It’s the last week of the month, which means Motley Fool co-founder David Gardner is responding to your questions and hot takes. Apparently, a lot of listeners have been wondering how many stocks they should own, and we’ve heard your call.
In this episode of Rule Breaker Investing, Dave Gardner and special co-Dave, David Kretzmann, look at the “too many stocks” conundrum in depth. How many is too many? How few is too few? How do you know when it’s time to cull your ranks?
Also, Dave (Gardner) dives into plenty of additional listener questions. How can you emotionally prepare yourself for this exciting bull market to change? Where can investors go for accurate split-adjusted stock info? How should investors with a limited budget approach buying pricey stocks? Do we invest better when we’re doing it for someone else? Tune in and find out more.
A full transcript follows the video.
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This video was recorded on May 30, 2018.
David Gardner: Welcome back to Rule Breaker Investing. This is the final week of May. This is the last Wednesday of May. It is time for your Rule Breaker Investing mailbag.
Now, if you’ve been with me all month, and I sure hope you have, you know it’s, what month is it? That’s right, it’s Conscious Capitalism Month, which comes to an end with this particular podcast, but we’ll certainly be reflecting back on some of the conscious learnings that we had together in the month that was.
This is a month that maybe had more podcasts from this podcast than any other month. I think we set a new RBI record here, because not only is this the fifth regular podcast — that’s right, there were five Wednesdays this May — but, we did two extras. Simple math, five plus two, I think we’ve brought you seven Rule Breaker Investing podcasts. And right now, if you’re about to listen to your seventh — in other words, if you’ve been with us all the way through — please give yourself six and a half points right now. Six and a half points, from me. Thanks! Of course, the other half-point will be given at the end of this podcast, if you make it all the way through this mailbag.
Alright, well, our mailbag is replete, as always. I think I have seven primary points to share with you this particular week. But we’re going to start off, as I’ve been doing in recent months, with our hot takes. This is generally me reacting quickly to short comments, typically posted on Twitter. With this installment of the Rule Breaker Investing mailbag, the May 2018 edition, with this installment, I’m going to go with a new approach, and that is, for our hot takes, we’re going to go formally, very officially, with a last-in, first-out inventory management approach to these hot takes. That’s right.
If you’re a student of accounting, you know what LIFO and FIFO are. FIFO, first-in, first-out. LIFO, last-in, first-out. What do these terms mean, if you’re not into accounting? Generally, it means you pick through your inventory and maybe try to put a value on it, you could either look at the first things that ever came into your warehouse, or the most recent, latest things that came into your warehouse, and go front to back either direction in order to value your inventory.
We are formally putting in place a last-in, first-out approach to our hot takes. That means I’ll simply be going through whatever’s most recent, reacting to whatever we just did on this podcast, and go backwards through our hot takes section. There you go, a little bit of financial learning. LIFO wedded to your Rule Breaker Investing hot takes.
First one up. I have to say, this is may be the saddest that I’ll be this week on the podcast, because I got this note from my producer, Rick Engdahl, after having returned, as I just did, from Scandinavia. My family went on a family tour of Norway and Iceland. So, yes, my producer, Rick Engdahl, who takes in all of your tweets and notes to firstname.lastname@example.org and gives them to me a day or two before this podcast, Rick had just sent over this note from Kahn Robert Fomm, who’s a fellow Fool in Oslo, Norway.
He writes, “Dear David, I’ve been a weekly Rule Breaker Investing podcast listener since the beginning in 2015. And every week, I look forward to your next new episode. I am based in Oslo, Norway,” which, as it turns out, was our first destination last week. Kahn Robert Fomm goes on, “And was excited to hear in the last podcast that you are returning to Norway for your vacations. If you need any tips or help with anything during your stay in Norway, feel free to contact me. Also, if you want a local “guide” [at least I’ll try my best] in Oslo, or simply meet over a cup of coffee to discuss stocks, finance, or life in general, I’m on parental leave from work these days, so my ten-month old daughter and I have plenty of time during the day. Wish you the best of holidays.”
So, of course, the reason I’m so sad is because I only got this a week after I’d returned from Oslo. I want you to know we had a delightful time in your home city. Kahn, we were at the Vigeland Sculpture Park, we went up to the Olympic ski jump for our overview across the beautiful city that is Oslo, Norway, the capital of Norway, of course. We spent some time, obligatorily, at the Viking Museum. Not my first time there, but, how often do we get to see an actual, real-live Viking long ship? The Kon-Tiki Museum, as well. I learned a lot about a book I had never read. A lot of people have read the Kon-Tiki story. My wife had done a primary school report. She wrote her, maybe, fifth grade report on Kon-Tiki, so we had to go there, to the museum. We were staying just across from the beautiful Oslo Opera House, which is designed, I believe, to look like a glacier coming up out of the water. It’s white marble and glass, and it’s stunning. We had just a delightful time in Oslo.
The truth is, Kahn Robert Fomm, that I’m not sure we would have even been able to make the time, because we were only there for a couple of days, and we were pretty fully booked. But, that was a very kind offer. I appreciate it. I want you to know, I reciprocate. If you find yourself coming through to Alexandria, Virginia — this goes for all of our listeners — any time you want to drop by Fool HQ in the greater Washington D.C. area, you can always drop us a note. Just drop a note to email@example.com. We do tours and have cups of coffee with our fellow Fools, it seems, every week.
