WW: Thank you Susan and good afternoon everyone and welcome to another Walker Webcast. I took last week off for my first full week of vacation since the onset of the pandemic and I'm super excited to be back this week for a discussion with my two old and dear friends, Tom and David Gardner from The Motley Fool.
Before I dive into my questions for David and Tom a couple thoughts first. I'm back in our Denver office today and have about six to ten colleagues with me in our office on a daily basis. We've established clear protocols at Walker & Dunlop for people to come into the office on a daily basis and I find the work environment to be safe, quiet and very productive.
I checked and today we have about 15 percent of our 930 employees across the country back in the office today and we actually have a number of bankers and brokers across the country that are traveling to meet with clients and tour properties. I was just told this week that an asset we're selling in Florida has had over 20 in person tours. That same property listed a month ago probably would have had four or five in person tours and the rest being done virtual and so we're seeing people get back to actually visiting properties and traveling across the country to visit with clients.
While I was on vacation last week in Crested Butte, Colorado I was impressed with how the local government had converted Main Street from two way traffic to one way traffic and took the extra space and converted it into outdoor seating and tenting for the merchants in Crested Butte. It made me think that local governments across the United States have the ability, and I'd suggest duty, to adjust the layout, permitting, and civic guidelines to enable commerce to happen in a safe and socially distanced manner. I realize that converting one street in Crested Butte, Colorado is a far cry from reinvigorating a major U.S. city, but I also suggest that with proper health protocols local governments across the U.S. can take steps to stimulate commerce at this time while the pandemic is still running across the country.
I was very surprised after last night's presidential debate, and I would say I'm challenged to call it a debate, the equity markets are up today and the VIX has fallen almost four percent today to 25.27. For those of you who don't follow the CBOE market volatility index, the VIX hit a high back in March of 82.6, fell down to the mid 20’s in late May when things seemed to be a little bit more under control and spiked back to 40 in early June with the surge in COVID cases across the country and has been in the mid 20’s for most of the summer and early fall other than a little spike back in the 30’s in the beginning of September. The 10 year sits at 69 basis points today and continues to be the benchmark rate for massive volumes of refinancing activity in both the commercial and residential mortgage markets. I look forward to hearing Tom and David's thoughts on how and why the equity markets remain so calm while the world around us appears to be so wildly volatile.
On the investment sales side of our business we're seeing significant property sales activity at somewhat eye-popping cap rates. We are currently marketing a terrific asset in Nashville, Tennessee that will almost certainly trade at a sub four cap rate and some indications of value having it going as low as a 3.5 cap rate. Cap rates like that used to be reserved for properties in Southern California with massive barriers to entry for new inventory. Obviously where interest rates are today is having a big impact on cap rates and property values.
I was very pleasantly surprised to see that the Democrats lowered their expectations for a stimulus bill from $3.5 trillion down to $2.2 trillion earlier this week and that Speaker Pelosi and Secretary Mnuchin have reengaged in negotiations to see if we can get another stimulus bill that both the Fed and the Treasury have said is critical for our economy. I would note that the most recent proposal is a $1,200 per family check with $500 per dependent as well as the Democrats are holding at $600 per week of additional stimulus or unemployment benefits. I have to think that the $600 per week number will come down if the Republicans are going to sign off on any kind of additional stimulus bill. Nonetheless, if we got a bill, very, very positive for the overall economy as well as for the multifamily industry.
So with that, let me turn to Tom and David. First of all to the two of you thank you so much for joining me today. We had, I think it was over 6,000 people pre-register for this webcast so clearly people want to hear your thoughts and ideas on the markets.
And just as a little background, Tom, David and I all went to grade school together in Washington, D.C. and have known each other our entire lives so this is a really fun one for me given how well I know these two exceedingly successful gentlemen. You began Fool in ‘93 as a financial investing newsletter which is the business that David had been in and you named it The Motley Fool from Shakespeare's comedy “As You Like It” where the court jester who could speak truth to the Duke without having his head lopped off. Talk for a moment about those early days David and you deciding to bound out on your own and then, Tom, why did you decide to quit graduate school and go join your brother in this endeavor?
DG: Well thank you Willy. First of all thank you from both Tom and from me and from The Motley Fool, we're really delighted to be with all of you today and Willy it's a pleasure to join in with you. I note that I'm wearing a jacket, I guess because I'm the only one still in Washington D.C. hanging out trying to bring some respectability, but I know you guys are out west and having a great time.
So Willy let me just say The Motley Fool started as a labor of love, we were taught the stock market by our dad. He was never a professional investor. I remember your dad, remember our dads were all there at our middle school growing up you know pitching in here and there. But our dad was a lawyer and the one thing he said to us is Tom, Dave, you guys can't be lawyers so that was the only requirement. Neither of us was.
But I guess I fell in love with the stock market at the age of 18 and pretty much just decided to take the portfolio that dad had built for me from age zero and start to manage it. Tom did the same when he was 18, that's how things were in our family. Dad said this is all you guys are ever getting, anything else that I have when I die is going to your kids. So he had raised us on the stock market and when it came time after college to figure out what we wanted to do we started to write about it and yeah, you got it, As You Like It, Shakespeare, I mean both Tom and I studied Shakespeare. We loved The Fools, the Fool characters who used some humor but could tell the truth. And in particular I guess before passing the ball away I'll just say that we really started Willy from a main street orientation, right, we were not a Wall Street family, we were not working on Wall Street. I did work for Louis Rukeyser, the PBS host, for one year before we started The Fool, but from the beginning we just loved the internet, we believed, America Online was the internet in the early days, we believed in AOL and in the end we ended up picking stocks most of our lives and building a company that we try to do that for other people mainly through subscriptions today, that's a big part of our business. So that's a little bit of an overview starting back in the day.
WW: So Tom let me just go to you on, you know after you guys had established The Fool any thoughts about changing the name from Motley Fool to something sort of more, sort of traditional or stayed like, you know Fidelity or Prudential once you actually got going and then the other question I have on the name is has anyone, actually has any investor actually tried to lop off your head for actually recommending a stock that didn't actually perform that well?
