Wall Street is in a serious slump. All the gains the major indexes made earlier in 2018 have left the building. In fact, the S&P 500 is just about where it sat 12 months ago. By coincidence, that’s when Motley Fool co-founder David Gardner debuted a five-stock sampler dedicated to “false choices” like time vs. money, or low risk vs. high reward. His premise was that it’s possible when faced with choices like those to get yourself a stock that does both.
In this episode of the Rule Breaker Investing podcast, it’s time to measure how those picks have done. Then, it’s a trip back to December 2016, when Gardner revealed his “5 Stocks to Put Under the Tree” — companies you could put in your children’s portfolios that they probably know, and would be enthusiastic to follow. Did they become the gifts that keep on giving?
A full transcript follows the video.[embedded content]
This video was recorded on Dec. 14, 2018.
David Gardner: One year ago, the week of November 22nd, Thanksgiving here in the United States, I picked five stocks. The theme that time was abundance, avoiding the trade-off mentality, having your cake and eating it, which is why we called the podcast Five Stocks That Will Let You Eat Cake. The market has been very bad the past two months. It hasn’t been much of a year to speak of. What about those stocks?
And, two years ago this month, I picked five other stocks for you on this podcast. Given that it was this month, you’re not going to be surprised to hear that I named that five stock sampler Five Stocks to Put Under the Tree. Two years later, we’re going to look back at those, too. How did those Christmas gift stocks age? Well, because the market’s been very bad the past two months.
One thing that may separate Rule Breaker Investing from every other podcast in the universe is that not only do we pick stocks here, but I update you on those stock picks years later, as well. Real performance. That’s right, we’re Foolish enough to actually score things in good markets and in bad. So, ready to be Foolish with me? Let’s do it!
Five Stocks That Will Let You Eat Cake, one year later. Five Stocks to Put Under the Tree, two years later. It’s time for transparency and accountability to play the game right on this week’s Rule Breaker Investing!
Welcome back to Rule Breaker Investing. It is such a busy time of year. Thanks for listening in! Thanks for lending an ear, suffering a Fool gladly! I hope I never take your time for granted, but I especially appreciate you taking the time to listen this week, because we’re going to have a lot of fun reviewing two years’ worth of stock picks and seeing how we did. After all, at the very heart of The Motley Fool, and the premise that we started our company with more than 25 years ago, was that you and I are going to be rewarded for picking stocks, for buying stocks directly, in a world peopled with funds, academics, and all kinds of forces that suggest that this is a waste of time — a Fool’s errand, if you will, the idea that you could actually pick stocks and beat the market averages. Many people think that’s not possible and a waste of time. I think we’ve demonstrated over 25 years and counting now that it’s actually well worth your time. And the earlier you start in life and the more money you save and put toward this, the better you’re going to be rewarded, sometimes wildly well-rewarded.
I think that’s very true, I’m happy to say, of members who write us testimonials over email, social media, write letters, drop off cake and candy sometimes. This podcast seems never to get those. We don’t get the postcards or the bourbon. I just labor away here by myself, not expecting or asking anything. But I’m happy to say that the plaudits have poured in, and most often, it’s from people who didn’t just join our services three months ago, or even two years ago. It’s the people who have stuck with us for five, 10, 25 years in some cases, because that’s where the real game of investing is won over the only term that counts, the long-term. So, whether you’re a longtime listener of this podcast for three-plus years now, or you’re hearing your very first Rule Breaker Investing podcast, welcome! Thank you for your time!
One of the things we do on this podcast is, we pick stocks, as I said, at the top. And then, a year and two and three later, we go back, and we remind ourselves what we were saying back then. And then we update the story and let you know how we’re doing. Was it worth it, picking the stocks? Is it worth it, picking stocks at all? Well, no single five-stock sampler, I think, can prove or disprove the idea that it’s worth it to pick stocks. But I’m happy to say that we have a consistent record on this podcast of nailing it with these five-stock samplers. And yet, that record, which is almost unblemished, is in jeopardy this time of year, because the stock market has made dramatic losses, especially along a lot of the stocks that I like, the ones that we talked about on this podcast, the Rule Breakers out there. A lot of them are down. I hope that you’re curious. I was very curious to go back and look at the performance of these stocks one and two years later and see how we’re doing.
