Motley Fool co-founder David Gardner is joined by senior analyst Jim Mueller and product lead David Kretzmann to help investors make sense of the market.
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This video was recorded on Feb. 22, 2023.
David Gardner: From its outset, February was often a month, for this podcast anyway, of looking back. Essays From Yesterday, Volume 4, Blast From The Past, Volume 7. Your mailbag this month largely reflects that and in particular is looking back, at the recent past of the stock market’s performance, which in the words of one listener, has often been dismal. Both the market at large, and many of our Fool favorite picks. Let’s talk about that. The ups and the downs, I’ll have Fool analyst, Jim Mueller on portfolio moves, timing, and more than once this week, the phrase Gardner-Kretzmann continuum pop back up so you know what? I, Gardner will be joined as well later on by David Kretzmann. In the house this week we got the band back together only on this week’s Rule Breaker Investing
Welcome back to Rule Breaker Investing. Yes, it was a month often of looking back, although the only reason that I spend much time looking back is, I like history and I think history can help us live forward better. When we go blast from the past or reread essays from yesterday, it’s largely in order to be reminded of what’s happened in the past, and what we did in the past, what you and I thought and did and can we do it better going forward? I think the big reason to look back at the past is not to be nostalgic, it’s to be earnest, and to look to be smarter. Which, of course, is one of the three keywords of the Motley Fool’s purpose statement to make the world smarter, happier, and richer.
I hope I’ll do a little bit of each of those with you this week. Now, one thing that was not from the past, other than it was last week’s podcast, was talking about games and philosophy and I really enjoyed. I hope you did too C Thi Nguyen, who joined with me, we’ve got a couple Twitter hot takes. I didn’t get the deep or thoughtful notes so far about games, philosophy, the game of life, the games of investing. Often the way it seems to work, for podcast near the end of the month is I get thoughtful notes in the following month’s mailbag, but I remain fascinated by Thi’s work agency as the differentiating force when we think about games. What makes games very different as an art form from any other it’s that you and I make choices within that game. He’s gone on to think very deeply and write quite widely, as the podcast was titled last week from twister to Twitter, which I think is App.
Yeah, we were all over the map of that conversation and we closed it out with a weekend extra, just a few days ago, our Mount Rushmore of board games. Speaking of Twitter, and board games, let’s go to our hot takes this month. This one came in from [email protected] in response to what’s on his Mount Rushmore of tabletop games, wrote settlers of Catan, sequence, Wits and Wagers, and cortical. Thane [email protected] the brain replying to the same question because T and I invited each of you, to share what’s on your Mount Rushmore of games. Thane Walton also included Wits & Wagers which Thane you wrote never gets old for me, helps that I’m a sucker for numbers trivia. Well, since Wits & Wagers popped up in both of those lists, it’s also in my library and I’m going to say it for anybody who doesn’t already know the game Wits and Wagers, I think you’re going to really enjoy it.
The game is premised on asking a trivia question that nobody can really answer. In all likelihood, I’ll just make one up here. What is the average number of inches of rainfall in Portland, Oregon each year? Now, nobody really knows that especially taken out to one decimal point, but each person around the table playing the game speculates gives their best guess, and so then you bring in all the guesses simultaneously, and you line them up from high to low and you make a wager. There’s a little bit of wisdom in the crowds going on here, but you make a wager as to what is closest to the actual answer, and then of course, the game does furnish the actual answer. In my example, the actual number of inches of rainfall in Portland, Oregon, which happens since I’m Googling it as we speak to be 36 inches a year. By the way, Seattle’s annual rainfall is 37.49 inches. Here’s the shocker for me, speaking of Washington DC where I live, averages 41.8 annual inches of rainfall, which is more than Seattle or Portland, which I think surprises a lot of people. Anyway, that’s how Wits and Wagers works. It’s a really replayable game. It invites all ages, it invites replay. It is a very fine game. Thank you for those. One other Twitter hot take on a totally different topic. This is about adopting a Foolish mindset to investing. Thank you, Holly, the Animator girl, @Kelly Jo, that’s with just a J-O 1822, on Twitter you wrote for me it took about six months to be Foolish. When I just started, I didn’t know what I was doing and panicked and sold a lot. Then I found the Motley Fool through a YouTube ad, and slowly but surely I learned from Motley Fool Live, and the write-ups and now I really know what I’m buying, and to hold. Thank you for that Holly, the Animator girl. It’s a reminder by the way, that one of our best features, I think at the Motley Fool these days is Motley Fool Live, which is basically the television channel that runs concurrently alongside our web publishing.
Members know this, that you can join us. Some of the people that I regularly feature on the show, for example, someone like Jim Mueller or David Kretzmann has been on Motley Fool Live before. It’s a wonderful opportunity in two regards. First, if you’re somebody who is an avid follower of the market and you were watching CNBC too much in 2022, well you might enjoy a little bit of a different mentality with Motley Fool Live. For people who are really avid, I think it’s a wonderful feature. But then also for people who have questions. After all, questions are what drive this podcast, especially our mailbag every month, but I just do it one week or month. Imagine if we were answering questions, which by the way, our member services does at the Motley Fool every day, but imagine if we were doing so as a television program. Well, that’s a lot of the way Motley Fool Live functions. Thank you for calling that out.
Holly, the Animator girl, and those are the Twitter hot takes for February 2023. Rule Breaker Mailbag Item Number 1, Arvind Sharma. Thank you for this note, Arvind. “David, I enjoyed this week’s podcast on essays from the past. What you said through last year or a few years ago, or a decade ago when the market was up or down. At the times of printed news, or in your email letters or during the era of printed media or digital radio or podcasts or who knows in your future Avatar powered by a chatbot, one thing I can say with confidence,” Arvind writes is, “you are consistent. Over the past few months, you’ve emphasized sticking to your principles in good and bad times and proved that good stocks beat the market. It is a confidence booster for me,” Arvind writes, “when I hear this consistent message from you again and again, and I hope forever. While few may think it is boring, it is very soothing and makes me better and stronger. In short, you are trustworthy, truly appreciate what you do. Thank you. Arvind Sharma.” Well, thank you Arvind, and I really appreciate you taking the time to write in. It does mean a lot to me.
