Webcast transcript:
Willy Walker: Thank you, Susan, and Tom, welcome back. Tom Gardner is co-founder and CEO of The Motley Fool, which he started with his brother, David in 1993. Tom attended St. Albans School with me, attended Camp Timanous with me, then graduated from St. Mark's School and Brown University. And, as you can tell, is an old, old friend. Tom, first of all, welcome back to the Walker Webcast. I think, if I'm correct – you, Peter Linneman, Ivy Zelman, and Barry Sternlicht are the only repeat guests I've had on the Walker Webcast, so that's not bad company.
The name “Motley Fool” comes from William Shakespeare's play As You Like It where the court jester known as the Fool, could speak the truth to the king and queen without having his head lopped off. So, let's start with hearing some truth about where the U.S. economy and, more importantly, the stock market’s state today.
Tom Gardner: Well, we're definitely in a tough place for growth investors, there's no question about that. This is a time where there's a flight to safety and quality to much larger cap companies into lower beta companies. And obviously, when we look at categories like energy and banking, they've been more attractive here over the last six months. It's hard to find a really great growth company in the public markets. That's a mid or small cap that's had a good six months. And that's hard because that's generally our style of investing at The Motley Fool. Not our only style, but our primary style of investing is a very long term five to 10 plus year view. And you know, it's difficult to remember when you look at the great FAANG companies, you look at Amazon and Netflix. Let's just take those two. It's hard to remember how many 30, 40, 50, 70 percent declines their stocks had along the way to creating tremendous wealth for their long-term business owners. So, it's our highest priority for the investors at The Motley Fool to teach people about investing in businesses to be a part owner of those companies and to expect that the prices are going to move around quite a bit. So, we're seeing a lot of volatility as just one segment of what's happening in the overall economy. I won't give a 41-minute answer to this question, but I will say that we're certainly in very unprecedented times. I mean, we're not in the 1970s, where inflation was for 10 years, the average rate of inflation per year was about 7.6 percent. So that's not where we are right now, but we definitely are in some unusual times and hopefully you're coming out of the pandemic and being able to get back to some normalcy. But it's a difficult time to be an investor, particularly if you're thinking about the next week or month. If you have a one-year goal as an investor, you're in trouble because one-year goals in investing is not a good methodology. But if you're keeping your five-to-10-year perspective, I think there are a lot of great companies to invest in today.
Willy Walker: But on that, Tom, you posted on your Twitter feed that you had just recently met with one of your favorite investors, and this person said, “Have stocks been volatile recently?, I haven't checked”. So, as we go into this, you just said unprecedented times and lots of volatility, potentially a war over in Europe. Should people just turn it all off and forget about it because it certainly feels like people are actively trying to time this right now?
Tom Gardner: Well, there are so many different ways to succeed. So, the first thing we would say is we are motley at the Motley Fool. We don't have a prescription that will work for everyone. After all, two 70-year-olds may have completely different financial pictures and a completely different temperament, family situation and that's true for everyone. If we were to pick that one factor of age, once we start coming down to what's your time horizon? Are you adding new capital, every two weeks, every month, every year? Or have you invested all your money that you have to invest? How much of a drawdown can you handle emotionally? And that's a difficult one for people to assess. So, there are so many factors that we all face. That's the great challenge of being an advisor at The Motley Fool is how do we try to meet everyone on their terms? But I would say if we took the average person in the average situation, whatever we think that is, historically, it's better to turn it off in periods of volatility than to have it turned up too brightly, right? It's better to step away from it and look at the other things in your life if you've got a good game plan. And that would include adding money, diversification, and a long term five plus year time horizon. When you reduce those three, when you're like, I have two years, I'm not adding any money and I have pretty high expectations for what I need in these two years. And that's what's been happening, obviously within a great market, that type of thinking develops. Then you don't want to turn that off. But if you've got the five plus year time horizon and you've got a diversified portfolio and you're adding money. This was never confirmed, but it came out of Fidelity – you google it, and you'll see. Some people say, oh, I think that probably is real and other people say, no, no, no, no, I don't know, that's an urban myth. But it came out of Fidelity that the best performing accounts in the history of Fidelity were accounts that lay dormant because somebody had died, or the family forgot they had them, and they were just there compounding. There weren't any transactions. There wasn't a lot, of course, correcting from one quarter to the next. They were just sitting invested, and that's a great way to build wealth.
Willy Walker: So, when I hear you say that in your six kinds of core tenets of investing on your website, you do talk about owning 25 plus stocks, holding those stocks for a minimum of five years and a number of other long-term suggestions or principles. But you also on your website have a clock, which is a countdown to when the market closes at the end of the day. And so, I am looking at these great principles of buying 25 stocks, holding them for a long time, kind of turning off the noise. And then I got this ticker in the upper right-hand corner that's counting down how many tens of seconds I have until the market closes. So, is the Motley Fool focused on long-term investing or day trading?
Tom Gardner: Well, maybe this is Walt Whitman's moment in the sun again. Do I contradict myself? Well, I do. I contradict myself. But if I were actually to weave those together into a cohesive view of investing, I would say, maybe as a sports fan, I follow all of the games of my teams, but I'm not going to trade out of those teams. I'm not going to stop following that sport because my team lost. I did remember at a particular game that Georgetown was losing to Villanova at 20 at the half and I thought, Really, this is my Saturday? We're down 20 at the half. And by the way, Georgetown came back and almost won that game. This is more than a decade ago, but now it's been a tough, tough season for Georgetown, who are basketball fans. But I digress. I think that it's fun to follow the market. So, I don't want to deny that to people. I love following business every day, I love reading about every company that I've invested in. I love reading about Walker & Dunlop. I love reading about your acquisitions. I love reading about Atlassian. I love reading about Airbnb. I think Airbnb is an absolutely incredible company that's using a wonderful methodology for developing their solutions, and they've got some safety concerns and regulatory concerns. No company has a path to automatic success, so it's endlessly interesting. It's really what you choose to follow.
