Motley Fool Hidden Gems Investing - Tom Tackles the Member Mailbag

Episode Date: October 21, 2023

Motley Fool CEO and co-founder Tom Gardner answers member questions in an excerpt from Stock Advisor Roundtable, our premium podcast offering. Tom talks about: His top starter stock picks and how Fool recommendations are made 5 CEO’s he’d trust to run The Motley Fool And what he’s learned from past investing wins (and misses) Stock Advisor members can listen to the full conversation here.  Tickers discussed: AXON, SPY, ABNB, TTD, TSLA, AMZN, DFH, TMDX, LUV, TREX, SHOP, ANET, CRM Host: Brian Stoffel Guest: Tom Gardner Producer: Mac Greer, Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

I would tell my younger self that only a few of your investments are going to be really transformative. A lot of value for Warren Buffett has been created with just Geico and Apple. You take just Geico and Apple, you have massive amount of wealth for Warren Buffett. But in order to find those two, he had to turn over a lot of rocks. He had to try a lot of things. He got into stamps. He got into, he bought and sold a lot of things. He got into Kraft Heinz. You know, he made a mistake there.

He's constantly, the artist is experimenting with all the materials. But really, it's going to be a few companies, less than 10, that make up most of the value of your portfolio. I'm Mary Long, and that's Motley Fool's CEO and co-founder, Tom Gardner. Back in August, Fool contributor Brian Stoffel caught up with Tom to answer questions from Motley Fool members about starter stock picks, why we find value in giving Motley advice, and lessons learned from decades of investing. Today on Motley Fool Money, we're giving you a taste of our premium content. Brian and Tom's Fool conversation originally aired on Stock Advisor Roundtable, our monthly

member-exclusive podcast. That show focuses on Foolish recommendations and takes a deeper dive into the businesses that we cover. Tom appears on bonus episodes of Stock Advisor Roundtable to discuss what's new in the Stock Advisor universe and to answer questions sent in from Motley Fool members. All right. Well, with that, let's dive into our questions. And question number one is one that I am very interested to hear your answer on. I'll offer mine as well. And it is, I have a question for both Brian and Tom. If someone is a new investor in individual stocks, what stock would

you recommend for their first stock pick to get started? I know you can buy 20 stocks at once with a small amount in each, but if someone is looking to build up their portfolio one position at a time, what would that first one be? What's your answer? My answer is Axon Enterprise. And to explain why it would be that company, because it has a little bit of everything. It has manufacturing and they make the tasers and stun guns and body cameras that first responders use. But it also has this software subscription bundle that goes with it as well. So I've picked that, one, because I think they're as close to a monopoly as you could find, a legal monopoly in their niche. But two, because if it's the first stock that you're going to own, I like that it helps you get educated on both

both hardware one-off-ish sales and software subscription sales. You can take the lessons you learn from those two sides of the business and start applying them as you move on to your 20 more stocks. Great answer. I would give an unfair first answer that a great stock to buy first would be SPY, which is the ticker for the S&P 500 spider. Sold in a stock form, you can invest in the index just by buying directly an equity-like vehicle to own the whole market. But that's not what you're really asking about, I'm sure, dear Foolish member. And I like Brian's answer very much. So my answer would be Airbnb, ticker symbol ABNB. It's a company with $8 billion in net cash in the bank. So it's not going to have any solvency issues at Airbnb. Also $2 billion

in operating profit in the last year. So it's not a company that isn't profitable. It's not a risky tech business and we don't know what's going to happen. It's one of the most well-funded companies on the public markets in the U.S. today, both from its balance sheet savings and from its operating work each day, each week, each month, quarter, and year. It also has the involvement of its founders. One of its founders, Brian Chesky, is the CEO of the company. I generally view that as a very positive thing. Those founder-run companies generate a lot of value in the public markets. Because after all, why is the founder still involved? They've already, in the case of Brian Chesky, his net worth is over $8 billion. I would say many people looking at