This is one of those podcasts where that’s what we’re doing this week. That’s all we’re doing this week. I have two five-stock samplers to review. As I mentioned at the top, the first one we’re going to review was picked one year ago. It was Five Stocks That Will Let You Eat Cake. I did go back and listen to at least the start of that podcast, just to get back in the frame of mind of where I was. I wanted to explain the phrase a little bit to you. Frankly, having listened to the start of that podcast, I’m going to promote that one as one worth going back and listening to. At the top of the show, I think I did one of my better jobs conveying some key points, not just about investing but about life. It was really fun to hear me talking about avoiding the trade-off mentality. Let’s briefly review what we’re talking about here.
You’ve probably heard the old line, “You can’t have your cake and eat it.” In fact, I went back, and using the power of Wikipedia, or maybe this was Quote Investigator. By the way, that’s a great website. If you’ve not seen quoteinvestigator.com, one of the meta threads that runs through Rule Breaker Investing over these last few years is, I love to find quotes when we’re misquoting somebody. Gandhi never did say, “Be the change you want to see in the world.” He never did say it. And yet, it’s a beautiful phrase. And it does sound like the kind of thing that you would expect Gandhi to have said. And yet, he did not. The site quoteinvestigator.com is a wonderful one for trying to see who actually said many of the famous lines that are emblazoned in our minds, imprinted. Sometimes, as little kids, we hear, “I came, I saw, I conquered,” which, by the way, I do think Julius Caesar did say. You can use quoteinvestigator.com. I do now. Free promotion for, I’m going to say my 17th favorite website.
Alright, with that said, the first time that somebody said the phrase, it was a letter from the Duke of Norfolk to Thomas Cromwell, who was the chief minister to King Henry VIII in Britain, and the subject of Hilary Mantel’s novel, novel Wolf Hall and its follow-up, Bring Up the Bodies, which I’ve not read. I did read the first one, though. I certainly recommend Wolf Hall. In fact, I read it aloud in full to my wife. She makes supper, and my end of the bargain is that I read to her as she makes supper. That’s worked pretty well over almost 30 years now. Anyway, Wolf Hall, Thomas Cromwell is the hero of Wolf Hall. He received a letter from the Duke of Norfolk on March 14th, 1538. This is the true part. Wolf Hall is a fictionalized account of Cromwell. Anyway, the letter said, “A man cannot have his cake and eat his cake.” And that is the first time that was used.
I think most of us understand the analogy behind this. The idea is, if you have a cake sitting in front of you, and you eat that cake, well, you can’t have that cake anymore, because it’s gone, you ate it, it’s no longer sitting in front of you. And yet, I love to find situations in life where that’s not true. I call it the trade-off mentality. People will present you false choices. I always say, take both. Quick example, which I used in the November 22nd, 2017 podcast I’m referencing, there was an article. It said, “To promote happiness, choose time over money,” to which my response is, “False choice. Take both.” In fact, in my experience, the more money you have — this may seem counterintuitive, but I think it’s true — the more money you have, the more time you have. For example, if you have a lot of money, presumably you have financial freedom if you have enough money, which means you have a lot more time to do the things that you want to do in this world. I don’t think, to promote happiness, you need to choose time over money. I take both.
You might not be able to have your cake and eat it, but how about some other classic lines that you hear from people? Like, “I’d rather be lucky than good.” My answer is, I want to be both. In fact, I think since Branch Rickey, the old Brooklyn Dodgers owner used to say, “Luck is the residue of design,” I think in a lot of ways, we make our own luck in this world. The better you are, in my experience, the luckier you seem, and in fact, the luckier you probably are. These things are actually correlated with each other. You’re not choosing one over the other.