And I would say that the clock maybe is a little whimsical, a little bit short term in that it's telling you when the market's going to close for the day. Ultimately, I'd love it if the market were open 24 hours a day. I can see going either direction, you know, Warren Buffet, one of his many great lines is “If the stock market shut down for 10 years, I wouldn't be selling out of any of my companies.” And that's when you know you've got pretty high conviction in what you've invested. You don't need prices to confirm your decision making. But all in all, I think that's a whimsical side. I could see us removing that altogether. Maybe, we'll have a ceremonial moment in honor of William Walker.
Willy Walker: Invite me and I'll be there when the ticker goes off. So, one of the other tenets you put up there, Tom, which I thought was interesting, was “Let your winners run.” And so, I was having coffee two days ago with my business school buddy John Hereford here in Denver. And we were talking about GE, and I was making the comment that it's amazing that under Jeff Immelt's reign as CEO of GE, GE lost $400 billion in market cap. And the question was why? How was it that two of the three people to succeed Jack Welch, both were basically abject failures as big company CEOs and only one of them, James McNerney, who went on to Boeing, actually did a good job of creating shareholder value. And my friend John was like pulling out his hair and saying, you know, my grandparents owned GE, I owned GE, and it's just this incredible failure. And so, if you looked at GE in 2002, when Welch turned it over to Immelt, you'd say, let that winner run. And yet if you'd done that, you lost a lot of money. So how do you determine when it's time to stick in and when it's time to cash in the chips?
Tom Gardner: Well, maybe when the CEO has two corporate jets that they're flying around and make sure that they've always got one at the ready, that might be an indication. I certainly think that you were dealt a difficult hand if you took over after Jack Welch. There were a lot of wonderful things created at GE. But it was acquisitive, the accounting. It was a very complex company to take over. I kind of view that scenario as you were dealt a bit of a tough hand when the world thinks you've got the greatest cards in the world. You actually got some pretty tough cards, but you played them pretty poorly in that situation. So, let's go back to “let winners run”. I think any philosophical principle that we pull out, we can find the exceptions. So, we could do that, but spare everyone. We could go to Seneca and just begin reading through his quotes and we would be blown away by how insightful he was in his life. But each one of them, we could take scenarios and see, oh, you wouldn’t actually want to do that there. Therefore, you would want a collection of principles, right? And they would work against each other and then in each one, there would be exceptions on its own, even in the group that would cause that to be a weak principle to use. So, I would say “let winners run” on average, given the way most people invest, is a really good thing & a really smart way to approach the markets.
Because when we're investing, when we invest (not to continue to bring up your company) but when we invest in Walker & Dunlop, we're not investing in your next quarter. In fact, in many cases, you might take an action that could slow things down over the next three months, because you're redirecting things to do something amazing over the next five years, the best CEOs will actually take an action that could harm the short term in order to benefit the long term, right? So that's not going to match up with the time horizon of the average investor, professional or individual that's holding a stock for 135 days. Right. So, I think “Let your winners run” is trying to remind all of us that we're investing in businesses and businesses win over time.
Let’s go back to college hoops one last time, I promise. Look at the top 20 rankings of college basketball. Even if you're not a fan, go online and look at the last 15 or 20 years of the top 20 rankings and see Duke, Gonzaga, North Carolina, Michigan, Kentucky – why are these same teams in the top 20 consistently? Maybe they're out one year or two here along the way, but they're the consistently great ones because they have a whole system that they use to run that program. And great businesses have a system that isn't about whether or not the next product release is going to be a hit and drive short term earnings for the next eight months. It's about what's the culture, what's the strategy, what's the vision and what's the execution against those? So “let your winners run” it's trying to remind investors to think that these great businesses build upon their success over time, and we shouldn't be caught by Wall Street analysts telling us what the target price is this year, because after all, that might be there to drive transactions for that firm.
Willy Walker: So, on that similar one you recently posted 10 stocks that had fallen by over 50 percent, and then five of them came back pretty strong and five of them did not. So, it was Apple, Microsoft, Netflix, Nvidia and Tesla were the five that have obviously outperformed. And AT&T, Chesapeake Energy, Kraft Heinz, JCPenney and Mattel were the five that underperformed. The question there is in that second group that all underperformed – those are some pretty dominant brands. I mean, back to your analogy to hoops basketball. Yeah, that's true. But there is also a Seton Hall in there that back when you and I were watching college basketball in college, Seton Hall had a pretty damn good team that was in those rankings all the time. And today Seton Hall is a pretty, middler D1 basketball program. So how do you determine that you're going to pick the Nvidia and not the Mattel?
Tom Gardner: Well, I love the questions because they're causing us to go a little bit deeper each question. So now let's add some more data. When we look back over a 20-year period, take a 50 or take the last century, you're actually talking about a very small fraction of public companies that drive all of the returns of the stock market. So, it's hard to keep the Pareto Principle in our minds as we move around the world that 20 percent of our effort drives 80 percent of the results. I think Peter Drucker once said 10 percent of everything that's done inside of a company drives more than 90 percent of the results and it's the leadership's responsibility to find that 10 percent and make it 15 percent. Because all you need is those few percentage points of outperformance against the competition, and you will win your category. So, that’s true in the public markets. When we look at 100 companies and take a random selection of 100 companies, 10 or fewer of them will account for all of the returns of that group. So that goes to the “let your winners run” zone.
But we're not going to pick all those 10, right? So, the second principle is to diversify to have Chesapeake Energy alongside Apple, right? And so, what's the correct number of companies to have in a portfolio? And that depends on a lot of factors. But at The Motley Fool, our data shows going back almost 30 years that holding a stock portfolio of 25 companies, a diversified portfolio, 25 plus companies and holding them on average for five plus years puts you in the zone of getting potentially if you're a growth investor, as we are, getting three or four or five really, really wonderful companies. It doesn't take many.
Remember Netflix is up more than 400x in value since coming public twenty years ago. So, 400 times. Multiply that against any investment. You're pretty happy with the $3000 in, you got a $1.2M from that. So, you're pretty excited when you start to invest and find that level of success. But, you've got your diversified portfolio, a few of those are going to drive the overall returns. So, you've got to accept that they're going to be some middling companies and some losers. You're going to have GE in there and it's going to hurt. But if we can just tilt you towards that five years towards letting your winners run towards adding new money, towards having a diversified portfolio, we start putting the odds in your favor. But any one of those things pulled out. I can have a really good debate with anyone about twenty-five stocks and people who say you never follow that many companies. Have you ever followed that many companies and we can have that conversation? But I think when you get a good collection of factors, the factors that I believe in at The Motley Fool and have proven out over time, you do still have tough years along the way. But that diversified portfolio of companies you believe in, and you get to learn from each of those businesses and hopefully get smarter over time.