Alright. Hot take No. 2 comes from Rebecca Smith, Reblsmithpdx on Twitter. Rebecca wrote simply, “@RBIPodcast, my something blue,” referring to something old, something new, something borrowed, something blue, when I talked about Bluebird Bio, ticker symbol BLUE, as a company that’s worth considering for your portfolio or the type of company, we should all have a little blue in our portfolio. Rebecca responded by saying, “My something blue is EDIT.” That’s the ticker symbol for Editas Medicine. “I’m a biomedical engineer,” Rebecca writes, “I know the technology well. It offers profound promise for a changing world.” Well, thank you, Rebecca.
Next hot take. This one came in from Craig Edwards @Crxinvestments on Twitter. “@RBIPodcast, congratulations DavidGFool. Today was one of the greatest comebacks ever on the RBI podcast!” Craig is referring to the May 9th edition, when I reviewed my five Thinky stocks and kept the Rule Breaker Investing streak alive as I reviewed five in a row. It got dark and ugly, those first couple. It looked tough. But then, the other three had all gone up more than 100%. So, thank you. It was a tremendous comeback. I think everybody knows, I’m not this good, and the streak will inevitably end. But, it’s been awfully fun to watch what we’ve done together here with the five stock samplers.
In fact, I should mention that our next review will be on June 20th. I’ll be reviewing five stocks riding the bull market. Spoiler alert: things are looking horrific for that one. I think I can almost call the RBI streak dead right now. But, we’ll see! You never know what’s going to happen in the next few weeks. And, darn it, if we lose one, well, that shows that we’re human. We very much are human. We’re Fools over here in Alexandria, Virginia.
Alright, next two hot takes both react to the May 2nd episode, which kicked off the month when I interviewed Alexander McCobin and Raj Sisodia of Conscious Capitalism. A couple of you really loved a few of the things that Raj said. Jami @Jami_B3AR, you wrote “@RBIPodcast, @ConsciousCap, love this great quote. “If you cannot respect the way you earn it, money has no value. And if you cannot use it to make people’s lives better, money has no purpose.” A beautiful statement by Raj Sisodia. Thanks for catching that one, Jami.
And, my friend Paul Hooper, @Selzhanik on Twitter, said, “A verbal love letter to what capitalism should be and will be,” this one comes from Raj Sisodia as well, “Business is the ultimate win-win game in the world. The outputs far exceed the inputs.” I love how you phrased that, Paul. A verbal love letter to what capitalism should be and will be.
And, as we begin to close out our hot takes, this one comes from, admittedly, last month, but I still wanted to fit in on this month’s show. Reacting to our April Blast from The Radio Past episode, Aaron Wheelek was very kind enough to write in, “Hey, Dave, Tom, and Mac, the Blast from The Past episode was wonderful. Thank you for putting this together. I love many of the topics covered by Rule Breaker Investing, but this was easily my favorite.”
The reason I’m reading this from Aaron is, he calls out my good friend, Mac Greer, in this note. He said, “Mac, a special thanks to you. I imagine it takes a lot of your time to dig through the radio archives. I appreciate the effort you put in, it was truly worth it. Thanks again for the work you all put in, both to the podcasts and the newsletters. You truly do educate, amuse, and enrich. Best regards, Aaron Wheelek.”
Aaron, thank you very much! Mac Greer has been a pleasure to work with these 15, or something like getting near 20, years together. And you’re right, Mac put in a lot of time to make that podcast happen. But the good news is, even though we didn’t use all of Mac’s clips, we’re going to come back a little later this summer and do Blast from The Radio Past Volume Two, try to drag my brother back in here. I know Mac will have five or ten more classic clips queued up for you.
And, the very last hot take. This one comes from @DejaVuSam on Twitter. Sam Acosta, you write, simply, “You’ve got to stop with the window crashing sound.” Alright, this is a really good opportunity to talk briefly about how we open and close each show. Now, the very wonderful Denise Coursey — who’s worked here at The Motley Fool for ten or so years and does some important work for our asset management sister company — Denise is the one who voices our way in and out of this podcast every week. I think she recorded it, maybe — help me out here, Rick Engdahl — maybe in the first week or so that we were doing this, just so we had something?
Rick Engdahl: In time for episode one.
Gardner: In time for episode one. And we’ve never asked Denise to come back and do it again. We have the same open, coming near three years later now, that we started with back in the day. And yes, it does include that window crashing sound.
As a man of the people, as someone who will always be swayed by the vox populi, I want to put this one out to a Twitter poll in the week ahead. I’m going to ask Anne Henry, who manages our RBIPodcast social account on Twitter, to ask you to poll, should we keep the window crashing sound, or should we get rid of the window crashing sound? Are you with Sam Acosta, who says you have to stop with it, or are you with, I’m seeing right across the transom, my friend Rick Engdahl looking a little sad and weepy if we were to have to get rid of the window crashing sound.
Engdahl: It’s not a window crashing sound. It is the sound of rules breaking.
Gardner: It is the sound of rules breaking. So, we’re going to put it out to you. We want to hear what you think. We may well act on it, so let us know. Check out our @RBIPodcast Twitter account for that poll this week. Please weigh in. I care!
Alright, let’s get started for real now. Rule Breaker mailbag item No. 1. This one comes from John Fitzpatrick. John, on Twitter, you’re @ImASuperball. Congratulations, sir! Not really sure what that means, but it sounds awesome.
You write, “I believe that I’ve run an investing course familiar to many Motley Fool subscribers. Try investing on my own and quit when the going gets tough. Get some professional help and acquire an investor’s temperament. Grow disenchanted with the costs and performance of mutual funds. Get some knowledge. For me, this was The Motley Fool. Go back to investing on my own in stocks, where I find myself now.”
