How Motley Fool helps normal people understand investing

For this What’s Working in Washington EXTRA episode, we spoke with Tom Gardner, co-founder of entrepreneurial startup Motley Fool. Motley Fool is a long-running company dedicated to helping normal people understand investing. Now, the business provides information to investors across the world. We spoke with Gardner to better understand how the market is flowing with recent tax cuts, and to better understand the company’s long history.

ABERMAN: So, many entrepreneurs start businesses because there’s something that just bothers them. I see that a lot, you know? They just have to fix this. Is that the story of how you and your brother started Motley Fool?

GARDNER: I think we were maybe both bothered that we didn’t know what to do with our professional lives. So, that would be like the catalyst, but we were taught how to invest. We grew up in Washington, D.C., we were taught by our father how to invest, and really as a game, and just as a way to learn about the world, not as a big risk-reward, and very intense set of decisions you had to make, but instead, hey, we own shares of the Washington Post. Dad took David to the Washington Post shareholder meeting, David met Warren Buffett there as a child.

Dad talked us through, you know, you open the sports section, this costs money to make this newspaper, this is how it’s priced. So, investing was a way to give us context on the world, and we thought, I had a great time at Brown University, and I am very happy to see Brown University really embracing entrepreneurship more and more. I didn’t really get that feeling on the campus of Brown when I was there, and that doesn’t take anything away from school. I loved it. It’s just that corporations were viewed as something else, some big structure with sinister people, and big legal departments controlling employees, and delivering dangerous products to customers.

ABERMAN: Otherwise known as The Man.

GARDNER: Exactly. That’s the most succinct way to put it, I apologize for the longer description.

ABERMAN: It’s okay! It’s very descriptive of what I think a lot of us who grew up in academic environments, commercial activity was something that other people did, like you didn’t want your hands dirty.

Subscribe to the What’s Working in Washington podcast on iTunes.

GARDNER: Right? You wouldn’t think that it was a game, with innovation entrepreneurship, people, culture, decision-making, mistakes, successes, and an opportunity for you to take your savings and put it behind some of these companies, and actually see if you do a good job of selecting what will be the winners as businesses over a long term. So, we decided, guys, we had so much fun learning this at home, and why don’t we take it forward to the world? And it just so happened the internet showed up right after we got out of college, and that was a perfect place to start sharing.

ABERMAN: Well, I always thought it was really nice of Al Gore to invent it for both of us, it’s changed our lives. But you know, when you think about it, though, you grew up in an environment, and I grew up a legal environment, my dad was a lawyer, so I ended up going to law school. You know, we tend to follow, and if we’re fortunate enough, to follow the pathways our parents provide, but yet, you could’ve easily, with that kind of background, gone off to Wall Street, joined a large bulge bracket firm, and just played the party line. But yet, you and your brother really did almost shake your fists to convention when you started this business. What was it about that mentality that caused you to want to go against the grain?

GARDNER: Well, I don’t want to be too disrespectful of Wall Street. No one would want me to do that. I would just say that my association with Wall Street, particularly for people that are joining in their twenties, is that it’s more often than not a sales and transactional environment than it is a research and analysis. It’s more short term in nature than it is like long term. I’ve had many people at large firms tell me, well, I wish we could invest the way that you do, but we’re held to a standard, we’re held to account every three months.

Some people have said, I’m held responsible every day. Well, at the Motley Fool, we’re holding ourselves accountable over five and ten year periods. That’s how most of the money is made on Wall Street. And it just wasn’t the environment where our thinking would be embraced. And so, it wasn’t unnatural, it wasn’t even really a consideration. David did have a summer internship through his Moorhead program at the University of North Carolina at Solomon Brothers, so he did have some exposure, and he walked away from that and said, it’s just not where I want to be. Plus, we just don’t want to wear suits and ties to work. None of us.

ABERMAN: I can understand that.

GARDNER: No fool, male or female, wants to have to get too dressed up to come to work.

