"Rule Breaker Investing" Mailbag: Talking Stocks and Options

We also talk with Sean Milliken, managing director of The Motley Fool Foundation’s ImpactFool (IF) Fund.

It’s Rule Breaker Investing‘s first-ever outtake — what stock could we NOT feature on last week’s “Market Cap Game Show,” and why? Motley Fool analyst Bill Barker joins in for a few laughs.

Motley Fool co-founder David Gardner closes out “5 Stocks Pursued by a Bear,” explores with Motley Fool analyst Jim Mueller if The Motley Fool gives options advice, and welcomes a visit from Sean Milliken, head of The Motley Fool’s latest fund.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 26, 2024.

David Gardner: It’s the final Wednesday of June 2024. It’s your mail bag. Thank you for the notes as always. Ahead this week, we close out five stocks pursued by a bear. We ask, “Does the Motley Fool give options advice?” Notes in about Sleep Numbers and Pet Perks, a visit from the head of the Fools latest fund plus the one stock we could not air on last week’s Market Cap Game Show, and Bill Barker is back to laugh with me as to why. Only on this week’s Rule Breaker Investing.

Welcome back to Rule Breaker Investing. It was a really fun month. It’s summer, it should be fun. Last week, we had the Market Cap Game Show with Bill Barker and Bill Mann. The week before that, it was Pet Perks Volume 1, the launch of our new episodic series, featuring not our pet peeves, but Pet Perks, the small things that make life better. Then we started this month of June with ChatGPT interviewing me about rule breaker investing. Those are the three episodes that this mail bag reflects back on. Thank you as always for your notes. Before I get to them, let me mention what we’re doing next week. Next week, I would love for you to write in to me, [email protected] is our mailbag address. Let me know what you’ve done over the last year to create more financial freedom, for yourself, for loved ones, for your community or for friends.

I would really love it, if you would reflect on what you personally have done to create some more financial freedom over the last year. This is what we do every year, it’s Independence week for the United States of America, whether you’re American or not. I would love to hear from you as we do what you’ve done to create financial freedom Volume 2. That is our annual July 4th extravaganza. Again, our email address [email protected], you can tweet us on Twitter X at RBI podcast, and we’ll feature you on next week’s show. Let’s take a look, speaking of Twitter X, it’s some of the hot takes from this month. Thank you for writing in Mike at Pro Shop Guy MF1. Mike, you wrote on Twitter, in his latest rule breaker podcast, David G Fool revealed his first set of pet perks, a celebration of small joys, and on that list, Mike, you noted was the power of giving and receiving handwritten notes. An example of this practice from a high school graduation ceremony, and I really appreciate you pointing to this story. It was the class president of Apponequet Regional High School, Mason Macuch, I probably mispronounced his name, but Mason is easy enough to say. Mason took the time as class president to write a handwritten note to all 180 members of his high school class. He stuck it underneath their seats at graduation, mentioned that and invited them all to reach underneath. What a phenomenal effort on his part. He said it took him 10 hours. Mike, thank you for pointing to that, the power of handwritten notes. Rumors are, I can neither confirm nor deny that Mason may be a listener of this very podcast because it beautifully timed up with our Pet Perks episode earlier this month.

Thank you for that, reflecting on the same episode, Meredith K at Meredith K on Twitter X, such a fun idea listened and enjoyed it. I’ve been on a hiatus from X and podcasts, you said, Meredith, but catching up on podcast and creating a list of pet perks was right up her alley. Thank you, Meredith. That idea came from Ben Adams, I’m going to do a little story telling about that a little bit later but we’ll park that for now. That was a fun episode to do, we will certainly return to pet perks in future. Finally, reflecting on last week’s Market Cap Game Show at Jason underscore trice on Twitter, long time fool, Jason, you said, “I usually listen to these on the run, but I saved this episode for my plane ride today and played along. I had so much fun, laughed out loud several times. Thanks for keeping me entertained in the air.” You took the time to share a photograph of the notes that you’d taken throughout the Market Cap Game Show, including your own guesses, and what you learned from it. I think that’s such a best practice. I called that out in a good way on Twitter, Jason, because you took the time to learn right along with us. We have a lot of fun doing the Market Cap Game Show. We really do play it for you, our dear listeners so when you play along, that gives us great joy, and we all learn together. In fact, let’s go to Mailbag item number one now because there was one stock that was not included on last week’s market cap game show, for the first time ever, we had to excise one of the ten stocks and put in a backup and for a very special reason. Let’s get started. We have eight mailbag items this episode.

Mailbag Item number 1. Rule Breaker Mailbag Item number 1. You know it’s not often we play outtakes on the Rule Breaker Investing Podcast, I don’t even think ours are that worthwhile. People used to pay, I don’t know, an extra 24.99 for the DVD with the outtakes. We don’t charge anything, this one’s going to be free. This is almost a first on this show, but something pretty hilarious happened last week and I thought we should share it out, and for reasons, you will quickly understand, dear listener, we had to wait a little while to do that. Stock Number 8, on last week’s Market Cap Game Show, never aired. Instead, I swapped in a different stock. We kept playing the game straight up legit, Bill Barker won straight up legit 7-3, but we used a backup stock because of the clip I’m about to play for you from last week’s show, Stock number 8. Let’s move on to Stock number 8. Bill Barker, for this next company, I’m going to open up its website, and I’m going to read to you the prominent tag line featured in a can’t miss big font, right there, home page. Then maybe would you make a guess as to the company? This is not scorable. [laughs] We’re just having fun.

Bill Barker: I guess I have to.

David Gardner: You have to say yes to that. Here it is. Technology is our how and people are our why.

Bill Barker: McDonald’s.

David Gardner: When I read that, I think this could be any company that’s why it’s a completely unfair question, I think McDonald’s a great answer. I don’t think that’s the answer, but it’s a great answer.

Bill Barker: Endava.

David Gardner: It still makes me laugh, Bill Barker to think that you could pull that Generika tag line and immediately recognize it, Bill, as the actual tag line used by this small-cap company that many of us had never heard of. Bill, how did you do that?