their work, if $8 billion dropped into their bank account, they would probably say, I'm not going to work anymore. I think I'm done with work now. There's going to be a different journey for me on earth. I have $8 billion. And there are some wonderful stories of some great people who did just walk away, like the founder of Duty Free Shops, who walked away and created the Giving pledge essentially, and gave all of his money away when he had something like $5 billion. And that's about 40 years ago, he started to do that and has succeeded at that journey. So who knows what Brian Chesky will do? He's worth over $8 billion. He and the other two co-founders, they're each worth over $6 billion. So combined between the three of them,

they have about $20 billion of ownership in the company and it's generating a lot of cash. It's got a big brand name that everybody knows. It's a little controversial. I'm not sure how excited people are to know that the house next door or the apartment down the hallway is an airbnb house or apartment so there's still plenty of work to do for airbnb but i think they're they're going to become if they're not already the dominant travel brand in the world and i do mean travel brand because i think it's more than just hosting or being a guest at a house their experiences and this is a very dynamic very entrepreneurial company with an excellent product development process so i think it's fun finally to follow a consumer brand i could

recommend to you another company that I've been doing a lot of work on recently, the Trade Desk, which I've recommended for many times and has been recommended across our company by a lot of analysts and advisors. But Trade Desk is one step removed from you get a front row seat as a consumer. Trade Desk is more B2B working with ad agencies. So Airbnb, the fact that they do have B2B in working with hosts in a way, but in general, they really are a consumer facing business that all of us can evaluate together great financials i think great management great design methodology and i think it's a great first doc why do you allow contributors on the free side to write something conflicting with some of the premium guidance well thank you for asking this question

because each time i'm asked it i i raise this again internally for us to work on but the fact that we still are getting the question means that we have not resolved this for our members and so i start with an apology we have to be extremely clear on that for you our members so the first answer will be foolish in nature and then i will say what is even more complex is that there are conflicting views within our premium guidance so leaving aside the free side altogether we have analysts who agree and disagree on all of our recommendations there i don't think there is a company that has unanimous support among our analysts and advisors who are recommending stocks in stock picking services at The Motley Fool or holding them in real money portfolios that we're

managing. So we don't have a unanimous position on any company. I think it's actually misleading when a very large investment bank comes out and says, hold, buy, strong buy. We're downgrading from strong buy to buy. Not quite sure what that means. Or we're upgrading from sell to hold. What is that i already sold but to have a single position for an entire organization i think it's misleading but also it's simple i understand why they do it it keeps things very simple but for us we're not we're wanting to make things as simple as possible but no simpler and the reality is we have disagreements among our analyst group advisors and our free writers any two any two people across our company can disagree on any company publicly and we want that we had a

a wonderful debate show last week on our live video between Asit Sharma and Tim Byers, and they went through a number of companies and you heard their agree and disagree throughout. What we have to do for you is make it clear what your advisor and your service is recommending and put it clearly in the context of the other ideas that are being shared by analysts. I apologize that it's created some confusion for you, but Motley is the core word in our company brand right there in the center. And Motley, to us, means, among many other things, that a variety of views are very essential to getting to some of the deeper truths about how to make money in investing. Well, I would even push back against you apologizing too hard, because I want to

piggyback off what you just said. Getting to those deeper truths, having a Motley community to push back against your ideas is how you get there. And as someone who wrote for The Free Side, I can tell you from experience, there truly is a Motley acceptance of a divergence of opinions. And I think it makes better investors in the long run. Let me just say one last thing there, Brian, sorry, which is that I really want to apologize for not having succeeded at making this clear. We're never going to let go of those divergent views. That's essential to our approach because we can never say the Motley Fool recommends Tesla. I was hiking in California and somebody recognized me and said, hey, hey, you guys are tough on Elon.

And so I stopped and we talked a little bit. It was a super bull on Tesla who has ended up being right. I will say I have recommended Tesla repeatedly all the way through. I've never sold a single share in any service or any real money portfolio. And I don't expect to do so for at least the next five to 10 years. That's how I think about Tesla in this world. However, his review was that we were consistently negative on Tesla. And I'd say in the great volume of coverage that we've done on Tesla, he's probably right because we have a lot of analysts that have differing views on it. But we have to work on disclosure. We have to make it extremely clear why that's happening. Because if you just got a recommendation for Axon, and then the next day

