Motley Fool Hidden Gems Investing - "Days like yesterday are a gift."

Episode Date: September 14, 2022

Down days in the market aren't fun, but they may also be great days to buy stocks. (0:21) Jim Gillies discusses: - Why his rule is to never buy stocks on a day the market is up - The types of companies he's been buying shares of lately - Takeaways from Starbucks' investor day event (16:24) Ollen Douglass, managing partner of Motley Fool Ventures, talks with Jenny Abramson, founder and managing partner of Rethink Impact, in front of a live audience about investing in private companies and what she looks for company leaders.  Stocks mentioned: SBUX Host: Chris Hill Guests: Jason Moser, Marc Rapport, Joseph Ori Engineers: Dan Boyd, Spencer Daniel Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGaming Ontario. We've got a closer look at Starbucks Investor Day and a closer look at the world of venture capital. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Jim Gillies. Thanks for being here. Thanks for inviting me, Chris. Let's go back in time, shall we? Always a good time. If we go back in time 24 hours, it's pretty awful because Tuesday ended up being one of those days where the financial news bleeds into the mainstream news because the Dow dropped over

1,000 points or whatever the total ended up being. But I wanted to talk with you about something that Asit Sharma and I started to touch on yesterday, which is this thing that, and maybe I'm showing my age here, but the thought that I have when days like yesterday happen is, I feel like I'm getting a second chance as an investor. Because if you invest for long enough, it's easy to daydream about going back in time and saying, oh, if only I had bought this stock 10 years ago, 20 years ago, when it fell. Because now, with the benefit of hindsight, I can see that was the time to buy. I'll be honest, Jim, I'm not doing that type of daydreaming. I'm doing more of the generic kind, which is to say, I think back to the Great Recession,

2008, 2009, and I think, boy, that really was the time to just be buying in general. even if you were just buying the index, the S&P 500 index, the QQQ. As I said, I feel like I'm getting a second chance because now it's like, oh, okay, this is happening. We can get into what some specific companies' CEOs are talking about in terms of the near-term forecast that they have, but this really does seem like a good opportunity for investors with a long time horizon. Yes. Oh, wait, we should probably expand on that. No, no, that's fine. We can wrap up. The podcast is over. Yeah, yesterday was interesting. Yesterday was interesting. I don't really go in for points

on the Dow, but I think if we look at a percentage basis, the S&P 500, I believe, was down 4.3%. The Nasdaq took a five-plus percent kick in the chin. Everyone is going, oh, interest rates are going up harder and faster than we thought they were, even though what they thought they were going to do was not what the Fed has been signaling. So, I'm not too sure why everyone got excited yesterday, but, you know, that and two bucks spicy coffee down the street, I suppose. I have a personal rule, actually, Chris, I have a personal rule that I actually don't buy on up days. I am constantly investing. My partner and I are investing every paycheck. About one-third of our money, most of the money under her banner is indexed. Probably combined,

about one-third of our money is indexed. We're constantly buying the index. We are dollar-cost averaging where we can, any dividend plays. Then, as someone who runs a stock-picking service and also contributes stock picks to other services in Canada, mainly right now, although I have from time to time been known to show up on the U.S. services, quite literally, my day job is to compile a list of companies that I would like to own and think that you should own at the right price. We had a rough June, if you recall. We all have short-term memory. Yesterday was bad, but does everyone remember how bad June was? Because July and August were pretty good, actually. We had a pretty rough June. Most of this buying was done in June,

But between June and then a couple when things rolled over in August, and then even a couple last week when I had the moment of, hey, wow, these stocks have gotten really cheap. This does not include indexes that I'm constantly adding to, this does not include any dividend reinvestments that's just automatically going through. These are just active buy decisions of the past three months, I went through my list for the show. I have purchased or added to 19 different companies in the past three months. Again, mainly clustered in June, a little bit in August, and two last week. The importance of having a watchlist, the importance of having done the legwork, so when you do get market sell-offs, whether they're as sharp

as the one day, one yesterday, or whether it's just a steady grinding down, you can be prepared. Now, they're not all winners since purchased, of course, but some of them have actually been pretty decent. And more importantly, among the names, there's none that I look at and go, okay, that was a mistake, even the ones that are a couple that are down 10-plus percent. I don't think I've made a mistake with them, and I can enumerate why. If we have a time machine, boy, we could do a lot of damage. If we have a time machine, going back to the global financial crisis, boy, that would be fun. Would anyone like to buy Starbucks for under $4 a share? It's about $95 this morning, and pays a very large dividend