TG: Well we really never reconsidered the name. I think there's such a power in standing out when you're in a B2C world so as investors would encounter our work online they would see an option to read something from Bloomberg which was probably outstanding, something from Reuters, probably outstanding, something from The Motley Fool? So if you're looking through a ticker page of news stories and you see The Motley Fool you kind of have to click it so it gave us a lot of first looks from people. Now of course we have had members tell us I waited for a year trying to figure out if this was for real, so I missed some gains because I just really couldn't figure out why would you call yourself that. And there are a lot of reasons, David mentioned some, but I'll just say that in the financial services industry that we were born into in the early 1990’s, and it’s still true today, but less so thankfully, but in the world we were born in you wanted to be contrary. Fees were very high, there were a lot of hidden transactional fees. Loads on mutual funds, it wouldn't be unusual to have a five percent up front load. There were a lot of people being taken advantage of on Wall Street and so to come in as Fools was a really nice position for us. Obviously it does, has hindered us in some ways along the way and in general we've been suffered, our members and others have suffered our mistakes gladly, they've suffered the slings and arrows, and the wins and the losses, the tragedies and the really great multi baggers that we've had. Overall our returns have been excellent but, yes, we've definitely developed data over the last 20 plus years Willy to show that we're right 65 percent of the time and we're wrong 35 percent of the time and some of the 35 percent of the time that we're wrong, we're going to be really wrong, but the nice thing is you kind of max out a wrong call at probably like a 60 percent decline. Of course there's a bankruptcy here and there in our past, but when you get winners you get 10 baggers, 15 baggers, 20 baggers, the math adds up around a really long term business focused approach to investing which has served as well.
WW: I’ve tried to convince my wife that I'm right 65 percent of the time, but it doesn't quite work. So David you guys wrote The Motley Fool Investment Guide in 1996 and to a great degree kind of put you guys further onto the map and at the same time it was met with what some would say some criticism of being a bunch of 20 year old’s trying to give investment advice to the world and sort of you guys are too young to really know what you're talking about. Talk about that time in the sense of the pushback you guys got and then also how that's informed your thought about emerging businesses and investing in startup businesses that are trying to sort of go against the tide, go against the sort of conforming views.
DG: Well I love that you connect those two Willy, that's such a good question. Yeah, because I think that it was understandable when we are in our late 20’s and we've been on the cover of Fortune Magazine and we're wearing jester caps and the market’s going crazy up, which it continued to for years actually, we were on the cover of Fortune Magazine in 1996 in the summer. The market topped eventually obviously four years later, but there was a natural association of these young crazy guys with their caps and the idea that the stock market was overvalued. We didn't believe that it was. Tom and I don't spend a lot of time trying to determine what's overvalued or not. We basically made a lifetime commitment to the stock market finding great companies and just buying and holding them and that's what we wrote about in our book. So in a lot of ways I think our book would have come across in the same style or tradition of Peter Lynch or Warren Buffett in the sense that we really do love just buying to hold in a world in which, geez these days fast forward 30 years, and people are trying to make money inside of a second through very active inside of a second trading, right, so we have a very traditional message.
But to hit the other second half of your question Willy we do very much favor growth, we favor risk takers. We love people like Eric Yuan who Tom has gotten to know some from Zoom you know just in the last year or Elon Musk who came to Fool HQ nine years ago and gave a stump speech about what Tesla was working on, or Reed Hastings or all of the entrepreneurs that we've benefited so much from buying, holding, recommending to millions of people to own their stocks and keep holding them. And so I think there is a willingness on our part, as Tom said it very well earlier, to be wrong and to recognize that's part of a venture capital mentality, not just as stock beggars but also of course as entrepreneurs which all three of us share, working the businesses at the same time we try to figure out the market.
WW: So Tom, David's talking about the cover of Fortune Magazine in ‘96 which I remember distinctly seeing the picture of the two of you and the next four to five years were an incredibly strong market, the underlying economy was growing, the dot-com boom hit and you guys seemingly could do no wrong, you were picking great stocks, the stock market continued to run forward. Talk about the growth of Motley Fool during that time as you guys really knew you had something, how did you think about international expansion, how did you think about the brand and just general growth as you guys went from this really startup company into being a real name on Wall Street.
TG: Well that was the period during which we raised capital. We had been profitable out of the gate for the first couple years without raising really any significant money but we were kind of inundated by requests and another friend of ours, we had a couple friends that were involved in helping to create the company and one is Erik Rydholm who is the creator of some of the most popular shows on ESPN, Pardon the Interruption, and has had an incredible career at ESPN over the last 20 years and worked for us, with us together in the first 10 years. And then Gary Hill is another one who came from Morgan Stanley and really helped us negotiate all of our venture contracts. He basically stacked up like 100 VCs, their offers against each other, and we got amazing terms. How we financed the company is a very strong aspect of our story and some of that is the benefit of our dad and our family teaching us how to invest. What we didn't really have a lot of experience in is putting together a business model that stands the test of time. I think that's true of a lot of companies back then. The value of $1 of revenue in 1999 is far, far lower than the value of a $1 of revenue at software companies, SAS companies and technology companies today, so we've seen a real advancement in that category towards a disciplined business model. So, we were kind of, 10 advertisers were driving our business. I think we did a great job with our brand, I think we really attracted a very large audience, I think we got smarter as investors, together we attracted a lot of talent to our company, but we really didn't have a business model that was built to last at that point. We had raised a lot of capital and sold a minority fraction of our company in the process of doing so. So those were very fun years, they were very productive years for us on a number of fronts, but they were years that lacked the foundation of risk management and recurring revenue distributed across a large audience of customers. We had concentrated pretty much non-recurring revenue heading into the 2000, 2001, 2002 nightmare scenario.