ABERMAN: Yeah, I remember when I stopped wearing ties, years ago, and I had to show up in a meeting, years after I’d raised Amplifier Ventures. And I showed up at an LP meeting with a tie on, and my partners looked at me and said, what are you not telling us? Why are you wearing a tie? It’s interesting, so, culture and long term, I know exactly what you mean, it is really very interesting and significant. You have to invest for the long term, and I think that’s an important life lesson. Speaking of life lessons, looking to the recurring theme of your analysis. It’s not just long term, the importance of founders. Why are founders so important to business success in your experience?

GARDNER: Well, we tell everyone at the Motley Fool that we’re all founders of the company. We’re all finding our way together. And so, I think our interest in founder-run businesses starts with data. The slice of about ten percent of public companies in the U.S. that are run by their founders outperform the market by around two percentage points a year, and that’s dramatic in market that’s going to go up, on average, nine to eleven percent of year. If you’re getting an extra two percentage points, that’s a huge breakthrough for you.

And then we have to ask ourselves, why is that the case? Why would a founder-run business have a better potential in the public markets? And I think it comes down to who those founders are. After all, in most cases when a company goes public, the person who started it, if they’re CEO, I mean, they could step down at any point and have more money than anyone would ever need. And unfortunately, the data shows, like Gallup survey data, that 75 percent of people go to work and they’re either indifferent or negative about their job. And so, what you’re getting when you get founders who are still going to work, even though they have enough money, is the exact opposite of indifference or negativity. It’s incredible enthusiasm, it’s the Malcolm Gladwell outliers.

Ten thousand hours, ten years, mastery. Just, Howard Schultz working at Starbucks for so many years, John Mackey at Whole Foods so many years. And then you’ve got Jeff Bezos, Buffett, Buffett never selling a share of stock, and building this business over many decades, why are they still going to work? Well, they’re gaining mastery like a bridge player. They obviously love what they’re doing, their reputation is tied up in that business, all of their asset base is tied up in that. And so, in general, it should not surprise us to then see that founder-run companies in the public markets spend more on R&D.

ABERMAN: They also reflect something else, which is very important, which is a founder that’s directly engaged, sets a very strong corporate culture

GARDNER: That is exactly right. And of course, there are founders that are incompetent or fraudulent. But in general, we side with the founders. The Motley Fool venture fund, which has just been organized, I mean that is really intended, and Ollen Douglass, who is running that, our former CFO, is really intending to be entrepreneur-first. Like, let’s walk through the documents, so you understand everything that you’re signing up for.

We don’t want to trick you in any way, because we’re signing up with you. We want you to indefinitely run this business. We’re not looking to move you out and install our person to run the company. So, I just think our orientation is very pro-entrepreneur, and we know that we’ll make mistakes, but in general, when you find people who stay at a business and create a culture that other people are staying, you have the odds of long term success in your favor.

ABERMAN: So far, we’ve talked about how you found yourself in this business, and culture, and founders.

Now I’ll reveal my own bias here. I’m an economist by background, I was an arbitrage trader for a while, and you know, I look at the current tax cuts, and the fiscal position in the U.S., and I’ll tell you straight up. I’m shaking my head. Tax cuts can accelerate the economy, I look at these tax cuts, and other than rewarding past investment, I’m having a hard time understanding what they were for. But putting that aside, what are you thinking about the current condition of the markets, and is there any relationship with the tax cuts to physical policy driving what we’re seeing in the market these days?

GARDNER: Well, there’s definitely the reality that we’re continuing to kick the can down the road, and some of that can be tied to our political structure. If you’re always up for reelection, you’re not going to be the one who’s trying to put together the really long term, smart fiscal plan. It’s easier to give both tax breaks and increase spending, and you combine those two things, and that’s a dangerous game to play long term. Keep cutting taxes, and keep spending more.