when you sign into the model, you're a new member. You just got the Axon recommendation. You just bought it with 3% of your portfolio. And the next day, you see a headline article on the cover of The Motley Fool or out online somewhere that says, these are the three reasons I just sold Axon. It can be quite confusing if you think The Motley Fool has just one position. Let's go to another kind of logistical question around how these recommendations are made, which is this. Tom, why would Stock Advisor make a recommendation on a company weeks before its reporting earnings? Well, excellent question. I would say that we would recommend a stock at any point that we thought that its next five to 10 years looks promising. And so most earnings

reports, not all, are little blips on the screen. They're inconsequential to the five to 10-year result of that business, its commercial performance, and the rewards to its shareholders. So a single earnings report would be viewed as almost irrelevant, but definitely not a meaningful factor in looking at an investment for the long term in that business. I remember Jeff Bezos, when being asked in a conference where he had given a speech, he was smiling and saying, on those quarterly calls, I always heard the Wall Street analysts say, Jeff, congratulations on a great quarter. I've always smiled at that because at Amazon, we pretty much knew what that quarter was going to look like two years ago because we're thinking so long-term. At Amazon, we're planning for the next 10 years. In order to have joined Amazon's board in and around, let's say, the year 2000 and think how volatile the stock was, you had to agree that you were not going to be worried about the

performance of the stock over any period less than 10 years. That was an incredible outlier factor that Bezos and Amazon had for qualifying board directors and many very high quality candidates said, no, I can't do that. I feel a legal responsibility to talk about the stock each year. But Bezos set up a structure to say, the stock is something we're talking about over rolling decades. We need to be the earth's most customer-centric company. We need to get productivity and develop all these great new things that we can at Amazon. We don't need to be worrying about the stock price on a three-month or one-year basis. So in that same vein, a quarterly earnings report wouldn't be a factor as to whether we bought or sold a particular stock

at the full yeah i like to think of it as if you know someone's a great athlete are you going to change your opinion based on how they do in one game probably not if they're an established great athlete it's the same type of story uh here of course sometimes it does make a difference because if someone blows out their knee well then yeah you realize as an athlete maybe i need to change my theory but but most of the time it doesn't you know one one other thing about that brian of a friend who's just learning a lot about baseball now and as i watch them learning about baseball i see understandably that they have a an exaggerated response to a single event you know that player blew it or that's that's the greatest player that's two games in a row

where they've hit a home run but you know that player has hit two home runs in two consecutive games, might have hit four home runs over the last two months and might be a sub-horror hitter. It certainly can happen that somebody can hit two home runs in a row. But if those are the first two baseball games you've ever seen, and that's the one player who hit any, no one else hit home runs, and it's the backup shortstop, because the starting shortstop is injured, and the backup shortstop, if you look at their minor league stats, has pretty, this has never happened. So it's an outlier, but you think they're maybe the greatest hitter in the history of the game, because it's your early experience looking at it. So I think in a lot of cases,

when people come to the public markets, look at individual stocks, they see the price moves in the short term. They see their earnings reports. They are inclined to day trade. Somebody just, extended family just contacted me. Somebody in college said, what do you think about day trading? I'm just thinking about this now. And so I'll be having a fun conversation about that. But But yeah, all those images look very important to us and very consequential when we first encounter a new subject that has a lot of volatility in the facts, the news, the information that you can see. And so we overrate the short term.

And we need to make sure we don't do that. All right, on to the next question, which is, Tom, I'm interested in your opinion about stocks under $10 a piece that you believe will do well in the next five years or sooner. I really don't think that the share price matters. I don't think that's a key factor to look at. I know it seems like it because you'll get more shares, but if you had many shares of a valueless thing or a very few shares of an incredible, like four shares of Berkshire Hathaway, right? That's the dream. So I don't think share, the deeper you read about investing, the more you'll realize that share price isn't what you think it is. It's actually the market cap of the company. So what

