The Motley Fool Investment Guide: Third Edition
Take heed . . . The wise may be instructed by a fool . . . You know how by the advice and counsel and prediction of fools, many kings, princes, states, and commonwealths have been preserved, several battles gained, and divers doubts of a most perplexed intricacy resolved.
The world has changed dramatically since The Motley Fool began its quest to help the world invest better in 1993. Today’s individual investor is armed with more information and greater—and cheaper!—access to the markets than ever before. Today, we can find a stock idea, research it online, and buy shares, all in a matter of mere moments . . . not that we think you should.
But much remains the same. Investing in individual equities remains the truest path to lasting wealth. Many Wall Street brokers will argue to their last breath that you can’t do it on your own. But we have clear evidence—now with a track record that spans more than twenty years—that individual investors can beat the market . . . so long as they can overcome a few key behavioral barriers.
And yes, we’re still answering questions about the name we chose for our company. So let’s start there.
That’s certainly not a very wise choice for a name when you’re trying to ply your trade in the investment world. For decades, financial professionals have done their best to sell customers on their Wisdom. Whether it’s the pinstripe suit, the knowing smile, or the self-satisfied advertising slogan (one company referred to itself as “Rock Solid, Market Wise”), your typical broker, money manager, or financial planner has striven for an image of success, intelligence, experience, respectability—in a word, Wisdom.
And for decades, they’ve been making a fair amount of money off of fools. You know about fools. You might even have been one yourself at some point. Ever bought a stock on your dentist’s recommendation with only a vague understanding of the company’s business model? Or have you plunked down your money for shares of an under-the-radar business because an email in your inbox breathlessly proclaimed it a “can’t miss opportunity . . . bound to double from $0.04 to $0.08 because of CAN’T-MISS catalysts?” How very foolish of you. Or what about the time you snapped up shares of the International Dashed Hopes Load Fund just because your broker said it was the top performer in its category last year? Terribly, terribly foolish.
And the financial establishment thanks you.
Fortunately, you don’t need to be the one who provides the funds for other people’s dreams. It’s possible—now more than ever—to make informed, intelligent decisions that will help you make the most of your financial future.
The Wall Street Wise would have you believe that “A Fool and his money are soon parted”—we get that a lot. But in a world where more than eight out of every ten mutual fund managers lose to the market averages, year in and year out, how Wise should you aspire to be? In what other realms could such a paradox exist: that the paid professional can do no better than—in fact, cannot even do as well as—dumb luck?
And yet, in few other arenas are the trappings of the profession so enmeshed with the job itself—massive desks, expensive suits, gold cufflinks, precision watches. You be the judge of whether those accoutrements are
designed to impress, intimidate, or overcompensate for their underperformance.
And that got us to thinking, working out of a far-from-glamorous 12-by-8-foot backyard shed all those years ago, that we should just go ahead and call ourselves Fools, since our attitude and approach to life were so radically different from what was being passed off as Wisdom all around us.
So we launched the very earliest iteration of The Motley Fool, taking the name from (an admittedly nondescript quotation from) Shakespeare’s As You Like It: “A fool, a fool! I met a fool i’ the forest, a motley fool.”
We’d always loved Shakespeare’s Fools: they amused as they instructed and were the only members of society who could tell the truth to the king or queen without having their heads lopped off. The Motley Fool began as a monthly newsletter distributed to a very . . . let’s call it “exclusive” membership base. The printed newsletter soon transformed into a daily feature in the early days of America Online, when users paid by the minute they spent in our community. From those humble beginnings, the Fool has become one of the premier financial destinations online, with millions of investors reading our free analysis and advice, conversing in our community, participating in our stock-picking game, and performing their research in pursuit of winning stocks. The Fool now offers a suite of premium services catered to different investing styles, mutual funds that follow our Foolish tenets, and even a wealth-management business for those who love our style and advice but want to leave the heavy lifting to someone else. And The Motley Fool continues to seek new avenues to achieve its mission: to help the world invest . . . better.
Our goal was and is very simple: beat the market and show others how to do it—whether that’s a teenager deciding how to invest the proceeds from her summer lawn-mowing business or a savvy, seasoned investor who wants to profit from advanced options trades. In our decades pursuing this goal, we’ve enabled millions of people to invest their own money—without the help of Armani suits—and set a course to the financial future they seek.
Our approach is best characterized by our general disinterest in, and mild disdain for, conventional wisdom. For example, the Wise will encourage you to invest your money in loaded mutual funds. (This “double dip”
enables them to charge you for that advice and then charge you on an annual basis for the funds’ management fees.) We, on the other hand, are telling you to buy stocks. They might tell you, “All right, take on that risk of stocks, but only buy the very safest ones.” Or, alternatively, some brokers will try to sell you a collection of rinky-dink shares of penny stocks, dubious entities with an even more dubious likelihood of ever paying off. And many brokers, once you’ve entrusted them with your savings, will quietly rotate you into and out of investment vehicles, maximizing their transaction fees . . . but not your profits.
