This episode of the Rule Breaker Investing podcast comes on an interesting day for Motley Fool co-founder David Gardner: his 51st birthday. It’s an auspicious moment to look back at the outperformance the Fool has offered to customers and investors who followed the company.

With that as his overarching theme, he discusses a pair of investment greats and how they have shaped the Fool’s style. One, who developed what David calls the most disruptive technology to hit the investment world ever — the index fund — is Jack Bogle. And the other, whose brilliance in buying boring, underappreciated businesses and turning them into long-term cash-generating machines, is Warren Buffett. Which did the Gardner brothers follow? Neither: Their framework was shaped, in large part, by the market territory that those two men’s philosophies left unexploited.

A full transcript follows the video.

This video was recorded on May 16, 2017.

David Gardner: Welcome back to Rule Breaker Investing, I’m David Gardner. I tweeted this out, but as I tape this, I turn 51 today. Kind of fun to look back on being a 17-year-old now three times over, on May 16, 1966, right through to today. I want to mention, I think I’ve mentioned this, maybe I mention this each year on my birthday, there’s one other person in the world quite a bit more famous than me or really most anybody else that shares my exact same day, my birthday twin, so I have to send my annual shout out, because she and I are the exact same age. Janet Jackson. Any time you look at Janet, think of me. We’re the same age. She looks better.

So, what do I want to talk about on my 51st birthday? I think I want to reflect this week on Warren Buffett not buying Amazon (NASDAQ:AMZN). A lot has been made in the last few weeks ever since Buffett came out in Omaha at the annual Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) fest that happens around this time every year, attended by so many Buffett fans, so many people who are both grateful and admiring of what he has done. I count myself among them, even though I’ve still never been to the Berkshire shareholders’ meeting. But he was asked, I guess, over the course of the Q&A, why hadn’t he bought Amazon? And he said he hadn’t bought Amazon, he hadn’t bought Google, he admired both those companies, he admired Jeff Bezos maybe more than anybody else in business today.

Later, something else I didn’t see but heard about, he was on CNBC being interviewed maybe the next morning, and when asked why he still hadn’t bought Amazon, he said, I think in a word, “Stupidity.” And I want to reflect on that. Because I really don’t think he should have bought Amazon. Or, based on the assumptions that he makes and the framework that he operates on, I think it’s just a different genre of music altogether. And I think what makes Warren Buffett great is that he’s built his own genre. It’s some mix — I don’t use these phrases normally — of value investing and growth investing. It’s not just the one and not the other. But more than anything, it’s focused on finding great businesses that stand the test of time, and finding great teams of people. He buys them out sometimes and leaves those teams in place very often. It’s on the quality of work done and quality of people contributing to that work that I think he’s buttered his bread. He’s also a genius across many other dynamics that we won’t talk about this week, but he certainly has a great sense, a global sense, of where markets are headed. And I don’t think he should be blamed, or blaming himself, for not buying Amazon, so I want to get deeper into that.

Let me mention this as somebody who did buy Amazon. In fact, it was the Motley Fool Fool Port back in the day, the original online portfolio we did for eight or nine years, right up there on “keyword Fool” on AOL to start with, then later fool.com when the World Wide Web opened up. Our cost on Amazon was, is, $3.21. So I guess, a historic moment for me this week as I turn 51 is that that stock just hit over a 300-bagger from that original price, $3.21. As I tape this afternoon, Tuesday, May 16, the stock is at $966.78, and that is a 301-bagger from that original cost. But forget about that. How about more recently in Motley Fool Stock Advisor? I know I’m talking to a lot of members today. We’ve picked it twice. The stock has been an absolute stellar performer. Since September 2002, it’s up 6,215% for Stock Advisor members. And we repicked it eight years later, in December of 2010. It’s up 444% from there. When you sum those two, and I’m going to be doing a little bit of that this week, you have aggregate outperformance of 6,275%.

