly fun and great. That's why we still smile about them. There's not time on this week's podcast for you and me to reminisce,

but love.fool.com, the dating site, because we said, hey, we're going to go head-to-head against other dating sites out there. We're focused on the money part of it. Getting finance right with your honey is going to count for a lot for your money. And love.fool.com, an internet site that existed for only a day or two, but it looked exciting. We were all about pairing you just based on your money thoughts. And plausibly, that's kind of smart, but it was also very silly and a fool lottery. I mean, we're going to run the internet's greatest lottery. We were criticizing state lotteries for basically taxing people who probably shouldn't be buying lottery tickets, which remains true today. So we decided we were

just going to run one on the internet, but we blew it. We gave out too many winning numbers. And of course, it was all made up and a joke. But I mean, we've had a lot of fun over the years with our Fool April Fool's jokes. And yeah, Chris, the whole point is to try to teach a lesson without being too didactic, always self-effacing, because for all of our classic jokes, we blew it. We somehow screwed it up. We flipped the graph upside down. We believed in E-merangue. And so I think the classic Motley Fool, April Fool's jokes have us making a big mistake in front of everybody. And it's totally real. We make it as dryly humorous and straight up as possible. We fool a lot of people. And then we throw it all in the next day and explain,

I think, what you're supposed to learn from this. I want to go to Rule Breakers. And let me start with the fact that earlier this week, Alibaba announced it is splitting itself into six separate companies. And one of the ripple effects of this announcement was people wondering, as has been wondered in the past, whether large tech companies like Amazon and Alphabet would do the same, should do the same? Is that a way to unlock value? All the classic questions. And while this was playing out, you were one of the people I thought of, because Amazon and Google are two of the, in my mind, two of the all-time stock picks in the Rule Breaker service that you ran for so many years. And I'm wondering a couple of things. The first is,

do you think a company can get too big to still be a rule breaker? When you look at Amazon, when you look at Alphabet, do you think they just are incapable by virtue of their size and their success of really having that rule breaker spirit and execution that they had when they were younger and smaller. Tom and I wrote a book in 1998 called Rule Breakers, Rule Makers. I wrote the first half of that book about the rule breakers, the companies that come along, the Davids that look at the world, which has been dominated, understandably, by Goliath, because Goliath is the big dog. These disruptive innovators who come in and change things, shake things up, take a surprising approach, a slingshot, and all of a sudden, that wins. Of course,

I've tried to butter my bread as much as I can, right through to the present day, probably for the rest of my life as an investor looking for those kinds of companies. But the second half of the book, Chris, written by Tom, was about rule makers. And the key there is that the best investments of our lifetimes are going to start as rule breakers. But eventually, they're going to go from breaking somebody else's rules to making the rules, to shaping society themselves. And at that point, they could become Dr. Evil, or maybe they could just become amazing. I continue to believe Apple, one of the great companies of all time, is an amazing company.

Some people don't like Apple, I'm sure. Some people probably think Apple's evil, and Apple's made mistakes. Although, I think those are pretty evident. They're not hidden, like a lot of the mistakes that are made in the financial and political world, often hidden, swept under the carpet. But big rulemakers, Chris, cannot afford to hide these kinds of things. And the great companies like Apple and Amazon and Alphabet, these are all companies that did begin, obviously, as rule breakers.

And that's the excitement for me as an investor, is finding them early and buying them. But the real juice is holding them through some tough times often. Amazon has had some death-defying drops over the course of its public market history. You keep holding, if you listen to The Motley Fool, or at least to me in these contexts, and eventually, the ones that work out become rule makers. Those are going to be the best investments of your lifetime. To answer your question, those companies are not rule breakers anymore. Those are rule makers, very evidently.

Alibaba, within its own context, is also a rulemaker. The real question is just what to make of it. I still love to invest in rulemakers. I continue to hold that I first owned as rulebreakers, like Amazon, continue to own them as rulemakers. But I don't think they're rulebreakers anymore. I think they're rulemakers. Obviously, if they do a bad job, they themselves will be disrupted. the story of the ever-changing nature of leadership, like, who the biggest companies were on the Dow Jones Industrial Average 30 years ago vs. 75 years ago vs. today vs. 30 years from now. It changes much more dynamically than people tend to think. We've seen MySpace look like a big dog before Facebook showed up, another rulemaker today, by the way.