Bill Barker: Oh, maybe I’m just a mot savant. [laughs] Maybe not. It’s a pretty generic sounding motto, and it’s a company that very few would know off the top of their head unless they happened to have been writing up a report about it the day before, which was where I happened to be when you threw that one out at me. It was very fun to make it appear for a couple of nanoseconds, I was a lot smarter [laughs] than really am.

David Gardner: [laughs] Bill, as you mentioned, most people have never even heard of Endava as a company. It is a British company, and one that you favor, you were in the process of writing it up. Actually, you’d already written it up. We were in the process of sending it out as the Motley Fools next firecracker stock recommendation. Therefore, you were barred, I didn’t know it at the time from saying anything about that, we were about to share that information. In fact, live during the recording of that podcast bill, I got an email from you, the lead advisor of firecrackers with Endava as the next pick. I of course, just randomly pick from my fool 500, the stocks. I don’t know what we’re about to pick next. The stocks that we’re going to feature on the market cap game shows. Again, most of the world has never heard of Endava at all, for you to pull out, technology is our how, and people are our why and say Endava utterly flummoxed me.

Bill Barker: Well, it does sound like a motto that might have been generated by AI. [laughs] As it’s absolutely vapid. But probably not. I think that as we chatted later on, you can have a motto that within the company is very meaningful, but saying it to the rest of the world, it just sounds like, that’s nice. Can you give us some real information? [laughs]

David Gardner: Well, said, Bill. We’re going to talk just a little bit more about Endava in a sec. But there’s one more outtake, we’ll play just a 1 minute clip of us with Bill Mann reacting to this, because you and Bill both knew the company. I had no idea what was coming, and then it becomes clear in this clip. Let’s talk about the market cap for Endava Associates, ticker symbol D-A-V-A. Bill?

Bill Barker: Pause.

Bill Mann: Pause [laughs] David, you’re going to love this.

Bill Barker: I just wrote this up.

David Gardner: This about to come out? Yeah, so we can’t do that. Great. [laughs].

Bill Barker: How would I know, Endava? [laughs] The sad thing is, I had to think about it. I was listening to the quarterly earnings, I was listening to this motto of theirs yesterday, I had like, oh, my God, what did I write up yesterday?

David Gardner: This is possibly one of the great moments of Market cap game show and I don’t think it’s ever going to air now. I have a backup stock, so I’m always [inaudible] I can’t believe that.

Bill Mann: By the way, he just wrote it up for the service that we run together.

David Gardner: Hearing that again, that is about as hard as I can cackle, spontaneously laughing. Bill, those are the first bleep outs that we’ve really ever had on this podcast, but it was hilarious.

Bill Barker: Well, I’m sorry about the language, but [laughs] it called for it in the moment, that I would know such a random fact as Endava’s motto. I probably won’t be able to tell that to you in a couple of weeks. That’s the kind of kind of fact that will just leave my brain.

David Gardner: Bill, I know you’re not going to give all the goods away here. This is a premium service recommendation, but how about a quick summary of thoughts on Endava for a company that we can all now get to know a little bit better.

Bill Barker: The thesis, at least my thesis, and it’s been recommended a number of times, but it has suffered since the late 2021 peak that it hit as a stock. It’s continued to grow, and it’s taken a little bit of a pause most recently on revenue growth, but there’s a good longer term growth story for this British software IT services consultancy. I think that the price is attractive, and it’s something that’s been recommended by a number of different services going back four years. Unfortunately, it’s at a lower price point than all those recommendations, but I think that the story here is intact, and I think it’s going to be OK.

David Gardner: All right. Thank you, Bill. Yes, I see the stock chart not looking pretty over the last couple of years. Let’s hope that you’ve picked it this time. But one thing that will probably never happen again is me randomly picking from hundreds of stocks, the one that the person I’m asking the question of had just picked for our services. It was just hilarious to think of you and Bill Mann, your protege, how you would have played the market cap on that stock, because you both would have known it to the second decimal.

Bill Barker: Well, yeah, the game theory was going to be very interesting because he knew that I knew exactly what the market cap was, and that the range that I would give him would maybe be right. Maybe I would have to be wrong, but seemingly I knew the market cap better than he did because I had just written it up and he was generally aware, but not as to the second decimal that I might have been. There was an interesting game that was about to unfold, if we had continued.

David Gardner: That was going to become about as pokertastic as the Market Cap Game Show could ever get with two guys playing chicken against each other. A shame we didn’t get to do it, but for very understandable reasons. Bill, I’m looking forward to seeing you again whenever we next meet on this podcast in the coming months. I know one thing for sure, you’ll be back for the Market Cap Game Show, March Market Cap Madness, World Championships, because you qualified with last week’s win 7-3 sons, Endava Associates.

Bill Barker: Thanks. I will see you then, if not before.

David Gardner: Thank you, Bill. Fool on.

Bill Barker: Fool on.

David Gardner: On to Rule Breaker Mailbag Item number 2. This is an opportunity for me, as I mentioned at the top to introduce the head of one of the Fools latest offerings. This comes from the Motley Fool Foundation, and this is a fund. This is a venture philanthropy fund that we’re very excited about. I’m invested in it, and I’m enthusiastic to introduce to you the Managing Director of the ImpactFool Fund. Thank you for joining us on this mailbag, Sean Milliken. Sean, How you doing?

Sean Milliken: I’m doing great, David. Thanks so much for having me. I’m excited to talk a little bit about the impactful fund.

David Gardner: Let’s do it, Sean, start by telling us just a little bit about yourself, your background. What led you to find the Fool foundation?