WW: Right, so let's transition to the 2001-2002 nightmare scenario for a moment. Actually before I get to that David, as you think about ‘96 to 2001 there are lots of people today looking at the markets and saying valuations look a lot like they did in the dot-com run up and then bust and there was a lot of talk about but no this time is different. And you would sit there and Globe.com would go public and everyone would say it doesn't need revenue it just needs a name and to be in the internet space and up it goes. And we're sort of looking at valuations today on certain stocks, whether it be Tesla trading at 1,200 times earnings or other companies that have just lost all sort of sense of typical underwriting. Do you see any sort of parallels between that ‘96 to 2001 era and where we sit today?
DG: I think there are some parallels sure, you just pointed to them Willy. You've got the IPO market extremely hot, stock sometimes doubling or tripling. That happened in 2020. By the way there were not many IPOs in the five years leading up to 2020 so in some ways there's pent up demand. And there are some very fine companies, by the way, coming public this year. But you also have the sense that, well in this case we have very low interest rates, and I think that's really fundamentally driving the incredible bullishness and evaluations that we see. When you have interest rates at or near zero, and as you well know interest rates compete with the stock market, if we could all just get a 10 percent interest rate we wouldn't be as attracted to the idea of a 10 percent stock market annual return. But when we can't get much from our interest-bearing vehicles the stock market looks much more attractive. So that's a good thing for the stock market and investors, I mean I think that equities are the way to make the most money over the course of the most years. We've been invested pre 2001, post 2001, pre ‘89, post ’89. Right here we are in 20, a lot of people were calling for the market to crash this year. It did, it went down 35 percentage points in 32 days earlier this year and then came roaring back. So you probably already know this about us but Tom and I really don't spend a lot of time trying to explain the macro movements of the markets, we’re more bottoms-up investors just looking for companies that we want to be part owners of over years and years. So Willy if this does end up being a time where geez, remember Willy Walker's podcast, the Gardner’s were on and the market was at the top and six months later it was down 50 percent, if that's true, just understand that we weren't predicting it, we wouldn't be surprised by it but we're prepared for it in a sense that it's happened before and it'll happen again. That's why we're invested for decades and we're not ever focused on one year or too worried about the valuations in any given market. I will point out just in closing that the quality of companies today is far in excess of the 1999’s and 2000’s. Dr.Koop.com, I don't see a lot of those types of companies today, The Globe com, I see really strong companies. I mean Peloton coming public two years ago really elevated valuation but that's a company that's for real, so is Zoom, so are many of these others so that's a difference that I see between now and back then.
WW: So I want to, I’ve got so much to ask you on that. One thing as it relates to so if everything fell apart in six months you said you know we're prepared for it. Back in 2001 you weren't to the degree that you had to scale down The Fool dramatically, I think you had to let go about 80 percent of your workforce, you had to scale back your international operations. So as you think about that timeframe, and as it related to The Fool, not picking stocks and whether Dr.Koop.com or Globe.com was going to go to 1,000 bucks a share, but how you were managing The Fool, the people inside of the company, your investments globally, etc., why are you better prepared today than you were back then to deal with that type of a falloff in the market?
TG: That's a great question. I think maybe three or four points come to mind for me. The first is we were really team managed then, we didn't have clear roles in executive leadership and so there really wasn't somebody who was saying I take responsibility for that decision, so I think that level of accountability really matters and that happened because we were a family company, and a team based company, and we've always been a very flat organization, but I think having clarity and roles, that's one.
The second is recurring revenue subscription is a beautiful business model and obviously for us it comes in a digital form. We really don't send out physical product, we don't have inventory, we don't have substantial advertising business with receivables, we have a very, very clean balance sheet. It's actually, well we see it in the SAS companies, I would view us in a way as a business as a B2C SAS company that's giving investment advice and financial advice and I think that that whole category is moving remote digital. I think more and more of the financial advice and investment advice we get in life is just going to be digital through the convenience of all the tools that we're using including Zoom right now. So, these things play very much into our favor. So there were tremendous tailwinds now versus a lot of ambiguity about what was going to happen to these businesses back then.
And then the last thing is we're just 27 years smarter, I mean some of it is just time. A certain amount of it is just we’re going to have to make that mistake I guess and then we're going to have to make that mistake. You know one thing I will say Willy and David and everyone that I admire about our company, and it’s about our company, it's about the soul of our company. It's a little bit about David and me starting the business, sure, but it's about the people at our company. We were very transparent as our whole business unraveled, it was devastating, there were a lot of tears. There was just openness, you saw what was going on and we took our lumps. And I think that, to a certain extent I look at the business world today and over the last 20 years and look at the companies and the industries that just took their lumps. And I think technology gained a real benefit in 2001, 2002 by Jeff Bezos starting a shareholder letter in 2001 I believe with the word “Ouch” and just listing mistakes. And some of the bailouts that are happening certainly in the bizarre situation that we're in are necessary but businesses and industries really benefit from just taking the lumps at a certain point in time and I will call out a company that, hey, it was an investor of ours early on. I think when you look at how America Online played out from that period, you know they settled a $300 million fine with the SEC for fraudulent creating a billion dollars in ad revenue. So I think we benefited from being private but we've always from our roots wanted to be open with our employees, and with our shareholders, our VC’s during that period, and I think that's essential if you're going to try and build a quarter century 50 year or in the case of Walker & Dunlop, how long has Walker & Dunlop been in business?
WW: Eighty-two years.
TG: Eighty-two years and just reading through the Glassdoor reviews and you know Willy how much a fan I am of the business you all are working on together and just studying your organization and the openness of your organization, the teamwork, you really need to create a stakeholder centric business in the world we're in today and I think we've gotten smarter about that.
WW: Yeah. I was reading a quote that you'd said, I think it came from the website so I guess it’s from both of you, which is take care of your employees, they will take care of your customers, and who in turn take care of your shareholders, and I couldn't agree more with that statement. We've always felt at W&D that if we created a great place to work sort of everything else falls in around that as it relates to taking care of the customers and taking care of stockholder return.