I think you're really asking is, what do I think about companies that are capitalized under a billion dollars, let's say, and finding very small. I'll just give you two very small companies. They're now a couple billion dollars each, but they've grown. They've been very good investments for me in my microcap service firecrackers. One of them is DreamFinder Homes because there aren't enough homes in the US and they have a really interesting methodology for their business. And the second is Transmedics, which has a new methodology for making sure that organs that have been donated get to recipients. It's a fascinating business. Both of them are very small companies with a lot of opportunity. All right, Tom, the person who wrote this

question harkens back to my first week at The Motley Fool, where I went digging for very similar things because it's interesting. And it is this. Tom, do you look back at your November 2005 decision to sell Trex with any regret? And if so, where does that rank among all of your investing mistakes. Maybe explain what Trex is and how it's done since that decision. I remember the Trex deck in Alexandria, Virginia. I made out of recycled shopping bags. You're just there out on this massive deck looking out on the Potomac River. You're thinking it's amazing that they could reuse material that's normally dropped into landfills and actually create something remarkable. Now, I can't even remember

exactly what I sold the stock at, but let's say they're long about 2005. Let's say it was down around $4 a share. Well, it subsequently fell below $1 a share in 2009 when everything's melting down. So you can imagine I'm just sitting there thinking, sold that one. It's down to 80% from where I sold, feeling really good about that. But that $4 stock is a $68 stock now. So you have an incredible missed gain of 17x in that case if i have those general numbers right so you miss a 17x you feel good because it was down eighty percent think of all the stocks that are down eighty percent over the last two years or went down fifty or sixty percent you wish or think oh i should have sold some of that right but it could just be that that's the company that 17 years later

you're looking back and seeing from where i sold it is up 17 times in value and a 17x return over 17 years is a very pleasing return a 17 x return over 17 years is 18 annualized return so absolutely that's one of that's a regret and one of the biggest investment mistakes i've made to miss an 18 annualized return over 17 years with all taxes deferred until you sell this is this is a dream you're not going to get that in bonds you're not going to get real estate you're not going to get it basically anywhere except in riskier asset classes like venture investing so 18 a year definitely a big mistake a 17 bagger definitely a big miss um i i want i want to scold you for reminding us all this dear foolish member but i smile as i say that because

i'm thankful that you do because it just reminds us how important it is to be a very long-term investor there's a wonderful post in our community where we're doing a lot of design work by the way way to upgrade that. Wonderful post in our community that said, Molly Fool talks about five-year investing, but the deeper I get into this more, I think that's too short-term. This is more about 10-year, 15-year, 20-year, and just think about what the rest of the marketplace is focused on. Is there a recession? What happened in the next earnings report? What's the new story of today? Where is the S&P 500 by 11 a.m.? What are the futures for tomorrow's market? It's just such a miss that we all are subject to when the real story of business is told over 10 and 20

years. And that's where you get the incredible returns like you've had from Trex. And I hope you held it straight through. All right, Tom, that was that was good. That was a good answer. And let me just also say, the longer you invest, the more you're going to have those because everybody is going to sell something that ends up becoming a winner. And what we're going to finish this episode up with is a lightning round. So I'm going to start a sentence and I'm just looking for you to finish that sentence and we'll move quickly. And the first one is apropos to the question that you just answered.

And so it is, I know it's time to sell a stock when? When the CFO retires suddenly. Oh, all right, that's a good one. All right, I'm just gonna leave that be because it's lightning round. That's, you know, this lightning round, right? We're not allowing me to go any deeper. Oh, it's lightning round.

CFO retires suddenly. I mean, I could say when the thesis changes and I'd sound good in a business school, but I'll say when the CFO, okay, when the CFO flees their home country. Okay, all right, that's a good one. Number two, one big misconception about the stock market is?

That it's not accessible for people unless you have a certain amount of money. That's not true. You can get started investing in equities with as little as $100 and build a portfolio that is worth millions over your lifetime by having the right principles. Number three, the one that I was most interested to hear the answer to.

If I had to hire the CEO of a stock advisor recommended company to run The Motley Fool, I would hire any of these five. Toby Luca at Shopify, Jeff Green at Trade Desk, Brian Chesky, Airbnb, Jay Shriulal at Arista Networks, and the most controversial of all, Elon Musk from Tesla. Of course, if Elon Musk became our CEO, MF would probably stand for something else than Motley Fool. A fool you would probably be his favorite acronym, FU. And we'd probably be a $150 billion market cap company. There you go. All right. One piece of investing advice I would give my younger self is,

you can't say don't sell Trex. It's tempting, isn't it? 18% a year. I would tell my younger self that only a few of your investments are going to be really transformative. A lot of value for Warren Buffett has been created with just Geico and Apple. You take just Geico and Apple, you have massive amount of wealth for Warren Buffett. But in order to find those two, he had to turn over a lot of rocks.