Sean Milliken: Well, I was lucky enough to grow up in a family of social justice warriors. My father was a social entrepreneur before it was a term. Started one of the nation’s foremost organizations dedicated to helping kids in school succeed. It was born in my DNA that I would go out and try to advance organizations that I thought were doing tremendous work and having a real impact in people’s lives. I spent some time in marketing development for boys and girls clubs, and communities, and schools. I really got my first taste at social entrepreneurship and helping young people start businesses in South Central California in collaboration with the USC School of Entrepreneurship. I took my learnings in that program and started my own social enterprise, it was called MissionFish. It was one of the first ways that people could contribute to their favorite cause online. We partnered up with eBay to create a program where you could give a percentage of your sale proceeds to your nonprofit of choice. It’s called eBay for charity. When eBay and PayPal separated, I was tabbed to run the Social Innovation Group for PayPal, which was in large part focused on advancing the financial health of individuals and small businesses. A lot of my background led me to when Motley Fool was starting the foundation, I was asked to serve on the forming task force, and then as a board member in helping to shape the direction of the organization, and hopefully have had some small part in some of the success it’s had today.

David Gardner: You bet. Thank you so much for serving on the board of the Motley Fool Foundation, Sean, and we always hate to lose board members, but the way we love to hate to lose board members is when they step away and become part of our team. You recently resigned from our board in order to be the managing director of the ImpactFool. That’s right, impact with F-O-O-L on the end, the ImpactFool fund. Sean, can you share the vision, the primary goals of the impact full fund?

Sean Milliken: Yeah. Well, you mentioned the play on words with F-O-O-L. We also sometimes refer to it as the IF fund, taking the acronyms from ImpactFool. Because as a board, something that the Motley Fool Foundation is laser focused on is, helping people take their next step in their journey toward financial freedom with a specific emphasis on those people that are living paycheck to paycheck. We have a real serious problem here in this country, that’s seven out of 10 people.

The foundation is really doing all it can to stand up programs, to invest in solutions to help people take that next step toward financial freedom. We historically, over the past couple of years, have invested in, I say invested. I’m using that word loosely. I hope people understand that the Motley Fool Foundation makes grants in certain instances to other organizations that we believe are aligned with us in our mission, and we’ve been making grants to what here we’ve called financial freedom rule breakers. Those social entrepreneurs that have come up with great ideas for helping people take their next step toward financial freedom. We’ve had a great deal of success in picking much as the Motley Fool is picking winners on the investment side. The foundation has now started to establish a real strong track record of picking winners that are helping people take that next step toward financial freedom. When we as a board, though, we’re looking at, how can we do more? To make sure that these promising solutions impact more people.

We looked at one, what type of organization could best use our help? Two, what kind of help can we bring to bear above and beyond financial resources? That’s really what we see as the greatest potential for what is the ImpactFool Fund. We will fund those organizations that hold great promise for impact at scale. We will provide them with financial resources, which are critical, particularly in those organizations we’re looking at $1-3 million annual operating.

David Gardner: I’m glad you mentioned that, Sean, because for a lot of listeners, I mean, we all hear about organizations doing great work out there. As you mentioned, our rule breakers program, which has been a focus of ours for the first couple of years of the foundation, we were kind of all over the map in terms of some really big foundations we were helping fund, some really small ones. What is it about that one to $1-3 million size organization that is our focus with the ImpactFool Fund?

Sean Milliken: David, I’m glad you asked, having been both an employee, a board member, and starting social enterprises myself. I know that there’s a very critical stage in the life cycle of an organization. There’s a lot of great ideas out there, started by social entrepreneurs, that friends and family, much as a for profit business, friends and family. Maybe a community foundation has opted on more to test out this new model. They’re not yet ready for what I would call institutional funding. It’s different in the nonprofit world. Those tend to be the McKenzie Scotts of the world or the Ford Foundation or Rockefeller Foundation, Blue Meridian, that will invest large amounts of money to really take that organization to scale. What those institutional funders need is a track record of success, metrics that they can rely on. A lot of those organizations that may have received that first influx of capital and support, there’s that middle stage where they might not yet have built out the building blocks necessary to go to scale. That’s where we think we can come in. We’ll be making a three year commitment of $300,000, $100,000 each of those three years. Equally, if not more important, is we will provide them with a scaling partner, a member of the Motley Fool Foundation team that has lived experience in taking an organization from young organization into established organization has those magic eyes that can look at the critical inflection points that their organization is facing and bring in the resources both from outside consultants as well as hopefully lean on the skills of Motley Fool members to help fill those gaps and help them reach that next stage of their development.

David Gardner: Thank you. That’s why I wanted to make sure I introduced you to our listenership because we have a lot of people, who, over the course of time, have managed to get closer to financial freedom thanks in part to our efforts at the Motley Fool. Indeed, a lot of people listening to me now do enjoy a measure of or full on financial freedom. I mentioned earlier this podcast, next week, we’re going to do what you’ve done to create financial freedom, a mail back a special episode next week for listeners to write in, in terms of what we have done add a little bit more financial freedom to our world and the world at large over the last year, and that’s exactly what the ImpactFool Fund is aiming to do. In closing, Sean, the focus is initially going to be finding social entrepreneurs, much like you with mission fish back in the day, and then you get acquired, picked up by Ebay and split off into PayPal. Your experience is just outstanding in this area. We’re going to start with a focus on the greater Washington DC area. It’s obviously the nation’s capital. It includes Maryland, Virginia. West Virginia. There is you’re putting out a call for nominations for organizations that we can work with at a hyperlocal level, start hooking them together, get them working together toward financial freedom. Could you share a little bit more Sean about how people could make a nomination or get in touch with us?

Sean Milliken: I should explain the original the goal for our fund, this first fund is five and a quarter million dollar, and that will support eight social entrepreneurs through the lifecycle of this three years. We haven’t yet reached that goal. But, because of the commitment of the Motley Fool Foundation, because a few very dedicated and generous donor partners like yourself, we’ve decided we’re going forward, and we think the best way to start is right in our own backyard here in the greater Washington area. We’ve launched a nomination process to find those first organizations that we will invest in and provide that support. There is a call for nominations that is available at foolfoundation.org/fund. If you go, you’ll learn more about the fund.