relative to that $4 a share credit crisis low. Would anyone like to buy Home Depot, which bottomed at, I believe, $19, maybe sub-$19, $18, $19 a share in 2009, I believe March of 2009. Today it's $277. They're paying an annual dividend of $7.60. If you'd bought then and held till now, not only you've got multi-baggers, but you're getting your money back every two and a half years. Like, hard life, man. So, yeah, buy with someone with a long-term ownership mindset. Days like yesterday were a gift. Periods of time where the market sells off are a gift. I understand they're emotionally challenging, perhaps. You hate to buy something and watch it fall 10%, 15%, 25%, 30%. But if you've done a lot of the homework upfront and you understand

what you're buying and you understand the valuation, like I said, days like yesterday are a gift, man. Let's move on to Starbucks then. We talked Starbucks. Let's talk Starbucks. Yesterday, Starbucks held their Investor Day presentation. Howard Schultz, the interim CEO holding court, as he does, does. Always does a great job with these types of events. A bunch of headlines coming out of that. They're going to be investing close to half a billion dollars improving coffee machines and stores. They're really looking to speed up the process for baristas, which makes sense because if they can increase their throughput, that is certainly going to help

same-store sales numbers, especially important because cold drinks, some of which are very complex, make up 70% of coffee sales, which I think is a number that surprises hot coffee drinkers like you and me. And yet, as a shareholder of Starbucks, I appreciate that there are people out there buying those expensive cold drinks. What, if anything, stood out to you? Because after a rough couple of years, a lot of which had nothing to do with the operations of the business and had everything to do with the pandemic, this is a very optimistic-sounding management team from Schultz to the CFO on down. I, like yourself, long-term shareholder of Starbucks, probably haven't owned as much

as I should have owned over those years, to be honest with you. I like Howard Schultz as this senior emeritus leader. I think it'll be very difficult for the new gentleman coming in underneath him, which I believe he's coming in soon. They're going to spend six months as an understudy to Schultz to learn the business. I'm going to mangle his name. Mr. Laxman Narasimhan, I hope I've got that reasonably correct. He's got a pretty good resume, but I think coming in under Schultz is going to be difficult. I like that apparently at Investor day, Schultz apparently has handed over a gold coffee bean given to him by a Guatemalan coffee farmer 40 years ago. It's a symbolic passing of the torch. I've just been around

long enough to remember the last couple of times there's been a symbolic passing of the torch from Schultz, and yet he always seems to come back and they all seem to leave for family reasons or whatever. The 2008, when the first time Schultz came back, he promised very similar things that came out of yesterday, that Starbucks' best days are ahead of it, that they were going to try to better the process for baristas, better the process for getting hot food to you. As someone who has been to Europe a couple of times this summer, specifically France, and I'm seeing what the food they offer at French Starbucks versus what they offer at Canadian and U.S. Starbucks, I kind of wish they would improve the overall

food quality, frankly. But you and I have talked before, I'm not sure North American Starbucks has ever really gotten food correct, if you will. I think there's a lot here that we've seen before when Schultz passes the baton to someone else. That's true. Although, if it works out for the business and shareholders the way it did post-2008, then I'm all for history repeating itself. That's where I'm going with this. I think Howard Schultz has the ability to, just observing him for the better part of the last 20 years. I think he has the ability to know when to jump in to be there leading the resurgence charge and when to walk away when things have

played out, which he's done it a couple of times, like I said. I think he has those instincts. I do think that he's come back and he was appointed interim CEO in March. I am actually little surprised that during the CEO search, he didn't settle on the guy in the mirror again, because he's done that a couple of times. But I hope he can stay out of Mr. Narasimhan's way because that's the big risk. When you've got Howard Schultz, the modern-day founder, he's not the official founder of Starbucks, but the modern-day founder of the chain that became Starbucks as on the board and hanging around and, oh, you're going to sit at his feet and learn from him for six months. Those are some big shoes to fill. I think Schultz has demonstrated in the

past, he's not unwilling to step in if he thinks that the guy in charge isn't doing what he wants. I hear what you're saying. Jason Moser and I talked about this recently. I've warmed up to the plan that Narissiman is essentially going to spend six months on the payroll, getting to know the business, traveling around, meeting with regional managers, going into stores. I like all of that. What's going to make me feel even better is if at some point in April, when he moves into the corner office, Narissiman by himself is doing a sit-down interview on CNBC or Bloomberg, and Schultz is completely removed from the picture, you know, that will send the signal that, okay, there is officially a new sheriff in town.