I want to for a moment though go back to the issue of 2001 and the conversion from ad based to subscription based because I think that that conversion obviously is what has allowed you all to create a business model that now has over 60 million unique viewers on a monthly basis to The Motley Fool products. It's fantastic what you’ve built. And the business model today is so much stronger than it was pre-crash and pre lay off into the crisis that Tom just talked about but that wasn't an easy thing to get accomplished. In other words, that had to happen, the dot-com world had to move from ad based to subscription based and yet at the same time, as we all know, big publications like the New York Times and The Wall Street Journal at that time were really struggling to get people to actually pay for the content they were getting over the Internet.
What's the analogy today? Like what are people betting on today in the virtual world that they're getting in a certain form that is going to have to change to make durable business models or do you think the way that SAS is being sold or the way that electricity is being sold for electric cars are basically being given away. What's the conversion that has to happen to make what everyone sees as this great value generator actually create durable returns? Is there one?
DG: Great question. I'll need to think about that latter part of it Willy, and maybe Tom has a good answer and he can chip in here. I do want to say that going back there, maybe revisit 2001 one more time here, but yeah, the preceding five years you really couldn't charge on the internet as you pointed out. I mean the newspaper companies they had other problems because I'm not sure you need that many local newspapers, in a pre-web world everybody had their local newspaper. There were a lot more banks back then too but once everything starts to go digital how many different newspapers do we need, how many different banks do we need, etc.
So I would say Tom and I kind of grew The Motley Fool in those early years in an environment where we frankly just could not charge, we would have been laughed at if we'd said hey by the way this is a pay thing on our website. As you'll remember Willy that just was not happening. So as 2001 and everything came crashing down one of the bets that we made for 2002 was well what if we go back to our roots, we started as a newsletter that was a subscription product, turns out mainly it was just family and friends that that we're paying for it in that first year before we got on to AOL but what if we just go back to that. We didn't know that it would work, but we actually contracted with an outside firm, Philips Publishing, in the same way that Simon & Schuster published our books. We had our newsletter, our first one Motley Fool Stock Advisor outside published so we just got a royalty each month and as that began to succeed and that subscription model kicked in that we're all talking about how much we love that thing all of a sudden we were like hey let's buy that back from Philips, I mean if we could buy back our books from Simon & Schuster that would probably make sense too but let's buy that back from Phillips and make that a big part of our business.
So, adding that subscription component and of course some of our best stocks have had a subscription component like Netflix. We love the businesses that do that. And Willy your question about what's the thing that we can't do now, like is there an equivalent of, we couldn't charge back in the day. Is there something in 2020 that you can't do? I don't know that I have a great answer for that. I think that analogy to electric power like freely juicing up your increasingly electric car with free electricity is probably helping Tesla right now although more recent buyers are having to pay some for their electricity, that might be a good one. One other idea that's a shot in the dark but I do find that there are a lot of subscriptions out there, how many subscriptions do each of you gentlemen have in your life right now. So I'm starting to wonder if people who are operating off that model are taking for granted that everybody else is going to want to subscribe to their thing too and maybe there's some forms of subscription management or curation that middle men can come in and make better so that we don't all just get nickeled and dimed to death by subscriptions in our lives, but I'm just making this up guys.
TG: Well I'll jump in on that quickly and say I agree with that. I think when you look at the marketplace of B2C and B2B, in general think of the individual at home or the family managing subscriptions. They need bundles, they need simplicity, they'll pay up for it so there isn't a lot of disruption that comes in underpricing those whether it's Amazon Prime. You start to get pricing power if you’re Apple by getting people to come back to your solutions again and again and be able to rely on them and integrate them. When you're in the B2B market there's a lot more willingness for companies at scale to patch together different solutions. It's not just one individual or family trying to manage a whole bunch of different subscriptions, it's a company that's looking and saying we could use Black Line, we could use HubSpot, we could use Atlassian. Now there are the benefits of integrating it on a platform like ServiceNow, that starts to come in, but in general I would say, I love the question Willy, I agree with David, it’s a hard one to answer. If I'm taking the question correctly it's what's going to have to happen now for these SAS companies or a company like The Motley Fool to make the journey to the next stage and what skin is going to be shed and what's the new company going to look like. And I would just say I think that you're going to have to have excellent retention rates, so an excellent dollar based, net expansion rates, those are very strong indicators for those businesses.
And then the second thing, I mean there are a few others, but I'll just say the second one would be that you're moving towards machine learning and AI because it's not just that that automation – and I know of the technical sophistication at Walker & Dunlop, it’s one of the reasons I love your company, it's those businesses that are constantly pushing forward to find the next applications and the next technology that they can use to make their members lives easier, more productive and to bring costs down. I think the automation side of bringing costs down is a little bit overrated. It'll be a very nice thing and gross margins will go from 79 percent to 83 percent and that's great but really what you're doing is you're simplifying your customers lives and getting them the best IP to help them make better decisions. So I think the companies that miss out on machine learning and AI and that don't have great retention rates and aren’t expanding their customer relationships are going to be the ones that get left behind. And those companies, by the way, will start making acquisitions and their growth will degrade, their goodwill will pile up, and all of a sudden they’ll start to realize although they had great tail winds and were in a great category they were actually the second or third tier businesses.
WW: I think your description there Tom as it relates to successful business models not being so much focused on, if you will, eliminating costs, while they will eliminate costs, but eliminating friction in the client experience is something that we at Walker & Dunlop have really been focused on a lot and I think if you think about companies, a couple that you've mentioned, if you think about companies like Amazon or Peloton or Warby Parker, if you go and use those companies the user experience has no friction to it, they've eliminated the friction points and by using technology to eliminate the friction points it just makes consumers want to go back and go back and go back. And it's been something that we've been very focused on at W&D and I think it's the real key to successful technology companies going forward. You mentioned Zoom previously as well. As you know Eric Yuan was on the Walker Webcast about a month ago, a little less than that, and you sit there and you say how can Zoom compete against Microsoft and Cisco? It's a worthy question, here's this startup going against these massive technology companies that oh by the way have been in the space for years. He left Cisco to go start Zoom but the simplicity of that Zoom entry page is almost so simple that you can't believe it, like you sort of expect by now that they'd have all these other icons on there and yet when we all came into this it's the same four dots and you know exactly what you're getting and the user experience is frictionless.
