It's the final Wednesday of June twenty twenty four, and so it's your mailbag. 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 fool's 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.
It's the Rule Breaker Investing podcast with Motley Fool cofounder David Gardner. Welcome back to Rule Breaker Investing. It was a really fun month, and 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 one, the launch of our new episodic series featuring not our pet peeves, but pet perks, the small things that make life better.
And then we started this month of June with ChatGPT interviewing me about Rule Breaker Investing. Those are the three episodes that this mailbag reflects back on. Thank you as always for your notes. And 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.
R b I at fool dot com is our mailbag address, and let me know what you've done over the last year to create financial freedom, 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 two. That is our annual July fourth extravaganza. So, again, our email address, r b I at fool dot com. You can tweet us on Twitter x at r b I podcast, and we'll feature you on next week's show. Alright. 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 m f one.
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 Aponecuit Regional High School, Mason Masouch. 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 one hundred eighty 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 ten hours. So, 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 podcasts and creating a list of pet perks was right up her alley.
Thank you, Meredith. And that idea came from Ben Adams. I'm gonna do a little storytelling about that a little bit later, but we'll park that for now. So that was a fun episode of do. We will certainly return to pet perks in future. And 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 Thanks for keeping me entertained in the air.
And 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. And 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.
And 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. So let's get started. We have eight mailbag items this episode. Mailbag item number one. Alright. Rule Breaker mailbag item number one. You know, it's not often we play outtakes on the Rule Breaker Investing podcast.
I don't even think ours are that worthwhile. I mean, people used to pay, I don't know, an extra twenty four ninety nine for the DVD with the outtakes. We don't charge anything. This one's gonna be free. This is almost a first on the 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. So stock number eight 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 seven to three, but we used a backup stock because of the clip I'm about to play for you from last week's show, stock number eight. Let's move on to stock number eight. Bill Barker for this next company, I'm gonna open up its website, and I'm gonna read to you the prominent tagline featured in a can't miss big font right there, home page.
And then maybe would you make a guess as to the company? This is not Okay. Scorable. We're just having fun. I guess I have to. You have to say yes to that. Here it is. Technology is our how, and people are our why. McDonald. I think when I when I read that, I think this could be any company. That's why it's a completely unfair question. I think McDonald's is a great answer. I I don't think that's the answer, but it's a great answer.
And Dava. And it still makes me laugh, Bill Barker, to think that you could pull that generic tagline and immediately recognize it, Bill, as the actual tagline used by this small cap company that many of us had never heard of. Bill, how did you do that? Well, maybe I'm just a motto savant, but maybe not.
Yeah. 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 happen 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. And, it was, you know, very fun to make it, appear for a couple of nanoseconds like I was a lot smarter than I really am. Bill, I think most people 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 Fool's 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 full five hundred the stocks. I don't know what we're about to pick next. The stocks that we're gonna feature on the market cap game show. So 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, and, Nava, utterly flummoxed me.
Well, yeah, it does sound like a motto that might have been generated by AI, as is absolutely, vapid. But probably not. You know? I mean, I think that as as we chatted, later on, you know, you can have a motto of that, within the company is very meaningful, but, saying it to the rest of the world, it just sounds like, that's that's that's nice. Can you just give us some real information? Well said, Bill. We're gonna talk just a little bit more about Endava in a sec.
But there's one more outtake we'll play, just a one 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 DAVA. Bill? Pause. David, you're gonna love this. I just wrote this up. Okay. So is this about to be this is about to come out? Yeah. So we can't do that. Great. How the would I go in Tava?
The sadness I had to think about. It was like, I was listening to the the quarterly earnings record. Like, I was listening to this old old motto there. Like, yesterday, I had, like, oh my god. What did I write up yesterday? I am like Like, this is possibly one of the great modes of our game show, and I don't think it's ever gonna air now. It should I I have a backup stock, so I'm always It should one hundred I can't believe that. That one hun yeah.
And and by the way, he just wrote it up for the service that we run together. And hearing that again, that is about as hard as I can cackle spontaneously laughing. And, Bill, those are the first bleep outs that we've really ever had on this podcast, but it was it was hilarious. Yeah. Well, I'm sorry about the language, but it, it called for it in the moment that, that I would know such a, you know, random fact as as Andava's motto.
I I probably won't be able to tell that to you in a couple weeks. You know? That's the kind of kind of fact that will just, leave my brain. Bill, I know you're not gonna 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?
Yeah. The thesis, at least my thesis, and it's been recommended a number of times, but it has, suffered since the, sort of late twenty twenty one peak that it hit as as a stock. It's continued to grow, and, it's taken a little bit of a pause, most recently, on on revenue growth, and, but there's a good longer term growth story for this British software, IT services, consultancy.