If you’re going to be or try to be a leader in this world, I think being dependable, being reliable is something that matters a lot. One of the funny definitions I sometimes heard of leadership is leaders solve more problems than they create. I think that being constant, in fact, I have a great Warren Bennis quote about this is a key ingredient. I’ve mentioned Warren Bennis’ book on becoming a leader a number of times before. I think it’s just an outstanding book that all humans should read. But Bennis talks about the four ingredients that leaders have that generate and sustain trust. I want to mention before I go into his shortlist of these four ingredients, that George Shultz, who died two years ago at the age of more than 100, of course, the longtime diplomat, businessman, economist, I’m reminded, and I would say statesman at the end of his life, George Shultz took the time to write, after a 100 years of living, what really works in this world and he settled on the word trust, which he calls the coin of the realm.
Anybody can Google and read this wonderful essay where he talks about the coin of the realm trust. I really think it’s so true for our world today. Not just what I try to do with you by showing up every week here for this podcast, but I think the Motley Fool tries to do that for all of our members in good times and bad. I think that any business needs to be building trust with its customers, with its employees, and certainly with its partners and suppliers. I would further say that any leader to truly lead needs to have the trust of those who would follow, and at a global level. If you want to be a nation that leads our world, I think you need to be building trust. I am just a huge fan of that T word, Arvind and George Shultz’s essay is a great example, but Warren Bennis talked about four ingredients that leaders have that generate and sustain trust, and here they are real quick. The first is constancy, and I think we just talked about that.
Bennis writes, “Whatever surprises leaders themselves may face, they don’t create any for the group. Leaders are all of a piece they stay the course.” Constancy was the first. The second is congruity, and I love this one. I hope I’m doing this through this podcast and anybody can call me out, either in a mailbag or offline anytime if they don’t feel like I’m trying to be congruous, which Bennis defines as leaders walk their talk. In true leaders, there’s no gap between the theories they espouse and the life they practice. The final two are reliability. Leaders are there when it counts. They’re ready to support their coworkers in the moments that matter. Then finally Number 4, and by the way, the other three don’t count if you don’t have Number 4, but number four, integrity. Leaders honor their commitments and promises. Arvind, I hear you on consistency. I do shoot for that. I think of that as one of the prerequisites to lead.
I also want to say that all of us should be going for all four of these at all time. We’re all human, so we’re going to fall down, we’re going to have blind spots, we’re going to miss it here and there. But at least you know that I’m trying to deliver dependability and trust. I think that’s so important, especially in the digital world, especially one of fake news, or questionable theories about what to do with your money that I think are always on offer broadly across the Internet. Arvind, I’m glad that you tune in here every week and thanks for taking the time to write. On the Rule Breaker Mailbag Item Number 2, Greg Land, thank you for writing in. Greg, this is not the easiest note to read, but I’m happy to share it, and thank you for sharing. Greg writes, “I listen weekly to the Rule Breaker Investing podcasts.
I’ve had a subscription to your service for a couple of years as I look at my purchases that were made at the time and probably still are your active recommendations, frankly, the best I can say is that the performance has been dismal.” Greg, I use your word to lead off this week’s podcasts. This is not cherry-picking as I actually currently own every stock listed below, in large part because they were recommended. Greg writes, “While it’s my decision what and when to purchase, advertising as if you beat the market, is from my experience, laughable. Not in the funny sense of the word. Suffice to say, hearing you discuss Amazon is a whatever bagger is more than aggravating for me, and while technically might be true, it is also,” Greg writes, “completely disingenuous. What would be a better representation of your performance would be from the last time the stock was actually selected, not the first time.
“I order from the company frequently, my job is using Amazon Web Services every day as a DevOps engineer, but as a stock, it’s been terrible for the last two years and nobody knows the future,” Greg writes, speaking of Amazon. “To close it out in the world of four percent risk-free T-bills only federally taxed based on the performance below, why should I continue spending money on a subscription?” Greg closes with five stocks that he’s bought, presumably by following our Foolish advice. The first two are down more than 80 percent, Fiverr is down 86 percent, Lemonade is down 83 percent. He then lists CrowdStrike down 53 percent, Amazon down 35 percent. The last one is TenCent, which is down 31 percent. I guess I have three thoughts back for you, Greg, the first is, I’m very sorry that you’re joining Fool services has led you to invest money in stocks that have gone down.
Now I can say that to Greg, I can also say that to 100,000 other people, in fact, more than 100,000 other people who’ve joined us within the last couple of years and are probably well down from where they thought they would be and certainly well down from where the market started two years ago. I feel the same way by the way, I’m also well down and I’m certainly disappointed in the performance that I have generated myself off of my portfolio and it’s invested not in each of these stocks. In fact, I’m not recommended Fiverr, Lemonade or CrowdStrike, but I certainly have recommended Amazon and mine was the TenCent recommendation as well in Motley Fool Rule Breakers, both of those down 30 percent or more for you, Greg. Let me just say, first of all, I’m sorry.
I hope that you heard from our previous listener, Arvind, that I’m consistent, that I’m consistent over time and I feel as if your own reflections are not just true for you, which they clearly are for the last two years, but true for so many people who have gotten started if they did investing in the last couple of years after an incredible run-up that we saw in the summer of 2022, a breathtaking high in 2021. It’s been pretty much straight down, especially for a lot of the kind of companies that I favor Rule Breakers. I don’t think that your experience is that radically different from many others, Greg, and so if misery loves company, you’ve got it. The second point I want to make is that this is a very short time-frame to reflect on. We can look back over the 30 years of The Motley Fool and I’ve seen other two-year time-frames that are like that. It’s going to happen from time to time.