We want you to buy shares of great companies, sprinkle some more volatile growth stocks in with an array of blue chips, and skip the penny stocks altogether. Then hold those stocks for the long haul—think decades, not days. We espouse this approach for one simple reason: it works. Going back through history, you’ll see that the stock market is pretty close to a sure thing, if you have the proper timeline (no day trading!) and temperament (no panicking!). From 1871 through 2012, holding periods of a single day were essentially a coin flip—52 percent of those days earned positive returns. But investors with longer horizons fared much, much better. Eighty-eight percent of ten-year holding periods were positive, and (this is not a typo) 100 percent of twenty-year and thirty-year holding periods made money. In pretty much any comparison between stocks and other asset classes, stocks win. According to a Credit Suisse study of the twenty-eight markets it tracks, stocks outperformed bonds, which outperformed cash in twenty-seven of them . . . by a wide margin. (China’s the only exception, and that’s because the country literally burned capitalistic symbols to the ground under Mao Zedong.) In short, stocks beat all other asset classes around the globe.
In addition to our contrary—though commonsense—approach of buying and holding stocks for the long haul, we’re also encouraging you to consider a range of options trades, including shorting stocks, an attempt to profit off the decline of a stock rather than its rise. It is possible to use options “Foolishly,” allowing you to generate extra income or giving you the option to own a stock you like at an even better price. (Fear not, we’ll discuss these concepts later in the book, in terms that are neither exceedingly complicated nor scary.) To us, if you’re an advanced investor for whom the stock
market is more than a passing fancy, we believe you should at least consider the potential advantages of maximizing your returns in a way that matches your timeline and your temperament.
And the list of our outrageous beliefs goes on. It is capped by the very idea that you should manage your own money yourself—that you are the individual most personally invested in your financial success and, therefore, are the one best suited to make your money decisions. To many segments of the financial-services industry today, this idea remains about as logical as a financial-services company calling itself the Fool.
In what follows, then, we hope to help you, and the world, invest better, giving you the confidence and the knowledge you need to succeed as an individual investor. But first, we should introduce ourselves.
WHO WE ARE AND HOW WE GOT HERE
We’re David and Tom Gardner, brothers and the founders of The Motley Fool. When we were young, we learned the core concept of investing . . . thanks to chocolate pudding. On trips to the supermarket, our dad would tell us, “See that pudding? We own the company that makes it! Every time someone buys that pudding, it’s good for our company.” Our childhood family vacations often included visits with the chief financial officers of companies based in the cities we visited. We didn’t always understand our dad’s conversations, and they cost us a few afternoons that would otherwise have been spent in a hotel swimming pool, but those visits set us on a path to understanding that businesses are only as good as the people who work there.
Years later, we began investing on our own, taking charge of the stock portfolios that our parents had started for us when we were born. For many casual investors, it takes a lifetime to overcome all the most common obstacles to investing in stocks—not knowing how to get started; believing they don’t have the time, money, and ability to do it themselves; a willingness to settle for the seemingly safe—yet often underperforming—comfort of mutual funds. Thanks to the foresight of our parents, we were fortunate enough to skip past that preamble of doubt.
Our very first purchase was shares in a trucker called Leaseway
Transportation (long since acquired by a larger company). Using a few elementary measures, we had culled the stock from the pages of Value Line, then a seven-inch-thick investment research monstrosity, a format that with the advent of online tools is about as common and timely today as ticker tape. We can’t recall the exact rationale for the purchase, but one hot summer, we watched with awe as shares climbed from $26 to $42, where we took our profit. In retrospect, the process of discovering and researching that potential investment left something to be desired—hardly our most inspired work—but it left us with a lesson that endures: If you’re willing to take a risk, and you’re open to continuous investigation and exploration into the world around you, you can enjoy tremendous financial success in the stock market without paying the Wall Street Wise for the privilege.
We’ve learned a lot since then, and today we welcome millions of readers to Fool.com
each month. Hundreds of thousands of individual investors have come to trust our advice enough to become members of our premium services. In this book, we’re going to take much of the guidance we provide daily on our site and in our services and break it down to its primary components. Rather than pointing you to a couple of “hot stocks,” we want to give you the tools and tips to build, light, and grow that fire on your own.