There is an easy way to nominate an organization. It takes about 10 minutes, if that. We want to know. We know that the Fool community is already working with the types of organizations we’re talking about. We want to hear about them because not only do we know of great organizations, but we know that you’re already doing great work with them and we want to have a chance to support them. Please go on to nominate. There’s other ways you can get involved. We are still we’d love to expand our capacity to provide support and services to additional impact fools. If you’d like to talk about how you can become involved as a funder, there’s a get involved page where you can set up a conversation with myself or one of the other impactful team members, and we’d love to have that conversation with you. Finally, there’s a way where you can sign up to lend your skills or your expertise. We’re still formulating the plans as to how we’ll best utilize your talents, but we’d love to hear from you that you’re interested.

David Gardner: There’s no question that the Motley Fool community powers so much of our efforts at the company. Sean, you’re pointing to how any listener right now could come and help us out. And I would love that. This means a lot to us at the fool and to be able to start reaching out to those portions of America, the Motley Fool doesn’t touch as much. We tend to be over indexed toward people who have capital. Who are beyond living paycheck to paycheck, and we’re trying to go out one more concentric circle. Again, Sean, thank you for making yourself available. As you mentioned, foolfoundation.org/fund. That’s just short for the IF, fund is the way for people to get into contact. Any final message you want to leave us with?

Sean Milliken: At the Foundation, we have big aspirations for helping solve At least be a contributor to solving the big challenge that I outlined earlier. It’s no coincidence that this is the fund. Imagine if everyone had a safe and affordable place to live. Imagine if everybody made a livable wage. We’re imagining if by investing in solutions to make that possible and we hope that you will join us in making it possible.

David Gardner: Thank you, Sean Milliken, Managing Director of the ImpactFool Fund. Some of that money is mine. I’m absolutely paying it forward myself, and I would really encourage anybody. Even if you don’t feel like at this stage of your life, you have something you could contribute to venture philanthropy, which is what this is about. We’d still love to connect in with you. Fool foundation.org. Sean, Good luck on getting things started this summer. Excited for people to reach out to you.

Sean Milliken: David, thank you for your own contribution to this effort, for your leadership of the Motley Fool Foundation in helping us spread the word about their fund. Very grateful. Thank you.

David Gardner: On the Rule Breaker Mailbag item number three, this one comes from Ben Adams, and it’s just reflecting again on our Pet Peeves episode earlier this month, again, a number of tweets and comments about I just wanted to share again a little bit of the backstory, plus an extra Pet perk that came from Ben himself. Ben is a UK citizen. He lives near Shakespeare’s birthplace, and he was the one who a few years ago, said, David, I think it would be, I think it would make a lot of sense if instead of just doing Pet Peeves episodes, you did some Pet Perks, the positive things in life, and since I’m an optimist, and Ben is one as well. It makes a lot of sense that we would do that. Of course, I’ve had so much fun taking down my Pet Peeves over the course of eight or so episodes in our nine year history. It was so much fun to present a Pet Perks episode and en got in touch with me afterwards, and said in so many words, how happy it had made him three years later that I acted on something he’d tweeted me in 2021 and created that episode earlier this month. He said it did feel far more foolish to him than Pet Peeves. He’s been a rule-breaker member for ten years now and a podcast listener since the very beginning. Just a delight, Ben, for you to share those things with me and how the fools made a positive impact on your life. When you first suggested that Pet Perks episode, you mentioned one at the time. It was autumn. You said, and I’m just going to add this. This is a bonus pet perk for those who listened to our June mailbag. You said and I quote, I’ve always considered each changing of the season as one of life’s free pleasures. It’s a privilege to experience, and it’s always exciting to think about any upcoming seasonal events. One of the joys of being an eternal optimist, I guess, said Ben Adams. He and I connected on that, and I completely agree. I’m quite sure many of you do, as well. Part of the reason I love living in the Washington, DC area, it’s true of many other but not all areas around the world. We have all four seasons. It is so energizing when all of a sudden, things start to heat up. I really like a hot summer. We got one this past weekend tipping 100 degrees for the first time in eight years in Washington, DC. I love it when the leaves begin to fall, and there’s always some extra energy that comes to me anyway. I’m sure many listening to me when that new season begins to dawn, a wintry winter, etc. That is definitely a pet perk. Thank you again, Ben Adams, for suggesting we highlight the little things that make everything better.

On to Rule Breaker Mailbag item Number 4. This one is to close out in brief the 30th and final five stock sampler that I’ve done on this podcast. The date was June 16th, 2021. We were all penned up due to COVID. The stock market had been a raging success over the previous couple of months. It turns out not great timing for picking stocks, especially given what would happen to the market in 2022, especially, and a couple of these COVID stocks have done incredibly poorly. I regret to say, my 30th and final all time five stock sampler, five stocks pursued by a bear, companies that themselves had lost a bit of value, and that’s why I was picking them because they were pursued by a bear. That’s Shakespeare’s line from a Winter’s tail is most famous stage direction, exit pursued by a bear. I was looking for stocks that had been bad performers and deciding to pick them. Let’s briefly review these five stocks. Worst performer was Peloton Interactive. It was at 105 that day. Today, get this. This is astonishing. This is one of the worst docks that I’ve ever picked. Peloton, I’m sure many of you know this. Peloton has lost I would say almost all its value at this point, which is incredible to think of how elevated its brand was, its profile and popularity, Peloton has dropped from $105 a share in June, 3 years ago to $3.81 when this five stock sampler concluded earlier this month on June 14th. Just for perspective sake, the stock market over those three years, June 16th, 2021, to June 14, 2024 was up 28.6%. That was the S&P 500. I’m happy to say two of the five stocks outperformed that pretty well. I’m sad to say the other three didn’t, and the other three really got crushed. Peloton the worst of all of them, losing literally 96% of its value from when I picked it on this podcast to three years later. It’s even a little lower than that as we record this podcast. I’m reading headlines about how they’re losing their star performers, etc. Peloton is a basket case of what I would describe as a failed rule breaker, and it is worth mentioning that in and among my successful 35 stock samplers, overall, in an outstanding record of outperformance, as I’ve emphasized, again and again, on this podcast, losing to win is what I do. Nobody has more bad losers in Motley Fool stock picking history, and nobody has more losers in Motley Fool stock picking history than I do. While I’m really ashamed in retrospect, that I took a shine to Peloton three years ago this month, I also want every listener to know those new and those old that this is actually part of investing for me. We’re taking more of a venture capitalist approach to the market, taking risk, and we’re going to take it on the chin, as I did with Peloton.