Willy Walker: So, one of the things that I've watched you focus a lot of time and attention on is what I would call the “softer issues” as it relates to identifying opportunities for investment. So corporate leadership, insider ownership, customer delight, company culture and the quality of a board of directors, for instance. As you look at investment opportunities, obviously below that are lots of quantitative metrics that you bring into account and in the list that I look through, you have plenty of quantitative debt metrics and growth metrics and things of that nature. But uniquely, I think to some degree, you really focus on what I would call “softer issues” around a company. Which one of those is the most important to you? Obviously there are lots of factors you take into when you invest in a company, but do you sit there and say, If I don't have a CEO that I can trust in then I'm not investing in this company, no matter how good the opportunity is? And on the flip side, you might not think that the opportunity is that great, but you've got spectacular leadership that could take your company into a space that can't grow that big, but it can dominate the space. How do you sort through those various inputs?
Tom Gardner: Well, I would say again, I would never want to pull a single factor out and bank on it. But if I had to, there are a few that I think can beat the market as long as you build a diversified portfolio and get a number of them. But since you've identified qualitative as something that's important to me. Let's take one that isn't easily measured. You're going to have to do some reading and thinking about it. But what I would suggest is read and determine whether or not you think the CEO, something in the category of is ALL IN for the next 10 years. And by “all in”, I would define that as cares about every stakeholder. So definitely wants to serve shareholders, but usually has that kind of down the list a little bit.
I remember Bill George taking over at Medtronic. In my recollection of the stories, he gathers for his first analysts call, and he says I'm responsible for reporting on what's happening at Medtronic every three months by law, and I will disclose everything that I can to help you understand our company. But my goal is to be here for 10 years and to create the greatest win for everyone who's a partner of Medtronic. Everyone who is associated, whether you're a summer intern or you're a lapsed customer that's given up on us. Everyone who's got some stake in Medtronic, I want you to be better off 10 years from now, and that may mean that we're going to have a tough quarter or a tough year, but I'm 10 years out, so I have to report to you every three months. But I'm going to spend extra time with those of you who are here for me with the 10-year journey. If you have the ability in your firm to think that way and there are a lot of investment firms that don't, I gave a talk at NYU and somebody afterwards said, “Well, I work at one of the big investment banks and you have a real luxury the way you're talking about 10 years but my clients want to know how I'm doing every month, every week, every day. I don't have the luxury of sitting back and investing for 10 years.” And I delivered a line that I almost regret afterwards, I said, “Well, Warren Buffett has said, you get the investors you deserve.” And afterwards, the gentleman and his brother came up, and said, Hey, you just picked on my younger brother and he played in the NFL as a lineman, so he wants to talk to you now.
I think the time horizon is so important, and I want to know that leadership is acting on behalf of everyone that's associated with that company and trying to max it out for them over a 10-year period. And Bill George delivered a 60 bagger at Medtronic in 10 years. You don't get that by having just one stakeholder or having three options grants and trying to max out your options in your SPAC, trying to make as much as money as you can, as much money as you can transactionally at that company, you're just going to be parasitic. You know, some companies are gathering vultures around them, whether they're private equity firms with very short-term time horizons that are willing to erode the trust of any stakeholder group in order to max out their one-year result or their four year result. So, I want to know, does leadership have the control or ownership stake, the voting, the support and the time horizon, the commitment to create 10 years of something remarkable? Because I know that only less than 10 percent of public companies are going to deliver great 10-year results. And I think it's going to come a lot to the leadership commitment to all stakeholders over that period.
Willy Walker: As you used Bill George and Medtronic as an example, it makes me think about two companies that have recently had leadership changes, one Intel and the other Peloton. Did you hear from either of the incoming CEOs at Intel or Peloton the Bill George speech?
Tom Gardner: You know, it's funny, I have followed the Peloton transition a little bit. I haven't followed the Intel transition as closely, so I can't speak usefully about that. What do you think? I don't mean to put you on the spot.
Willy Walker: In the context of what Bill George said when he came into Medtronic, I'm not sure that I heard that from either of them, but both clearly know the businesses that they're coming into. Both clearly have challenging turnaround situations, and both have massive markets to play into. And so, the fact that Intel given where we are from chips today isn't, it's tough to move that aircraft carrier, but you'd think that Intel should be able to really get itself back on track. Peloton's a little bit different just because it's somewhat trying to move into a new space that really hasn't been, we all thought it had created this new space. And I don't know what that space looks like going forward.
One of the things, Tom, I was going to talk about this later but let me jump back to this now as we're talking about Peloton. So, Peloton has two and a half million subs. I think they make about 300 bucks a year per subscriber, and their market cap today is somewhere around $10B. So, as I looked at The Motley Fool, I think you have about a million subs. And while someone can come on to The Motley Fool and start getting your research for $99 a year, I think most of your subscription plans are somewhere around 250 to 400 bucks. So, let's just wag it and say it's the same as Peloton at $300. And so, I'm just thinking you've got about half the number of subs or Peloton. Is Motley Fool worth half as much as Peloton?
Tom Gardner: Well, we're a private company, we do have an internal market, so all of our employees are shareholders. We own our company outright. So, valuation does matter in a way. But the valuation game is a very fun game to play. It's kind of like having that market clock up and carrying about to follow a little bit of what's happening in the market. But as we know, things can flip pretty substantially, and they have it the Peloton pretty intensely here over the last 12 months. I guess I would say I like our business a lot, I like being in the intellectual property business. Our Dad has said to us and has been involved all the way through since we started in 1993 and a wonderful advisor, he said: If you continue to do work, that's intellectually satisfying (and I’m not saying that's not true for every company, I'm just saying for The Motley Fool), if it's intellectually satisfying for everyone who's a part of what you're building, that's going to compound. And I think I like our business a lot. We certainly are subject to the rise and fall of the markets and that hurts when our style is out of favor. But I like our potential.