We want to help you help yourself make money. This was our intention back in 1993, when we launched The Motley Fool as an investment newsletter. Ye Olde Printed Foole, as we fondly referred to it, contained our stock picks, one monthly investment article, and a patchwork quilt of content in keeping with our motley interests. We mailed out unsolicited copies to a few thousand unsuspecting people—we borrowed some friends’ and relatives’ wedding invitation lists—and wound up our first month with exactly thirty-eight subscribers. After publishing twelve monthly issues, we got a sinking sense that not everyone shared our passion for investing.
But as fate would have it, the burgeoning internet was beginning to connect people in a way previously unimaginable. By sharing our ideas and answering people’s financial questions, we could begin a conversation about stocks with people around the world. In 1994, we partnered with a small but fast-growing service called America Online (AOL to friends), providing us greater visibility and reach.
With our dial-up connections and our desire to awaken the world to the benefits of investing in individual equities, we started typing. We offered our investment opinions and advice in response to requests from complete strangers, doing our best to provide them with as much information about their own holdings as they could handle. In so doing, we discovered some wonderful things (like how many people were willing to volunteer their own investment research for the benefit of many) and some bad things (don’t get us started on the penny-stock scam artists, who still peddle their false and fraudulent get-rich-quick schemes to starry-eyed investors today). Within a few months, our little gabfest had grown into the most popular financial discussion on AOL, so we shuttered our monthly newsletter and took our show online. We were more interactive and timelier, and we didn’t have to run to the neighborhood Kinko’s and lick dozens of stamps each month.
Before long, and with the help of a feature in the New Yorker, word started to get around, and soon we were AOL’s most frequented service in Personal Finance. People were buoyed by the idea that they could do it on their own. And it didn’t hurt that our Fool Portfolio, a real-money portfolio invested exclusively in stocks, rose 11 percent in our first few months online, while the Standard & Poor’s 500 (or the S&P 500, the index used most frequently to track money managers) stood flat. We closed our first year up 59 percent, almost 40 percentage points ahead of the market. Not so surprisingly, a lot of people were signing into our area to find out what we were up to.
It turned out our strategy for finding and buying shares in great companies, with the help of our growing community, was working. The greater the success of our investments, the more Fools came to the forum. And that itself led to better performance. As the shampoo bottle says, “Lather, rinse, repeat.”
In the ensuing couple of decades, our business has changed in ways large and small as we continually strive to educate, amuse, and enrich individual investors like you. We have offices around the world, tackling the specific challenges and opportunities that are present in different countries. From our home office in Alexandria, Virginia, we publish a slew of investing articles each day on our award-winning website, with our talented stable of writers and analysts sharing the news and their views on individual
companies, the market as a whole, and advice for making the most of your money. Our groundbreaking CAPS stock-rating service provides insights into what more than fifty thousand Motley Fool community members (as well as more than one hundred professional Wall Street firms) think about the stocks that investors own or are investigating. (Those players who’ve earned the best track records carry the most weight in a stock’s CAPS rating.) We now feature hundreds of vibrant discussion boards, where newbies, individual investors, and industry experts together can weigh in on the prospects of a particular company, where users offer their best advice on living below your means, and where retirees share their successful stories of leaving the workplace long before they hit the official retirement age (to name just a few of the most popular boards). We’ve written a shelf full of bestselling books, we produce several binge-worthy podcasts, we boast a weekly radio show that airs on dozens of stations around the country each week, we’re a mainstay on voice-activated devices like Amazon Echo and Google Assistant, and if you flip your television to the financial news channels, you’re bound to see one of our analysts sharing his or her insights. And if you’re the type who would prefer someone to do it all for you, well, we’ve also built a wealth-management business to do just that.
Coming full circle to the early days of the Fool, we also offer a stable of newsletter services for investors who are interested in paying an annual subscription membership for access to a team of analysts who put their heads together to come up with their best stock ideas. Some of them focus on a particular style of investing (dividends, growth, etc.); some of them feature real-money portfolios that members can follow along with at home; some dive into more advanced investing styles, like options (a strategy that we’ll explore later in this book). But these aren’t your father’s newsletters. They offer far more than those early pages of printed text ever could—in fact, we prefer not to even call them “newsletters” anymore, and in a nod to technology, we no longer print and mail them to our members (though they’re easy to print at home, for those who prefer). In all of them, we’re shooting to better meet the needs of the hundreds of thousands of members who have decided to put their trust in us, and we’re constantly refining our strategies for finding stocks that beat the market.
And it’s worked out pretty well for the folks who have chosen over the years to follow our advice. We don’t want to brag, so we’ll just borrow a quote from a 2013 report from the venerable Mark Hulbert, who has tracked the advice of financial newsletters since 1980: “Consider this: The three top spots in the Hulbert Financial Digest’s five-year rankings of more than 200 investment-advisory services all buy and hold quality companies. Remarkably, all three are subscription newsletters published by the same advisory firm, The Motley Fool in Alexandria, Va.”