Well, and I share that opinion. I'm hopeful that, you know, the first conference call after that April installation date for him officially in the corner office, I'm hopeful that Howard Schultz is nowhere to be seen on that conference call, and every conference call afterwards. Because it's hard to have two competing visions steering the ship, which has happened a few times with Howard and with Starbucks. Spoiler, when those types of, I won't call them disputes, but differences of opinion and how the ship should run. The opinion that people go with is Howard's. I am hopeful that at Howard's age now, and he doesn't really need the money, I am hopeful that he is able to stay out of the new CEO's way,

just because, again, it's hard when there's two hands on the tiller and pulling in different directions. I think there's some interesting challenges for Starbucks. Like yourself, I was blown away that 70% of those cold drinks, I will say that the cold drinks are generally at least double or triple the cost of the black coffee that you and I are drinking. I suppose as a shareholder, I don't mind that and I see why it's 70% higher. I think the ongoing unionization issues that they have will be a challenge for anyone in the corner office. I don't particularly have an opinion one way or another about whether the unionization should be broadly. I mean, there's lots of companies that have had lots of success that have been both unionized or

had unionized workforces and without unionized workforces. I think it'll be interesting. and I just really hope they can get the food better, because I've never gone there and said, you know what I want to have is one of those breakfast sandwiches that was assembled a month ago and wrapped in plastic ever since, and now please heat it up for me, and I will take it as it's kind of vaguely damp back to my table and enjoy it. Well, the good news is the investment they're making in new machines, some of those machines are going to heat that sandwich up more quickly. So there you go. But will it still be unsettlingly damp is my question. One step at a time, Jim, one step at a time. All right, Jim Gillies,

thanks so much for being here. Thank you. Jenny Abramson is the Founder and Managing Partner of Rethink Impact, the largest venture capital firm in America investing in female-led businesses. At our recent investing conference, she was interviewed in front of a live audience by Olin Douglas, the managing partner of Motley Fool Ventures. They talked about investing in private markets and what's happening at the moment with businesses before they become public. Olin Douglas When you go out looking for companies, one of the biggest questions often is like, how do you find how do you things what do you look for in companies that you invest in

so we tend to look at about just to give you a sense of numbers about 600 to a thousand companies a year of which we pick four to five to invest in so if anyone ever tells you there's a pipeline issue in terms of having enough women to invest in or impact like don't believe them there's plenty of businesses out there but you know of the 600 to a thousand we look for i'd say three things One, we look for obviously female leadership and more than that diversity at the top. We think it's really, it's less about gender specifically. We think the reason that all the data shows returns

are so much higher is that you have diversity of perspectives, diversity of opinions. I think the second thing is a business that's gonna succeed, that someone wants to actually buy. I can't tell you how many times I get pitched by something that's a really cool product but I have no idea that someone's gonna pay for it. We actually wanna see people paying for it.

real customer traction when we invest. And then I'd say a large addressable market. So the TAM has to be big enough, and in our case, solving a big enough problem. We like to see it doing something for the 99%, not the 1%. We'd rather have a large addressable market that solves a lot of people's problems

as opposed to just a few people who are very wealthy. Very good, and so as I think about that, a framework that we kind of use, fits really well into what you say. We summarize it to, when we look at companies, we look at people, business model, and market opportunity. And that's kind of what you said. In what order do you put those in?

I'd say number one, number one, and number one. Oh. No, I mean, I think you can't look at them separately because people often will say, what's most important? They're all important. And luckily, if you look at 600 deals, you should be able to find four that have all of them. And I think the popular answer is usually it's people.

It's all about the people. It's all about the leader. And you're absolutely right. You can't back a company that doesn't have a fantastic leader because this is so hard. The work is so hard. But you also can't do a company that doesn't have a great market. And you can't do some company that no one's going to buy. And so I struggle with picking.

I don't want to pick. And thankfully, we don't have to pick. Very good. Yeah, and it's interesting you mentioned that, Ted. I haven't thought about it. We've kind of forced ourselves to pick, and we do it in order of people. I was going to ask you, what was your, you do people? people business model and market opportunity the reason we rank them is

people is the only one where if it's not right the conversation stops like I don't want to hear about your business I don't want to hear about your market I mean if I can't we like to say that the average venture capital investment lasts longer than average marriage because it does and if I don't feel good about the person that's fair i don't want to sign up for 10 years i had one of my ceos who was a very famous ceo before the job say this on stage that you know it's harder to get divorced from an investor than a spouse and she was divorced and um and i got all these people writing me because i was sitting on her board being like is there a problem are you guys not getting along i was like

no we have a great relationship so you're absolutely right no no yes and let me do that And then we think if you get great people, then, you know, they need to have a business model, but they can have the ability to learn. And if you have good people that have the ability to learn, they may go after a wrong market, and they'll pivot because you have great people and great opportunities. So we kind of think about it really in those terms, and it's a lot more to it than that. But at least I find that it's very helpful to kind of simplify things as much as possible. I would add one thing. When you're looking at people, just be careful that you're not looking to find someone that reminds you of you because so many investors do this.