And I think that that the price is attractive, and and it's, something that's, you know, 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, the story here is intact, and and I think that it's gonna be okay. Alright. Thank you, Bill. And, yes, I see the stock chart not looking pretty over the last couple of years, so 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, and 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. Well, yeah.
The game theory was gonna be, very interesting because he knew that I knew exactly what the market cap was, and the range that I would give him would, you know, maybe be right. Maybe I would have to be wrong, but seemingly, you know, I knew the market cap better than he did because I had just written it up and, you know, he was generally aware, but not as to the second decimal point that I might have been. So, there was there was an interesting game that was about to unfold if we had, continued.
That was gonna become about as as the market 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 seven to three, sans and Dava associates.
Thanks. I will see you then, if not before. Thank you, Bill. Fool on. Fool on. Alright. On to rule breaker, mailbag item number two. 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 Impactful
Fund. Thank you for joining us on this mailbag, Sean Milliken. Sean, how are you doing? I'm doing great, David. Thanks so much for having me. I'm excited to talk a little bit about, the impactful fund. Let's do it. Sean, start by telling us just a little bit about yourself, your background. What led you to find the full foundation? Well, I was 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. And so it was kinda 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 of schools.
And I 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 Mission Fish. It was one of the first ways that people could give, contribute to their favorite cause online.
We partnered up with eBay to create a program where they 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.
And so, a lot of my background led me to, when, The Motley Fool was starting the foundation, I was asked to, serve on the forming task force, and then as a board member and helping to to shape the direction of the organization. And hopefully, I've had some small part in in some of the successes had to date. You bet. And 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. So you recently resigned from our board in order to be the managing director of the impactful that's right. Impact with f o o l on the end. The Impactful Fund. Sean, can you share the vision, the primary goals of the Impactful Fund?
Yeah. Well, you you mentioned the, the play on words with f o o l. We also sometimes refer to it as the IF fund, taking the acronyms from Impact in Full. Because as a board, you know, something that The Motley Fool Foundation is laser focused on is helping people take their next step, in their journey towards financial freedom with a specific emphasis on those people that are living paycheck to paycheck. You know, we have a real serious problem here in this country, that seven out of ten people.
And the foundation is really doing all it can to stand up programs, to invest in solutions to help people take that next step towards financial freedom. And 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 will, are aligned with us in our mission.
And, we've been, making grants to what here for we've called rule financial freedom rule breakers. Those social entrepreneurs that have come up with great ideas, for helping people take their next step, towards financial freedom. And 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 towards 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?
And that's really, what we see as the greatest potential for what is the impactful fund. As we will find 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 between one and three million dollar annual operating. And I'm glad you mentioned that, Sean, because for a lot of listeners, I mean, we we all hear about organizations doing great work out there.
And as you mentioned, our rule breakers program, which has been a focus of ours 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 three million dollar size organization that is our focus with the Impact Full Fund? Yeah, David. I'm I'm glad you asked.
You know, 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 hopped on board to test out this new model. Yep. But they're not yet ready for what I would call institutional funding.
It's different in the nonprofit world. Those tend to be the Mackenzie Scott's 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. But what those institutional funders need is a track record of success, metrics that they can rely on.
And, 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. And so that's where we think we can come in. So we'll be making a three year commitment of three hundred thousand dollars. One hundred thousand dollars each of those three years. But equally, if not more important, is we will provide them with a scaling partner.
A member of the Motley Fool Foundation team, that has has lived experience in taking an organization from young organization into established organization. Has those magic eyes that can look at the the critical, you know, inflection points that our 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. Well, thank you.
And 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. And indeed, a lot of people listening to me now do enjoy a measure of or full full on financial freedom.
And I mentioned earlier this podcast, next week we're gonna 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 to 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 impactful fund is aiming to do. In closing, Sean, the focus is initially gonna 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 your experience is just outstanding in this area. But we're gonna start with the focus on the greater Washington DC area. It's obviously the nation's capital and includes Maryland, Virginia, West Virginia. There is you're putting out a call for nominations for organizations that we can work with at a hyper local 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? Yeah. So I I should explain that the the original the the goal for our fund, this first fund, is five and a quarter million dollars, and that will support eight social entrepreneurs through the life cycle of this three years. And, 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. And so we're gonna 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's available at full foundation dot org forward slash if fund. If you go, you'll learn more about the fund. There is a easy way to nominate an organization. It takes about ten minutes, if that. We want to know. We we know that full their the full 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. So please go on and nominate. There's other ways you can get involved. We are still we we'd love to expand our capacity to provide support and services to additional impactfuls.
