TIP754: Rule Breaker Investing w/ David Gardner
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this compelling episode, Clay Finck interviews David Gardner, co-founder of The Motley Fool and author of the new book "Rule Breaker Investing." Gardner shares his contrarian investment philosophy that deliberately breaks Warren Buffett's traditional value investing rules. (00:36) Gardner has achieved an impressive 20.8% average annualized return versus 9% for the S&P 500 since launching his Stock Advisor service in 2002, discovering companies like Amazon in 1997, Netflix in 2004, and Nvidia in 2005 when they were considered overvalued by traditional metrics.
• Main Theme: Gardner's "rule breaker" investing approach focuses on finding top dogs in emerging industries that appear overvalued but possess sustainable competitive advantages and visionary leadershipSpeakers
David Gardner
David Gardner is co-founder of The Motley Fool and a New York Times bestselling author who has achieved remarkable investing success by deliberately breaking traditional value investing rules. He launched The Motley Fool's Stock Advisor service in 2002 and has publicly achieved a 20.8% average annualized return versus just 9% for the S&P 500. Gardner discovered seven 100-bagger stocks including Amazon, Netflix, Nvidia, and Tesla, demonstrating his unique ability to identify rule-breaking companies early in their growth trajectories.
Key Takeaways
Embrace Being Wrong to Win Big
Gardner advocates for a "losing to win" mentality, similar to venture capitalists who expect most investments to fail but rely on massive winners to drive overall returns. (17:09) He emphasizes that the stock market actually reverses typical human psychology - while behavioral economists show the pain of loss is three times the joy of gain for humans, in investing, the joy of potential infinite gains far outweighs the maximum 100% loss. This mindset allows investors to take the calculated risks necessary to find 100-bagger stocks like his Amazon and Nvidia positions.
Look for Companies That Appear to Be "Cheating"
The best investment opportunities often come from companies with such dominant competitive advantages that they seem to have an unfair edge over competitors. (50:00) Gardner references Seth Godin's concept that great companies like Starbucks and Amazon have advantages so strong they appear to be "cheating" - whether through brand dominance, network effects, or operational excellence. These qualitative advantages often aren't reflected in traditional financial metrics but create sustainable moats that drive long-term outperformance.
Invest in What Appears Overvalued
Contrary to traditional value investing wisdom, Gardner specifically seeks stocks that commentators describe as overvalued. (35:45) He uses the Tiger Woods analogy - Nike paid $40 million for an unproven golfer in 1996, which seemed drastically overvalued at the time but proved to be a brilliant investment. The key insight is that truly exceptional companies aren't just 2-3 times better than competitors, but can be 40 times better, justifying premium valuations that seem excessive to traditional metrics.
Focus on Qualitative Factors Over Quantitative Metrics
Gardner argues that the most important business factors - CEO quality, brand strength, company culture, and innovation capability - have no line items on financial statements. (45:46) Traditional valuation models focus on earnings and cash flow (outputs) without properly weighing the inputs that actually drive business success. This creates opportunities for investors willing to pay premium multiples for companies with exceptional qualitative advantages that aren't captured in standard financial analysis.
Think Like a Part Owner, Not a Trader
True investing means putting on the "jersey" of companies you believe in and holding through inevitable volatility. (22:36) Gardner emphasizes the Latin root of "invest" means "to put on the clothes of" and advocates treating stock ownership like sports team loyalty. This long-term ownership mindset is essential for capturing the full value of rule-breaking companies, which often experience multiple 50%+ drawdowns even as they generate thousand-fold returns over decades.
Statistics & Facts
- David Gardner has achieved a 20.8% average annualized return versus 9% for the S&P 500 since launching Stock Advisor in 2002. (00:36) This represents more than double the market's performance over a 22-year period, demonstrating the power of his rule-breaking approach.
- Gardner owns seven 100-bagger stocks including Amazon (1,300x return), Netflix, Nvidia, Tesla, Booking Holdings, Intuitive Surgical, and MercadoLibre. His early AOL investment in 1994 rose 150 times before he eventually sold it. (11:30)
- When Nike signed Tiger Woods to a $40 million contract in 1996, he had never played a single professional hole of golf. (36:16) This seemed dramatically overvalued at the time but proved to be a brilliant investment, illustrating Gardner's principle of investing in apparent overvaluation when backed by true greatness.