John goes on. “The past eight years have been exciting as I divest from mutual funds to stocks in this new age of emerging titans. Question: I’m no longer worried that a downturn in the economy will scare me away. Rather, I’m worried that I will become bored as the economy slows for a period. What words of wisdom do you have for me to prepare myself emotionally when investing and/or the economy become a little less exciting?”
Well, that’s a fun question, John, and a great way to kick off Mailbag Week. I think, first of all, investing has been exciting. When the stock market has risen many of the last eight years double digits, and that’s just kind of compounded upon itself, admittedly after two of the worst market years in memory — we kind of dug ourselves back out those first five years or so, and then we’ve gone on to some new highs since then — it is exciting.
It is fun to think that checking the market on a given day, week, month, quarter, year, that you’re going to see, “I’ve made money! I’m rewarded! Look, honey! Look how far we’re up! Aren’t you glad that we went back and added to Facebook in the downturn?” Those kinds of thoughts and conversations, it’s very natural to feel that this is exciting. This has been among the most exciting periods for any common stock investor, not just in my lifetime, but I think in the history of the American stock market. Very rarely have we had this kind of uplift measured over almost a decade.
So, John, you’re very right to ask yourself, what are things like when it isn’t this way? The truth is, there are certainly times where the market not only goes sideways, but goes down, sometimes doggedly so, over the course of 18 or 36 months.
So, your question, what words of wisdom do I have for you to prepare yourself emotionally when all this becomes a little less exciting, here they are. And this is not personal, I’m having fun here. Get a life! What I mean by that, John, is that there are so many things outside of the stock market and our investing to be excited about and to be doing. When I say get a life to you or to me or to any of us, I’m just trying to convey that we shouldn’t get too hung up checking our stocks. It’s always great to see positive reinforcement and to know that it’s not just an atta-boy that the market gives you when your stock doubles, but it actually leads to real financial independence over time if you do well as an investor. That’s the goal for most of us.
But whether the markets are up or down — maybe especially when they’re sideways or down — I think you and I start to realize, we could spend our time in a lot more productive ways than just checking our stocks or following the market. I don’t spend any time watching CNBC. I think the amount of time I’ve spent watching CNBC over the last three years probably rounds to below 30 minutes, and that even includes walking past an airport TV or a bar tuned in to CNBC. I spend no time with financial television.
But I sure do check my stocks, and I always have, multiple times every single day. I’ve likened it to being a sports fan. You’re not going to change your favorite team based on whether you’re winning or losing. But darn it, isn’t it fun to watch the games? See, for example, as a baseball fan, we have 162 games every year, almost every day, to check in and see, watch the game itself or check the box score, check the stats. Not going to sell my favorite team. Realize we’re going to have some winning streaks and some losing streaks. But, isn’t it fun to keep track of it? And it is.
But, there are many productive ways to spend our time outside of this. I have to admit, any time I talk to someone who likes sports less than I do — having just spent time in Iceland in the last week, one of our guides and drivers, great guy, didn’t even realize or care that Iceland’s football team is headed to the World Cup! That they did so well in the Euro finals a couple years ago! He was kind of oblivious to it. And I said to him, “Svenny,” that was his nickname, his actual name is way longer than that and harder to pronounce. I said, “You have saved so much time over me by not paying too much attention to sports.” And I’ll say the same thing to anybody who’s not following the markets too much.
To conclude, John, I would say, there are so many wonderful ways for you and me to spend time adding value to the lives of others and deeply enriching ourselves, that when the market finally does go sideways or down, I hope you’ll remember that I said that, and I bet you and I will be spending our time more productively during that time, ironically, than when the market’s rising.
Alright, Rule Breaker mailbag item No. 2, this one comes from Hoboken. Mike, @mike_hoboken. My producer, Rick Engdahl, and I had a little debate about how to pronounce the word Hoboken. We’re pretty sure it’s the one in New Jersey. The thing with Rick arguing is that he lived in the city, so clearly, he’s going to be right. I was saying, is it Hoboken or Hoboken? Which one is it? Hoboken? That’s it, Rick gave me a thumbs up. OK, good.
Anyway, Mike. Your question. “Many podcasts ago,” Mike writes, “you mentioned a website you use to calculate split-adjusted returns. I can’t locate that podcast with the website. Would greatly appreciate it if you could reenlighten me. Thanks in advance.” You bet, Mike!
It looks like it’s still working. I think this is still a good website. Now, the reason I’m mentioning this is, this is not Bloomberg that I’m giving you when I give out this URL. This is a smaller, looks more like a home brew, circa 1990s, almost, web interface. It’s buyupside.com. The tag line for the site is “Free information for the serious investor.” And yes, I’ve bookmarked this one. Mike, and all others, whether you’re in Hoboken or somewhere else, and if you’re ever looking for, like, how has Starbucks done since June 3rd, 1998? This is a good site where you can come in and see the returns. And yes, they’re split adjusted, and I’m assuming — I sure hope they are — that they’re accurate. I use it, and I would suggest you use it, too.
It’s particularly good for investors, that is, people who act, by definition, for the long-term. This is a very valuable site for us, because we can see, how has Facebook done over the last 11 years, let’s say. Answering those kinds of questions — which are, to me, the most important and the most fun questions to answer of all. So, buyupside.com is there for you, Mike, and all others.
Alright, mailbag item No. 3. I’m joined by a special guest, a multi-time cameo appearance guy on this show, David Kretzmann.
David Kretzmann: That’s right! Yeah, absolutely. Thanks for having me back, David!
Gardner: You and I partnered on the Gardner-Kretzmann Continuum in the past mailbag.