And so 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 or one of the other impactful team members. And we'd love to have that conversation with you. And finally, there's a way where you can sign up to 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.
Well, there's no question that the Motley Fool community powers so much of our efforts at the company. And so, Sean, you're pointing to how any listener right now could come and help us out, and I would love that. This 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 index toward people who have capital, who are beyond living paycheck to paycheck, and we're trying to go out one more concentric circle. So, again, Sean, thank you for making yourself available. And as you mentioned, full foundation dot org slash I f f u n d. That's just short for the if fund is the way for people to get into contact. Any final message you wanna leave us with?
You know, at the foundation, we have big aspirations for helping solve at least be a a contributor to solving the big challenge that I outlined earlier. And, it's no coincidence that this is the fund. You know, 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, you will join us, in making it possible.
Thank you, Sean Milliken, managing director of the Impact Full Fund. Yep. 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. So full foundation dot org. Sean, good luck on getting things started this summer. Excited for people to reach out to you.
David, thank you for your own contribution to this effort, for your leadership of The Motley Fool Foundation and helping us spread the word, about the F Fund. Very grateful. Thank you. Alright. On the rule breaker mailbag item number three. This one comes from Ben Adams, and it's just reflecting again on our pet perks episode earlier this month. Again, the number of tweets and comments about it.
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, you know, 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. But it was so much fun to present a Pet Perks episode, and Ben 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 twenty twenty one and created that episode earlier this month. He said it did feel far more foolish to him than Pat Peeves.
He's been a Rule Breakers member for ten years now and a podcast listener since the very beginning. And just a delight, Ben, for you to share those things with me and how the Fools made a positive impact on your life. You know, when you first suggested that pet perks episode, you mentioned one at the time. It was autumn. And you said, and I'm just gonna add this, this is a bonus pet perk for those who listen 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. Right? One of the joys of being an eternal optimist, I guess, said Ben Adams. So and and he and I connected on that, and I 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. And it is so energizing when all of a sudden, things start to heat up. I really like a hot, hot, hot summer, and we got one this past weekend tipping a hundred degrees for the first time in eight years in Washington DC. And 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, etcetera. So, yes, that is definitely a pet perk. And thank you again, Ben Adams, for suggesting we highlight the little things that make everything better. Alright. On to rule breaker, mailbag item number four, and this one is to close out, in brief, the thirtieth and final five stock sampler that I've done on this podcast. The date was June sixteenth twenty twenty one. We were all penned up due to COVID.
The stock market had been a raging success over the previous couple of months. Turns out not great timing for picking stocks, especially given what would happen to the market in twenty twenty two, especially. And a couple of these COVID stocks have done incredibly poorly. So I regret to say my thirtieth 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 Tale, his most famous stage direction, exit pursued The worst performer was Peloton Interactive. Stocks. The worst performer was Peloton Interactive. It was at a hundred five that day. Today, get this. This is astonishing. This is one of the worst stocks 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 one hundred five dollars a share in June three years ago to three dollars and eighty one cents when this five stock sampler concluded earlier this month on June fourteenth.
Just for perspective's sake, the stock market over those three years, June sixteenth twenty twenty one to June fourteenth twenty twenty four was up twenty eight point six percent. That was the S and P five hundred. 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 ninety six percent 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, etcetera. 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 thirty five stock samplers, overall 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.
So 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 the market taking risk, and we're gonna take it on the chin as I did with Peloton. Also, an incredibly poor performer, Unity Software.
The company behind so much app creation, so many 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 ninety six at the height of COVID, June of twenty twenty one, dropped to sixteen when this five stock sampler closed out just a few weeks ago. So that is a loss of eighty three percent. You can imagine with two stocks down ninety six and eighty three percent respectively.
With the market up twenty nine percent, 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 three years ago at a hundred fifty two dollars a share. June fourteenth this year, up to two hundred ninety two dollars a share. I think a lot of Motley Fool members own this stock. A number of our services behind it, rule breakers, certainly my old service all the way through.
So I love Axon Enterprise. It's a company that we've recommended many times. I'm delighted to note that it's up ninety two percent over these three years, but that's not gonna compare against the downers.
And 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 sixty two percent 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 sixteen percentage points, down sixteen point two percent.
As I mentioned, the market up twenty eight point six percent. So this final five stock sampler, five stocks pursued by a bear indeed were all the way through the last three years underperforming by forty four point eight percentage points. Two weeks from now on this podcast, I'm excited to bring you the July tenth episode. This will be one of the big ones of the year, I think. Reflections on thirty five stock samplers.