And so, I’m a fan of fiscal discipline. I mean, I probably didn’t really understand those concepts fully until starting a business, and realizing well, if we don’t have the money to pay people, something very bad is going to happen. So I’m not a political authority, and I’m not a macroeconomist, I can just say that everywhere I’m trying to see tax revenue coming in, and how it’s being utilized. And things that are bringing more tax revenue aren’t always raising taxes, but they also aren’t just recklessly lowering taxes. There’s some complexity to it, and complexity to where capital should be getting spent. And so, I think that we are not looking the problem straight in the eye right now, that’s all I’ll say.

ABERMAN: Yeah, it feels to me a little bit like we’re burning our furniture to keep warm, and we don’t have a plan. But the thing that strikes me, though, is it seems to me that so far, the financial markets are really decoupled from it. It seems like kicking the can, but it doesn’t look like the markets particularly care about this right now.

GARDNER: Well, I mean the markets, to a certain extent, are short-term in nature. I mean, they’re probably only trying to assess what’s going to happen over the next twelve months max, maybe two years. So, many investors are not jumping into the market thinking, what are the implications five, ten, fifteen years forward? And I will say, I’m a long term optimist, that can sometimes come back to bite me, but we’re pretty optimistic a the Motley Fool, that when we focus as a country, or as a city, or as a company, on a problem that we want to solve, we generally do a pretty good job as a species at really solving that problem. The question is, are we able to assess that we have a problem? And it doesn’t feel like we’re really there yet. So, I don’t think the markets would react to that until it became apparent that there were consequences to decisions we’re making.

ABERMAN: So, what do you think is driving the markets right now?

GARDNER: Well, I think the markets are more volatile now, in part because the shift in policy, so we’re going to see a rise in interest rates, inflation beginning to creep higher. There’s also less capital sitting on the sidelines of the market. I mean, if you look at taxable money market funds, this is something I learned from my father. If you look at that in 2008, 2009, about forty percent of the value of the overall market was sitting in cash in money market funds in 2008, 2009.

Now it’s between nine and ten percent. The historical norm is around 11 percent, going back 30 or 40 years. So, there’s just a little bit less money. More money is in the market, believing that the markets are a safe place to be. And of course, we remember what happened in 2008, 2009. Nobody wants that, everybody thinks it’s incredibly unstable. The reality is much more in the middle, and I think that we should expect a more volatile market, but I do still think we’ll get five to seven percent returns per year over the next five to ten years, making it the best place to have your capital long-term.

ABERMAN: I had not heard that statistic about money markets, that is really significant. That really does show you that people think the coast-is-clear siren has gone off, and it’s okay for them to be back in the markets.

GARDNER: Yes, and historically, we had never been anywhere near forty percent cash and money market as a percentage of the Wilshire 5000. We had never been anywhere near people setting so much cash aside outside the market. If you think of it as a balloon, all the oxygen was out of the market, and stored in 2009, and now we’ve been blowing that oxygen into the market. The market’s been going up, and we only have about ten percent left. We were at forty percent before. Now, ten percent is not a bad place to be. Historically, we’re kind of in the ten to twelve percent range in terms of cash sitting on the sidelines.

So, I don’t think that we’re headed to the sort of crisis that we had in 2008 or 2009, or 2001, because I don’t think the market’s that overvalued. I just think, if you’re going to be shaken by the market going down ten or fifteen percent, this is true at all times, then you really shouldn’t have that much money in the stock market. But hopefully, we can teach you, at the Motley Fool, that a ten percent decline doesn’t mean that much. It’s going to happen along the way. What really matters is what your ten-year annualized return is.

ABERMAN: As I look at the markets, and as I look at what you talked about with the money markets, I recall that, really, the decision to effectively guarantee those deposits was a really big deal and stabilized the market. You know, when the money markets broke the buck, as I recall. That was a big deal, because all of a sudden, maybe it’s not a safe place. And again, that was a political decision, which leads me to say: we’re about to go through a midterm, not long after this episode airs for the first time. Are you thinking about political risk, or political outlook, as you look at the investment horizons?

