Interview: The Motley Fool’s David Gardner talks about stock-market investing

Earlier today, I reviewed the new book from The Motley Fool, Million Dollar Portfolio. I had the pleasure to interview author David Gardner at the end of December. This post contains excerpts from that interview. The complete interview will be included as part of the hypothetical future Get Rich Slowly podcast.

J.D.
Earlier this year, you met with Stephen Popick, a government economist who writes for Get Rich Slowly. During the first part of your interview, you talked about teaching children about personal finance and investing. You talked about a long-term version of the stock-market game.

I like the idea of a stock-market game, and I've had some people ask me about similar things. They want to know if there are similar tools or methods for adults who want to learn about investing without risking their capital just yet.

David
First of all, I enjoyed meeting Stephen a lot. He's a very nice guy. I think at the time, he and I were talking about CAPS and about what we're doing on our site with that, and that's what's coming to mind as you ask me the question.

I think the purpose of a site like CAPS is to enable people to score themselves. You know, to actually step up and instead of at a cocktail party saying “I think CROX is going down!”, if you think CROX is going down, type it in. Put it right into this transparent open platform where you thought CROX at this date at this price was going to lose to the stock market. And that's what CAPS does.

The way I sometimes describe it is that it's like one big stadium. All the world's invited to sit, all the world's invited to play right out on the field. Anything you do on the field, the whole world will see and will always know about from here on.

J.D.
The Motley Fool in general and Million Dollar Portfolio specifically [are] about picking stocks. [The book] is written for the individual investor who wants to own individual stocks. Yet early in the book you write that, “If you're a beginning stock investor, your portfolio should be built upon a sound asset allocation plan and a set of carefully chosen mutual funds.”

I was wondering if you could elaborate on this. What's the relationship between mutual fund investing and investing in individual stocks? At Get Rich Slowly, as I've been learning about investing, I've stuck pretty close with index funds. But I'm wondering if you can talk about the relationship between mutual fund investing, or index fund investing, and investing in individual stocks. When do you make the transition from one to the other? Do you do both at the same time?

David
That's an excellent question. In fact, it's really the question that each of us has to ask ourselves. Part of what we're trying to do with the book is to show people that there are multiple ways to invest successfully.

The truth is there are innumerable ways to invest. It more comes down to figuring out what color your parachute is. That's really largely based on three factors:

  • Factor number one is the degree of involvement that you want. If you're going to spend no time at it, you're going to want to invest much differently than if you're going to spend all your time at it. Obviously most of us are somewhere in between.
  • The second thing that's really important is something to do with your temperament or your mentality. It's one part risk-reward — how much are you willing to take in both cases — and another part your intellectual curiosity (or lack thereof) — understanding how best to suit your investments to your own mind.
  • Number three is making sure your money is aligned with your own passions and interests. An analogy I've used a lot is that if and see the books on your shelf, I feel like I know you. I can say, “Okay, that's what J.D. reads,” and I can probably make some guesses about who he is and what he's interested in. I should have the exact same experience if I picked up your brokerage statement or if I saw your overall financial plan.

Number one is about your time, number two is about your psychology, and number three is about you, and making sure that your investment portfolio gives me a clear read on you.

J.D.
Say you're an average investor. You have a 401(k) through work and then a Roth IRA on the side that you manage yourself. I want to know how you go about investing in individual stocks in a way that makes sense.

I guess what I mean is, I think the book recommends 12 stocks and it also recommends 30 stocks for a diversified portfolio, but if you only have $5,000 a year for your Roth IRA, how do you approach this, especially so that transaction fees don't chew away your capital?

David
If I had $5,000, the first thing I would do is I would probably make five $1,000 investments. With one of those thousands, I would definitely buy an index fund. I would start right there.

We love the index fund. As much time as we spend talking about stocks, we tried to champion an index fund for 15+ years. In fact, we had Jack Bogle in our office just ten days ago talking to our employees. We've become good friends with Jack over the years. We have a huge degree of affinity and for the index fund.

Where we part with Jack is that we think of that as the benchmark. That's the “you didn't have to spend any time, you didn't have to apply any brainpower, you just basically went autopilot”. The funny irony of that — as you well know — is that autopilot beats most of the other pilots out there most years.

We think, “Hey! I can beat the autopilot.” […] We feel as if — and I think our public record proves this — that we can beat the market. It's not about never having any losers, and it's certainly not about always beating the market every year. It's about not paying anybody a management fee, and over time doing better than all those who are.

But you do have to put some time into this. If you're going to try to beat Jack Bogle, you're not going to do it by hiring somebody else to do it for you. You're going to probably have to roll up your sleeves and learn over time. You're going to have to bloody your nose a bunch of times, you're always going to be humiliated by years like 2008, no matter who you are. You have to be willing to be that way.

A little bit of a blustery answer there. Yeah, so that was my whole key into the $5,000. I would take the other $4,000 and buy four different stocks.