Sure has to me and as I’ve often said, it will happen again in future. For anybody who’s playing the long game, which I am, and I think most of us here at The Motley Fool are doing, bad news, it’s going to happen again. This kind of performance will happen again in future. I just want to make sure that you understand that this does, in my experience recur about once every 10 years, we have a really bad market for about 18 months or so. I feel as if we’re on the tail end of that now. But you’re looking backward over the last two years and you’re seeing just how bad things have been. In the third and final response I have for you is just keep swimming. That’s a really important phrase that I’ve been using over the last couple of years, that of course comes from Finding Nemo, one of Pixar’s spectacular short animated films. But it means a lot more to me than just words from a cartoonish fish.
I think for me, it is about making sure that you are obeying a process that makes sense for you. What we have talked about and in fact, exemplified for 30 years now is steady dollar-cost averaging in good markets and in bad into the best companies that we know, and especially for Rule Breakers with a willingness to be wrong, especially in the short-term, a willingness to lose, to make some bad stock picks. You referenced Amazon, which has indeed been probably the best stock I’ve ever picked, despite its poor performance over the last year or two. I guess that’s really a matter of perspective because when I think about investing at the Motley Fool, I think in 30-year increments or at least three minimum-year increments in terms of looking at performance. But I totally understand how somebody who’s relatively new, either to the Motley Fool or to investing hasn’t had that experience. In some ways hasn’t been able to learn and see that perspective.
I think it’s important to talk about what works over time and what wins. That’s always where I’m going to be mainly focused. But if it sounds disingenuous to you, it certainly isn’t intended disingenuous, I just think I hope I speak for everybody at The Motley Fool saying, we continue to do our best, and overtime I believe our best is better than the market, but over any short-term period, yeah, you can end up with a stock that gets cut in half or worse. One of my favorite podcasts, if you want to just Google maybe a Rule Breaker investing episode before you started listening, it’s called; losing to win.
For me anyway, it’s my highest eloquence I can bring numerically backed as to why winning requires losing in the short-term, at least the way that we invest. Greg, in conclusion, thank you very much for writing. I always ask everybody who joins a Motley Fool service, are you doing better with us? Then you would without. I would encourage you to ask yourself that question, if you truly don’t think that you’re doing better with us, then you would have without I’d be the first to say, change your services, either cancel and take another Motley Fool service or cancel us all together if we’re not truly helping you do better with us, then you are without. Greg Land, thank you for the note Fool-on. Onto Rule Breaker Mailbag Item Number 3, and my golly, look, it’s Jim Mueller. Jim, it’s great to see you again, welcome back to Rule Breaker Investing.
Jim Mueller: Thanks, David. Always a pleasure to be here.
David Gardner: It’s a pleasure to see, we’re not a video podcast, so people can see that you’re at Fool HQ today, one of our employees, Jim, I believe you’ve been to the office far more days than you’ve not [laughs] since we reopened more than a year ago, am I right?
Jim Mueller: I have not worked at home since we reopened in June.
David Gardner: That is remarkable now. I can say that certainly and a lot of our employees, many of them have not spent many days at all in the office. Jim, I especially want to say I appreciate the people who do go to the office and I am getting over there a little bit more in the last few months that I had previously, but thank you for your fealty to the bricks-and-mortar of our office building and to water coolers, real ones.
Jim Mueller: Your pattern was a couple of days in the office and but three days at home, anyway, before all this.
David Gardner: That’s true. Just by nature of where I’m at my career, etc, that is indeed true.
Jim Mueller: There are several of us from different departments who show up on a regular basis.
David Gardner: As I say, I really do appreciate that. I’m sure others would feel the same way and then a lot of people are glad that they don’t have an hour-long commute that they used to have. I think we’re still all over the map in different places on this one. Jim, this is notes from Mark Kirch, it might be Mark Kirk, but I think it’s Mark Kirch, and Mark, thank you for writing. ”Hi, David. I’ve been a Fool for about five-and-a-half years now and over that time I’ve learned the hard way that your advice to do nothing during market turmoil is the best way to go. That trying to time the market based on current events is a small f, fool’s errand. In particular, I thought that I was making a brilliant move by selling most of my stocks in early March of 2020, figuring that a massive COVID recession was on the way.
Then I’d be able to jump back into the market at a much lower cost basis once the economy tanked.” Mark goes on, “I felt smart for a few weeks as I watched what had been the holdings in my portfolio drop 35 percent. Who knew that Congress would enact the largest stimulus in history, dropping interest rates to near zero and that the market would roar back as quickly as it had dropped, especially the rule-breaker stocks that made up Mark Wright’s most of my holdings? Surely this was just a momentary blip and the downturn would resume or would it after an agonizing several weeks, my FOMO over KMI and I repurchased the same stock I had sold a couple of months earlier, but at a higher cost basis than I had sold them.
I felt like the biggest small F Fool in the history of investing, and I became convinced that your advice to buy in tenaciously hold great companies really is the best way to go.” There’s going to be a turn here though, Jim. It’s coming soon. Mark continues, “Following my reentry into the market, the shame of my foolishness, small f was assuaged as I watched my portfolio double in value over the next year, I was feeling great in February of 2021. Since that time, I’ve watched its value declined by as much as 60 percent. But I learned my lesson and I haven’t sold anything other than when the Motley Fool issued a sell recommendation, having the foolish just keep swimming mindset really reduced my anxiety level even in the face of massive drops.” Jim Mueller, “recently through,” Mark writes, “I’ve been second-guessing myself.” Now there’s more to this note, but let me invite you and Jim, any reflections on just the first couple of paragraphs as Mark has experienced the ups and the downs of COVID investing.
Jim Mueller: He has certainly experienced the ups and downs, and we all have. A lot of my own portfolio has been doing the same thing up and down and up and down. March of 2020 was not a fun month for me at all. The rest of 2020 was pretty cool, 2021 was all right, 2022 sucked. Hope I’m allowed to use that word on this podcast.
David Gardner: Sure you can.