Let’s talk about your life partner. Would you rather have somebody who’s smart or good looking? And my answer is, I would choose both. And the good news is, there’s both out there. How about how people think about capitalism? A lot of people think, who’s going to really be rewarded by the system? In the 20th century, classic textbook teaching was, it’s to maximize shareholder value. It’s for the shareholder that business exists. Capitalism is there to reward the capitalists, the people who put the capital in the companies who are going to try to maximize shareholder value. The CEO letters of Fortune 500 companies put out annual reports and send them to shareholders, decade by decade through the 20th century. And many of them would say, “We’re here to maximize your value.”
Really, though? I see a lot of stakeholders beyond just the shareholder. I see the customer. Some of the best businesses do great by their customers. It’s hard to stay in business very long, or be a good long-term stock pick, if you’re not creating value for your customers. And then, there’s the employee. That’s an important stakeholder, really important for us here at The Motley Fool. I hope it’s important in your workplace, as well. You, the person working for the company, I hope that person feels included and rewarded. And then, how about partners and suppliers? I sure hope you’re trying to maximize their value as best you can or balancing against all these other stakeholders.
Conscious capitalism, which is what I’m lightly referencing right now, has an abundance answer to that trade-off mentality around capitalism. The answer is not that we’re there to pick one stakeholder and just reward and max it out for them. It’s to actually create a win across all of your stakeholders. Abundance, the non-trade-off mentality.
So, a year ago in that podcast, I picked five stocks, each of which I created a false choice. Then, the punchline for every one of these five stocks is, actually, you don’t have to choose, because it does both. It has both. Let’s go through them right now and talk about, of course, their performance.
The date was 11/22/17. I have my cost basis, my opening prices for them. I should note that we’re taping this podcast a few days ahead of time. We’re taping this on Friday afternoon, December 14th near market close. Those are the prices I’m using. But you’re going to be hearing this Wednesday, December 19th or later, depending on when you tune in and listen to Rule Breaker Investing. The prices will have changed a little bit. The market has been volatile. Who knows whether they’ll be higher or lower. Of course, we’re taping right now, so those are the numbers we’re using. So, from 11/22/17 to 12/14/18, how are we doing?
Stock No. 1: Amazon (NASDAQ:AMZN). I asked you a year ago on this podcast, which would you rather have? Would you rather have the world’s No. 1 e-commerce company, the company that’s No. 1 globally at e-commerce, or would you want to have the stock that is No. 1 at cloud services? The cloud? Which choice of those two would you opt for in the stock that you’re going to buy? And the answer, of course, is both. amazon.com does both of those and is many other things beside.
A year ago, the stock was at $1,156 a share. Today, I’m very happy to say, to kick it off with stock No. 1, it’s gone from $1,156 to $1,604. That’s a gain of 39%. It’s been an outstanding year for that stock that will let you eat cake.
Now, we’re always comparing every one of these stock picks to the market. That’s the boogie man. That’s the bogey that we’re pursuing at all times. We’re always trying to beat Jack Bogle and his index fund. Here’s a funny stat. The market from that podcast a year ago through today? The S&P 500 index is flat. It’s at 0%. So, this is an easy number to calculate. Amazon’s up 39%, the market 0%. Therefore, we put ourselves with a plus 39 in the win column for stock No. 1.
Now, I have to tell you, that’s one of the better picks among these five. We’ve got some light and some darkness. It’ll be interesting to see how it all shakes out. That’s stock No. 1.
Stock No. 2 is CBOE, the Chicago Board Options Exchange is what that acronym is for. About this company, a year ago on the podcast, I asked you what you would rather have? Would you rather have a low-risk, low-reward stock, or a high-risk, high-reward stock? And of course, the answer is, you’d like to have a low-risk, high-reward stock. You’d like to have both of the good things. In my experience, you really can have that.
A lot of people assume that everything correlates directly the reward of something with the risk that you’re taking for it. A lot of people think it’s either got to be high-risk, high-reward, mediums, or lows, but you couldn’t seemingly have low-risk stocks that can grant high rewards. And yet, I believe that our portfolios here at The Motley Fool, for anybody who has owned stocks for a long time with us, I think you have a lot of low-risk companies that have earned you high rewards.