Kretzmann: I think it’s still going strong. I don’t know if I’ve seen many people share their score with us on Twitter, but hey, you and I can at least use it.
Gardner: And, David, maybe we’re going to launch an appeal this week. Because, while I have you here for mailbag item No. 3, I now realize that if you have a little extra time hanging around, because there’s at least one mailbag item after that that’s directly relevant to you and to me —
Kretzmann: Oh, let’s do it!
Gardner: Let’s go after this one. I sent you the email from David Creighton. When I saw David’s mail, I thought two things. First of all, great question and a very common question about getting started investing. No. 2, another Dave.
Kretzmann: Great name!
Gardner: I’m Dave, and I had to have Dave, you, Dave, on the show to talk to Dave. And I’m going to resist the temptation to reread the Too Many Daves poem from Dr. Seuss, which I’ve done on this podcast before. For anybody who doesn’t know it, just google Too Many Daves by Dr. Seuss, and please enjoy that poem, and think about mailbag item No. 3 as you do it.
Kretzmann: A Dave-heavy week, I love it.
Gardner: It is, Dave. Good to have you on the show. I have a question from Dave, and I’m going to read it. Here we go.
Kretzmann: Alright, let’s do it.
Gardner: It starts this way, appropriately so. “Dave, you often say that the goal in beginning a portfolio is to get to 20 stocks as quickly as possible.” By the way, that’s not necessarily exactly what I say, just to make it clear. I typically will say 15 stocks. It’s all contextual. Our fellow Dave here has it generally right, directionally right, but I wouldn’t want all of my listeners thinking, “Oh, yeah, I have to get to 20, because that’s what David always says.”
He goes on from there. “I have $500 in my Fidelity account, and I’m ready and eager to put it to work.” Awesome. “I have my eye on a share of Intuitive Surgical,” ticker symbol ISRG, one of our favorite longtime Rule Breakers. I own some shares. Dave, do you own any ISRG?
Kretzmann: Unfortunately I don’t. I missed this one. But, hey, I should probably look at starting a position.
Gardner: Well, you have a lot of stocks already, which we’ll talk about a little bit later. “But, today,” Dave goes on, “it would be a $450 investment.” That’s right, because the stock is around $450. So, here’s Dave with $500 in his Fidelity account, looking at one share of Intuitive Surgical. He goes on to say, “However, I could also split that $500 between several stocks at lower price points. Or, I could save that money, and then just add to it, and when able, let’s say, buy a share of Amazon,” which, last I checked, is trading more like $1,000 a share.
So, here’s the situation, David. Since our friend Dave can only put about $100-200 a month toward investing at the moment, is it a better strategy to knock out larger-cost stocks first? So, like, buy one share of Amazon once you get to $1,000, and then save to get to one share of Alphabet, etc., which will take longer to do? Or, should our friend Dave start with the lower-cost ones and work his way up?
He concludes by saying, “I’ve been listening to all The Motley Fool podcasts for over two years now. I’m thrilled to finally be at a place where I can jump in. Thank you for all you and your team do.” We’re thrilled for you, Dave, not just because you’re a fellow Dave, but that you’ve gotten to the point where you’re ready to invest. That’s tremendous, because for a lot of us, just saving to get to that point is the hardest of all.
David Kretzmann, as you hear Dave’s story, your reactions?
Kretzmann: It’s a great question. It kind of reflects the situation we’re in today, where it seems like fewer great companies are splitting their shares. On one hand, that’s great, because it shows that they’re not so focused on the stock price. But on the other hand, for us smaller retail investors, it can mean we have to think a little bit harder about how much we’re allocating to these companies, because it takes a lot more to buy a single share, in some cases.
In this situation, it does depend on your context. I think, we’ll talk about today, there are a couple other options for how you can go about buying shares. There are some brokerages out there where you can actually buy fractional shares or partial shares. That would mean, in this case, you could invest a flat amount, $50, $100, $200, regardless of the share price, and still get exposure to an Amazon or an Intuitive Surgical, stocks where you might have a little bit harder time buying one or two shares.
Gardner: Right. And the way that works, David, as I understand it, I don’t use a brokerage that has that, but I’ve always loved that feature. I know a bunch of Motley Fool members have started that way. The way it works, I think, is that, let’s say we take your $50 and my $50 and Dave’s $50, so we’re at $150, and we’re taking some other $50s. And finally, as a brokerage, we can buy a share. Then we just say, “Well, you own one-tenth of it, and you own one-twelfth of it.” You just allocate fractionally to all of your customers how much they own of each share.
Kretzmann: Yeah. Essentially, the way that I understand it, I don’t know all the technicals of it, but you’re essentially, like you mentioned, pooling money together with other people who are buying fractional shares of a certain security or stock. Then, that way, you still have exposure. You might think about that and it’s like, “Do I really want to only own one-sixteenth of Amazon?” Of course, what counts isn’t the number of shares that you own, or the fraction of shares that you own. The dollar amount is what counts.
Kretzmann: Whether or not you own one share or a tenth of a share, if it doubles, your money is still going to double, regardless of how many shares you have.
Gardner: That’s right. If you’re $200 in and it doubles, you’ll make $200 more.
Kretzmann: Exactly. So, you want to focus on the dollar amount invested. I think David is thinking about that in the right way. A couple brokerages out there that you might want to consider, one is Stockpile. This is a company that some of you might be familiar with. This is a company that, in the past couple years, has popularized stock gift cards — essentially giving someone $50 of Disney for Christmas or something, just a flat amount that you can give to someone. The commissions are cheap. I think it’s $0.99 per trade. So, realistically, there, you could invest as little as $25 or $50 into a company. I don’t think you can invest in all several thousand publicly traded companies in the U.S., but any of the big-name companies out there, you could probably buy shares with Stockpile. That might be one option you want to look at to get started, initially.