And I want to talk about Zoom in a second but before we dive down to specific stocks and questions that I have for both of you on your portfolios and we get to REITS and commercial real estate and things of that nature. You both mentioned Amazon and Apple and Netflix. Fifteen percent of the S&P 500 market cap today is FANG stocks. Does this concentration and those big names concern you?
DG: You know it doesn't concern me in the sense that I don't lose any sleep over it and those are stocks that we've recommended and held for, let me see, Netflix 2004, Amazon 1997, Apple 2009, so these are all 10+ year positions and for Motley Fool members, and I know, some of you are watching us right now, you know that we've just held them and sometimes we've added to them because we like to add to our winners not our losers, that’s been part of our investing performance, and so Willy I guess I'm delighted to think that we co-owned all these companies as they succeeded in the wildly effective ways that they have. I think in most cases they've succeeded because they please their customer, they've for the most part not made big mistakes, for the most part they're doing good things in the world that people want more of. People can criticize Jeff Bezos across seven different dynamics probably. I don't spend a lot of time with that myself. I'm extremely grateful that I was living, that we were living when Jeff Bezos was on this planet because Amazon has been a lifesaver for a lot of people here in 2020 and the whole move to e-commerce and logistics was driven by that company. So while that occupies a significant part of the S&P 500 there's a whole ecosystem that it's in part ways responsible for spawning and growing and that's also true of Apple and so many others of those great companies.
So Willy you know I guess I'd love more companies to be that awesome so that rather than chopping down the Amazons and Apples we just see others rise and gain some more market share of the S&P 500 themselves. And you know I think we might continue to see companies like I hope Zoom and a number of others do that, rise in devaluations that start to dilute the big dogs that have been the four or five horsemen that have run roughshod over competition as they made our lives much better and made us a lot of money as investors.
WW: David on that, let me just dive into that for two seconds because I love the answer, but as I was pulling notes together for this today, and you just said that you've owned, let me get this right, Amazon since the late 1990’s, Netflix since the mid-2005, 2004 or 2005, and Apple since 2009 and incredible stocks, all of that incredible performance subsequently. As I was putting together my notes for this I thought about let me ask David and Tom of a stock that they would want their grandkids to get and I went back to two stocks that my grandparents both loved, one was GE and the other one was Alcoa. And so I went back to 1989 when I graduated from college and looked at GE and watched it rise between 1989 and 2000 from $4.50 on GE up to $60 a share and on Alcoa from $18 a share in 1989 up to $91 a share in 2007. And so you sit there and you say man in 1989 those were great pics and they were great long term holds, and yet at the same time I think everyone here knows GE’s almost back to that 1989 price, it almost touched it this year and Alcoa is down below that 1989 price today. And so I guess the question as long term investor when do you know when that arc has peaked?
DG: Well I think that the important thing is to ask yourself about the relevance of the company, what it's doing, is it innovating, which is to me the biggest thing, that's the word I chase in life is the word innovation, who is the innovator. And certainly, I'm sure at points Alcoa was, although it started to get out innovated by companies like Nucor and some others that came into its area. So I think you have to look at the companies that are innovating and while we can definitely look at General Electric as a great example of in some ways everybody's safe stock and Jack Welch being on the cover of CEO magazine saying this is the CEO of the decade and that sort of thing, I don't think ultimately his approach to business was ready for the next generation which is looking more for conscious capitalism, something that means a lot to Tom and to me, we can talk more about that if you like. But you know it was a command and control militaristic model where they needed to be one or two in every one of their markets and would acquire their way into it if they needed to and ultimately the world just kept changing. And I don't think it's a very innovative company and the leadership wasn't really rolling with the times. So, I mean, I think about coming like Mars, how about Mars, that’s a company that’s been around longer than our own lifetimes guys. $38 billion company today. It's a private company so it's not as well known, but that's a company that probably if you'd bought it and held it ever since your grandparents had it, if they could have, they’d probably be happy today. So I don't think it always ends badly, but I think you have to be watching who's innovating and who's irrelevant and if I see those things changing I start thinking about selling.
WW: So Tom, your top five picks are very technology focused and David's top five picks right now have a little bit more diversity to them, if you will. He's got Lululemon and he's got Take-Two which is big game maker. But you're very much focused, very tech innovation focused with your top five picks right now being Fiverr International, ServiceNow, Slack, Zoom, and Zscaler. Talk for a moment about, and all of them are technology companies, always significant insider ownership, all with large addressable markets and all very expensive right now. So why do you like these companies?
TG: I’d say the first thing thankfully is that those have been purchased along the way so we've enjoyed great returns from them and then the question would be would you buy them now? My answer is yes, I would buy them now, but I would not buy them now for anyone who has less than a five-year time horizon. So my work specifically, but I think overall The Motley Fool is pretty much out there saying, if you can’t hold it for five years it's probably not a good idea to invest in it at all and some of the reasons for that are when you actually look at the performance of the market over long periods of time a very small fraction of companies drives the majority of the returns. If you go back 100 years, one in 25 companies has driven all of the returns. In fact, 80 public companies out of 25,000 over the last 100 years are responsible for 50 percent of the market’s gains.
So really what we're trying to do for long term business focused investors is try and find what companies do we think will stand the test of time like Starbucks, which is up 20 percent a year since 1992. There's a lot of puts and takes in any given year and Starbucks has had declines of more than 70 percent in the value of its company along the way. But looking for the elements of what really drives great results over long periods of time and when you look at those businesses, I'll just anchor on two, read about the founder and CEO of Zscaler who has a history of success in security companies, Cloud Native, a security business now said after selling the prior to, I'm not selling this one, this is the one, I have the capital and I'm doing it my way. He grew up at the foot of the Himalayas with no electricity or running water. So I love the life stories of the chairman’s, CEO’s and founders of these companies, they matter to me in this world and in my investment approach. So Zscaler right there. Zoom. Eric Yuan, his life story and the business that he's created ultimately for a financial metric, just to trot one out here, I think that these businesses that are really efficient in their use of capital are indicating something to us and growing at a high rate.