J.D.
But the one thing I worry about is that each time you purchase a stock, you're paying $20 or whatever it is, so you're sacrificing something right away.

David
Actually, you can pay no dollars for it, pretty much. Or let's just say five bucks.

J.D.
I guess Sharebuilder can do that.

David
Yeah, and have you looked at Zecco at all?

J.D.
I haven't actually used it, but I've looked at it a little bit.

David
Well, there are some funny crazy models that can reduce your costs to almost zero. You can definitely pay less than ten bucks. In other words, if you were looking at a $1,000 investment, you're paying less than 1% for your transaction in.

J.D.
So as long as you're holding it and not churning your stocks, you're keeping your costs low.

David
Yeah, that is certainly true, and that's something we've advocated.

So, if you're trying to answer that $5,000 question, I would take four stocks…and I would make sure they were from four different industries. I would pick companies that I'm personally motivated to follow, that I'm energized to learn more about, not something somebody told me about that's somebody else's industry I have no interest in.

That's not the only way to answer that question. It's also not the only way to invest. That's just the “get started” approach, where you're actually going to be able to earn more money over time.

J.D.
I've been reading Roger Lowenstein's biography of Warren Buffett. As I'm reading that, I'm just shocked at how over and over again the market will go through down periods like the early seventies or the late eighties. Again and again people proclaim “the death of equities” and how the stock market is no longer the place to be.

But Warren Buffett is waiting there patiently. As people are saying that, he's being greedy when others are fearful.

David
I don't think the stock market is so much a thing to ultimately believe in or not. I just think of it as an opportunity to become a part owner of companies.

I think capitalism works. That's one of my basic beliefs. And as long as capitalism is being practiced effectively by a culture (or by the world), there will always be good stocks. Therefor it's always worth paying attention. But you don't actually have to think in stock market terms.

“The stock market” as a label is too broad. It's too broad a brush to paint. I don't really think about “the stock market”. I think about my individual stocks. Some of them do better than the market; some of them do worse. In the end what you're doing is becoming a part owner of things. And as long as you believe in ownership and capitalism in that sense, why wouldn't you have a life-long love affair with the stock market? Or at least realize that it's a really interesting place to learn?

Even if you didn't invest, if you're in business, or really in our culture and you're trying to make good decisions about either the company you work for or if you're trying to guess trends or anything like that, you absolutely want to become a student of the game of business.

That's really all the stock market does. It scores and tallies what's happening in the game of business over time.

I don't quite understand somebody if they were to say to me, “I don't even look at the stock market” or “You're either in it or you're not”. My opinion doesn't change. The one way that I can say I'm Buffett-like is that my opinion of the purpose of it and the underlying system doesn't change. I don't jump in and out of the market over time.

J.D.
Right. So long term, it's a “weighing machine“, as Buffett would say.

David
I didn't have that in mind as I was speaking, but I'm glad you came up with it. You and I know it starts with “in the short term, it's a voting machine”. The purpose of that line is simply to remind people to try to look past the present. That's contrary. That's hard to do. Most people don't do that by nature. Some people are probably incapable of doing it. The reason he reminds us of that is you're going to make better financial decisions if you can gain that ability.

Thanks to David Gardner and The Motley Fool for taking the time to speak with me. If you have suggestions for future people you'd like to see interviewed, please let me know. Also, please let me know if you have feedback on the interview itself. I'm still new to them.

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Brent Riggs
Brent Riggs
11 years ago

That’s some great advice. Especially timely and practical in this time of uncertainty. People are looking for good leadership concerning finances. Thanks for the great post…

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

Great interview. Great advice.

Jeremy
Jeremy
11 years ago

Good job. Very well put, and some strong concepts out there. Please don’t save the rest for a podcast unless you’re planning on it soon…

He hits on some really good points. To invest successfully, you have to be cautiously optimistic. Optimistic like he said (“capitalism works”), or you won’t be betting on the future, and cautious or you won’t be betting on it for long!

So I still think the questions is, “Should I be investing?”

And I was just writing about individual investments vs ‘the market’ on my blog as Nothing Is Average earlier today!

Adam
Adam
11 years ago

I would be wary of advising people to buy individual companies. There is a bare minimum amount of knowledge necessary to make informed investment decisions, and it is not insubstantial.

People simply buying stocks in companies they like is no different than advocating they put all their money on their favorite number at the roulette wheel.

chacha1
chacha1
11 years ago

Hi J.D., I like the conversational style of this interview. No need to change it IMO. @Adam … for sane people, there’s a big difference between gambling and investing. We did see, with the rise of day-trading, a significant number of uneducated stock-buyers (I’m not going to call them “investors”) who thought they could play the market like a craps table. That’s not most people, though. The information needed to research a company and its stock price history is all available for free on the web through sites like MSN Money. Most importantly, market data is just data, not opinion,… Read more »

allen
allen
11 years ago

JD, i really like the conversational tone, the feeling of the back-and-forth: Too many times, i’ve read invterviews that are so dry, with just the subject talking, that i stop reading. Even though this is a dry topic, the back and forth nature keeps me interested. I liked how you brought up the “average investor”, which is what (by definition, i guess) most of us are. Really brining the high-minded topics into the street. One thing i’d like to comment on is the concept of investing as being representative of yourself: This is not normally possible for most of us.… Read more »

A. Dawn
A. Dawn
11 years ago

It is extremely hard to pick winning individual stocks. On the other hand, mutual funds are designed for average investors; as a result, it’s not that hard to pick a mutual fund with moderate rate of return.