Another one out there that I believe still exists is ShareBuilder, although now it’s under the umbrella of Capital One. This is actually how I got started 12 or 13 years ago when I first started as an investor. What they do, at least at the time, and I think they still have this fee structure, where you could submit flat dollar amount trades on Tuesdays and pay $4 to buy a flat amount of a stock. That’s another way where you can invest a flat amount, get exposure to some of these companies, even if you don’t have enough money to buy a whole share.
Gardner: You’re not timing your way in in any precise manner with this kind of approach to investing, but that suits us as investors anyway, because the long-term returns are all that really matter. We don’t need to necessarily pick our price to the penny at a certain minute of the day. So, yeah, as they pool our money together, often they’re just buying once a day and fulfilling customers’ needs that way.
Kretzmann: Exactly. Something else to keep in mind, Stockpile at this point doesn’t support retirement accounts. So, this would just be for your individual taxable account. Dave, I don’t know, in your particular situation, if that money is within, say, an IRA with Fidelity, which might make it a little bit trickier to switch over to another brokerage. I believe, with ShareBuilder under Capital One, you can buy partial shares within a retirement account. That’s something else to keep in mind, what type of account you’re going to be buying shares in.
Another popular brokerage out there, especially for younger folks these days, is Robinhood. Now, you can’t buy partial shares with Robinhood, but they do charge zero commissions. For me, that’s becoming my go-to individual taxable account, because the app is just so seamless, it’s a great user experience, and it’s just kind of nice to not be paying commissions as you build up positions.
Those are a few options for you. I would say, if you’ve listened to all of this and you’re still at the point where, “Well, I have an account with Fidelity, or one of these established brokerages, and I don’t really feel like either transferring my account to another brokerage, or, I don’t really feel like buying partial shares,” then I would say, one approach — David, I’m curious to get your thoughts on this — would just be to rank companies based on which companies you want to own over the next five years. Just prioritize a list of companies. It might be Amazon, Alphabet, Intuitive Surgical. I don’t think there’s anything wrong with taking a few months to build up a position, or build up enough money to accumulate one share of any of those given companies. But just think about, which companies would I be happy to own if the stock market wouldn’t trade for five years?
Kretzmann: And just rank companies that way, and build up positions over time. So, a few different ways you can approach it.
Gardner: I like that a lot, David. Thank you. Dave, I hope that that’s been helpful. I agree with my friend, Dave, that there is more than one way to win this game. A lot of younger people are starting with something like Robinhood because it’s no commission cost at all and it’s right off your mobile phone. Very attractive to many people.
On the other hand, if you could move your $500 from Fidelity to a place like Stockpile or Capital One ShareBuilder, if it’s still happening, where you could buy fractional shares, I think that that’s a great way to take that first $500 you have and buy ten stocks, $50 worth of each. Start with a portfolio. And, there’s no doubt a third and a fourth way right there.
But, we wanted to give you some options and let you know. It’s great to hear from David Kretzmann, because he was where you were 12 years ago when he started that way. And really, the purpose of The Motley Fool is to help the world invest better, and for a lot of us, to get you started. So, I hope that was helpful.
Alright. Before we go to Rule Breaker mailbag item No. 4, two things. First of all, David, you’ve assured me that you will hang around for the second point.
Kretzmann: Glad to do it, Dave!
Gardner: Excellent! Rule Breaker mailbag item No. 4. This one comes from Paul Spangler, writing in from Portland, Oregon. “Hi, Dave! After trying to figure out the stock market on my own for a couple of months, I found The Motley Fool, subscribed to Stock Advisor, Rule Breakers, and Hidden Gems. I’m happy to say I’ve had some amazing results and have seen some of my stocks grow over 200%, like Shopify, Silicon Valley Bank Financial, Align Technology,” a couple of Rule Breakers that we love in that list, “and a couple more over 100%, like Match Group, PayPal, Atlassian, Marriott, Nvidia, Netflix“
“I recently started listening to The Motley Fool Money and Rule Breakers podcasts on my commute to work and to school for my MBA degree. I’m enjoying my MBA classes even more now, because the way in which you discuss companies, their performance, metrics, and strategies is almost exactly what I’m learning about through case studies and class discussion, which is pretty cool. I’m crossing my fingers I get chosen for one of mailbag readings on your podcasts, so here it goes.” And, ka-ching! You sure did, Paul!
“Here’s my problem,” he writes, “I have major FOMO.” I think a lot of us recognize that acronym these days. David?
Kretzmann: Fear of missing out.
Gardner: Indeed! “When it comes to investing in stocks.” Paul goes on, “It seems like almost every stock recommendation from The Motley Fool service is appealing to me in some way, shape or form. And being a 31-year-old focusing on saving for my future and growing my investment portfolio over time, I’m open to some of the more high-risk, high-reward stocks. In a previous podcast,” and this is an allusion to the Gardner-Kretzmann Continuum podcast, David.
Kretzmann: OK, excellent!
Gardner: That’s why I’m so glad you’re here with me today. “In a previous podcast,” Paul says, “You mentioned that a good rule of thumb would be to own a number of stocks close to your age. So, by that “rule,” I should own around 30 socks. I counted up my total number of individual stocks that I owned and discovered that I’m invested in 80 different companies, which is far more than I have time to keep tabs on and really dig into outside of The Motley Fool updates. On the one hand, I know I probably have too many stocks. But on the other, if I hadn’t invested in a lot of these companies I’d never even heard of then, I would have missed out on some great returns. Hence, my Fear of Missing Out.