I think for Peloton, it's a hard business. You know, you can go back to NordicTrack since the CML Group was the owner of that company, Smith, and Hawken, and they own Britches Great Outdoors and they own NordicTrack, and NordicTrack was the big revenue driver. And then just people started to not use that as much, and then they were reselling them. You can buy them rather than buying directly from the company. So, it's a hard business and they definitely got out over their skis with inventory management. So, it's going to be a difficult turnaround. I expect that they'll be acquired.
Willy Walker: So, as you think about as you look out on The Motley Fool at other companies, what other company do you either emulate or aspire to be?
Tom Gardner: Hmm. So many. 29 years of just calling companies and asking them what they're doing.
Willy Walker: I'm saying in the money management or the research space not just like, generally speaking the companies you like, but as you look at other companies at The Motley Fool is either trying to be like or is like in your mind, who do you look out as a comp to Motley Fool?
Tom Gardner: I would say that in the public markets, it's hard to find them. It's not impossible, but for the most part, the public markets, there can be so much pressure exerted on these companies in the shorter term that they tend to become more transactional and that's problematic. So, I would highlight three private companies Vanguard at the top of the list, Bloomberg, and Fidelity. Think about what those three companies have done for investors. We can pick through any given year or any decision they've made, and we can see flaws and mistakes. And Jack Bogle, one of my heroes in finance, was happy to point out his many mistakes throughout his life. I said to Jack in my last interview with him, that I don't think that there's a single individual or single company that's given as much to the investor as Vanguard in human history. At scale, tax efficient, essentially free, a diversified indexing – it was so contrary and so attacked, so mocked when we came out with our first book in 1995-96 The Motley Fool Investment Guide, where we brought forward all the performance of mutual funds and then we showed that Vanguard's simple S&P 500 index fund beats more than 90 percent of them, that's even before you start adding in taxes. Why does Wall Street even exist for the individual when sitting right there is Vanguard with a beautiful approach? We were really attacked. We were attacked from one news financial channel to the next, one institutional investor to the next. But it's proven to be true over time, and it was not our great discovery. It was Jack Bogle's and his thesis at Princeton in 1950.
So, I think Vanguard, Fidelity, and Bloomberg, if you think about what they’ve done, none of them really chased short term success. They built something for decades, and if they went outside of money management, I’d say Costco, Nike, Starbucks. Think about what Jim Senegal has done with Costco. I mean, he left his employer to compete with them and created Costco, and he said that “I have not made any important decision at Costco without sitting down and reflecting on what it might mean for the company in 20 years.” And that’s what we want from every CEO.
Willy Walker: Yeah. So, I want to talk for a moment about the way that Motley Fool works, because I read all these great articles by various writers. I read one by Sean Williams, who wrote a great piece on Berkshire Hathaway recently, and it's up on your website today, and it's great, it's insightful about Berkshire and why he thinks Berkshire is a great investment. But is Sam a writer, an investor, or a portfolio manager?
Tom Gardner: Well, in this case, he's a writer. Let's take some of our taglines at The Motley Fool could help us understand. One of them is The Motley Fool investors helping investors beat the market. So, we have a couple hundred contract writers at The Motley Fool around the world that are covering with a focus on a particular industry or particular style of investment, and they are writing articles. Some of them are writing three articles a day. Some of them are writing 10 articles a month. Just kind of depends on the length, the depth, and the type of work that they want to do and that we need in that category. So, in Sean's case, he's a writer for us, and oftentimes a lot of our contractors will sit actively on Motley Fool Live, which is our nine a.m. to eight p.m. live video throughout every day for our members. But we do have people who are then running portfolios for us. There are subscription services, so you might pay $499 a year for Epic Bundle at The Motley Fool, and you would get a collection of solutions where an advisor is picking stocks and teaching you their style of investing. And then at a higher price point above a$1000 a year, we're actually managing money in full view. So, you can see we’ve allocated a million dollars towards dividend investing and running a real portfolio. You see how we allocate it, how we review the companies, how infrequently we transact, and you see the full collection, so we have that and then we have a money management business as well, and that is a regulated business that sits outside you're not going to really see the leaders of that out in the media or writing very frequently.
Willy Walker: And so, beyond that on your website, you also have an area called The Ascent, which has a number of, from my take, its got incredibly insightful reviews of everything from credit cards to student loans to all sorts of other financial services. Two things: How important is The Ascent in those partner relationships to The Motley Fool's overall economics? And second of all, why don't you just go out and do them all yourself?
Tom Gardner: Hmm. So, the first one, it's a smaller part of our overall business, but a very meaningful and very rapidly growing part of our site. We have wanted of in our name and in our DNA to prepare the whole world to invest. And not everyone is sitting here right now ready to invest. You have $8000 of credit card debt at a 15.2 percent interest rate, which is a crime you shouldn't be investing in the stock market trying to beat that right. We need to help you pay that down. So, there's a whole foundation before you can start to make smart, long-term investments. And we had trouble creating a subscription out of it because a lot of that content is for free. It's not as exciting. It's not as fun covering companies. And so, we were really never able to crack the code on subscriptions. So, we created the business model of lead generation and the danger in that model is that we would point a user to someone who's paying us a lot of money, even though it's not a great solution. In our case, because it's not our primary business, we don't feel that tension and pressure. We have an amazing team sorting through deals where, as disclosed on the site, we are paid by partners on that, as are others in advertising. However, it is our North Star to help you get the best solution. So, I'm happy that it's not our primary business, but it is a very rapidly growing side of our company, and it has proven to be a way to sustainably spend some marketing capital to get more and more people to get themselves set up and get their first brokerage account and start investing.
And then why not do it ourselves? I really think so because it's not our aspiration. I think we're sticking to our knitting a little bit by focusing on subscription and long-term investment. But there are so many pieces to the personal finance puzzle of having a great long term game plan, right? We really don't want you borrowing money to buy stocks. We don't. We want to help you pay off your student loans. I do think given the size of our audience, we had 300 million unique individuals coming to our site over the last 12 months. I do think we have the potential to start gathering almost a little bit different than this. But think of Groupon, like starting to gather more and more people to negotiate better and better deals, particularly because it's not the cornerstone of our business. What we want to do is get you ready to invest for the rest of your life.