That's how I view these. Whether they should break themselves up, as Alibaba did or not, I think that's kind of a tactical decision. I don't think there's a one-size-fits-all answer to that. But do you ever find yourself thinking, I know from years of working with you that you have engaged in watching smaller companies, rule breakers, become targeted by larger companies for acquisition. And you've said in conversation, boy, I really hope they don't do that. I really hope Disney doesn't buy Pixar. I'm loving Pixar as a public company standalone. loan. I really hope Disney doesn't buy Marvel. So, I'm wondering if you also engage in a similar type of thinking with a company like Amazon or Alphabet, where you think, boy, I really

hope they just stay the rulemaker that they are now. Or if you think, boy, if they spun off Amazon Web Services, I think that would be great. Or is that a mental exercise that you don't engage in when it comes to rulemakers? Well, I think these really big companies are very complex, and they have different functions in our society. Apple started as a hardware company and made the hardware of computing accessible to so many people who would have otherwise been confused by PCs or smartphones. And all of a sudden, your little BlackBerry phone that had its keyboard on it that you loved so much, a lot of business people can relate to this, all of a sudden, it gets disrupted by this much simpler, more elegant piece of hardware.

But now, of course, Apple is much more a software and services company today, in a lot of ways, than it's ever been before. I think each of these companies is very different. But I do think one thing unites them, and this is a more important, bigger point than just investing. This is more about our culture and our society. I think that once a company truly becomes great, it starts to affect society in ways that it needs to start to recognize and take some responsibility for. There are detrimental effects, I think we now know, to social media. I think a company like Meta really needs to be a leader in examining that. I think in many ways, Meta has been and does care deeply about this. But I think we as

third-party observers, not even shareholders, just people living in societies shaped by Amazon and Apple and Meta. We need to ask of those companies that they be thoughtful and intentional, thinking about what social problems, not just that they're creating, by the way, because I don't view these as poisonous, bad, toxic things that are creating lots of problems, but they have an opportunity. They have balance sheets that are bigger than many nations today around the world. These are companies that I think we're increasingly asking them to leverage their power and their enterprise for purposes greater than just their bottom line. Indeed, I would say a bunch of these companies are doing that. You think about Starbucks. Starbucks didn't

have to start putting its baristas through college or doing a lot of the additional efforts that Starbucks has affected. The thing about Starbucks is some people are always going to hate it. Some of their employees want to unionize, which I think is a mistake, personally, against the company. That's a real minority of them, and they tend to get the headlines. Nevertheless, if I'm running one of these big companies, Alibaba, I'm thinking hard, not just about my income statement, but I'm thinking about leveraging my balance sheet and thinking about what we can really fix. That's true not just of every great big company, But I think The Motley Fool, in a lot of ways, Chris, is trying to do that as a smaller company.

I think every company can make a social effort and have really positive impact, especially at things it's good at. April 1st is not just our favorite holiday, April Fool's Day, because it's the day when everyone's a fool. It is also the one-year anniversary of the launch of The Fool Foundation, something you're very involved in. To start, for those who are unfamiliar, can you share the foundation's mission and purpose? Sure. Yeah. The purpose of The Motley Fool Foundation is to try to create a world that has financial freedom for all. That's not going to happen in my lifetime. It may never happen, but we've had a good record at The Motley Fool for

shooting high, for aiming high, and outperforming what we thought we could achieve. That remains true here in year 30, as it was in year 20 of our company, 10, etc. We're around celebrating our 30th anniversary this year. I think it'll be true in years 40 and 50. I think that financial freedom for all is a powerful statement, and it's one that has you thinking about, just talk about the United States of America today. There are three buckets, and it's about one-third, one-third, one-third in terms of distribution here. We've got the financially healthy. I'm going to say that's you and me. That's a lot of people listening to us. Motley Fool members, I mean, it's been a rough market the last couple of years, but there's a lot of financial health