So again it's the quality of the revenue and just to, sorry for a mathematical formula, but if you take the working assets, so you back out cash and add back debt, you take the working assets and see how much do they generate in gross profit for each dollar of asset investment. Those five companies, you're looking at some pretty extraordinary numbers out there, like Fiverr is an extremely well run, Israeli based business that is helping freelance workers and businesses and consultancies come together and help companies that are in need for talent remotely around the world, so there's a big tailwind there, it's still a small cap.
So last point is although they are all tech companies, kind of so is everything, so is W&D, I mean my favorite companies are going to be the tech leaders in their category and I really loved the Marc Andreessen article in 2011, “Why Software is Eating the World”. That has proven to be true, and all of these businesses, all the categories that we look at are being disrupted by software and I'm looking for those companies.
TG: I think they can. Part of it is I think that the markets for those businesses are enormous. I think Zoom has an advantage right now because there was an absolute necessity for Zoom, whereas Slack does have something of an alternative in what Microsoft Teams are doing. Essentially Microsoft is looking at all these SAS companies and saying let's replicate as much of this as we possibly can so that we can provide it to our large enterprise clients and expand their spend and maintain their relationship. But these companies are the innovators out there and I'd say Slack with Stewart Butterfield and just all of the components of what Slack has created, they have an elegant design to their applications that is unique. And yeah, I think both of those businesses, I think they partner, and I wouldn't be surprised to see them partner more and more over the next 10 years.
WW: Your analysis on Zoom, you kind of get to the valuation as it relates to the growth and revenues and how they just continue to, you know, I think the expectation for this year was $750 million and then it went to $1,000,000,002 and then it went to $2.6 billion and you've been running your numbers saying and if all this works out five years from now this valuation actually makes some sense. But it's not like Zoom is the only one in this space, it's not, you know one of the things that David talked about Peloton previously, I want to talk about Amazon trying to enter the fitness space because quite honestly if Amazon focuses on your space, watch out. Why is it that Microsoft and Cisco can't all of a sudden say Zoom's revenues are now $2.6 billion, we would like to have that $2.6 billion, we're going to focus in on this, this isn't rocket science and we're going to go and disrupt this space and make life difficult for Eric and Zoom. Why do you have such confidence they can hold this distinct market positioning?
TG: Well I think the first thing is that the market is so large. I mean I think you could make an excellent argument that Zoom from almost a position of, I wouldn’t say irrelevance obviously, they were a successful company already but semi unknown a year ago to be one of the top 25 brands in the world right now. I think you could make that argument and that's an incredible, that's a transformation like we've never seen before in history. And obviously that's what's happening in the business world, you can create applications that could become relevant, obviously you have outside factors that have accelerated this, but those applications can have a worldwide audience and can become a very important brand in the world so I think the market is so large for this.
The other thing I'll mention is that Eric Yuan as you said before was at WebEx. And Eric Yuan, as I'm sure you experienced in the conversation you all had with him, he's not a trash talker, but he is an honest person, and he went home every day ashamed of the customer feedback he was getting at WebEx. And so he sat, he went to like a shared workspace and sat there and said what do I want my company to be all about and the first thing is like I want customers to be happy. Any customer that isn’t happy, like that's a problem for me, and I want my employees to be happy too. I'm sure he may have shared this, like if you are not happy today, don't come to work. It's okay, if you're not happy this week don't come to work because if we even just get a fraction of our employee base that is happy to come to work today the outcomes we can get will be much bigger than if we're trying to manage an uneven dynamic. So I think that happiness dynamic for Eric Yuan had him create software designed to work on the slowest speeds whereas the others were creating high speed professional B2B connections where if you drove into a tunnel it was gone or anything that threw off your signal and so we all had that Skype experience or that WebEx experience of it just doesn't quite work and how does Zoom work so well, because it really built its applications from the ground up.
WW: So I want to, first of all I was amazed when I was talking to Eric about his focus on happiness and I was like, I was all expecting him to tell me about why Zoom is such a great company from a technology standpoint and all this and he kept going back to I want to create a happy experience. And I think that gets back to the friction issue of he's created Zoom to remove friction, all the friction you just talked about with Cisco and WebEx and all that stuff. I've been in the fanciest conference rooms on the face of the planet with all the Cisco cameras and panels and all that stuff and after someone spends a half a million dollars to get the whole thing set up the person on the other end of the of the call doesn't have the same equipment so all that investment in high grade technology goes out the window because someone's sitting like I am in my office right now on a low tech solution.
But I want to loop back Tom on you as it relates to remote work and getting back to offices and how that plays into commercial real estate. But before I do that let me jump to David for a second because your portfolio has, it has tech in it but it’s a little less tech heavy. You've got Etsy, you’ve got Lulu, you've got Raku, you've got The Trade Desk, and you've got Take-Two. Two in particular that I want to talk about, one of them because my great friend Strauss Zelnick runs Take-Two interactive and I'm a huge fan of Take-Two and would love your thoughts as it relates to gaming and where gaming goes. When I had Eric Yuan on I talked about the confluence of video conferencing and gaming and there's no doubt in my mind that those two things kind of clash as it relates to people coming together to be creative and to play with each other and work with each other and what have you and I'd be interested in any thoughts on that David. And then the other one is Lululemon because it has such implications for retail and many people who are listening to this call are in the commercial real estate space and own retail assets. And I went to the Cherry Creek mall with my kids last weekend. I walked through Neiman Marcus and I could have thrown a stone and not hit anyone and we come around the corner to Lululemon and the line is out the door and it was an hour and a half wait for us to get into Lululemon. So my question to you on Lulu is why has Lulu been able to succeed when other brands, whether it be Tommy Bahamas or Ann Taylor or a bunch of other leisure brands have not done the same as Lulu, and then my second question to you is, will any of us ever go back to Brooks Brothers and buy another tie?