Willy Walker: So, in talking about the research on your site, I read a piece by Anand Chokkavelu, who wrote The Top 21 Stocks to Buy in 2021, and two of those were Altria and Philip Morris. Where do you stand on Sin Stocks and what is The Motley Fool's responsibility or not to have an opinion about those types of investments?
Tom Gardner: Well, this is always a little bit under review at The Motley Fool. I'm definitely open to reconsidering this. But what we've done for 29 years is to say it's up to each individual who works at our company because it's up to each individual investor to draw up what works for you.
So, for some people, it is completely wrong to buy cryptocurrency because of the environmental drag. For other people they might look at and see that there's a lot of reliance on servers and data centers for video gaming, so I'm not sure why we should be punitive in that one category. So, there's a grand debate, and I think probably what I want more than anything for The Motley Fool to contribute to society in this zone is to have that discussion, to have that debate and to consider in my case, in our case, our mother died of lung cancer. I don't support it. I think that of all of the substances out there that shouldn’t have been legal when you look at marijuana, I'll put psychedelic mushrooms up against cigarettes. And I think we have a happier society if the latter is never available. And the other one (marijuana) is very tightly regulated, but useful under certain circumstances. So, it's a grand debate. I wouldn't have that on my list, that company on my list.
There aren't many companies that I wouldn't invest in for ESG related reasons, but there are companies that any chance I get to talk to them, I will raise the question or ask, “What do you think about what's happening in this area of your business?” Because it's hard. It's extremely difficult to run a business at scale in the public markets, and you are never going to be on top of making sure that each individual employee, each individual customer, each individual supplier, each individual shareholder is being heard, is having their hopes and dreams considered, and that that a company is fully enlightened as it goes.
Every company has weaknesses. It's the ones that shield themselves from the truth that know the product that they're selling is probably a net negative. And think about it, there are probably a lot of companies where we could go through the food category and health care. Purdue Pharmaceuticals happened because there's something very wrong in the system that's happening in a lot of other ways. And if you look at Philip Morris or you go to the broad category of food and beverages, we could see things that we know are proven to be damaging. There is type two diabetes in a can being sold. But I think it's best to keep that open rather than to have The Motley Fool try and be an arbiter of what is on the right side of the line and what isn't.
Willy Walker: Either way, have you watched the Hulu series Dope Sick?
Tom Gardner: I have indeed, and I would also recommend Dope Sick Nation if you haven't seen it, which is a VICE documentary series that's fantastic. It's so heartbreaking because it's a crossover story whereas in society, going back throughout our lives (we’re similar in age, Willy.) In times you could pinpoint and say that drug is wrong. A person who uses that drug is wrong. They're doing something they shouldn't have been doing, and they're paying the penalty for it. Then you become a little bit more enlightened and realize, Well, that's an illness, right? And then there is, how do you actually cure that illness? And if we take the case of OxyContin and then lead into heroin, if you take the case of palliative care, pain management, you have a lot of people who blew their knee out playing hockey in high school in 18 months. I mean, our grandfather had suffered a devastating injury playing football at Georgetown University 100 years ago and was hospitalized and became addicted to painkillers and spent a year recovering from that before coming back and then became the athletic director at Georgetown University. But there's a lot of poor management on the regulatory side, and it's obviously hard. As one of the most brilliant people I've ever met when I was at Brown. By the way I went to Groton bot St. Marks. That’s David’s school.
Willy Walker: That’s right.
Tom Gardner: That’s alright they are both wonderful schools.
Willy Walker: They're both wonderful as they are, right? But by the way, when you tweeted out on this discussion, said that W&D is only up 10x since our IPO and last I checked, we're closer to 14.
Tom Gardner: I said greater than 10x. So, you're right, you're totally right, Willy. I blew it earlier.
Willy Walker: OK, it's OK, so Groton. Where were we?
Tom Gardner: But I would just say that one of the most intelligent people I've met in my life was a poet who lived in Providence, Rhode Island, when I was in college. And he said, “Everything around us in this world is a tool that can be used but figuring out when to use them and when and how to use them and how not to is one of the big journeys of our lifetimes.” And he said, if you look at morphine, it has a wonderful use in the last week of someone's life in hospice care, it is not a wonderful thing to use when you're 17 or 23 years old and you have emotional pain from your upbringing and you're trying to figure out how to how to medicate that, right? I think that's what business is trying to do. There are many other forces in just business but trying to find the solutions out there that help customers in the world improve and we can all debate how much or how little we think that system is working right now. But I think there are obviously a lot of wonderful examples and a lot of amazing efforts that are being made at companies to try and make the world better and the more, the better. Because now we're so connected, you can't hide as a company, you're not going to get to hide and say, like, well, thankfully, I didn't know that deal we made outside the U.S. and how we treat our employees in that factory that nobody's visited, that's not really happening anymore, and it was happening 25 years ago.
Willy Walker: So, as you say, tools that we use and when we use them, it's I hope, a good segway to crypto. You did a little poll on your Twitter feed as it relates to and you made a statement, 90 percent of crypto will be worthless and you didn't actually give a timeframe to it. But let's just say, for argument's sake, worthless within the next five to 10 years. What was the response to that? And then what's your opinion on that?
Tom Gardner: Well, I'd say that there was almost unanimous agreement and then because there are somewhere like 10 to 20 thousand forms of cryptocurrency right now, if that's true, that means there could be hundreds and hundreds of success stories. And part of that tweet was to say that this is a fruitful area for research. We're moving into a more digital transformation for real. We may get worn down by that term. It may start to be cliché and companies may attach themselves to try and get a short-term valuation boost. But the reality is we're working in different places. We're connecting in different ways. The 23-year-old of today is not looking to buy an apartment or a car anywhere near the frequency or as early in their life as was happening 20 years ago, or 40 years ago. So, we're moving into a virtual world and we're not transacting with paper and metal like we used to, and it's amazing the drop off rate. I remember studying MasterCard and Visa just five years ago and seeing, you know, while 87 percent of all transactions are still happening with paper money, it’s down now at 83 percent. It's down to 80 percent. And that was a wonderful way to see how large the market opportunity is for MasterCard and Visa. But here we are pandemically, the drop off has been dramatic. Right? I mean, it's obvious, but we're not going back. There are a lot of things we're not going back to.