in and among the Motley Fool membership and what we do. The other two buckets in America are the coping, the paycheck to paycheck. That's one-third of America today. And then the last third is the financially vulnerable, people who are having a hard time of it. Now, we know that there are systemic reasons for these things. We also know that there are personal mindset reasons for these things. It's not that you and I should blame the government for not fixing everything or blame the people who are not doing well. There are lots of complexities here. But in our first year or so as the foundation, we've done a lot of research and begun to invest in Rule Breakers, just like I've done for many years picking stocks. We're taking

that same mentality, asking, who are the Davids out there looking at the Goliaths of the seemingly impenetrable financial world? It just seems so hard for a lot of people to get past the paycheck to paycheck. But who's actually enabling that? Who's breaking some rules? Who's bold? Who's taking risks? Let's invest in them. Let's shine a full spotlight on them. Let's invest with them. Let's acquaint our membership with them. Some of these Rule Breakers are working in your backyard. You may not even know it. I think that one thing's true of this organization, Chris, that you and I have worked at for so many years now, is we're pretty good at mobilizing our membership, at getting our members, whether it's changing

how the investing world works. I think Arthur Levitt, the former chair of the SEC, came and gave a stump speech, I think you remember that day, Chris at Fool HQ thanking us for the efforts that we'd made to open up financial transparency from corporate CEOs and earnings conference calls, and to say, you can't give privilege information just to Wall Street, you need to give it to everybody. And that's part of The Motley Fool's own legacy. So, I think that recognizing what we can do in finding the rule breakers and mobilizing our, I'm going to call it, full fuel. If you're listening to us right now, you're part of that fuel. You may not be active right now, but potentially in the future, I hope you

would be active with us as we think about creating more financial freedom. This is maybe too long an answer, Chris, I apologize. You can edit the whole thing out if you like, but I want to add that we can't solve every problem overnight, and we can't look at everyone. We need to focus, just like any good for-profit or not-for-profit company. For The Motley Fool Foundation, of which I'm the chair, we are focused on that middle third. Some people call it the missing middle, Chris. That group of people that's just an extra dollar away from saving or buying their first stock, we like to call them strivers.

We want to make the strivers into thrivers. There are about 100 million Americans that qualify as that sort of a person. And there are teachers, there are nurses, there are people that we work with every day, they're serving you in restaurants. They're working hard, but they're not quite saving it. They don't have that portfolio for their child that you or I, Chris, may have opened up for our kids. And yet, we want them to. We know the benefits of that. And they want to get there as well. We're a can-do organization looking for the can-do people out there, and we're so over-indexed toward can-do people listening to us right now. I have to mention the event that's coming up

later this month, April 14th, 3 p.m. Eastern. For those interested, they can go to foolfoundation.org for more information to sign up, register for the event. The event is free, Yes. Yeah. And I get to host it and I would be really excited if we had a huge showing among our membership. So yeah, 3 PM, April 14th, but you can go right now to full foundation.org and sign up right there on our website, join in with us. And we're going to be showing off the rule breakers to you on April 14th, the ones that we've already funded in our first year. And we have a few new ones that will be debuting. And so if you're wondering who are these people and what is their approach? And maybe, is this person operating in my backyard or my neighborhood

or my state? The answer might well be yes. And we would love for you to get to meet what rule-breaking looks like among social innovators, not just the for-profit types, which I love too. And by the way, Motley Fool Ventures, our venture fund, does this for-profit. The Motley Fool Foundation, in a way, is like Motley Fool Ventures, except we're not a venture Capital Fund, we are helping fund these solutions for our society. And we're not just picking anybody. We're focused on the rule breakers. We'll put a link in the show notes for people who are interested. You can go to foolfoundation.org or click the link in the show notes. David Gardner, happy April Fool's Day. Happy April Fool's Day, Chris. Thank you for having me.

always good to be with you. Go to foolfoundation.org to sign up for the online event on April 14th. 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. Thanks for watching!