DG: Well with the bankruptcy that's going to be temporarily difficult. I already have probably more tie’s than I needed at the age of 54 so I mean maybe we were all over investing in things that made more sense last year. We'll find out Willy and Tom how much the world changes from what we thought it would be.A lot of us are projecting 2020 permanently going forward. I think that's a little bit of a of a myopic view. I do think that a lot of the things and habits we got into pre 2020 will come back.I do hope that Brooks Brothers does come back.
With Lululemon Willy you have, first and foremost you have a brand that was brilliantly managed, you have a category leader.You have a female focused business which I like a lot because Wall Street is so often so male dominated, fortunately less so today than ever before and probably even less so next year. There's some wonderful trends in place behind female energy taking over the world in lots of different ways and I vote for that but you know stocks like Lululemon or Etsy these are traditionally more female oriented businesses and get overlooked I think or not as included when people think about what are the real winners out there. There was some bad management at Lululemon. You might remember the founder and some of his comments and ultimately, he needed to be, he took himself out of the game. But you know brands have a way I think of managing through and evolving and adapting when they mean that much to people and that's the thing about Lululemon that I love is that people who love Lulu, love Lulu. It's the same as a Starbucks kind of premium brand position, people love Starbucks, people love it. Lululemon has also expanded more toward men. I don't have my Lululemon pants yet, but I probably might in the next year or so, a lot of other guys do that are more fit than I am. So I think it's just an example of a great brand that had raving fans and just fought through some difficult times. And, by the way, the stock, we wouldn't, if we were having this conversation four years ago, we wouldn't be talking about Lulu as a big winner. So you have to remember at different eras companies can make comebacks. In some ways The Motley Fool as you talked about earlier Willy, we’re kind of one of those stories, we’re kind of a comeback story so we've seen it happen.
And then really quick on Take-Two. I didn't know Strauss Zelnick was a good friend of yours, that makes me like it more, but Take-Two interactive as a lifetime video gamer myself, it's a stock that I've just had as a recommendation since 2007, it's up nine or ten times in value since then. The markets have tripled since then, we're up 700%, 800%, the markets up 200% so it's been a substantial out performer but then again the markets been strong over these 13 years. A lot of people are talking about interactive entertainment being the next social medium, like social media are moving into the games world and GAAS, Games As A Service, initiated in a lot of ways by Take-Two interactive with the great success of Grand Theft Auto V which started out as a game that you bought eight or nine years ago, all of a sudden you were subscribing to it as they added more downloadable content and then people are still playing it like World of Warcraft and other great stock, Activision Blizzard, years and years later. So the world has changed and made games themselves count for more, it's a much bigger business than Hollywood today, and people are living and spending time in those worlds in way you just don't with a two hour movie.
WW: So I want to switch to commercial real estate for a second and overall real estate markets because a lot of people listening today are invested in and want to get your sense of it. We've talked about a lot of, you know, high flying tech companies and as a publicly traded company I'm obviously envious of the multiples at which many of the companies we've just talked about trade at. And at the same time there is value in bricks and mortar, there's value in dividend payments, and there's value in long term return. Can we talk for a moment about thoughts on things like the retail space and Simon properties, the office space and Vornado, hospitality and either Marriott or Hilton, multifamily and Avalon Bay, or single-family housing like Lennar. Tom let me go to you, any thoughts as it relates to what you kind of like given what this pandemic, I mean David just said we all are kind of thinking that we're going to stay in this forever and we're obviously not going to stay in this forever. It's had very dramatic impact on things like retail and hospitality but we all know at some point we're going to go back to a hotel and at some point malls, the good ones are going to be back up with a lot of people and be very vibrant places for people to shop and to eat and to interact with other human beings. What are your thoughts on commercial real estate and then I do want to get to multifamily versus single family in this urban flight that's going on, but let's focus just on the kind of four major food groups of commercial real estate for a moment.
TG: Sure, well you know first of all it's important for David and I to both say or at least I'll say because I think it's true of David too but we're not experts in commercial real estate, it's not an area where I've made a lot of investments in my work at The Motley Fool, so I can talk a little bit more about trends and things that I think and observations I've had about how markets change. The first thing I would say is that while I do believe that we will return, I think that the return will have some permanent change and I think the permanent change to study is what is happening in your life or my life or our lives that actually is somewhat beneficial. I mean are there benefits to not having that same commute that you had every day if it was 40 minutes both ways. You know what freedoms or benefits in this otherwise horrible scenario have emerged and what do we think that's going to change in behavior going forward and how will that affect how we use commercial space.
So, of those categories you've mentioned I'm pretty resistant to getting excited about retail, I just think that area is so challenged. Shopify, talk about removing friction, a really great person for you to interview Willy if you have time in your schedule in the year ahead is Tobi Lutke at Shopify or Harley Finkelstein. I mean they are developing in their own way a commercial real estate company for merchants online and they remove friction everywhere they possibly can. And I think that you're going to see so much retail realized, the margins are actually very good, the process is relatively seamless and we should be banking on online same store sales growth and building our business around that. I see retail commercial REITs as really challenged.
I would say hospitality, I mean you read like the Palmer House which you would never have thought would possibly vanish in Chicago and see its value cut in half in its latest appraisal so obviously that's a devastated area as well. I'm a little bit more long term positive on that. I think Marriott is a great brand, great long- standing brand and I would bet on the return of travel and maintaining protocols in hotels and hospitality more than I would on retail.
And then office to me is just going to – again, rookie amateur, but I would just say I think it's going to be significantly changed. I think it's the safest area and obviously you have businesses that are paying their rents and so those businesses are much more stable than office REITs but I think just at The Motley Fool we're talking more about regional offices than a big headquarters and some of that is yeah what are the benefits of this experience, well some of it is you can be more mobile and do we really need to be in the same place when we have Zoom, Slack, and other tools. We've proven that can work with our 500+ person company, fully remote since the first week of March. So I think there will be returns but I think that changes are coming and the way to figure them out is what actually benefits, what change benefits the world. And so I think there will be a reduction in the use of office space but there may be more spreading out, more offices, less open floor plans. It's going to depend on what happens, there are a lot of things that remain unknown but I'd say office REITs to me are the safest of the group.