He had to try a lot of things. He got into stamps. He got into, he bought and sold a lot of things. He got into Kraft Heinz. You know, he made a mistake there. He's constantly, the artist is experimenting with all the materials. But really, it's going to be a few companies, less than 10, that make up most of the value of your portfolio. Stock Advisor's own Lauren Horst put out a great article, When Hunting for Outliers Makes All the Difference.

I suggest members head back and read that one because it talks about just what you were saying. Next question is, one investing lesson that took me a long time to learn was? many, but most of all, that a truly great investment has to be a company that is great at many, many things. Phillip Fisher, I mentioned uncommon stocks, common stocks, uncommon profits, excuse me. And he really talks in one section about how you've got to get R&D spend, right? You've got to get your sales, right? You've got those new products. They can't just be new products without any kind of market research, without a good sales force, to put together a successful business and a culture where people want to come to work. And then you get a massive

change into workplace environments. Do you work from home? Do you have a flexible workforce? Do you mandate back into the office three or five days a week? All of this constant challenge, it's very important to evaluate any company you're invested in that's becoming a significant part of your portfolio from multiple perspectives to see how they're running that organization rather than to think that the earnings per share in a quarterly report is going to give you true signal. All right. I'm going to give you a pass there because that was a type of lightning round question that necessitates a longer answer. But this next one can be as short as five words. I think I failed on all the lightnings. No, no. You've done all right with some of them.

One thing I look for in leadership is long-term dedication there we go one thing investors might be missing about artificial intelligence is that it is getting more effective every second of every day it is not uh just because being in real time is pulled out of chat gpt4 and you don't have the same access to real time and oh it's a step back and all this the steps forward by ai are a never-ending and they're going to have to be managed and regulated no that's a good one it's it's continually getting better getting the arms and legs of a robot to move is but getting the mind of the robot that you can't see the invisible to gain intelligence it's happening at a much faster rate one story

that I'm really excited about going forward is? The story of the Motley Fool and our opportunity to help more members find the right advice for their situation because small cap growth is wonderful one type of member, large cap dividend payer for another type of member. One member has 35 years ahead of them. Another is looking really at the next five to seven years.

So really being Motley in our advice, that's the story I'm most excited about in life. A system of success. This one you can take a little bit longer with because it requires it. But the most overrated and underrated financial metrics are? The most overrated is earnings per share or gap net income, simply because it's so highly rated. And the most underrated is, I would say, probably gross margin growth for me, improvement of

gross margins because that's showing something around pricing power. It's showing something around efficiency and showing something around demand. So the growth rate of gross profits and gross profit margins, I think is underrated and overrated is net income and EPS. Those are literally the exact two things that I would have chosen. And well, I'll just throw in there now that if a company invests in another company that shows up in the net income, it makes net income almost entirely useless for companies that do that because I think it was about 10 years ago when I was sitting with the CEO of a public company that I that I won't name who just said because it's probably not the thing you'd want out there in the public eye but you tell me what

EPS you want from our company and I can give it to you that's how much range there is accrual accounting can be a very fun tool for those who know how to use it last one stock advisor is for blank. Lifelong investors. I think the biggest mistake that we've made or members have made with a service like Stock Advisor is to think that you can get the goose to lay the golden eggs in the next month, four months, year. Just think of recommendations from the earliest years, 2002, 2003, 2004. We never sold Costco. All Amazon, Netflix, all those great recommendations by David G, right? So it's best used as a lifelong tool. And I know that sounds like a sales pitch to get you to stick with our business as a member, but hopefully you choose to be a member of The

Motley Fool for the rest of your life. We're going to have tough years along the way, but I think net net, we're going to create a lot of wealth together. If you're a lifelong investor and not already a Stock Advisor member, head over to fool.com slash MFM discount. There, we're offering a special rate to Motley Fool money listeners. By joining Stock Advisor, you'll get two new stock picks each month, rankings of a whole scorecard of companies, access to premium podcast episodes just like this one, and more. 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 Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.