We're definitely not going back to going to the ATM, getting cash and transacting that way. The 24-year-old of today is not thinking that way, their whole view of transactions is wildly different from my father and mother's. And so, there is a place for digital assets, a very big place for cryptocurrency, a very big place for digital currencies. There is a very big place for non-fungible tokens, NFTs. So, this is real, in my opinion. This is real. Against that. Half of it I'll say could almost be qualified and defined as broad. Right, because what you have is “I'll create this digital image, and I'll sell it and I'll create a limited supply. “Right? I mean, you're almost talking about the basic principles of a Ponzi scheme that are being used. So never let none of us ever forget that a large percentage of these are being created to make money for the creator. And that's what business in some ways is, of course, right? But you don't get very far in business if that's really all it's about. You know, whenever you hear an entrepreneur say, I started this company because I could never work for anyone else, you're like, well what are you telling your own employees? I mean, so a lot of this is so narrow, so self-interested. And it's we're just going to see a series of collapses around that. But against that, there are technically sophisticated creations designed to try and serve an important function. And I would just say take NFTs which is such an interesting area. But let's take an NFT. All you have to do with a non-fungible token is give it some utility, give it a reason, a use like don't just sell me a digital pickle that everyone's bidding on. There's only 11 of these pickles. And you know, you don't know, sell me something that because I have that token, I get some benefit to me to even just start with Disney. You know, on fast track, I get to jump forward in this line because I have this, right. Start to think that way about digital assets and all of a sudden you can see we're going to have a digital wallet with our collection of things, right? And those are going to augment our reality. We're going to get certain benefits as we move around in the world, right? And every business is going to want to have some sort of token that rewards you for loyalty rate and then its base level, one dimensional we've already had those. Right. But when it starts to be a community thing digitally online, you can meet other customers. Your business is really going to want that.
I think that there are a number of expressions that are still very early in their infancy, but it's going to be like the public markets, but it's going to be even more dramatic cause there's no cash generating asset here. Right? Cryptocurrency is not a functioning business, but I probably disagree with Charlie Munger a little bit on that. I know he had some choice words for Bitcoin. But obviously to me, this is a major, major trend. But it's so easy to create them almost like SPACs. It's so easy to create these things and sell them that there's a lot of borderline fraud happening right now.
Willy Walker: Your comment about the CEO who said, “I couldn't work for anybody else and so I set up my own company” reminds me of another sort of quip that you made, which was when an executive says, “This is how our company is like Amazon, you say, sell.” Is Amazon that untouchable in your mind?
Tom Gardner: I think it's mostly that whenever… I'd like to know that your company is like your company and why it's special. I think once I hear that, it's like I'm hearing a VC pitch rather than something really driven by purpose, right? It's more transactional thinking. I look at Atlassian. I would be shocked if I ever heard Atlassian's leader say anything like that, I mean, they're so heart, soul, and skin in the game. They have voting control. They have a huge ownership stake. There are two founders. They created this business just by building something that they wanted to make their life easier. Right? So, when you start saying “We're like Amazon”, you're probably talking about that, you're going to reinvest your capital and you won't be cash flow, you won't be net income positive, positive for long or whatever that factor is that you're we're going to take from this business and plowed into this business. Overall, those are more financial in nature, and what I want to hear from the CEO is what you're trying to do in the world.
Willy Walker: Talking about crypto and the growth in crypto and the opportunity there. Leo Sun, who writes for The Motley Fool, did a great piece on Shopify, and essentially said “Great Company in a great space, a huge and growing space of e-commerce and retail e-commerce, but potentially still a little overvalued at where it is.” Back to the very beginning of the conversation Tom, where it's like, you know, buy something, hold it for five plus years. Given the growth in e-commerce and retail e-commerce, isn't it time for all of us to go by Shopify?
Tom Gardner: Well, it's a wonderful question, I mean, the stock was at $1,700, it's now below $700. I purchased at prices higher than this and I purchased at prices lower than this. So, if we're talking about a major theme, yes, if we're talking about a very well-run company with real thought leadership and market leadership inside of Shopify, yes. But if you're if we're hoping that there's an automatic winner right in front of us, I would say I would never approach it that way. If we take Shopify right now, every great company kind of begins to hit the wall of its present gameplan. Think of Netflix with DVDs in the mail and think what happens when they hit that wall? All of a sudden, it's like Reed Hastings sitting on a park bench doing an iPhone video, introducing Qwikster, and everyone saw our chief investment officer, Andy Cross, convinced me not to say I was like, I don't know what to make of this. I've never seen anything like this. How can a company of this size and scale present themselves this way with this transition in Qwikster? It just doesn't feel right to me. So, every company hits those walls, think of Intel going memory chips. Only the paranoid survive, Andrew Grove. So, every company hits that. Shopify is sitting a little bit of a wall right now on fulfillment. We don't actually quite know what they're going to do, right? Amazon is going to get to a point where it's like whatever you order will be there in 30 minutes. And that's very hard to compete with. And it's a question as to how important that is to the buyer. So, when you order things online, how important is it that it's there in an hour a day a week? Certain items, you need them in an hour. The problem is that those items that you need in an hour, you might as well bundle the things you need in the week, right? You form the habit around the things you need in the shorter period of time. So, you know, look at the size of Amazon's fulfillment in distribution and fulfillment investments versus Shopify. I mean, there's no way to even compare them. So, Shopify has its merchants, but they're going to be moving towards two-day delivery. And the question is, what will the demand be for the timing of delivery around the items that you can purchase? And obviously, there are some people that won't buy from Amazon at all. They oppose Amazon on many different levels, let's say, or some different levels. So. But those are usually niche areas, right? It's hard to stop the major mainstream momentum of people wanting greater convenience in their life. So that would at least put one question mark if somebody was thinking of Shopify. I mean, isn't it almost automatic? They're below $700. I'm going to take 20 percent of my net worth and put it in this one company. I would say, no, I don't think you should ever put more than five percent into any individual company. But I certainly would make Shopify one of 20 or 30 stocks in my portfolio today. Yeah, because I am ultimately Willy sorry, because like I believe in you, Willy like I mentioned Atlassian or I mentioned leadership at Airbnb, I think is very impressive. I believe that we shouldn't expect these companies not to hit a wall. We should know that they will and ask, is that the leadership team that's going to figure it out? And honestly, if you look at Virgin Galactic and all the executive turnover there and the chairman just stepped down and Branson sold a lot that just doesn't look like it. It looks like, hey, if we hit a pebble, everyone's going to leave. But I need to know you're going to hit a wall. You're everything's going to fall apart in front of you, and you're going to have to figure it out. You're going to be embarrassed. You're not going to have great answers on that quarterly call because you're in the process of figuring it out; we should all be re-read only the paranoid survive. See what Andy Grove was saying that needed to happen in their culture to go through the metamorphosis and come out as the butterfly. So, I think Shopify has that, and that's why I'd be happy to have them as one of 25 stocks and portfolios.