Adam
Adam
11 years ago

chacha1 said:

The information needed to research a company and its stock price history is all available for free on the web through sites like MSN Money.

You are right, people have a lot of information at their fingertips. For the most part, finding it isn’t the problem. Knowing how to interpret it is.

Frugal Bachelor
Frugal Bachelor
11 years ago

“I don’t think the stock market is so much a thing to ultimately believe in or not. I just think of it as an opportunity to become a part owner of companies.” I think this is a great quote. This is also how I think about stock investing. When you own a stock, you are a part owner of the company. Who wouldn’t want to be a part owner of a great company? It is way easier and less risky than starting and running your own business. On the spectrum of risk, owning individual stocks lies smack dab in the… Read more »

willamettejd
willamettejd
11 years ago

Call me conservative or a curmudgeon, but for the average person successfully picking individual stocks that will beat the S&P Index over the long-term is about as risky as flipping a coin. Some random thoughts on why: (1) We know that an index fund beats actively managed funds (with highly trained “expert stock pickers”) roughly 95% of the time over a 10-20 year period, even before factoring in maintenance fees. (2) We know that index funds can be obtained with maintenance fees as low as .5% (perhaps even lower) (3) We know that the “average” individual has a small and… Read more »

thomas
thomas
11 years ago

Excellent questions, excellent interview. Looks like I have a new book to thumb through.

Sherry
Sherry
11 years ago

“I think capitalism works. That’s one of my basic beliefs. And as long as capitalism is being practiced effectively by a culture (or by the world), there will always be good stocks.”

I concur.
This was a great interview JD – thanks. I agree with the above statement, and I thought David did a good job explaining how working with individual stocks work if you have the right motivation in picking the individual stocks that you do. I also appreciate the question you asked early on regarding mutual funds.

This was a great, balanced interview.

noone
noone
11 years ago

Hey, I read the MF way back when it was all free on AOL after I saw one of the brothers present at the Press Club! My eye was caught by the silly hats he wore then (do they still wear those?) and I listened enough to find them on the web (as limited as it was at the time). Their basic advice on budget and debt got me enough knowledge to end my debt! Their site (when free) allowed me to pick up basic info on investing and such while I was paying off my debt. I stopped reading… Read more »

Rick
Rick
11 years ago

Great plug for Zecco. I love the brokerage. It’s not the best out there, but the price certainly is. And it doesn’t have all the greatest tools that other brokerages have, but when you only have $5000 to invest, you don’t need all the greatest tools. Also, I disagree with the statement that you can’t beat the market. While there are many reasons, there are two primary reasons that stand out the most. 1. First, because index funds are not actively managed, they can’t take into account obvious changes in the marketplace. For instance, anyone who paid any attention at… Read more »

Ron
Ron
11 years ago

At this time I only have about $2000 left on my 2008 Roth IRA contribution left. I have never bought individual stocks before but there is one in particular that I have always wanted to get in on and it is selling quite a bit lower and I am ready to put in $2k on it.

What is the best way to go about this? Share builder or Zecco. At first glance Sharebuilder looks a little easier to set up and get going.

Any thoughts?

Ken
Ken
11 years ago

Great interview. I am a member of their Hidden Gems service and although it is not fairing too well right now, I do believe in their philosophy and that helps me sleep at night knowing I have companies that are healthy to survive the economic downturn.

ekrabs
ekrabs
11 years ago

Great interview!

For those who care, I believe you need to maintain a minimum balance of $2500 before you can enjoy their 10 free trades per month offer.

Sharebuilder is $4 per trade if you don’t mind them doing bulk buys once per week. Real-time trades are $10 per trade I think.

davmp
davmp
11 years ago

For those who don’t know yet, Zecco announced at the end of January, 2009 that they’re changing their policies such that you need to maintain a portfolio size of $25,000 or make 25 trades / month in order to qualify for the 10 free trades as of March 1, 2009. And if you want to go with ShareBuilder and are a Costco member, make sure you sign up through the link on the Costco website. They’ll give you a cash bonus after making your first trade, plus give you a % rebate on purchase transaction costs for the life of… Read more »

Rick
Rick
11 years ago

True. I was disappointed to see that Zecco was doing this. However, Zecco still is one of the cheapest brokerages you can find — only $4.50/trade. And with most options strategies for private investors, Zecco is the cheapest brokerage for trading options. Only if you trade more than 10 options at a time can you find a cheaper brokerage elsewhere.

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