Jim Mueller: But since 2023 began, it’s been doing OK. I mean, we’re all experiencing that, so I know exactly where you are. The one possible issue I might raise is how often are you checking your balances. Richard Thaler, Nobel Prize winner of economics for behavioral finance, after Daniel Kahneman, famously got it a couple of years previously. He’s done some research into this, into how often people check their portfolios. He found that the more often people look at their portfolios, the worst their performance is. Not because the stock performance is any different, it’s because we tend to react to what we’re seeing. He said, if you’re checking it daily, you’re going to see down more often than you’re going to see up. You’re going to see red more often than green. Then if you check it monthly or quarterly or even better yet annually, we only check out once a year, odds are that you’re going to see a green result.
David Gardner: That’s a really good point.
Jim Mueller: His suggestion is to stop looking. My addition to that and I feel bold saying that I can better Nobel Prize-winning economists is to turn off CNBC because they’re designed to grab your attention and make things almost a below things out of proportion. I mean, especially on bad down days. One, stop looking as often and two maybe print out a couple of quotations that I’m going to read off to you. I have these on my profile. One of them is Peter Lynch’s quote, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections and has been lost and corrections themselves.” Then another one, David, see if you can name the speaker. “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.
David Gardner: I’m just going to add Charlie Munger, but I don’t know Jim.
Jim Mueller: Much older than that. The mathematician Blaise Pascal.
David Gardner: Pascal, wonderful.
Jim Mueller: Pascal. Yeah. It’s really hard to get over those emotions. Really hard. One way I’ve found that helps doing it. It’s not a perfect answer, but it really helps is to slow you down by writing out and writing in a journal and not allowing yourself. Setting a rule saying not allowing yourself to sell on market down days. Just set that rule and say, the market is crashing today and I feel run but I’m going to pay my rule and go with that. Another thing that might help you think about this on a good day, on calm day, when you’re calm and not feeling all stressed out and everything, is to write down what you’re going to do when the market collapses. Are you going to sell? Are you going to sell all, are you going to sell parts, or are you going to buy?
David Gardner: Premeditated action.
Jim Mueller: Yes. Premeditated action.
David Gardner: Assuming you can actually follow through with your pre-meditations.
Jim Mueller: Right.
David Gardner: Although you stand a much better chance by articulating them, Jim, that’s what you’re saying.
Jim Mueller: That’s exactly where I was going. It really helps to set this up ahead of time. When you’re in the moment, you can go back to that and say, I have thought about this ahead of time and in this situation, I’m not going to buy, so I’m going to buy because there’s stuff that’s going on sale.
David Gardner: Jim, I think you’ve done a great job speaking to what I would call a capital F Foolish mindset. In a lot of ways our corresponded here, Mark I think understands that, feels that he reflects how maybe before he had that mindset, he was getting whipsawed. By the way, if there were ever a reason to be or go bipolar, the last couple of years of stock market activity has given you every nudge you would ever need. Because the extremes of highs and lows and the rapidity and flip-flopping, both directions of these is very rare in market history. I think a lot of us have been forced to confront our own psychology in a way that because of the extremities of the externalities, we never necessarily have faced that before.
A lot of us are asking new questions. But Jim, let me just continue, Mark note a little bit longer because I guess he has what I’ll call the key question that I think we should speak to coming up. Mark goes on to say that second-guessing that he was feeling. He says, “Started when I listened to an old interview on a full podcast with Howard Marks where he was talking about his book, Mastering the Market Cycle”. Mark writes, “I’m at an age a couple of years younger than you are,” so if I’m 56, let’s just say Mark is like 54. “Couple of years younger than you are, but I’m an age,” Mark writes, “Where the value of my investments significantly overshadows the additional amount that I’m able to invest on a yearly basis.
A large downturn has a real and potentially lasting impact on my wealth that isn’t proportionally offset by new investments, especially as your retirement appears on the horizon in 10-15 years. He writes in conclusion, all this brings me finally to my question, am I doing myself a disservice by following the Fool’s standard advice to ignore market valuations and just stay the course through market cycles? Aren’t there times,” Mark writes, “In the market cycle when stock prices are so far ahead of underlying value that it makes sense to sell and wait for the cycle to shift. In hindsight,” that’s a key phrase, Jim. “But in hindsight, February of 2021 looks like one of those times to me, I look forward to your response. Thanks for all you do your dedication and making the world smarter, happier, and richer is appreciated. I hope by Mark Kirch.” Jim, your thoughts on market timing and market cycles.
Jim Mueller: Howard Marks is a phenomenal, intelligent, smart investor. But he is not you, and he’s not me. We have to invest in the ways that make sense for us and our situations. I’d like to address a couple of points. One, I hope the idea that the size of your portfolio makes it seem like your relatively smaller investments won’t make a difference. Invest anyway, I hope you are. Especially during market downturns where you can get more bang for your buck. As long as you trust that the companies will make a return that will shorten the amount of time it takes before your portfolio reaches its previous high. Two, in the depth of a bull market too, we humans tend to do what’s called recency bias. That is, what’s happened recently is going to be the way it is for all time, and that I think is affecting your sense of how long it’s going to take.
Unless you’ve really shifted positions around, I think your estimate of 10-12 years, just to get back to where you were is probably pessimistic. I’m not guaranteeing it is or isn’t, but I think the odds are that it is and it will happen sooner than you think. Three, hindsight is, I think it’s the cruelest of behavioral biases. It always tells us what we should have done when we didn’t know what we should’ve done. By knowing something in the future that we did not know at the time. In February 2021, there was no way you could tell that that was a perfect time to sell. No way in the world. We cannot know the future. It is impossible to know the future. I’ve got a six-inch crystal ball sitting on my desk and it makes it a great lens. It sucks as at predicting the future. I’ve watched it and it has not clouded at once. It doesn’t work.
I have that to remind myself that we cannot predict the future, we just can’t. But hindsight makes us think we could’ve. We take a certain route home and we get into a traffic jam and you might have been thinking, maybe I should go to the surface streets today. You’re getting a traffic jam on the freeway says, I knew I should’ve gone on the surface streets. No, you didn’t, but you think you did because you’ve learned something’s afterwards. After the time you had to make the decision. Which is where I think those quotes by a Pascal and Lynch come into play. We make the best decisions we can ahead of time, and then we can adjust them over time, but we can’t go back and remake them and go back and do them over. Again. Try to plan out what you might do ahead of time when you’re calm and then when the stuff happens. Trying to think of a polite way of using that phrase. When it happens, go back to what you wrote when you were calmer and thinking things out.