David Gardner: Also, an incredibly poor performer, Unity Software. The company behind so much app creation, especially software entertainment, lots of games. Unity, which developers have used to create innumerable apps and games over the last decade. Plus this is a stock that was at 96 at the height of COVID, June of 2021. Dropped to 16 when this five stock sampler closed out just a few weeks ago. That is a loss of 83%. You can imagine with two stocks down, 96% and 83% respectively, with the market up 29%, we didn’t win with this one. The best performer among these five was Axon Enterprise, ticker symbol A-X-O-N, which had been a little bit on the rocks back in June, 3 years ago at $152 a share. June 14th, this year, up to $292 a share. I think a lot of Motley Fool members own this stock. A number of our services behind it, Rule Breaker’s, certainly my old service all the way through. I love Axon Enterprise. It’s a company that we’ve recommended many times. I’m delighted to note that it’s up 92% over these three years, but that’s not going to compare against the downers. When you take it all in all, these five stocks, and let me mention them again, Axon Enterprise, Peloton Interactive, The Trade Desk, which is up 62% these last three years, Unity Software, and finally, Zillow Group, which was cut in half over the last three years, a company I continue to own and believe in for the long term. When you take it all in all, those five stocks averaged a drop of 16 percentage points, down 16.2%. As I mentioned, the market up 28.6%. This final five stock sampler, 5 Stocks Pursued By a Bear indeed were all the way through the last three years, under performing by 44.8 percentage points. Two weeks from now, on this podcast, I’m excited to bring you the July 10th episode. This will be one of the big ones of the year, I think. Reflections on 35 stock samplers. Thirty different times, I picked baskets of five stocks along themes, just like this failed one and it’ll be an opportunity to reflect on what we can all learn together from that experiment. Again, I’m rubbing my hands together in anticipation of that podcast two weeks from now. But for now, let us send off 5 Stocks Pursued By a Bear. Des, please send off that five-stock sampler. The last one to Fool Hala, with I think the appropriately sad music it deserves.


David Gardner: All right. Onto Rule Breaker Mailbag, item Number 5. This one from Paul Nourbash. Paul, thank you for writing in. David, I’ve been a long time follower of Rule Breaker, investing in your podcast. Thank you. Shockwave Medical, ticker symbol S-W-A-V, was one Rule Breaker recommendation that really caught my attention because they adapted the technology using ultrasonic waves that treat kidney stones. They adapted that to treat heart disease; the number one killer in the United States. Shockwave Medical adapted this ultrasonic wave to break up calcium in our arteries behind coronary arterial disease. The technology was safe, effective. It has patents that create a mote. Medicare assigned the company a billing code that boosted revenue.

Paul writes, “I am a healthcare professional in an unrelated field, and I joined the Fool community discussions regarding Shockwave Medical. Tried to help more people understand how amazing this company was, using my medical knowledge.” By the way, the discerning listener will notice he’s using the past tense talking about Shockwave Medical. Some of you, no doubt, shareholders will understand why. It will become clear very shortly. Paul goes on, “I purchased early. I watered my growing flowers. In the end, I had a position that was greater than my Sleep Number.” I’m going to explain a little bit more about that in a sec. Paul goes on, “Just as I started to feel like I might want to sell some shares and trim down the position, Johnson & Johnson purchased the company for $335 a share. My problem was solved, the cash is now in my account. This experience got me thinking about the Sleep Number.” I’m going to pause it right there. Now, again, we have people who’ve listened to this podcast for just days, in some cases, months and years. Those in that last category, years, will remember the six principles of the Rule Breaker portfolio. I think I did that in 2021.

Principle Number 4 of building a portfolio, if you’re a Rule Breaker, is to establish your Sleep Number. That’s exactly what Paul is referring to. Now, Sleep Number is a phrase we’ve tossed around this podcast. It was even a stock on this month’s Market Cap Game Show. But in this context, what Paul means is, what I mean by Sleep Number, which is, what is the percentage? How high would you allow your biggest stock to become as a percentage of your overall portfolio? Your biggest position, how large a slice of your overall pie would you let that become and still be able to sleep at night? That’s why I call it repurposing the phrase, your Sleep Number. For example, if you start to get uncomfortable, if your largest position in your portfolio is, let’s say 10% of the overall portfolio, then I would say that your Sleep Number for you is 10. Once a stock approaches 10% of all of your holdings, that starts to become uncomfortable. You start to lose a little sleep. I’d say, I’m glad you know yourself well enough to have identified that number. By the way, everybody has a different number. We’re all different in different places in life with different risk tolerances, dreams and expectations for our portfolio, different time horizons, etc. That’s why I’ve always encouraged my fellow Fools to think, well, what is my Sleep Number? A reminder that many mutual funds have a very low Sleep Number. They’re required to maintain extreme diversity. Many index funds have Sleep Numbers approaching one. If a single position out of hundreds or thousands of stocks in a fund, if a single one gets to be 1%, the fund managers start to sell it down so it doesn’t become too large a part of the fund.

That’s one extreme, the fund industry. Others, I know people who are very comfortable holding a huge position in just one or a few stocks. They have a much higher Sleep Number. I know people who’ve had Sleep Numbers in excess of 50. For many others, that would be completely inappropriate. They would not sleep if half of everything was in one or let’s say, a couple of stocks. Again, we’re all different. But when Paul is writing about his Sleep Number and Shockwave Medical, you, dear listener, now know exactly what he’s talking about. Paul goes on, “This experience got me thinking about the Sleep Number. I do not believe that the Sleep Number works as a fixed number but should be modified based on a company’s characteristics. My understanding of the Sleep Number is that if my sleep number is 10, I don’t feel comfortable if a single holding in my portfolio is larger than 10% of the entire portfolio. I really like the concept of a Sleep number, but I’m not sure that the same Sleep Number works with all stocks.