WW: And then David on housing, single-family versus multifamily, urban flight versus cities, are cities in New York back at some point, what's your take on that? In other words, would you buy Avalon Bay over Lennar or would you buy Lennar over Avalon Bay?
DG: So I'm going to give an answer but I'm going to say what Tom said again which is that I don't really invest much in real estate.
WW: I’ve got it, but you've got all these other investments that are impacted by the way all this happens.
DG: You’re right, you’re right.
WW: So you’re looking at those investments and thinking about how this happens. Like, for instance, the people going to the mall to buy Lululemon and the suburban setting, are people moving out of cities to suburbs and do you see that as the driver of economic activity or do you think the city survives?
DG: Right. No, I wanted to say that American Tower has been my only REIT and it actually reorganized as a REIT after I’d recommended it two years later but I mean I like American Tower, how about that, just from a REIT standpoint.
WW: It’s now Colony, it’s now part of Colony. Colony’s taking a turn and took a massive beating on their hospitality ownership but they are converting that company in a very dramatic way from being a bricks and mortar real estate company to actually being more of a technology focused real estate company which is going to be a very interesting thing to watch if Tom Barrack and Mark can actually convert that company successfully from a traditional bricks and mortar to more of a technology company.
DG: Very well said and so yeah the 5G buildout, and so to the extent that I have insight or ideas it would be acting on things that relate to the buildout of technology in our world and that's why that kind of business, and what you just said Willy orients much more with me. I do want to mention that we have, we do have some good REIT analysts at the company and so I can share some of the words from Matt Frankel who is one of our analysts who's not a big fan of mortgage REITs as long term investments but really likes, actually Walker & Dunlop, which has been a recent recommendation.
WW: I didn't ask you guys on to say that, but I'm very appreciate of it.
DG: In no way was it tied to this conversation. That is a decision made independent of Tom and me 100 percent. But because of your focus on multifamily, and I do think that that's very forward-looking and we do need more of that, we need less single-family and we need more multifamily and so that's important. Obviously real estate has not been a great place to be in 2020, it’s down about 14 percent on the year. But I'll give you an example of a REIT that our team particularly favors and it's STORE Capital, ticker symbol STOR. Virtually all of its properties have reopened, only about a third of them were in COVID sensitive industries in the first place, rent collections at 85 percent and steadily improving, stocks down 25 percent in 2020. So when you focus on quality well run businesses with strong balance sheets, whether we're talking about REITS, or the all the other companies we’ve mentioned in this hour, those are the stocks, the companies that we want to be invested in.
WW: Great. So I’ve got one final question for the two of you and we're going to wrap it up which is that you guys are long term investors and throughout our lifetime all we've done is watch the equity markets go up. Yes, they've had corrections and what have you but if you've been an investor and actively investing and holding for the long time it's been an incredible return. What's the biggest threat to the long-term value of the U.S. equity markets continuing to go up? Is it political unrest, protectionist trade policies, our national debt, the dollar loses its role as the reserve currency, or some other threat that says that if we stay the course for the rest of our lives things in the equity market should keep going. David you said previously there’s not a lot that keeps you up at night, is there something along those lines that would be the catalyst to the equity markets really losing value?
DG: Sounds like you want an answer from each of us. I'll give a quick one and pass the ball to Tom. Willy thank you so much for a wonderful conversation, we've had such a good time. I think for me we need to hit the golden mean between understanding that capitalism is a beautiful thing and not letting capitalism wreck things. And so I worry that people don't appreciate capitalism and all that it has done for us, we are taking so much for granted today Zooming from Washington D.C., Denver and California and having a conversation in front of thousands of people. All of those things are small miracles when you think about where the world was 100 years ago and most of that is due to ownership capitalism, people taking risks, entrepreneur, venture capital, and trying to make a product or service that people would actually want to buy that's better than the next door over.
So we have to recognize that and to the extent that the younger generation is not learning that, or is falling out of love with that, that's a problem. On the other side we have to make sure capitalism is the best form that it can be, we need a better form of capitalism than the one we three grew up with. We need less Enrons, we need a lot more Lululemon and Starbucks. We need companies and entrepreneurs to take risks but please all their stakeholders. And the CEO of our company, my brother, Tom Gardner, has done an outstanding job managing for all of our stakeholders, from our shareholders, yes, but right through to our customers, partners, suppliers, and employees, and a couple other stakeholders besides. So we have to hit that and not lose that.
WW: Tom, final word.
TG: Well we're certainly going to move into an inflationary time but that hasn't wrecked the equity markets irreparably. I would say, I would just echo what David said, I think that capitalism wins, and the markets win, the more people feel that they benefit from it. So the more it looks fair that everyone has an opportunity to succeed no matter their age, their gender, their ethnicity, their cognitive process, and a number of other factors that all of us as organizations and individuals can get smarter and more enlightened about the journey that each person is on and different groups of people are on in their life and how to make their journey woven into capitalism in a way that they benefit. So I think everyone, every company should have employee ownership and every company needs to start using tools to allow their employees to share where they're frustrated and what's not working and to get that data all the way through to how companies are financed and whether we're really building long term mindsets.
And the more that people see scalping and jumping in, like I got my commission, I'm going to my gated community because I made what I need to make, the more that develops the less chance there is for a healthier form of capitalism to emerge. Capitalism is going to win if it gets healthier every decade in our lives and so it's something that we all have a stake in. But we need to make sure that every adult and every child, every kid starts getting invested as our dad taught us when we're kids. So there's a lot of great work to be done and I'm excited most of all probably about the people we get to meet along the way and Willy the fact that we get to reconnect with you at points along the way and remember what things were like when we were all seven years old playing maul ball.
WW: I'm extremely appreciative of both of you for taking the time. I'm super proud of all that the two of you have accomplished and I'm honored to have you guys spend an hour with me and give some insights to the people who joined us today, so thank you both very much.
Thank you everyone for joining us. We've got Mark Zandi from Moody's coming on next week on the Walker Webcast to talk about the macro economy and what 2021 is going to look like.
Thanks again to Tom and David and I hope everyone has a great day.