I think the world misperceives risk. A lot of us just think of risk as volatility, the beta of a stock, how it goes up and down. But they really should be looking at the business and asking, how truly risky has Alphabet been? It sounded like a really risky stock back in the days when it used to be Google. People thought of Google as very risky because it was a new thing. It IPO-ed, it bounced up and down. But really, this was a company that was becoming the dominant, No. 1 player of global search. That’s an incredibly robust and very profitable business, much lower risk, I thought at the time, and I’m happy to say the reward has been high for those who’ve owned Alphabet for years. The risk is pretty low.
I feel the same way about CBOE. It’s a totally different business. It’s not as big an idea as Google or Amazon. In the parlance we use, our risk ratings here at The Motley Fool, which is a feature in our services, CBOE is a low-risk company. But I believe it has high reward.
How’s it done? Well, a year ago, it was at $119. Today, it’s at $101. The stock is down 15% over the last year. The market is at zero, so that’s a -15.
By the way, it’s hard for me not just to look back a few months at these companies and see where they were. Because at one point earlier this year, this list of five companies was rocking. In fact, for each of these, I’m going to highlight briefly where it was earlier in the year. We’ve already covered Amazon. Amazon today is about $1,600. In September, the much-vaunted announcement of the $1 trillion market cap crossing for Amazon, the stock was at $2,050. It’s gone from $2,050 down to $1,600. That’s a drop of 20%. For CBOE, in January of this year, i.e. it had a great move from Thanksgiving last year when I picked it into the new year, it was at $139. Today, it’s down to $101. That stock is down 40%. It was really a great pick initially.
Anyway, let’s go on to stock No. 3 now. About stock No. 3, I’d like to ask you this, as I did a year ago: if you were buying a stock that was a leader in online dating, would you rather have a stock that was a leader for people who are a little bit older and more mature, people who have a higher net worth and can spend more, more of a premium dating service, maybe second marriage kind of thing? Maybe, like match.com? Or, would you want a company like Tinder, which is a really hot dating app for younger people? And here’s the good news — I think you know the punchline by now — Match Group (NASDAQ:MTCH) has both. They own match.com, they own Tinder, and dozens of other sites for many different tastes and demographics. Match Group is the world leader for online dating.
A year ago, the stock was at $30. Today as we tape, it’s at $43. That’s a really nice move of 43%. $30 to $43, rocking. And of the five, this has been the best performer.
I love this company. I was mentioning it a year ago, of course, on this podcast. But throughout the year of 2018, it’s become increasingly clear to me that this is a great long-term player that you want to be invested in. While the near-term performance is great, I think what really matters is the longer-term performance, not just looking backwards, but we’ve had it for several years, so, yeah, that’s good, but how about going forwards?
I should mention, even though the stock is at $43, up 43%, in September, it was at $61. You’re catching Match Group right now down from $61 to $43. I’m not going to complain too much because the whole market’s down, and all of these stocks are down, too. But, wow, it would have been more than a double just a few months ago reviewing this five-stock sampler.
Anyway, let’s do the math. Plus 43, we had a -15, plus 39. Right now, if you’re scoring along with me at home, we’re at plus 67 through those three stocks. Let’s go to stock No. 4.
Stock No. 4 is Nvidia (NASDAQ:NVDA). About this company, I asked a year ago, let’s think about a CEO. Would you rather have a CEO who is an extremely brilliant engineer — this is, after all, a technology company — would you rather have an outstanding engineer running your company, or an extremely capable executive? In Jensen Huang, the founder and CEO of Nvidia, you indeed have both. It turns out, both of those attributes can exist in the same person. We don’t need the trade-off mentality that so much of the world seems to have about people and things. Nvidia has been a spectacular long-term winner on the American markets, and he had recently been named CEO of the year as I picked this stock a year ago. I’m happy to say, I really picked this stock almost 15 years ago. It’s a long-term holding in Motley Fool Stock Advisor.
But a year ago when I picked it, with this group of Five Stocks Letting You Eat Cake, it was at $215. I regret to inform us all that it’s dropped from $215 to $147. That’s down 46%. It’s been cut in half from where it was a year ago. And yet, it’s amazing to me that in October — that’s right, just two months ago — Nvidia, a worldwide leader at what it does and a megacap, was at $293. It’s dropped from $293 to $147 in two months.