They're looking for patterns that they've been successful, so they're looking to repeat that pattern, or they've invested in someone else who's successful, and I think that's what causes the 2% statistic I started with. And if instead you look for other things, grit, passion about the problem you're tackling because you're going to run into horrible, horrible times as an entrepreneur, and if you have another reason to tackle that problem that isn't just about the money-making, I have found entrepreneurs will outlast those problems. You know, we have one entrepreneur who's tackling Alzheimer's and sort of a much better way to diagnose it three to five years earlier and

solve it. And she had personal issues. Her family had multiple members she helped care for with Alzheimer's. She will literally run through walls when she hits hard times to make that business keep going. And I think that's a key thing to look for in the people as well. Got it. And so that's great. If you think about things to look forward to, going through all the founders and all the meetings that we do, what are some big red flags for you where founders come in and they say something? And in your mind, if not, out loud. How long do we have? I would say one is diversity on their senior team. You can't build diversity later if you don't build it in early. And this isn't about feel good this isn't about oh i should do this to look good in the world this is actually

about getting lots of perspectives it's not just about gender or race or anything else it's people who are different from them so that when problems arise they have other perspectives in the room and so we find if that's not there in that early four or five person team it's not going to be there later and we think they're much less likely to to do well um so i would say that's one red big big red flag that we we noticed early on yeah yeah and one that we think about it's a little a minor one, I'm sure you'll agree with it. When a founder comes up and says, I have a great idea,

great, describe it, let me see your pitch deck, and they say, well, I need an NDA. Oh, yeah. I'm like, I talked to a thousand companies, I'm going to sign an NDA. Yeah, it's really an interesting dynamic. It almost goes back to the people.

As you're a founder, and if you are going to try to raise particularly venture capital, there are potential investors where that's important. If you're talking to strategic investor and they have products that are similar to yours and I think that's you know a great question to have but venture capitalists we're not looking to run the business many of them like Jenny who have run businesses and it moved over to the dark side where it's much you know you don't have to

worry about the problems of running a business and so that's one of the things where people we usually try to counsel people and explain to them why it makes things difficult again we see so many ideas so many so many people that it's hard to to really know whether we can even keep our promise of not sharing what you talk about and because oftentimes what I would like to do is hey you're in this area I know someone who's in that area also you should meet them and talk to them because if you're really going after a big opportunity one more company shouldn't make a difference and together you guys can probably

figure things out to help you both. Can I add one more? Sure. So I think there are oftentimes, every VC has, mostly, has their own lens, right? For us, ours are pretty obvious. When someone pitches you and they haven't taken the time to do the homework to know what your specific investment thesis is, and that's, you know, you can find me on Twitter. I'm at Abramson Jenny. It's not that hard, right? You can find everything in PAC. You should be in the conversation with me long before we talk, because then I'm likely to follow you. I'm likely to follow what you're doing and it doesn't have to be me it's not about ego it's it's with you all it's every venture firm know enough do your homework ahead of time and if someone hasn't

that's probably a sign of how they do lots of things in their business um so i would say that's another red flag is again it's not that they have to follow us on twitter or do any of that but just sort of be in the ecosystem understand the dynamics and who are you pitching very good very good and so as you think about your portfolio do you either have companies that you think want to track to go public uh that you can talk about or have you had companies in your portfolio that have already gone public so for compliance reasons i can't cherry pick and pick my favorites but we have some large companies i mean i'll give you a couple examples we talked about mental health earlier we have a company we invested in called spring health that's tackling mental health care

through precision medicine so taking the trial and error out of medicine it's employers allowing their employees to get much better help, run by a woman, April Coe. We invested early on. They hit $2 billion in valuation last year. Obviously, the public markets, I don't know, we've had 20 unicorn exits in the first half of this year versus 102 last year. So, obviously, the public markets are weird right now, but companies like that with that kind of growth are very exciting. We have a company that I mentioned before, Wealthy, which is caregiving, that's having massive growth. We have a company, Evidation Health,

which is helping remove the bias in clinical trials, democratizing clinical trials run by an amazing entrepreneur. So we have a lot of businesses that are having high growth, really exciting problems. They're solving great CEOs at the top that are excited. But like children, you never pick your favorite. I learned that as a mother of three. Exactly.

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.