“So, what is the Foolish thing to do now in my situation? Should I narrow down my companies to 30 that I like? If so, how do I go through the process of thinning out my portfolio? I’ve been more inclined to buy a new stock, let’s say $1,000 at a time, than I am to reinvest in a stock I already own that’s done well. So, how do I resist the urge to invest in a new company? Thanks in advance for any advice you may have on this. Thanks for creating such a great community of Fools, etc. etc., Paul Spangler.”
David of the Kretzmann portion of the Continuum fame, David, what do you think?
Kretzmann: Well, I’m actually closer to Paul’s situation. I think, as we talked about on our Gardner-Kretzmann Continuum podcast, I probably own 70-75 stocks. Now, I probably actually added a few more since our last podcast. And I’m 25. So, the way I look at it is, you can own a lot of stocks, but what really counts is your allocation to your core holdings. I’ve been trying to focus more on something, David, that you talk about, adding to your winners. I think, as Paul highlighted, it can be easier to buy something new than add to something that you already own, especially something that’s gone up. I’m trying to focus more on portfolio allocation that way. So, in a sense, you can own 70 or 80 stocks, but you’re still heavily concentrated in your top ten or 15 ideas.
I refer back to Peter Lynch, the famed investing mutual fund manager of Fidelity Magellan in the 80s, an incredible track record. People would joke that Peter Lynch never found a stock that he didn’t like. I think at one point, he owned over a thousand stocks in Fidelity Magellan. He owned hundreds of stocks, at least.
Gardner: So, by the Gardner-Kretzmann Continuum —
Kretzmann: He was breaking that rule.
Gardner: — he was a Methuselah!
Kretzmann: He was breaking the rule, David.
Gardner: He was 1,000 years old. He might be!
Kretzmann: [laughs] That might be the secret. I think Peter Lynch approached it in a similar way, where if he found a company that he was intrigued by and wanted to follow, he would buy a little bit. He didn’t necessarily need to establish a full position. Of course, the performance of the fund would still be driven largely by the top ten or 15 or 20 holdings.
So, I approach building my portfolio the same way. I think, especially if you are at a younger age, you have decades ahead of you to invest and accumulate positions over time in your favorite companies. I don’t think you necessarily need to worry so much about fine-tuning your portfolio right away if you’re 25 or 30 or even 40 or 45, because you still have decades in front of you to invest and build that portfolio.
Gardner: And, once again, one Dave to another, I think we agree on this. One thing I want to make clear to Paul and everybody listening is, the Gardner-Kretzmann Continuum — first of all, if you don’t know the GKC, if this is an acronym or a concept that’s alien to you, just page back a few weeks in this podcast and you’ll see and be able to hear it in its original form.
I think both of the Daves here agree that if you’re 31 years old like Paul Spangler and you’re inspired to think you should have about 31 stocks, that’s not a maximum. You can certainly go and have 80 stocks. In my case, I have 55 stocks, and I’m 52 years old. But, I don’t think there’s any upside number, really. I think a lot of it is just, do you like what you own? Are you happy the way you’re invested? Do you feel like you have the time to keep up? And if you don’t have the time to keep up, do you have a trusted source — let’s say, in this case, maybe The Motley Fool — that’s keeping up for you, allowing you to own whatever size of portfolio you want to?
Kretzmann: Yeah, absolutely. For me, it really helped finding a tool like Personal Capital, that’s what I personally use, where it’ll essentially aggregate all your holdings from all your accounts and you can easily see your total allocation to different stocks across your accounts. I think, in my case, between my retirement accounts, my 401-K, my individual accounts with four or five different brokers, it was hard to keep track of what I owned, how much I owned, and where I owned it. But with a tool like Personal Capital — and I think there are some others out there, that really, for free, they’ll aggregate those accounts, show you the allocations — for me, that’s really helped from a portfolio management perspective, to think, “Oh, I feel like I should have more exposure to company A or B.” Or, “Maybe I have a little bit too much concentration in this one company, maybe I’ll hold back on adding to that one.”
So, I would encourage you, especially when you have so many stocks, find some sort of tool, even if you do a spreadsheet on your own, just to get a sense for what your allocations are across the board.
Gardner: Alright, great. Let’s tie a bow on Rule Breaker mailbag item No. 4. We have five, six, and seven. And as I look them over here with time running out, I see there’s a lot of similarities between these. David, if you’re kind enough, will you hang around the microphone a little bit longer?
Kretzmann: I’d be honored, Dave.
Gardner: Great. I’m just going to share these, and we’ll just kind of keep the conversation going. Obviously, a big theme of this week’s podcast is, how many stocks should you have in your portfolio? What about fear of missing out? A lot of these dynamics.
Mailbag item No. 5. A quick tweet. This one from @chadhuggins1. Chad wrote, “David, you have around 200 active stock recommendations.” That’s true. When you add together all my stock picks in Stock Advisor and all my stock picks in Rule Breakers, and you sum them and you call that the Supernova universe, which is what I call it, because we have Motley Fool Supernova, which is a service that invests exclusively in all of my picks — it comes to about 200 stocks.
So, Chad goes on, “But you only have 55 stocks in your personal portfolio. What is your portfolio strategy? Personally, I have a hard time not investing in every great company I learn about.” I think we’re hearing some more FOMO going on here, David. Maybe part of the consequence of being a Motley Fool fan and owning some of our services is, because we tend to keep streaming ideas, people hear something like, “That sounds good to me! I’ll buy that one, too!”