A lot of people know this, but not everybody listening to Rule Breaker Investing knows this term, alpha, so let’s break down our term very briefly. Alpha is when you exceed the S&P 500, or the market’s average. If a stock is up 12% last year, and the S&P or the market at large was up 10%, then you would say two points of alpha were generated. If you think about what Amazon has done for Stock Advisor members since I picked it in 2002 and 2010, it has racked up 6,275 points of alpha. Again, a number that I spent time on, because I guess it’s a historic week for me, I’d never done this number before, but I just calculated the total points of alpha earned by Stock Advisor, my side of the scorecard, since we launched in March of 2002. If you sum those up, those are 182 stock picks, and the average gain of 381.2%. If you do that math, but you take out the market’s average, because this is alpha, after all, our average stock pick is up 381%. The S&P is up 75%, on average. So we have 306 points of alpha across 182 picks. You do that math, that’s 55,801 points of alpha. Or if you’re a CAPS player, and I hope you are, you recognize that as score. It’s the same concept. We have racked up tens of thousands of points that have exceeded the market averages. And I’m going to be talking about both Warren Buffett and Jack Bogle this week, as I think about these numbers. 

If that sounded like bragging, I hope it didn’t too much. Keeping score is very important to me. It’s particularly important because of two people that I deeply admire and I wanted to talk about this week, as I mentioned. I’m going to start with Jack Bogle, because what we’re going to do this week is, we’re looking at the systems thinking of how that 5,500 points of alpha have been achieved. Why would that have happened? And I think they have two dominant forces when we look at the investment world today. The first one I’m going to call is the Jack Bogle force. That is a world of index investing. It’s been put out there that, last year, Vanguard, the company behind index funds and ETFs, the company that has made investing simpler and more affordable for millions of people around the world, and added huge value over the course of Jack Bogle’s life, since he wrote his Princeton senior thesis on the concept of indexing, I think it was back in the 1950s, what he’s done through his persistence, his force of character, simple math, and what I would describe probably as, ironically, the most disruptive technology within finance of our time, the most disruptive technology, the index fund, is remarkable. As I said, he’s created a world of simpler, better-performing mainstream investing. People who were being underserved, overpaying for mutual funds that were managed and not performing as well as the basic averages, and you were overpaying for that, and he’s flipped that world. And it’s remarkable.

But I’ve used this phrase before, and I’ll use it again this week. I also think it’s led us to this consequence. We are now living in what I call an age of, let’s put a hashtag on this, #BigDumbMoney. There is a huge amount of money sloshing around in the markets today, swooshing around and basically trying to fill out an index, or buy an entire sector. There’s no particular choice being made between this stock over that one. You could have bought Amazon, and you do, if you own a Vanguard index fund, but you also would have bought some of the lower-performing e-commerce producers. Maybe you even owned buy.com back in the day, which isn’t still around today, at least not in the form I remember it, because it got beaten out by Amazon. But the point is, in a world of big dumb money, there’s no particular discrimination, selecting this stock, not that stock. So it’s an amazing thing that Jack Bogle has created, but using our systems thinking here, what you’re seeing is an age of big dumb money.

Now, let me turn to Warren Buffett. Similarly, through his performance, his force of character, his persistence, his brilliance, and imitation being the sincerest form of flattery, we have a significant part of the world that believes the way to invest in stocks is the way that Warren Buffett has always done it and will always do it for the rest of his life. And that is, as I mentioned earlier, finding businesses that are often quite boring. They might be insurance, they might be candies, or how about media and publishing? Often, they’re quieter companies. He buys them, sometimes outright. They remain private, just part of the big public umbrella of Berkshire Hathaway. And he’s achieved this in the only way that I think you and I ever would want to have it proven to us — he’s done it in the real marketplace. He’s not an academic. He’s not an economist. He’s not theorizing. There are no studies other than the actual kinetic force of all the things that he’s done, and the outperformance that he’s created. And today, Berkshire Hathaway is one of the largest market caps in the world, an incredibly successful company.

And in some ways, back to systems thinking here, now thinking of Bogle and Buffett, some ways, he’s the ultimate anti-Bogle, isn’t he? And he’s an exemplar to many. He basically says, “It does matter which stock you pick. We should pick this one, not that one. I don’t even favor this sector this year.” People love what he writes in his annual letters. They’ll take any scraps off the floor just being near the Buffett table, anything that they can get. A lot of people love the Q&A at the Berkshire Hathaway annual meetings, just because they want to hear what Warren and his partner Charlie Munger think. And it’s remarkable, because they’ve been right in a grander way, and more frequently, than anybody else of our time.