As this podcast attempts to deal as much as possible with reality, we’re scoring it where it is today, down 46. We have to subtract 46 from our 67. We’re down to a plus 21. Still ahead of the market, with one final stock to review.
Let me ask you about stock No. 5: would you prefer a business that’s a bricks and mortar company, or an online company? That classic battle, bricks and mortar vs. online. We’re not even talking about retail sales right now. How about a company that lives within the educational world of big, bricks and mortar, expensive universities, but also cheaper, seemingly less-adopted so far, online learning? Well, with 2U (NASDAQ:TWOU), ticker TWOU, you have the leader in bringing people through online learning to some of the best bricks and mortar universities, earning, often, graduate degrees, sometimes undergraduate degrees. 2U is the leader at uniting those two worlds. We didn’t have to trade off. We can have a company, once again, that has both.
A year ago, 2U was at $67 a share. Today, I’m sorry to say that it has dropped from $67 to $55. That is a drop of 18%.
In a weirdly happy way, I’m here to let you know that looking over these five, we ended up with a plus three number. A tiny amount of incremental outperformance of the market. We kept it positive. It was pretty dramatic for me as I went down the numbers. I lost my breath briefly as I looked, “How has 2U done over the last year? Oh, it’s down! Oh, but not so much that we’re negative with this sampler of five stocks!”
Now, of course, it’s worth mentioning, this is only one year later. We always pick stocks for at least three years on this podcast and at The Motley Fool. But it’s fun to note that over a really tough year — by the way, talk about tough. 2U’s stock in May was at $99. I just gave you the closing price at $55. This is another company down more than 40%. In fact, looking over all five of these companies, they are down respectively 20%, 40%, 30%, 50%, and over 40% from where they were just months ago. And yet, I’m still happy to say, we’re beating the market.
Enough with Five Stocks That Will Let You Eat Cake. We’ll whisk them off the stage. We give them a wave and a little bit of a smile, because we are beating the market with them, albeit by less than 1%. So, with the market flat, this group of stocks is up the equivalent of 0.6%, slightly ahead of the market in their first extremely volatile year. What about Five Stocks to Put Under the Tree?
Two years ago this month, Five Stocks to Put Under the Tree. We’ve talked about that. You know the game we’re playing here. I say let’s get right into it with stock No. 1.
These are alphabetical, just as I did on the podcast, and as I did with our previous stock sampler. What was up first alphabetically? We like to do it by company name. Let’s kick it off with, yep, Amazon. I picked it with that five-stock sampler two years ago. It was at $770 a share. Today, as I mentioned already, it’s at $1,604. Good news, that stock put under the tree, that made a wonderful gift, the gift that keeps on giving, up 108%.
How’s it doing against the stock market? Well, the stock market over the last two years since that 12/7/16 podcast, the stock market is up 16%. With Amazon up 108, -16, that’s a plus 92 in the win column. Let’s go to stock No. 2.
Stock No. 2, one of those companies that puts a lot of products underneath people’s trees this time of year. That’s Apple. Apple two years ago was at $111 a share. Today, it’s at $167. By the way, I should mention, since it’s kind of a theme this podcast, Apple was at $230 in October. It’s gone from $230 down to $167. I’m really happy to say, we’re still up 50%. Vs. 16% for the market, that’s a plus 34 in the win column for Apple. 92 plus 34, we’re up 126% over the market so far.
Spoiler alert: it’s about to get better.
Stock No. 3: Activision Blizzard (NASDAQ:ATVI), the video game and entertainment company. Another one of those companies whose gifts I appreciate receiving this time of year. Activision Blizzard two years ago was at $37.50. Today, it’s at $48. That’s a 28% gain. That gives us a plus 12 in the win column. That brings us up to plus 126.
Do I sound like a broken record? My golly, this stock was at $85 in October. It’s dropped from $85 to $48 in two months. And yet, we’re still pretty happy with our longer-term returns, beating the market.