David Gardner: Yes. Well said, Jim. I’ll just add that well, our first mailbag item this week was about consistency. I think it was Ralph Waldo Emerson that a foolish consistency is the hobgoblin of small minds. I certainly can grant that sometimes consistency isn’t your friend, for example, one of the many definitions of insanity is doing the same thing over and over again, expecting different results. But I want to underline doing the same thing over and over again. When you’re being consistent, especially through market cycles with the strategy that makes sense for you. We all have different risk tolerances. We all have different amounts of money and different numbers of years before we’re going to try to draw down on that money. There’s no one size fits all answer for how to manage a portfolio.
We do our best to give you principles that you can use making everybody else listening. But I do think there’s something to be said for continuing the approach that you’re taking the market’s not changing midway through, not investing, as we sometimes said, Jim, driving with a rear view mirror is not a great way to navigate going forward. I think staying at a consistent speed, going in a consistent direction is much more likely to end in success. It sure has for me. Mark those thoughts are helpful and I see another Fool in the house here as we open it up with the Rule Breaker Mailbag Item Number 4, and I really appreciate this one. Jim Mueller and David Kretzmann because each of you is specifically mentioned in this mailbag item. David, it’s great to see again, my friend, and David Kretzmann you have made many appearances on this podcast over the years as has Jim Mueller. David, what are you doing these days around the Fool?
David Kretzmann: I do a little bit of anything and everything within product helping lead our product team here at the Motley Fool always something new every day.
David Gardner: You and I collaborated unwittingly on one of the more important concepts that’s emerged from this podcast over the last eight years, and that’s the Gardner-Kretzmann continuum. Now, David, that is going to be called out not just in this mailbag item, but in the one after, would you briefly restate, just give a definition for our new listeners?
David Kretzmann: Yeah, and if we had known it would take on a life of its own over the past decade, we might have to put in a little more thought when we came up with it. But maybe the idea was all it took. The Gardner-Kretzmann continuum or the GKC score, is essentially just taking the number of stocks in your portfolio and dividing it by your age. David and I were just theorizing that generally speaking, it’s probably applicable that anyone regardless of your stage in life, it’s probably a good goal for you to have a GKC score of one or higher. As an example, if you’re 36 years old and you have 36 stocks, you’d have a GKC score of one, if your 50, and you have 100 stocks, you’d have a GKC of two. That’s the general idea is skewing toward more diversification your portfolio, not less.
David Gardner: Yes, and I think one of the charms of the GKC, David, is that it brings that degree of mathematical precision that is somewhat unnecessary. The basic understanding here is that over the course of time, you should probably increasingly diversify your portfolio. It makes more sense for somebody who’s 20 to have 20 stocks and someone who is 60 to have 60 stocks. Yet we did express it mathematically and it has taken on a life of its own and I continue regularly to think that way. I think many of our listeners do too, which is why we’re going to move to Paul Ward’s note here on Rule Breaker Mailbag Item Number 4. This one’s from Paul Ward writing and gentlemen from the United Kingdom. “Hi David. Hello from the UK after listening to the podcast Blast From The Past Volume 7, I was inspired to write this note and get your opinion on a particular conundrum that I’m facing.
While my personal investing journey started over 20 years ago, my initial investments were in managed funds and it’s only been in the past five years or so that i become more fully invested in individual stocks. My education with the Motley Fool has been even more recent than that. It’s fair to say that in hindsight, some of my initial stock picks were not good ones.” Paul writes, “And have certainly not delivered the returns I was hoping for yet. Having become more fully immersed in the Rule Breaker philosophy in the past couple of years through listening to your podcast and subscribing to the Rule Breakers service, I’m only too aware of some of the mistakes that I made in those early days into my credit. One thing I’ve always done,” Paul writes, “Is hold for the long term, which is where the scenario I now want to share with you. He didn’t know he was with us three with you manifest.” Here we go, Jim and David, the introduction of a commission fee by my current broker. That’s interesting. An introduction of a commission fee, David, Jim, I feel as if all of the commissions are going away not being reintroduced, guys.
Jim Mueller: This broker is going in the wrong direction.
David Kretzmann: Zig while others are zagging. But I don’t think this is a good zig in this case.
David Gardner: Well nevertheless, this is Paul’s broker and maybe it’s like maybe Paul’s broker was in his wedding. This could be a very important relationship to Paul, so let’s keep going. Which previously offered commission-free trading. This broker has encouraged me to transfer a number of my stocks from a standard stock trading account to a tax-free account known in the UK as an ISA. Unfortunately, it’s not as simple as transferring lock stock and barrel. To do this, I have to sell all my holdings in the standard account and then repurchase them in the tax-free account.
This I had intended to do wholesale until I heard the podcast blast from the past and your recommendation to revisit the six principles of a Rule Breaker portfolio, which I duly did. Now, upon listening to these six principles, a couple of things dawned on me and David I may mean this one at you, one based on the Gardner-Kretzmann continuum, my portfolio is overdiversified. I have holdings in 71 different stocks in ETFs and being only 46 years of age, I’m on the wrong side of that continuum. I’m going to pause it right there. David, your thoughts immediately.
David Kretzmann: Well, generally speaking, I think for most people, it’s a better thing to be overdiversified than under-diversified. Now of course, that’s going to be a different number for any person. But in addition to the GKC score, which we’re talking about right now. We probably need to come up with something along the lines of asleep score. Like are you sleeping well at night with your portfolio? I think for most people more often than not, the more stocks you hold, the bigger cash position, probably the less you’re worrying about your portfolio and less likely you will be to take a short sighted emotional action in your portfolio. I think the overdiversified number will be different for everyone. But personally, I don’t think 70 stocks for someone in their 30s is a wild number.