So, what you have here are two completely dominant forces that really operate in opposite manners. You have one saying it doesn’t matter what stock you pick; just make sure you pick them all and pay nothing to do it. And you have the other saying, “This is how we beat the market. I’ve done it for decades. It’s proven out in the marketplace, not just of ideas, but the actual marketplace.” You have Buffett and Bogle. And then you wonder why Buffett at the end of the day would be kicking himself and saying he’s stupid for not buying Amazon.

And now, just to close it out on Buffett, there’s one key, I think, that helps Rule Breakers like you and me, and helps explain the outperformance of a scorecard like Motley Fool Stock Advisor. That is, very specifically, that Buffett, for decades, has warned people away, and himself, not invested in “technology.” I air-quote that in this podcast because the word “technology” is a funny one. It’s used to mean, I think, too many things. About 10 to 15 years ago, I was saying with the onset of the internet, everyone’s a tech company these days. There’s no longer any distinction between what a tech company is and what it isn’t. I’ve never really liked the phrase “tech stocks” that you’ll hear bandied about on CNBC, because it’s unclear to me what’s a tech stock and what isn’t. I think it becomes less clear with every passing day here in 2017. But I think it’s been really important and profound, the anti-technology viewpoint that Buffett and so many who imitate him have. And it’s been fine. Warren has done wonderfully well as an investor. But when you think about how important to technology is and how fast it’s changing, and how it’s part of everything we do today, it looks like an increasingly strange position to avoid technology, or demean tech stocks or growth stock investing or whatever else we want to call sometimes Rule Breaker Investing

So I think what you have here, when you put the two things together, then, is you have a vacuum that has been created by, on the one hand, big dumb money, swooshing around in the market, buying indiscriminately; and then, on the other hand, by the “smart money” specifically not investing in Amazon or Google or Netflix or Tesla, the list goes on, of world-changing companies that have been game-changing investments for many Fools over the past 20 years. So with Bogle warning people off of stock selection altogether, and Buffett warning us off of specific types of stocks, tech stocks, and at the end ruing that he didn’t buy Amazon, I want to say this to Warren, and then this to you. To Warren, I say, you never needed Amazon. Look at your wonderful record. Amazon was like rock music, and you were playing classical music all the way through. And classical music stands the test of time. It’s beautiful and it works for centuries, and I don’t think it makes a lot of sense for one musician to all of a sudden say, “Why wasn’t I playing this other genre of music?” So Buffett shouldn’t invest in Amazon. It doesn’t make sense, given his framework. And Bogle already invests in Amazon, but given his framework, it makes just as much or as little sense to own that one as any other stock.

And now I want to remind you, in closing, of our framework. I think the most important principle that we have of our framework that’s guided us for a couple decades now, not just managing Motley Fool Stock Advisor, but Motley Fool Rule Breakers as well, is that first Rule Breaker principle — which I frequently hearken back to on this podcast — the first trait that we’re looking for in Rule Breaker companies are top dogs and first movers in important, emerging industries. Top dogs, that means we’re looking for the leader, the Amazon out front of e-commerce as e-commerce is born. Or a company like Amgen, out front of biotechnology as biotechnology is born. Or a company like Netflix out front of an entire industry, multiple industries, really, from television two films in Hollywood to media companies, out front realizing, not only are we going to go streaming with all of this, but we’re going to start producing the content ourselves. Tesla, out front of a world that asks, “Who killed the electric car?” as one popular documentary film was named, saying, “Not only is the electric car not dead, but we’re going to build an electric car that’s the best-performing and safest car ever made, and it’s going to run on pure electricity.” The top dog and first mover in an important emerging industry. This framework that we’ve operated off of and will continue to do so for a long time specifically has you looking at the leaders and leaders in emergent areas that are exciting. 