Kretzmann: Yeah, it’s something I personally have run into. I’ll come across a company and get really excited about it. It’s like, “I want to own a little piece of this.” I think the beauty of brokerages like Robinhood is, you can own just a couple shares of a stock that’s trading for $35-50. You can start small. And then, for me, having that skin in the game, it motivates me and encourages me to follow the story over time, and then maybe just build a position up over time as I have the means and interest to do so. There are different ways you have to do it. I feel like you don’t need to be at a point where you have to jump in with a full starter position right away. You can start small and just follow the story and build it out over time.
Gardner: Absolutely! Side note, David. Did you know that Robinhood these days is being financed at a multi-billion-dollar valuation?
Kretzmann: It’s an impressive company. I’ve actually listened to several podcasts with co-founder and CEO of the company. Man, that’s one of the companies at the top of my list that I wish was public.
Gardner: It didn’t start too long ago, either! I think the company is something like five years old, or some insane number, where they have just launched with a free mobile app, getting people started investing, which we love here at The Motley Fool, and really parlaying that into a significant business.
Kretzmann: Yeah. I think, so far, they already have several million people signed up with accounts. They’re really focused on that millennial audience. I think the average age of their users is something like 25. Really, a powerful business model. This is kind of a tangent, but looking at Charles Schwab, a popular brokerage account that started in the 70s, when they started out, the average age of their account holders was about 25. Today, the average age is about 55 or so.
Gardner: This sounds like me! Keep going!
Kretzmann: There you go! I think you’ll see something similar with Robinhood. As we know, these platforms are very sticky once you open an account with these different companies. I think Robinhood has just done such an incredible job at capturing that younger millennial audience. I suspect that whole crowd will grow with them over time. And, they plan to offer more and more different banking and financial services over time. They’re certainly not going to stop with stocks or cryptocurrencies. They’ll keep going far beyond.
Gardner: Rule Breaker mailbag item No. 6. This is probably my favorite note of the month, so thank you, Kurt Ilia, for this note. “Hi, David! One of the things I love about investing is that, as Yogi Berra once said, 90% of the game is half mental. Or, to put it in Buffett’s words, it’s an easy game if you can control your emotions. So,” Kurt writes”, any time I notice a potential mind hack that can lead to better results, I get curious.”
“As I listened to your April 18th podcast on Five Stocks That I Own That You Should, Too, I was struck by your comment that all of the five stock samplers you’ve presented over the past three years have handily beaten the market. If memory serves, your accuracy rate,” that would be your percentage of winners against losers, “has tended to be better for those picks than your overall average as well, and there are only rarely any stocks that have actually lost money in them. Even for someone with your great track record, that is beyond impressive.” And, I think I’ve said many times before, Kurt, thank you, it’s beyond lucky, as well. There’s no way we can possibly keep this remarkable streak going. But, as long as it is, #RBIStreak.
Kurt goes on. “This got me to reflect on the fact that a small group of stocks that I have helped my 13-year-old son pick for his portfolio, which is a subset,” Kurt writes,” of my own set of about 50 stocks, routinely beats my own portfolio in the market. I’m always careful when I pick the stocks for my son’s portfolio. But when I have to look at my son and suggest that he put his hard-earned cash behind a company, perhaps it’s bringing out a bit of extra diligence or stock-picking wisdom in me. You mentioned that the new batch of stocks that you picked was for your fellow North Carolina alumni at an event. While not the same thing as picking stocks for a family member or friend, I’m guessing the dynamic was similar as you narrowed down the list to share with your fellow Tar Heels.”
“To conclude,” Kurt writes, “and so, it got me thinking. Is there something to this? When we’re forced to boil down all of our stocks to a small number of the best ones, to advise people we care about, does this discipline actually lead to better performance? Or is this just an illusion based on survivorship bias in our own portfolio? Thanks for all the good that you and The Fool continue to do for the world and for all the fun it leads to along the way. Fool on, Kurt.”
Well, I love that note, David. The truth is, when I think about my own dynamic of picking five stock samplers on this podcast, or investing for my kids, or for my wife’s portfolio — typically, I’ve created a better portfolio for my wife than my own portfolio. We have separate portfolios. Of course, we’ve been together 27-plus years, I think we think of them all as one, but the truth is that she has hers and I have mine. And she’s out-performed. And I’m picking all the stocks for her portfolio.
And when I give speeches, I stand up in front of people and I say, “Here are seven stocks that I like. I’m going to make seven points and I’m going to tag a stock to each of them.” And those have typically done really well. A good example was when I spoke to Conscious Capitalism in the year 2012. I picked ten stocks in front of the Conscious Capitalism crowd that year. In fact, the CAPS page is CC2012Culture, because I was picking companies based on great cultures. And those 12 companies have, on average, outperformed the market over these six years by 396%! Which is hugely better than how I would normally have done with any of my own portfolios!
So, I think that there really is something to this, David. Have you found that you’re investing for anybody else, your family or your friends so? I know you’re a younger guy. Or is it just your own portfolio?
Kretzmann: No, I think that does bring an extra element of discipline. You really want to be sure you’re focusing on quality ideas. I help run my mom’s retirement accounts. In that case, I want to really be sure I’m bringing the cream of the crop to her portfolio. So, I think there is something to that.
Gardner: I really do, too. And I think it’s a great point, Kurt. I’m going to remember that. I think that should be memed. If that’s not already a meme, that should be. I don’t know if the Ilia Phenomenon will quite rise to the status of the Gardner-Kretzmann Continuum, but the Ilia Phenomenon, I think, is real.
Kretzmann: I think so.