Willy Walker: You talk about companies hitting a wall. It makes me think about all of us in our personal lives. Hitting walls at various points and I asked David Rubenstein when he was on two weeks ago to give me his personal board of directors, and he actually afterwards said to me, I love that question because I got to shed some light on some people who have been hugely helpful to me in my career. And he mentioned his two partners at Carlyle, as well as a couple other people. Who's on Tom Gardner's personal board of directors?
Tom Gardner: Some very long-term friends of mine. My dad, my brother. And some CEOs that I've met along the way, and some of them don't even know they're on my personal board because it's not a formal thing. Perhaps it should be. But I would say, for example, the conversations I've had over 15 years with a man named Selim Bassoul, who was previously the CEO of a company called Middleby, which became the largest commercial kitchen equipment business in the world. He took it over when he bought 20 percent of it by borrowing money. He bought 20 percent of the company when it was market cap, $10 million in the public markets. It was gone. It was bankrupt, essentially. He bought it, and he turned it into about a $7 billion company when he stepped away from Middleby two years ago. Now, Selim is the new CEO at Six Flags, and I can't wait to see what's going to happen at Six Flags because of Selim. He is an absolutely relentless customer advocate. And so, if you've been to Six Flags and you didn't have a good experience, maybe go again in eighteen months, and see what it's like. It's already struck a partnership with Starbucks. He is a force, and I like to have a few of those people that have been out there running a company with a large employee base, a lot of customers, a lot of risk, a lot of exposure and trying to manage a balanced life in the process. And I'd say I've learned so much from Selim over the years. I could quote 10 different things from him. I won’t do that. But if you want to read about the great CEO and what he created, I’ll give you one because it’s a fun one. Selim says the number one competitive advantage in the world for business is this: “If it’s hard for your company to do, very hard and it’s very good for the customer, that’s the greatest competitive advantage.” We think that it’s like our customers want this. Let’s give it to them. It’s not that hard. We should be able to do it. We can make money on it, right? Like less work, more reward. And that’s our methodology. And Selim’s has a different approach. What if I could guarantee to all my restaurant customers that equipment for five years, 100 percent all costs covered of any fixes? Or what if I could do that? And then you know that CFO and others on the board? Yeah, but you can’t do that. But what if I could? Wouldn’t that be the greatest thing that we could possibly offer? So, it's a good game to play with the leadership team. What is the single greatest thing we could do for our customers? Let's not measure, let’s not do SWOT analysis. Let's actually allow ourselves to think about the thing that would be most complicated, almost impossible for us to do, but it would be incredible for our customers. And there's got to be some of that going on at Tesla to have created what they've created and to look for leaders in businesses that are acting that way.
Willy Walker: I'm smiling broadly on that because my partner, Howard Smith, who's the president of Walker & Dunlop and I went back and forth on an idea I had last week, and it's exactly that. And so, Howard, I'm going to follow up after this with you on what Tom just said as it relates to hard to do and great to the customer. So, Tom, in an article on you in Time Magazine, they said “even billionaires get ideas from The Motley Fool.” Can you give us an anecdote about a billionaire who got an idea from The Motley Fool that you know about?
Tom Gardner: I could give a specific one, but it's not that surprising. It's actually kind of straightforward what's happening. By virtue of recommending, following, and contacting companies we had a breakthrough about 15 years ago when we began to hire a full-time team that just calls all day, connecting with anyone that anyone in our company wants to learn from. So, a business writer, a CEO, a college professor, anything, anywhere in any subject that you find interesting, send that name to this team. They'll contact and see if that person will have a 30-minute phone call or a 15-minute call. In general, if you make a small ask out of the gate, you're flattering them. Our company has taken a real interest and it is very thankful for what you're doing. We'd love to talk to you about it. And then that 15 minutes will lead to maybe a contract to work together, when we're in offices, a visit to the office and sometimes a full-time assignment. And sometimes they work with us, join our board and with us for many, many years, it's happened multiple times. And so, if we just think of things that way, we're sitting in the front row seat, just learning from every company, and getting the best practices and testing them in the laboratory of our company. And so, in the process of doing that, we're meeting a lot of different CEOs and then CEOs look at what we're doing like, you know what? I've decided to take a portion of my money and invest it with The Motley Fool with your style of investing. And so, we have a lot of CEOs who have had some wonderful success in their career that are using either Motley Fool Money Management or regulated business, or they're using our subscription services to learn and make investments. And in some of the more enjoyable cases, you know, they've gone and started businesses with members of ours or two members who have met in an event and decided, we both are interested in robotics. Let's why don't we start a small little business and then it grows to become something viable. So that's probably as much and as enjoyable as anything else for me in 29 years of The Motley Fool to see our network connect people together to create things because my dream and the whole reason that I've done this for 29 years, just for me personally, is because I think a business can be so creative and so innovative, so dynamic, so interesting. We want more employment. It can do so many wonderful things in the world. But I would say on an average scale of one to 10, the reputation of business and corporations in the U.S., probably a five, I'd say, out there in the world.
Willy Walker: But not you. So, The Economist calls The Motley Fool an “ethical oasis”. So, let's pause for a second. First of all, let’s take our hats off to you. But I guess my question to you, Tom, would be in a dispersed environment, I've been to your headquarters in Alexandria. Unbelievable workspace, you told me yesterday very few people are back there. How do you maintain an ethical oasis in a distributed model?