Thirty different times I pick 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 five stocks pursued by Abarendez. Please send off that five stock sampler, the last one, to Foolhala with, I think, the appropriately sad music it deserves.
Alright. Onto rule breaker mailbag item number five. This one from Paul Norbash. 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 SWAV, 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 moat, and Medicare assigned the company a billing code that boosted revenue. Paul writes, I'm a health care professional in an unrelated field, and I joined the full 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. And in the end, I had a position that was greater than my sleep number. I'm gonna explain a little bit more about that in a sec.
Paul goes on, just as I started to feel like I might wanna sell some shares and trim down the position, Johnson and Johnson purchased the company for three hundred thirty five dollars a share. My problem was solved. The cash is now in my account. This experience got me thinking about the sleep number. I'm gonna 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 two thousand twenty one, And principle number four of building a portfolio, if you're a rule breaker, is to establish your sleep number, and 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? And that's why I call it repurposing the phrase, your sleep number.
So for example, if you start to get uncomfortable, if your largest position in your portfolio is, let's say, ten percent of the overall portfolio, then I would say that your sleep number for you is ten. Once a stock approaches ten percent 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, etcetera. And 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 one percent, 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 fifty. 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. So 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 ten, I don't feel comfortable if a single holding in my portfolio is larger than ten percent 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 three trillion dollars, made up fifteen percent of my portfolio, I could probably sleep like a baby without concerns.
On the other hand, if a stock with a market cap of three hundred forty million dollars made up more than ten percent 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. And, 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 wanna 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 a 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. So we're getting a little bit into the weeds.
That's my fault, Paul. What I wanna say top line is, I think that's a good consideration. I still like a generalized sleep number. That's still how I'm gonna 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.
You know, 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 six. Alright. On to mailbag item number six. This one from professor Hubbard writing in again. Thank you again for a couple of months ago. This one is mathy.
Let's go investing one zero one. This might be investing one zero two, and I appreciate it. Let's do it. DG, I'm intrigued by the following contention. You're right. The implied volatility of an equity or other asset class vacation relative to itself is mean reverting. I'm gonna 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 you again. Good to be here, David. Thank you. Thank you. And, Jim, obviously, you've made a a fair amount of your career in and around options at the Motley Fool. So I thought let's let's have Jim in, and let's talk this through a little bit at a higher level, but not too high level because a lot of us don't use option 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. So, again, I said investing level one zero two.
Jim, what's the first thought that comes to your mind as you reflect on the professor's musings? Well, the first thought that comes to mind is that The Motley Fool has had an option service for fifteen years in in August. It was it was launched by Jeff Fisher and Jim Gillies as co advisers, and they ran it for about ten years as as a team. And then I took over I think it was the, right at the start of twenty twenty. So I've been running it for, four plus years, four and a half years.
So you're not taking too much umbrage. Obviously, not everybody who listens to this podcast is familiar with all the Motley Fool services. Oh, yeah. You would want the professor and everyone else to know that The Motley Fool has offered options, advice for quite a long time. Oh, yeah. And we teach people, of any level of experience with it, how to start off, how to use them foolishly, capital f, foolishly.
They use smartly and without, without, getting into too much hopefully, without getting into trouble at all. But, so, and they can be as he points out, they can be extremely profitable and can boost a portfolio's returns by two, three, four percentage points a year, which as you know with compounding over time, that just really helps, grow a portfolio. Yeah. And 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 Fool 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.
And you were recently reviewing the numbers in terms of sort 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. Yeah. So of the just shy of fourteen years, we have the three of us, Jeff, Jeff Fisher, Jim Gillies, and I have run a total of two hundred and eighty closed strategies. That is strategies that have ended, and we've got the final number. Mhmm. K?
Of those, a hundred and sixty two of them, well over half, were either written puts or covered calls. And, for the un in 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 at a particular price. And that's about as far as I wanna get into that. Yeah. Because there's a whole bunch of, learning you can do online to to find out about it.
But note, most of that is for short term trading. We approach options as investors for with 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 not just, trying to play games on the tickers.
Because you hear so many so many times that options, you're just gonna lose money, but, no. We have, eighty three point nine percent of all our strategies, of all those two hundred and eighty, have ended up making money, whether it's only a few dollars or several thousand dollars. The range is very wide. And of the of the covered calls and written puts, eighty nine point five percent of the hundred and sixty two have made money.
And I've got twenty three of my of those, numbers, twenty three of those are mine, and twenty three have made money by the time they closed. So Well and, you know, we're allowed a little bit of bragging on this podcast. I do it sometimes myself. I wanna brag for you because I just, of course, shared one of my worst performers of a five stock sampler in the thirty I've done historically on this podcast, and those were dogs.