For example, if Apple, a company with a market cap of $3 trillion made up 15% of my portfolio, I could probably sleep like a baby without concerns. On the other hand, if a stock with a market cap of $340 million made up more than 10% of my portfolio, the risk would probably keep me up all night. Just a suggestion, but I propose you modify the Sleep Number based on the market cap.” Paul, I really appreciate that point. You did include your own mathematical equation, which basically, there’s different ways of doing this. But you propose looking at whatever is your biggest holding and make that as a percentage of the stock that has the largest market cap in your portfolio.

That’s one way of doing it. But overall, just to go to the general point, I want to say that I generally agree. The market cap of the company that makes up your largest holding does seem relevant to consideration of how large you’d want that to be. I certainly agree that many of us would feel more comfortable with a large position in Apple than in a small cap stock. That’s not always true. Some of us really know that small cap stock. We might even work at that company, let’s say, or be very familiar with its technology, and believe it’s promising. For us, the risk of holding that stock would be much less than other people who hold that same stock. For them, if they don’t understand it as much, their risk is more. That’s the point I’ve tried to make over the years; not everybody can look at the same stock and take on the same risk. If you really know the industry, you’re taking less risk than if I don’t and I hold the same position. We’re getting a little bit into the weeds, that’s my fault.

Paul, what I want to say, top line is, I think that’s a good consideration. I still like a generalized Sleep Number, that’s still how I’m going to talk about it. But when I do talk about this in future, I’m going to agree and point out the nuances that what company is your largest holding seems to be important when you decide what your Sleep Number is. One of the things I love about this podcast is, we can make up language like Sleep Number applied to stocks and then geek out about it for an extended period of time. I hope that was helpful, Paul, and everybody listening. If not, hey, we’ve got our next Mailbag item. Let’s move on to Mailbag item Number 6. All right. Onto Mailbag item Number 6. This one from Professor Herbert, writing in again. Thank you again for a couple of months ago. This one is Mathy. Let’s go investing 101. This might be investing 102, and I appreciate it. Let’s do it. DG, I’m intrigued by the following contention you write. The implied volatility of an equity or other asset classification relative to itself is mean reverting. I’m going to say it again, the implied volatility of an equity or other asset classification relative to itself. The implied volatility relative to itself is mean reverting, would tend to revert back to the mean. Before I get any deeper into math, and especially options, let me welcome our next guest, Jim Mueller. Jim, great to see again.

Jim Mueller: Good to be here, David. Thank you.

David Gardner: Thank you. Jim, obviously, you’ve made a fair amount of your career in and around options at the Motley Fool, so I thought, let’s have Jim in. Let’s talk this through a little bit at a higher level, but not too high a level because a lot of us don’t use options strategies. You are a veteran. Let me go on with the Professor’s note and then open it up for conversation. He goes on to say, “Now, if this is so, it would appear to me that certain options strategies will generally be successful. Namely, writing calls and puts when the implied volatility of the underlying asset is high relative to its average implied relativity, that should be inherently profitable so long as risk is managed reasonably.” Now, I realize I’m using language that may confuse a lot of our listeners. We don’t need to go too deep here, Jim. But he goes on to say, “Conversely, failing to abstain from writing calls and puts when the implied volatility of the underlying asset is low, relative to its average implied volatility will likely be unprofitable.”

He concludes, “My general thoughts are that US equities likely will continue to increase in value greater than inflation over time, more so than most other asset classifications, so I’m mostly a long term US equity investor. I’ve been so for four decades, but it’s never too late to consider other investment ideas. I’ve been expanding my consideration of strategies. Understandably,” he concludes, “The Motley Fool has devoted little or no consideration.” Oh my gosh, really? Of options as an investment vehicle. But I’m wondering whether you personally have considered the possibility that implied volatility of asset classes is inherently mean reverting. Thanks.” Again, I said investing level 102. Jim, what’s the first thought that comes to your mind as you reflect on the Professor’s musings?

Jim Mueller: Well, the first thought that comes to mind is that the Motley Fool has had an options service for 15 years in August. [laughs] It was launched by Jeff Fisher and Jim Gillies as co-advisors, and they ran it for about 10 years as a team. Then I took over, I think it was right at the start of 2020. I’ve been running it for four plus years, four and a half years.

David Gardner: You’re not taking too much umbrage. Obviously, not everybody who listens to this podcast is familiar with all the Motley Fool services. You would want the Professor and everyone else to know that the Motley Fool has offered options, advice for quite a long time.

Jim Mueller: Oh, yeah. We teach people of any level of experience with it how to start off, how to use them Foolishly, capital F, Foolishly.

David Gardner: You bet.

Jim Mueller: That means smartly and without getting into too much, [laughs] hopefully without getting into trouble at all. As he points out, they can be extremely profitable and can boost a portfolio’s returns by 2, 3, 4 percentage points a year. Which, as you know, with compounding, over time, that just really helps grow a portfolio.

David Gardner: Yeah. These options strategies, Jim, obviously are more suitable to more experienced investors, at least Rule Breaker Investing. I haven’t done a lot on options over the years. I tend to stay focused just on individual stocks. I know that’s a huge part of your work as well. You and I have worked together on many services like Motley Fool Stock Advisor over the years, for example, or Motley Fools Supernova. But Jim, especially the conservative approach, writing puts and calls as a harvesting strategy to increase one’s income, this is our primary focus and has been for you. You were recently reviewing the numbers in terms of the advice we’ve given and how it grades out. Can you just share a little bit of that? You shared that with me offline.

Jim Mueller: Yeah. Of the [inaudible] 14 years, the three of us, Jeff Fisher, Jim Gillies, and I, have run a total of 280 closed strategies. That is strategies that have ended, and we’ve got the final number. Of those, 162 of them, well over half, were either written puts or covered calls. For the uninitiated, a covered call is where you buy shares and then sell a call for that income.