The reason this works so well, I think, is to go back to it, you have the two biggest investment voices of our time saying, on the one hand, “You shouldn’t even pick stocks, you fool!” and the other saying, “Stay away from those, because that’s risky, and we really don’t know where the world’s headed, and I don’t want to have to figure out what Google is about or where the world is headed, because it’s unpredictable and I don’t think I’ll do a good job.”

So it’s that Rule Breaker principle No. 1 that I want to double underline here, especially during this month of May, where I’m seeing more articles and publicity about Amazon and its success and what Jeff Bezos has done, largely, I think, driven by what Buffett said about Bezos, but also by the performance. I saw an article this week about how it’s been the best super-stock since 1926. The list goes on of accolades by Amazon. I think I said last week on the podcast, every time you hear Amazon, and we love the stock, we love the company, we own it, we’ll continue holding it for a long time, but the Rule Breaker in you, every time, I encourage you, that you hear Amazon, you should be hearing some other stocks, as well. I hear, as I said last week, MercadoLibre, which is very similar to Amazon, is much smaller than Amazon, but that’s a strength, too, starting from a smaller base. This is a stock that has outperformed Amazon pretty dramatically over the last year, has beaten it over the last three years, still a much smaller company operating e-commerce in Latin America. That’s just one example. I think the Rule Breaker in us, I like to try to avoid the hype of the headlines and think through other similar, using pattern recognition, other similar patterns or stocks that would seem to fit the bill, and might even be better performers. But, to go back to frameworks, because that’s what this podcast, I guess, this possible rambling 51st birthday reflections, are about. I think it’s about the framework that you choose to guide to the decisions that you’re going to make.

To close, Bogle’s framework is brilliant. It has served more people than Buffett’s, more people than any other framework in the financial world in the last 50 years. It’s the most disruptive technology the finance world has seen. And Jack Bogle has our undying credit and gratitude for what he’s done. The framework that Warren Buffett has operated off of is probably the single most imitated and documented, studied, taught framework for those who do pick stocks in the world. However, it’s a framework, ironically, that I think excludes the great stocks of any given era, especially this tech-driven era. And so, if you follow the Rule Breaker traits and follow our framework, you’re going to be buying into, consistently, the companies that do define the age in which we live. A word I like using a lot from the German, “zeitgeist,” the spirit of the age.

One last thought — I think I’ve said “in closing” two other times — it isn’t just about stock selection, is it? The only way you’re going to get a 300-bagger, or rack up 55,801 points of alpha — that’s in Stock Advisor, by the way. In Rule Breakers, we have 16,550. When you put those two numbers together, in a world where lots of people are taught that to beat the stock market would just be luck, between Rule Breakers and Stock Advisor, I’ve got over 70,000 points of alpha over the last 15 years. The only way you’re going to do that is if you hold the stocks and keep holding. It’s being focused on the business, not the stock price. If you’ve been a business-focused investor, you would never — we haven’t — you would never have sold Amazon, because it’s been out front the entire time. Nothing has ever caught it, and it’s entered more than one industry beyond just e-commerce, and also had leadership positions there. So if you’re a Foolish investor, you’re going to hold and hold and hold, as we’ve been demonstrating in Stock Advisor and Rule Breakers.

I think what I love most about what we’ve done, looking back now over 24 or 25 years, is that we’ve done it for Main Street. The advice that we’ve provided has been for you, if you were interested enough to find our website, and willing to cough up as little as $100 a year. So in contrast to big institutional players, celebrated hedge fund managers, from the beginning, we’ve basically tried to champion investing for the little guy, for the individual investor. Just like my brother Tom and me when we started the company, we were trying to make a better world for people like us. I think I’m speaking to you. So, for people like you. Done transparently, scored right out front of America, whether it was in our paper newsletter back in the day or our website today. So, to Jack Bogle, to Warren Buffett, and to you, the Rule Breaker, I say, know your framework, know your music, know your genre, let’s each continue to play the music that we play!

David Gardner owns shares of Amazon, MercadoLibre, Netflix, and Tesla. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), MercadoLibre, Netflix, and Tesla. The Motley Fool has a disclosure policy.

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