And you have a higher hit rate than I do with my stock picks when it comes to these options strategies. And, again, this is not really the domain of rule breaker investing, but I like the question for 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 advice is out there where you have people saying if a certain stock hits a certain price three months from now, we're gonna 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. And this has always been how the Motley Fool rolls with options. Jim, did I speak truth? That's that's, but it if if we have time, I'd like to address one more point on on what the professor wrote, the implied volatility.
He is entirely correct that when implied volatility is is high, the option premiums also tend to be high. That's because the implied volatility goes into the price of the option. And, and so it can be very profitable selling options, writing options, whether it's puts or covered calls and and generate that income.
And when the implied volatility falls down, down gets down to twenty five, twenty percent, fifteen percent sometimes, then those premiums don't pay very much, and you might wanna avoid doing that. But we have guidelines, that, tend to tend to say tend to give the green light on on a particular strategy, and that tends to line up more with a higher implied volatility. And if, but I I wouldn't look at just the implied volatility of the entire market like the VIX from the CBOE.
I'd and it's really hard to figure out the implied volatility of a single comp a stock over time. But, if you're if you follow the the guidelines, such as a one percent per month yield or, having the strike price a certain distance from of the strike price of the option, certain distance from the share price. Sticking to those will help, give you much, many, many more profitable trades, than, ignoring those and trying to squeeze out every penny you can.
And 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 out 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. And, you know, 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 I'd much rather just stay focused simply on finding great companies and owning them for much longer than Wall Street will hold them. That one is for me, that's been my number one 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 bit of advice before we hit our last two mailbag points? 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 stock long term stock holdings, satisfies that edge for me at least. Really well said. Jim Mueller, thank you for all your contributions over these many years at The Motley Fool.
Keep up the great work, and thanks for helping me out on rule breaker mailbag item number six. Full on. My pleasure. Thanks, David. Alright. On to rule breaker, mailback item number seven. 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 hundredth 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 longtime fans will instantly recognize.
And 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. Okay. Adam wrote in, 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 hundredth 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 just rules that in quotes 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, end quote. 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?
And 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 in. 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. And here it is again. Never attribute to malice that which is adequately explained by ignorance.
You know, one thing we learned from Shirzad Shamine 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. Not wrong all the time. Otherwise, that would be a crazy thing if you walked around, you were wrong about everything you thought. But we tend to too quickly to judge situations we're not familiar enough with or others where we're really not inside their head. We're just inside our own.
And, 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.
And so don't assume that they don't like you. Assume that they just don't know, which is actually kind of a comforting position because it's sort of fun to think, well, it's not that they don't like me. It's just that they're ignorant. And 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, and I think we could 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 in and helping us all get a little smarter. I would say, yeah, happier, maybe even a little richer with this note too.
Alright. Well, from Hanlon, we go to rule breaker mailbag item number eight, which is written by Ross Hansen. So from Hanlon to Hansen, we close this month's mailbag. Hi, David. Ross writes, I've been a fan of The Motley Fool since two thousand when I started reading your articles in the Des Moines 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 four zero one k match every year.
And at some point in the mid two thousands, I started dabbling in investing. One of my first purchases was Nuance, a Motley Fool recommendation. Let me pause for a sec there and say, I think that was mine although at 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 ten 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 twenty two percent boost over its previous days closing price.
But my recollection is over the years, Nuance Communications ticker symbol n u a n 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 two thousands, 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.
And thank you for taking the time to articulate that, Ross. You do say in a postscript 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 chat GBT interview earlier this month, but mainly, I wanted to highlight what you said because this is such a beautiful example. And again, this is someone else's lived experience. This isn't just me whistling Dixie here.
Buying a stock that underperformed for some years, holding on to it, and unfortunately not benefiting from it. But then doing that with not just one stock, but another stock and another stock after that. And Ross Hansen found his way into Apple in the late two thousands and Netflix, the same era. And here we are now fifteen years later, those stocks have returned dozens of times of their value.
And that is the true lesson, I think, of rule breaker investing and why I'm so happy that you know habits number one and two of the rule breaker investor, Ross. The first one is rule number one, let your winners run high. And, yes, that's exactly what you did. And rule number two 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 can 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.
And 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 twenty twenty four mailbag of this podcast because it is indeed a valuable lesson from The Motley Fool, and that is to buy winners. Winners tend to keep on winning. Let them grow over time. Don't jump in and jump out and your nuances 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 ninety six percent. Thanks for another great mailbag. I hope your summer is proceeding well, dear fool. Full 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 r b I dot fool dot com.