For the income you’re after, and what you’re doing is you’re selling the promise to sell those shares at a particular price. That’s about as far as I want to get into that. Because there’s a whole bunch of learning you can do online to find out about it. But note, most of that is for short term trading. We approach options as investors with the same Motley Fool long term mindset. So it’s company first, not ticker first, and we want to choose companies that we would be willing to invest by buying shares in and not just trying to play games on the tickers. Because you hear so many times that options you’re just going to lose money, but no, we have 83.9% of all our strategies of all those 280 have ended up making money. Whether it’s only a few dollar or several thousand dollars. The range is very wide. Of the covered calls and written puts, 89.5% of the 162 have made money. Of those numbers, 23 are mine, and 23 have made money by the time they closed.

David Gardner: Well we’re allowed a little bit of bragging on this podcast. I do it sometimes myself. I want to brag for you because I just, of course, shared one of my worst performers of a five stock sampler in the 30 I’ve done historically on this podcast, and those were dogs. You have a higher hit rate than I do with my stock picks when it comes to these options strategies. Again, this is not really the domain of rule breaker investing, but I like the question from the professor. I like high level questions. I also like to have friends who can speak at high levels. So let me conclude the options portion by simply saying, we have offered a lot of advice. In contrast to what most options vice is out there, where you have people saying, if a certain stock hits a certain price, three months from now we’re going to make a ton of money. Those are generally losing strategies that we do not endorse and really never have at the Motley Fool. We’re on the other side of those trades conservatively offering the opportunity to have our shares called away, and people who adopt this strategy get paid in effect interest by others for that privilege. This has always been how the Motley Fool rolls with options. Jim, did I speak truth?

Jim Mueller: That’s definitely truth. But if we have time, I’d like to address one more point on what the professor wrote. He implied volatility. He is entirely correct that when implied volatility is high, the option premiums also tend to be high. That’s because the implied volatility goes into the price of the option. So it can be very profitable selling options, writing options, whether it’s puts or covered calls and generate that income. When the implied volatility falls down, it gets down to 25, 20%, 15% sometimes, then those premiums don’t pay very much, and you might want to avoid doing that. We have guidelines that tend to give the green light on a particular strategy, and that tends to line up more with a higher implied volatility. But I wouldn’t look at just the implied volatility of the entire market like the VIX from the CBOE. It’s really hard to figure out the implied volatility of a stock over time. But if you follow the guidelines such as a 1% per month yield or having the strike price in the option, certain distance from the share price. Sticking to those will help give you many more profitable trades than ignoring those and trying to squeeze out every penny you can.

David Gardner: Thank you for that, Jim, and again, Options advice on Rule Breaker Investing doesn’t happen very often. We gave a little bit there just for my own small part since the professor also just asked me, have I personally considered the possibility that the implied volatility of asset classes is inherently mean reverting? I would say I would generally agree that it is. I don’t think that volatility radically changes or disrupts or disconnects from previous eras. We all know times in history, for example, COVID, when the stock market went crazy down and crazy up really fast, where we depart from traditional levels, we leave the mean operating outside another standard deviation or two of crazy volatility. But yes, I think it generally does revert back to what you’d expect. Jim, we’re nothing, if not long term at the Motley Fool.

For me, I prefer more thinking just in terms of what is the stock market’s traditional return? I think less about Betas and the movements of stocks and how fast they move up or down against the market. I’d much rather just stay focused simply on finding great companies and owning them for much longer than Wall Street will hold them. For me, that’s been my number 1 tip to beating the market, and I’m happy to share it every week on this podcast. But to the extent that my modest views on mean reversion are of any interest, I wanted to speak to the professor as well. Jim, before I let you go, any final takeaway or a bit of advice before we hit our last two Mailbag points?

Jim Mueller: Well, you can be a very successful investor without using options. But I have found that they scratch an itch of wanting to do something and doing that with options rather than with your long term stock holdings satisfies that itch for me, at least.

David Gardner: Really well said. Jim Mueller, thank you for all your contributions over these many years of the Motley. We’ll keep up the great work, and thanks for helping me out on Rule Breaker Mailbag Item number 6. Fool on.

Jim Mueller: My pleasure. Thanks, David.

David Gardner: All right, on the Rule Breaker Mailbag Item number 7. This one from Adam Nelson. Now, Adam, along with a number of other names, I’ve gotten to rock this week, like Jason Trice, for example, earlier, our pro shop guy, my friend, Mike. One of our guests on our historic 100th mailbag earlier this year, Adam Nelson, the man who is singularly responsible for one of the great Mailbag notes ever. When he suggested an improvement to our Market Cap Game Show that long time fans will instantly recognize. For the rest, well, I’ll leave it as a mystery for you to discover, should you choose to research the work of this great man, Adam Nelson.

Adam wrote and, hi, David. It’s been a while since I’ve dropped you a note. First, I’ll say thank you again for all you do on the podcast. When we last talked for the 100th Mailbag, I was in the midst of a potential job change, and I’m happy to say, I’ve landed in a dream role, on a dream team. So thank you for all the encouragement over the years. Well, you’re very welcome. I think I did very little, Adam, but congratulations to you. Moving to my Mailbag note, after listening to your episode about laws from May last month, I got to thinking about how much I like razors. Not shaving razors, though I do enjoy a double edged safety razor and the pleasant experience of a badger hair brush. Now, I’m talking about philosophical razors, Adam writes, which are just rules that, “cut out conclusions” which have a low probability of being correct as an example. I’ve used Hanlon’s razor to great effect in my life. It states, and I quote, “Never attribute to malice, that which is adequately explained by ignorance.”

Adam goes on. If you look up the Wikipedia for Hanlon’s razor, there are a number of other references from history that perhaps state the same principle more elegantly. I’d love to hear an episode that highlights some of your favorite razors and how they might apply to life or investing. May I even propose Gardner’s razor? This is yours, not mine, Adam, but you said, never attribute to investing skill, that which is adequately explained by traders luck. Fool on, Adam Nelson. Well, Adam, I really appreciate you writing, and always good to hear from you first of all. Second, I love Hanlon’s razor, I had never heard that before. Maybe I’d heard it in some other form, but I thought you phrased it quite elegantly. Here it is again, never attribute to malice that which is adequately explained by ignorance. One thing we learned from Shirzad Chamine on this podcast over the years, the author of Positive Intelligence. One thing we learned is, that people tend to judge each other far too quickly. A lot of us walk around with what Shirzad would say is a judge, a little judge in your head constantly saying, well, of course, he looks that way because he’s so that, or of course, she said that, because she’s always saying that. We often, even if we don’t voice it, we’re making judgments, often snap judgments, and it turns out we’re wrong.