Tom Gardner: Well, in a way, our business has always been distributed in that we connect with our members online. And so, it's been a digital experience for us. So, the transition in March 2020 to what we've had to all go through over the last two years wasn't as hard for our company, and we had already spread out to different offices. I think that gosh, I mean, to get back to The Economist's quote, I would say that the financial world needs a company that wants to be held accountable, admit its mistakes and calling ourselves a fool is probably a pretty good early indication that that's what we're about. But that is going to create an open environment where people can learn because a lot of what happened in financial services when we started, prices were much higher. They were much higher. And the general pitch from Wall Street was, you're not smart enough to do this. You shouldn't do this. You shouldn't even try. There were ads on TV. This is like doing your own dental work, right? And we said in response to that, no, just call Vanguard's a five-minute phone call. Distribute your money into four different index funds. They can set it all up for you, and you'll be 95 percent of what Wall Street has to offer.
So being very solutions oriented and genuinely wanting a smarter, happier, and richer world, that's the mission of The Motley Fool. That doesn't require being on premise together as an employee or as a customer or as a partner of ours. It does make things different in some ways easier and some ways harder. But our mission culture wise, at the Fool right now, we've decided to go for the impossible. Kind of the Selim Bassoul that you're going to be sharing with Howard Smith. Sorry, Howard, about that one, by the way. But I would say so. We're about 630 full time and maybe 700 contract employees at the Fool. We're going to try to create a work atmosphere where you tell us how you want to work. We're going to set you up. So, if you want to be in office five days a week, but you don't want to come in mornings, be in office five days in a week, but you only want to be in mornings, you don't want to be in an office ever again. We're trying to create an environment where you tell us what you want, and obviously it's group of people fit into general categories then. And if we can solve those categories, what if we could create a company where you could work exactly as you want to, on the hours that you want to, in the locations that you want to. And there's a 50-50 shared responsibility. We can't just like, hey, go do whatever you want. Hopefully it'll end up working out for our customers. There's a good, disciplined Apple product methodology that we use at The Motley Fool that brings us together and integrates it. But the more we looked at it, the more we began to ask ourselves, like, there are people who are immunocompromised who even though we're in Omicron and it's their 39th mutation in the last seven months, and it looks like it's becoming more transmissible but much less severe. They're still immunocompromised Fools at our company that are at risk. And do we want to say sorry to them and choose your employment or not, because we need you to be in this environment at these times. So, it's endlessly challenging, but that's kind of what we all signed up for only when we went out to create something. And that's the dream that we have. What if everyone could pick their work environment and we could make it work?
Willy Walker: So, there are two quick things on that and then we're going to close. The first is just that we designed it that way, and that's what we signed up for makes me think about inflation and the fact that there was an article this past weekend on Jerome Powell and the unprecedented measures that the Fed took during the pandemic, as well as the Treasury Department and the Trump administration to basically save the economy. And in it, they mentioned that Carnival Cruises borrowed $6 billion in April of 2020 to keep it afloat. And that was actually the time I wish I'd known that at the time, because you would have been like, go long if a company that's completely out of business their entire business has been shuttered can go and borrow $6 billion. That was a direct correlation to the amount of capital that the bet had flooded into the system. And today we're not recreating the cruise industry from whole cloth. And I don't care about the cruise industry, but the bottom line is that's what we did. We decided we made a decision as a country to save all businesses, flood it with capital and today the inflationary pressures we’re gaining it's just the aftermath of all that and hopefully the Fed can control this. But we signed up for this. I mean, this is we're inheriting those actions. And thankfully, Carnival Cruise still exists and you're not having to recreate the cruise industry from whole cloth.
The other the other piece to it as it relates to in-office out of office, Tom, that I think is so interesting in what you just said, Jim Cramer and David Faber this morning at CNBC's “Squawk on the Street” talking about this exact issue. And as they were talking about it, my mind went to the following, which is just that they're going to be some people who take your path, and it works brilliantly. There are going to be other people like David Solomon at Goldman Sachs, who say they want everyone back in the office and might lose 20 percent of their workforce. They may not, they may. But there is no defined path and that's capitalism. There will be different models, and some will work, and others won't work. And the winners will win, and the losers will lose. And so as long as the government doesn't step in, as long as the government doesn't require companies to say everyone's got to be back in or you're going to be charged this if they don't do this as long as they stay out and buy the most libertarian thing I'll ever say, as long as the government stays at bay, we can all figure out as far as leaders of companies what the proper path is for our company, for our clients and the way we need to move forward. And so, I love hearing the model that you're adhering to.
Final thing I'd say is that you talked about learning and that the most exciting thing about the Fool is that people get to learn every single day, and this is the second time you've come on. And I learned a ton by having you on. And so, I just want to say thank you. Thank you for coming on and spending an hour with us and giving us your incredible insights into the markets and what you're seeing at the Fool today.
Tom Gardner: Well, mutual Willy. I love every conversation we have. I love following your company. I've learned so much from your culture all the way through to a business that I didn't know very much about, right? When I remember when I first was talking to you when we first reconnected. And, you know, it's just not a category that I was spending a lot of time in. One thing I do want to say is there has not been a situation… every time I'm in the conversation or in a circle that's somehow adjacent or connected to your business, I ask as a somebody, a shareholder and somebody who's recommended your company to our members. I ask and I will say that is unanimous - the positive reputation you have at Walker & Dunlop and that and that does matter now, sometimes positive reputation as just marketing, right? But when you demonstrate that you're trying to build something, that you're going to innovate and you're going to be above board and transparent in what you're doing, you start to attract the customers of this world and the employees of the world, and you get the stakeholders that you deserve. And so, I love all of our associations with your company. I also love that we're all kind of in the D.C. area and trying to create more great businesses. Some of our big D.C. area businesses kind of disappeared over the last 20 years, and it's great to see innovators emerging. And I'm a big fan of you and your company and thankful to spend this hour together and we could talk for another hour.
Willy Walker: We certainly could and just have one final point. If you do an analysis of five-year total shareholder return on all the public companies in the greater D.C. area, one company you know and invested in is number one on that list. So just as an aside, it's great to see you, Tom. We'll be in touch.
Tom Gardner: Thank you Willy. Take care.
Willy Walker: Thanks everyone for joining us today. Have a great day.