David Gardner: Just to be clear on this, David, because we’re all about this mathematical precision which is unnecessary but beautiful. 71 stocks and Paul is 46, which by the way is a 1.54 GKC. David, I think you and I are both coming down on the same side on this one. That’s not a big problem necessarily. Maybe a bigger problem is having to sell all your positions in order to reposition them in a tax-free account. Now, I do know we’re working with a CFA on this podcast because Jim Mueller has his CFA charter. Now, Jim, I don’t know if that extends to the UK and I know you’re not providing personalized investment advice here but do you have any quick thoughts before we go to the end of Paul’s note?
Jim Mueller: A couple of quick thoughts. I do not know if the UK has anything equivalent to what’s called the wash-sale rule in the United States. That is, if you sell something at a loss in a taxable account, you have to not buy it in any account you have control over or that you are a beneficiary of like a spouse’s account or something for 30 days on either side of that sale date. Otherwise, you’re not allowed to take that loss on your taxes. I don’t know if the UK has such, I hope Paul, you know that and would be working around that if such exists. Second point is talk to your broker, maybe you’ve been with them long enough so that they could give you a lower commission if they insist on creating commission or charging you commissions, or if you’ve been along and loyal customer of theirs. See if they can get no commissions, see if they can extend that for you going forward.
David Gardner: Yeah. Jim, we allowed the possibility that Paul’s broker was in his wedding. If that’s true, I’m thinking the answer should be, yes.
Jim Mueller: Yeah. But if not and if it’s like seven or eight dollars, I probably wouldn’t worry about it unless you’re investing only $100 at a time, it purchases $100 at a time. If it’s higher than that, I probably wouldn’t worry about it too much. After those two questions and your consideration then, I have a question back for David and Kretzy here. You say a 1.54 GKC number is decent, is there an upper limit that you would say might be too much? There’s like a four or five, or 10.
David Gardner: Can the ratio ever get David Kretzmann too high?
David Kretzmann: We haven’t run into a scenario where a listener has written in and challenged the upper limit. [laughs] I’m waiting for someone to accept the challenge. Now, maybe someone’s newborn has a portfolio of 200 stocks and we’re looking at a GKC and the thousands, there’s some ways to stretch the boundaries of the score. But so far I haven’t encountered anyone writing in or on Twitter who has what would be seen as an obscene score, but I’m sure there is a limit. Just from what someone’s practically speaking able to follow in their portfolio, but I haven’t personally encountered it yet.
Jim Mueller: Who is that famous investor who owned thousands and thousands of stocks?
David Kretzmann: Shelby Davis.
Jim Mueller: Shelby Davis.
David Gardner: The Davis Dynasty and Shelby Davis was famous for making a lot of money. Of course, it was lifetime, and he just kept buying and just never sold, ended up with. He had a very high GKC, [laughs] even as an older gentleman, David Kretzmann. By the way, David earlier you referenced sleeping at night and the sleep number, that’s something that you and I are going to address on the final mailbag item of this particular week. David, you and I will speak to sleeping at night and having a portfolio allocation that lets you do so on the following item. By the way, Paul does mention for Sleep Number fans, his sleep number is around 30. He mentions in a postscript. He also mentioned by the way, that this opportunity or maybe this forced opportunity to sell and then rebuy applies only to about 30 of his stocks, not all 71.
Just a little bit more context, but gentlemen, I wanted to speak to one other aspect of his note because he’s talking about repurchasing all of his holdings. If he’s going to do this, has him likely he says saddling his portfolio with the good stuff along with the bad, the winners as well as the losers, and so he’s asking, basically, does he go like-for-like? Does he take this opportunity to reduce his overall number of holdings, even if it means locking in pretty significant losses on stocks that he’d be selling at a loss? He mentioned Teladoc, he mentioned Fastly. The final line of his node is, I’ve thought for a while I have too many stocks in my portfolio, but to echo Jim Mueller, I prefer a glacial approach to selling. What would you do? Well, since we have both Jim Mueller and David Kretzmann here, let’s speak to the end of this note. Jim, thoughts back on a guy who’s like, should I rebuy the winners along with the losers, or which ones or what do I do here?
Jim Mueller: I’m going to reflect this right back at Paul. If you’re not going to be making this transfer, what would you be doing? Would you be closing out some of the positions, maybe repositioning some other positions? Look at it that way rather than buying back losers and selling winners and that stuff. Because where the stocks are held in an account doesn’t really matter except when it comes to tax treatment, but from an investing point of view, it has to be an investing question. Rather than tax returns or selling at a loss right now, and hopefully, it’s a good enough company that is going to come back. Answer the question this way for yourself. If I was not doing this, what would I be doing with this portfolio?
David Gardner: I like that a lot, Jim. David Kretzmann, as I think about Paul’s situation, I feel the same way. It’s like if you’re going to have to reset, what stocks would you want to have in your portfolio anyway? Not just for Paul Ward, but for all of us listening and speaking. If you’re invested in things that you don’t want to be invested in, but you’re holding on hoping to get back to even let’s say David, this is not probably what you should be doing anyway.
David Kretzmann: To me, this seems like a natural catalyst for some spring cleaning in a portfolio. I think arbitrarily holding something that you’re no longer really interested in, just hoping that it’ll come back, I appreciate the principle of it, but I think we don’t want to be too anchored to any given stock that we own. I think particularly in this case, again, like Jim, I’m not familiar with the intricacies of UK tax law, I wouldn’t let losses be what stops you from selling something, especially in a taxable account. Potentially locking in that tax loss could actually be a benefit to offset some of your gains. For myself, typically, when I’m looking at a spring cleaning of my portfolio every year or two, I’ll typically start with the weeds in the portfolio, the losers in the portfolio. They’re down 70 or 80 or 90 percent and trim there versus starting with the winners. I like the idea of a spring cleaning every now and then.