A fair amount of the time. No wrong all the time. Otherwise, that would be a crazy thing if you walked around and you were wrong about everything you thought. But we tend to too quickly judge situations we’re not familiar enough with or others where we’re really not inside their head. We’re just inside our own. Yes, there is a tendency to say, well, they just said or did that because they don’t like me, or they don’t like what I’m doing or saying or what I’m about, when in fact, Hanlon’s razor encourages us not to attribute that to malice when it could quite adequately be explained by ignorance. It may be that that person who did or said that thing just actually doesn’t know, doesn’t know you, doesn’t know the world, doesn’t know the context well enough. So don’t assume that they don’t like you. Assume that they just don’t know. Which is actually a comforting position because it’s fun to think, well, it’s not that they don’t like me, it’s just that they’re ignorant. I don’t mean to be cynical about this, but I think that Hanlon’s razor can be used to great effect, and it comes from somebody Adam Nelson who says it has been used to great effect in your own life. I think we can all borrow a little bit from that.

I’m not sure in a podcast that already has pet perks, pet peeves, and our I Fought the Law and the Law Won episode. I don’t think I need a new episodic series around razors, but I think I may pull back out Hanlon’s razor in some future, I Fought the Law and the Law Won, because it totally fits well with that. Adam, thank you for writing it and helping us all get a little smarter. I would say, you’re happier, and maybe even a little richer with this note too. Well, from Hanlon, we go to Rule Breaker Mailbag Item number 8, which is written by Ross Hanson.

So from Hanlon to Hanson, we close this month’s mailbag. “Hi, David,” Ross writes. “I’ve been a fan of the Motley Fool since 2000 when I started reading your articles in the Des Moine Register. This was during my first year at college at my first job in a new town. Young, with time on my side, I maxed out my employer 401(k) match every year. At some point in the mid-2000s, I started dabbling in investing. One of my first purchases was Nuance, a Motley Fool recommendation.” Let me pause for a second there and say, I think that was mine, although other services, maybe Hidden Gems, I think had Nuance as well. I will say this, my recollection is, Nuance was a long term underperformer for me over the years that I picked it. Thanks for writing in, Ross. This is a week of wins and losses. Mostly for me losses.

Let’s keep going. “One of my first purchases was Nuance, a Motley Fool recommendation. The information provided by the Motley Fool seemed to make sense, Nuance was possessed of natural language processing algorithms. We’re talking about 10 plus years ago when more audio content started being relevant on the Internet, and you could do speech recognition and other things. It became a company that eventually Microsoft bought a few years ago at a nice 22% boost over its previous day’s closing price, but my recollection is over the years Nuance Communications ticker symbol NUAN was mostly a loser. It was an exciting technology at the time, though, let’s go back to Ross’s note. I didn’t do very well on the stock, held for years and eventually sold. For some time, I drifted away from the Motley Fool, but would check in once in a while. I picked up a few more stocks in the late 2000s, including Apple and Netflix, and I still hold them today. Without the guidance of the Motley Fool, I would not have held these companies for so long and would have missed out on tremendous gains. One of your lessons is that the winners will far outweigh your losers by letting your winners win, and to add up, don’t double down. I recall you once compared it to a horse race.

I have plenty of mediocre and losing stocks, but my winners easily wipe out those losses a valuable lesson from the Motley fool.” Thank you for taking the time to articulate that, Ross. You do say in a post script to your note that you especially enjoy the Market Cap Game Show, and thank you for that, you give Bill Barker a compliment on his quiet, smooth, deep voice, and you enjoyed the ChatGPT interview earlier this month. But mainly, I wanted to highlight what you said because this is such a beautiful example. Again, this is someone else’s lived experience. This isn’t just me whistling Dixie here. Buying a stock that under performed for some years, holding onto it, and unfortunately not benefiting from it. But then doing that with not just one stock, but another stock and another stock after that. Ross Hanson found his way into Apple in the late 2000s, and Netflix, the same era. Here we are now 15 years later. Those stocks have returned dozens of times of their value. That is the true lesson, I think of Rule Breaker investing, and why I’m so happy that you know habits number 1 and 2 of the Rule Breaker investor, Ross. The first one is Rule number 1, let your winners run high. Yes, that’s exactly what you did. Rule number 2 is to add up, don’t double down. So when you have a loser stock like Nuance or Peloton mentioned earlier this week, don’t add new money to stocks that are going down that aren’t doing well for you trying to get back to even.

That’s what too much of the world is trying to do, and it doesn’t really work. The best thing you could do as a Rule Breaker investor is to ask, What is really doing well? What are the blooms that are popping? What are the flowers that are making me happy, and water those. That’s exactly what you’ve done, as I heard you say with Apple and Netflix, and earlier, we heard about Shockwave Medical, a tremendous Rule Breaker winner and another member who took the time to add to that over time, ending up with a sleep number that made him slightly uncomfortable. Great timing, enabling him to exit at a good point, anyway.

But I hope Ross Hanson’s lesson is a good bow to tie around this particular June 2024 Mailbag of this podcast because it is indeed a valuable lesson from the Motley Fool. That is to buy winners, winners tend to keep on winning. Let them grow over time. Don’t jump in and jump out. Here’s a nuance, your Nuances will quickly be forgotten and replaced by your Apples and your Netflixes, which on their own, will make up for every loser you’ve ever had and leave a lot more money on the table. The greatest stock ever yet picked in Motley Fool Rule Breakers history last I checked it was Mercado Libre on its own. It has made up for every loser the Rule Breaker service has ever had and leaves profit on the table. This is a truism most people don’t know because they live too much in fear of losing and don’t realize that winners can go up forever, losers can only lose Peloton, 96%. Thanks for another great Mailbag, I hope your summer’s proceeding well dear Fool, Fool on.

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