I know a lot of people say the market is going to get hit at some point, or 2019 is going to be a bad year after all these great years. Have we been looking at the last couple of months? I did say a few months ago on this podcast, I think we’re already in a bear market. And a lot of times, the pain really happens upfront. When I’m seeing companies like Nvidia cut in half in two months, and Activision Blizzard nearly cut it in half in two months, and Amazon and Apple 20%, 30% down from their recent highs, I feel like we’ve already felt a lot of the pain. Things might get surprisingly better from here. We’ll see in 2019. I think the market’s going up!
Alright, stock No. 4 is maybe a particularly interesting one, because this company, it is often said, has had about as bad a year as any big company could have. Stock No. 4 that we put under the tree two years ago this month was Facebook (NASDAQ:FB). Facebook was at $118 a share that day. Today, it tips the scales at $146. It’s up 24%. We’re four for four on the stocks we’re putting under the tree. It’s not been a great investment. Up 24%, that’s 8% ahead of the market.
Facebook in July was at $218. We’re printing our results here when it’s at $146. This is another company that has lost a huge amount of value. And yet, I don’t even think as much as you’d expect from the headlines that we read. Some people, it seems to me, are leaving Facebook nearly for dead at this point, thinking their problems run so deep, everything from questionable executive decisions right through to betraying the trust of their customers, or security leaks, bad decisions, bad outcomes, and results. It certainly hasn’t been a good time. I know a lot of you are probably not very happy with Facebook right now. As an investor, I’m not very happy with Facebook dropping from $218 to $146 in just a few months. That said, doesn’t it sound like a lot of the other companies we’re talking about? I don’t think Facebook really deserves to be singled out in quite the way that headlines are naturally doing. I’m not excusing any of the bad behavior and bad performance at Facebook. I sure would like to see things get better. And yet, my horse sense, the Fool in me, thinks that things are probably going to get better than people think.
We’ll take our little plus eight and we’ll add that in the win column. That takes us from 138 to 146.
What was the fifth and final stock we put under the tree two years ago? By the way, what a two years it has been for these stocks! I mean, the market’s been good, a 16% gain over two years. Not bad. It’s about the historical average. But I’m really happy to say Netflix (NASDAQ:NFLX), stock No. 5, has had a really good two years. This is another one, if you put this stock under the tree — for example, if you bought shares for a child instead of giving them another gadget, or another hunk of plastic, I mean, I like those things, too. I sure did when I was a kid. But, you can also give stock. And it’s not just to kids. You can give it to brothers, uncles. Of course, it’s easier to give stocks to somebody who has a brokerage account already. But, if you’re thinking about somebody who hasn’t started investing yet, here’s what you can do. You can give them money. Just give them cold cash and they can then open an account and buy stocks with your monetary gift. I think stock makes a wonderful gift. As we’re discovering in this podcast, it’s hard for me to think of more rewarding gifts, frankly, as I think about the hardware under many trees, than what we’re describing and discussing in this podcast.
Netflix, two years ago, $126 a share. Today, $272. The stock is up 116%. Subtracting 16, that’s an even plus 100 for this fifth stock, we put it under the tree. You total it all up, we’re at plus 246 for this group. That’s right, take these five stocks together, add up their percentage points by which they have beaten the market, and that’s a plus 246.
By the way, to finish out the math, the average gain of these five companies was plus 65% against the stock market, which over the last two years was up 16%. So, 49% per stock ahead of the market averages for one of my better five-stock samplers. This is one of those rare ones where I got all five of them right so far. But, I do want to put an asterisk. I don’t want to gloat or celebrate here. This is only two years later. If 2019 is a bad year, maybe these stocks decline further. We’ll see whether you wanted them under the tree in retrospect. But right now, I’m going to predict you were really happy to either give or receive these stocks. And remember, the greatest gift is the gift of giving. I hope you’ll think about giving some of your favorite companies, some of your favorite stocks if you’re a stock market investor, so many of you are, think about giving a stock to somebody else.
Alright, that was a super fun review of two stock samplers. Next week, it’ll be Boxing Day, the day after Christmas, December 26th, the final Wednesday of the month, your mailbag.
In the meantime, happy holidays to all Fools everywhere! Fool on!
As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com.