David Gardner: Maybe David and Jim, this is a real opportunity for Paul. He sounds like his hand is being forced a little bit here to reposition because of commissions into a tax-free account, but maybe he has an opportunity to truly make his portfolio reflect his best vision for the future, regardless of the past performance of these stocks. Sometimes you should hold on to that thing that’s down. Maybe it has a great balance sheet and you know it really well, and it’s just reacting to a bad quarter of earnings, let’s say, or maybe a cyclical industry. Other times maybe you should sell your very best stock, the one that’s performed best. Maybe it’s outstripped, at least in the near term, its own corporate results. I think everything is contextual, but guys, as we finish this up, Paul Ward and others, I hope this has been helpful. You’ve taken a son, a journey through the GKC, thinking through the Jim Mueller, I love this Jim, glacial approach to selling. Is this a branded term that you’re using? Is this a book coming out from you soon?
Jim Mueller: [laughs] I don’t know about a book or maybe I should register that at the Trademark Office across the street.
David Gardner: Glacial approach to selling.com probably has not been claimed yet, so Jim, as long as they didn’t mention it on this podcast, nobody’s going to register it, I don’t think.
Jim Mueller: It goes back to the letter we were talking about just previously in that don’t let your emotions dictate, and don’t react in the moment, but take your time and think about it and look at the company and make a decision. You’re letting you’re thinking brain, your slow brain as Kretzmann talks about catch up and help you do better.
David Gardner: Wonderful. Well, thank you, Jim Mueller for joining us. You you’ve got called out specifically by Paul, so we had to have you on, but thanks for a couple of good mailbag points. I’m going to bid you adieu, keep David with us as we close out this week’s podcast. Jim, Fool-on.
Jim Mueller: My pleasure, David.
David Gardner: Onto Rule Breaker Mailbag Item Number 5 to close out this week from Andreas Ham and David Kretzmann, I love the way this starts. Hey, Davids greetings from Snowy Germany.
David Kretzmann: That paints a picture.
David Gardner: Makes me a little wistful because who doesn’t want spring to come? I can’t quite remember whether punks it. I think Punxsutawney Phil said it’s going to be a little bit longer winter this year, Groundhog Day in the US, but we barely had any snow this year in the Washington DC area, and so I’m still cheering on some snow, so thank you, Andreas, greetings from snowy Germany. David Kretzmann, let’s play really fast lightning round word association. Are you ready?
David Kretzmann: Sure.
David Gardner: Snow?
David Kretzmann: Cold. [laughs] Did I play this right?
David Gardner: I guess really what I was trying to get at my fault, David, is do you like snow? Do you like cold?
David Kretzmann: I don’t mind it. It’s not something I’ll go out of my way to enjoy, I am living in Austin, Texas now, so aside from maybe once or twice a year, we’re not accustomed to too much snow down here, but a little bit of snow here and there, I’m all for it.
David Gardner: Wonderful city. Well, greetings from Snowy Germany, Andreas Ham writes, “I listened to the Blast From The Past episode. The first blast about Sleep Number is one that I encourage every Fool to follow. However, I made one tiny enhancement to that idea for myself that some may want to consider as, well, my sleep number is not derived,” Andreas writes, “from my top one, but from my top three holdings. Now, put a fork in it for a sec here. Let’s just talk about this briefly. The Sleep Number, the way that I’ve defined it and used it as a tool for Rule Breaker Investing is this is the amount that you’re willing to put into your very highest holding. Your largest percentage of allocation into a single stock, and there’s no right or wrong answer. Well, maybe 100 is a wrong answer, but it’s very individual, David. As you and I would understand, you always looking over our members at the Motley Fool Members Success and what it means, and you know David, that there’s not a single sleep number. Am I right?”
David Kretzmann: Absolutely. Everyone’s a little bit different. People have different risk tolerance, volatility tolerance, different goals, different timeline, and so every person is going to have their own unique score or number.
David Gardner: What Andreas is doing is he is suggesting that maybe it’s not just about one stock or your biggest, he’s broadening it to say, well, what if you did it for your top three holdings? I’ll pick it up right there. Andreas writes, “I want to avoid the possibility that my top three holdings will take over 50 percent of my portfolio value. Therefore, each holding on average would have a sleep number of around 17, which doesn’t seem that high if you’d consider 1/6 of your wealth in a single stock. I would say, especially for younger people who are building toward something that probably is more practical.
If we’re talking about somebody who is further along the path of life, that might, for some people, even the number 17 might be a little bit too high. But again, it’s all relative, and no judgment, I certainly have a higher Sleep Number myself, Paul Ward, our previous correspondent and said his was 30, so we’re all at different places. But Andreas goes on with a Gardner, Kretzmann continuum, and we always love this David to the second decimal point of 1.06. At the age of 34, you can see why those three stocks make me uncomfortable if they make up over half of my portfolio.” David, he mentioned what the stocks are, we’ll talk about those in a sec. But what are your initial reactions as you hear Andreas’ mindset?
David Kretzmann: Well, first of all, I think it’s awesome to have. I think that number is 35 or 36 stocks at the age of 34. I think that’s a great number, a very solid foundation. I think Andreas is approaching this in a great way, thinking about not only the GKC score, how many stocks you hold, but also the sleep number score. Am I comfortable? Am I sleeping well at night? Not only with the number of stocks, but also the allocation and composition of those stocks. I think this is a great approach to one’s portfolio.
David Gardner: Thank you for that and I agree, and let’s go onto the three stocks that do make up his three biggest holdings. They’re companies I know that you know and I recognize as well. He calls them wonderful in his note, the 3R Advanced Micro Devices, AMD, NVIDIA, which is of course NVDA, and The Trade Desk, longtime Fool favorite ticker symbol TTD, which he mentioned he originally got from our German Motley Fool services. NVIDIA and The Trade Desk for Andreas have been 10 baggers. While he says he’s a bit late to the AMD party with just a three-bagger on average. Again, given how far down the market is, even a stock like The Trade Desk was from its highs, still had remarkable performances. David, do you own any of those stocks?
David Kretzmann: I own NVIDIA and Trade Desk. AMD, I don’t own though. That seems to be a very popular stock among the younger generation, so maybe I’ll have to take a look at it.
David Gardner: David, I would be remiss if I didn’t ask you, what is your present approximate GKC yourself right now?
David Kretzmann: I’m probably right around like 2.25, give or take.