Gardner: Alright, that takes us to our final mailbag item. As I said, it’s kind of one ongoing conversation, so let’s just keep it going here to close this week with Steven Asperos, who wrote in this way: “Dear David, I’ve been somewhat of a Fool since first reading your book, The Motley Fool Investment Guide, back in the late 1990s. I find your concepts on stock investing interesting, but wasn’t sold on your philosophy until a few years ago. I became an early subscriber to your services, gradually adding more of your services. I’d pick and choose from your top recommendations, add those to my brokers, more conservative stock choices. Foolishly,” that’s with a small F, “I never fully committed to your philosophy, nor any of its missions as specifically instructed, and I got burned badly purchasing large stakes in stocks such as Ambarella and Chipotle,” which are Rule Breakers with mixed results over these years, some great and some horrible for both of those companies.
“However,” Steve goes on, “when I sold my business two years ago, I decided to try a Foolish investing experiment. I took the $180,000 in my wife’s IRA and I bought 36 of my favorite Motley Fool recommendations, $5,000 a stock. I would buy and not sell. I wanted to see which ones really threw off the most profit. I wanted a larger sample size, because I kept picking your losers while the winners were killing it. Well, what happened,” Steve writes, “blew me away. Stocks that I never would have bought turned out to be the biggest winners. Companies like Align Technologies, up 182%. 2U, up 187%. And Shopify, up 163%. Amazingly, the only stock in the red was Kinder Morgan. The portfolio was up 69% over the two years.”
“After all that, my question is, do I have too many stocks to be really Foolish? Does the mutual fund nature of this portfolio make it too spread out to hit real home runs on stocks like the ones just referenced? I love you podcast,” Steve closes. David, we might sound like a broken record here, but do you want to add a thought into the cauldron here before we say goodbye?
Kretzmann: Well, I think the answer to Steve’s question here is no, I don’t think you have too many stocks. I think, especially, the longer your time horizon, the less the number of stocks you own matters. Even if you own a little bit of a future multi-bagger, 10-bagger, 20-bagger, 30-bagger, a little bit is all you need. That’s a quote from Tom Engle, TMF1000, a beloved longtime Motley Fool contributor. He says, “If a company is going to be the next big thing, a little bit is all you need to own. If it’s going to be a dud, a little bit is all you need. You’ll be glad you only had a little bit.” I think there really is something to that. Even though I invested a small amount in Netflix as part of the first batch of stocks I bought 13 years ago, it’s still the largest holding in my portfolio today. It’s just been a staggering performer, well over a 100-bagger now, thanks to you, David, and your recommendation.
So, starting with a small amount or investing a flat amount across multiple companies. If you can hold those companies for ten-plus years, I think that’s a great, Foolish approach.
Gardner: When we think of what Kurt Ilia talked about, about how we typically will do better for our family members than for ourselves, it sounds like that might have just happened right here. It was illustrated. It’s kind of funny to think that Steve took his wife’s IRA and just sort of threw it out into The Fool stocks there, not his own. But look how she’s done! And Steve, I bet you did well selling your business. But, 69% is an awfully good return for this two-year period.
Kretzmann: Oh, yeah.
Gardner: I think a lot of the lessons that have come through this week’s podcast are implicit in that final mailbag item. I agree with David. Steven, I don’t think that you have too many stocks. And I don’t think anybody needs to think they have too many stocks, unless you find yourself stressed out about that and you want to thin it down. But, I don’t think there’s any convincing math to me that suggests that we should have smaller, not larger portfolios, or that there’s some cut-off that you shouldn’t go beyond, unless it’s something that you feel yourself, and your own time management, and any anxiety or not that you’ll have.
Anyway, David Kretzmann, thank you for your prolonged contributions. I only asked you in for one point, but we had so much fun. I was delighted to have you with us.
Kretzmann: Always fun, David. Thanks so much!
Gardner: Alright. Thank you for joining us this week. Next week, we’re going to kick off June with stock stories. It’s volume two of our ongoing series, telling some memorable stories around some of the dynamics stock experiences that we’ve had as investors. I’m sure I’ll have some of my Foolish friends in and share our stock stories with you. In the meantime, Fool on!
As always, people on this program may have interests 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. Learn more about Rule Breaker Investing at rbi.fool.com.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. SVB Financial provides credit and banking services to The Motley Fool. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), Amazon, Ambarella, Chipotle Mexican Grill, Editas Medicine, Facebook, Intuitive Surgical, Match Group, Netflix, Starbucks, and Walt Disney. David Kretzmann owns shares of Align Technology, Alphabet (C shares), Amazon, Ambarella, Chipotle Mexican Grill, Editas Medicine, Facebook, Kinder Morgan, Netflix, Nvidia, Shopify, Starbucks, Twitter, and Walt Disney. Rick Engdahl owns shares of 2U, Alphabet (A shares), Alphabet (C shares), Amazon, Ambarella, Bluebird Bio, Chipotle Mexican Grill, Editas Medicine, Facebook, Match Group, Netflix, Nvidia, PayPal Holdings, Shopify, Starbucks, and Walt Disney. The Motley Fool owns shares of and recommends Align Technology, Alphabet (A shares), Alphabet (C shares), Amazon, Ambarella, Atlassian, Bluebird Bio, Chipotle Mexican Grill, Facebook, Intuitive Surgical, Kinder Morgan, Netflix, Nvidia, PayPal Holdings, Shopify, Starbucks, SVB Financial Group, Twitter, and Walt Disney. The Motley Fool recommends 2U, Editas Medicine, Marriott International, and Match Group. The Motley Fool has a disclosure policy.