David Gardner: Which is remarkable. The reason that you and I unwittingly co-created this important concept years ago. It’s because I simply was asking you at approximately the age of 25, how many stocks you had and you said you had like 50. I thought that that was pretty remarkable and actually a real achievement for somebody at that younger age when we first talked about this.
David Kretzmann: Yeah. For me, I’ve always enjoyed owning a lot of stocks. Like Peter Lynch said, there’s no stock I meet that I don’t like, something to that effect. For me, I love collecting stocks and just tracking them over time. It’s not for everyone. But for me, I think that GKC will be two or higher for quite a long time.
David Gardner: That’s wonderful. I’m going to say mine is still right around 1.0. I’m not even sure I bought any new stocks in the last couple of years, so I might be slightly under 1.0, but don’t tell anybody.
David Kretzmann: You still got time to catch up.
David Gardner: Let me pick up with Andreas’ question. Those stocks constantly he mentioned take up over 50 percent of his portfolio these days. He’s always wondering which of these darlings, he writes, should I cut, not kill. Should I cut? If at all considering buying high and never selling, which is something that at least on this podcast and for my rule-breaker approach, I advocate not everybody at The Motley Fool would even agree with that. We have many different Motley approaches, but that’s certainly is true of generally how I invest. You mentioned AMD and NVIDIA operate in similar market segments.
He knows those very well. He’s probably a technologist of some way shaped or formed himself. Unlike The Trade Desk where he now relies in part on our Epic bundle team’s insights. Here’s the challenging question he’s been asking of himself. Would you rather cut a company whose market you understand, whose products or services you love, or who’s prospects for growth seem higher despite knowing less about the market and not using the product or service yourself? He does say, I’m asking you this question, David, but he does say there is no right or wrong answer.
David Kretzmann: I’m glad you put that in there, but I’m probably going to challenge giving the wrong answer. We’ll let Andreas and you be the judge of that. It’s a great question, though, and for me, I think what Andreas mentioned where it’s not kill, it’s cut. We’re talking about trimming, not completely removing.
David Gardner: Well said.
David Kretzmann: I think that’s the right mindset here. Personally, I would probably, maybe cheat the question a little bit and maybe just trim an equal percentage across all three, unless there is like a single one or two companies in there that you really aren’t losing any sleep. Almost regardless of what the sleep number score or what the percentage of your portfolio those one or two stocks make. But for me, like barring a single company where it’s top of mind, where you want to own more and more of that company within your portfolio. My personal leaning would be trimming equal amount across all three as a starting point and then maybe do additional trimming from there as needed. But something to that effect would be where my head goes.
David Gardner: Thank you. I agree with you. Let’s hope that’s not the wrong answer. I do think that the reason that I think about the sleep number, or advocate that, or put that out there is exactly to have conversations like this with ourselves, or sometimes with our friends or on a podcast in order to make sure you’re asking, am I getting enough sleep at night? Am I invested in a way? Am I allocated into stocks in a way that makes me truly comfortable? I feel as if Andreas, the sleep number is functioning properly for you.
You’re asking this question at this time, and David and I both favor, and approach that typically has this dollar-cost averaging like not necessarily deciding to go big or small in any one of those three, but to take a general approach. Again, there might be a reason that anybody listening to us would differ. If, for example, they know one of these companies much better or they feel in their heart of hearts that one of these is played out a little bit more than the other. I don’t think it’s wrong necessarily to do it non-equally, but if you do that, I would say keep score and learn from it. Jim Mueller, David, I think would say write a journal entry to yourself about that and then reflect back later on to see whether you were right or wrong or what you can learn from that.
David Kretzmann: Absolutely. For my own portfolio, anytime I buy or sell a stock, I even just jot down a sentence or two about what’s the market cap, valuation metrics or just other things I’m watching with the stock. Why am I reducing my position or adding to my position? It’s never set in stone. There’ll be stocks that I sell this year that I look to buy back into overtime and vice versa. I liked that approach, keep score journal, track your record over time and learn from it.
David Gardner: I love how Andreas completes this note. You saw this because I shared it with you ahead of time, David, but he writes, “When I add companies to my portfolio, I try to imagine a future where the products and services I love will be used and needed even more than today.” David Kretzmann, I say this is a fellow business-focused investor, somebody who really is trying to make his portfolio reflect his best vision for the future. He ended it by saying maybe you can have another analyst to the mailbag episode for an additional view or story on this question. Well, this week we got the man himself, David Kretzmann. David, I’m so glad to be paired with you again. Thanks for leaning in and joining. I think I’ve been maybe interviewing outside authors or something that’s packed outside. I’ve missed you. We need to do this more in 2023 maybe than 2022. It’s a delight to hear from you and to know that your GKC is still exceeding two.
David Kretzmann: Always a pleasure, David, and yeah, let’s have a GKC check-in another time this year, it’s always fun.
David Gardner: Whenever you come on, I think it triggers more future mailbag items and it’s a delight. Keep up the great work on behalf of our members, David Kretzmann, in good markets and in bad. It’s been tough, and we’ve all felt that. Yet, I do feel as if we’re probably near the end of it. David, maybe the market bottomed in October. We’ll know with hindsight 2020 about two years from now.
David Kretzmann: We’ll know when we know, but I think one day we need to circle on the calendars. It’s 10-year special of the GKC’s origination. I think we’re getting close to that.
David Gardner: I am going to go back and figure out which was the original podcast and date, and we will definitely date that and celebrate a Fool-a-versary on that one. David Kretzmann, Fool on, my friend.
David Kretzmann: Fool on.
David Gardner: You know, it takes good mailbag items to make a mailbag episode from one month to the next and it takes really good people to write good mailbag items. Our email address is [email protected] It is a delight each month to share some of the best questions, thoughts, and occasional poems that I get from this community. Thank you once again for suffering Fools gladly. I want to thank Jim Mueller and David Kretzmann for leaning in as well. I hope you have a wonderful, I’m even going to say maybe a little bit snowy, I don’t know, week ahead. Until next week, Fool on.