GARDNER: It’s not a priority in my evaluation. I will say that, in the end, I think that business has the greatest opportunity to drive impact at scale around the country, and around the world. That’s good and bad. We need regulations, there have to be controls, there have to be rules to business. We see what happens when we shed those rules, those aren’t good. But overall, feeling so strongly about rulemaking that you’re an opponent to business, I think is missing the mark on what’s actually happening in the world.

And if you look at the decline of poverty, look at solutions that are emerging from entrepreneurs, I would encourage anyone listening: don’t just think about business as a very large company that’s damaging the environment, or taking advantage of customers. I’m not saying those things don’t exist. But you really need to associate or orient your thinking about business towards technology, towards automation, towards simplification, solving problems. And there are so many incredible businesses being created right now that are able to solve almost anything that we’re doing. I would identify Tesla, which is a pretty controversial company.

I know that Elon Musk, who spoke at Motley Fool headquarters years ago, is a controversial figure, but I would actually suggest to you that what he’s creating is not that controversial. It’s pretty awesome. It’s unbelievable, what he’s trying to do. He’s trying to disrupt multiple huge categories with install bases. Automobiles, fossil fuels, space, and all the energy technology that he’s creating with Gigafactory. I mean, it’s unbelievable what he’s trying to pull off, and I’m actually an optimist. I think he’s going to be successful, and ten years from now, Tesla will have continued to be a great long term investment.

But no matter who you are, things that you love in this world are actually an evidence at companies that you can invest in in the public markets, and each of us should have our own area of interest. For some people, it will be research and biotechnology, for other people it would be breakthroughs in service care for the elderly. It runs the full gamut out there, and there are great companies to invest in, and encourage you to think foolishly that way.

ABERMAN: Or think tactically! I agree: invest in things you care about, and invest in things you know about. I think that’s a great lesson.

We’re now going to turn our attention, Tom, to some of lessons you’ve learned as an entrepreneur and a founder here in town. Looking at your career since 2002, when you started Motley Fool, do you feel that your efforts that you and David, your brother, put in, have you impacted people the way you hoped you would?

GARDNER: Yes, and no. I mean, yes, because we are having a much greater impact, and I do feel it’s a very positive impact, than we expected when we started the company. So, we had more than 150 million people around the world come into Motley Fool’s sites and services over the last twelve months, by way of example. So, that’s astonishing to us. The platform that we have, to help people think through a subject that I truly believe should have been taught in school. And I love the schools I went to, and I love the teachers that I had, so I’m not really finger-pointing with that.

It’s just, instead of learning how to evaluate which train would get to Philadelphia first, leaving in Chicago and leaving in Denver at these times going these speeds, imagine if that mathematical problem that we all faced was really about compound growth, interest rates, credit cards, that risk of spending more than you have, the benefit of actually saving and investing. What happens if you get three percent a year instead of ten percent a year? What’s the different outcome? How does compounding work?

Those lessons really can be taught in a fifth grade math class, and have a huge impact on young people, and I’d love to see the Motley Fool be much more involved in that. And David my brother and co-founder, would as well. So, I think the answer, first is yes. It’s awesome, what’s happening. But then, I would say no, because you look at the data, and there are still many people who are not comfortable investing in the stock market. They view it as a gambling machine, rather than treating it like a bank, and putting your money in for very long periods of time. The average stock is held for like 160 days.

That’s absurd, no business should be evaluated over a 160 days. If you’re going to invest in a stock, you need to give it five years. You need to give that business a chance to really perform. And so, I think a lot of the financial media coverage, and a lot of the transactional nature of Wall Street, really draws people into thinking they have to be on top of things, they have to be willing to buy and sell frequently if they’re going to win, when the reality is Warren Buffett says the best time to sell is never, and he’s somebody who turned ten thousand dollars into 80 billion dollars just by principles that are understandable for all of us.

So, I think the answer is yes and no, and the no side of it is: we still have a lot more to teach, we have many more tools and applications to build so the people can get get involved with the Motley Fool and understand exactly how to win over the long term, with the type of research that we do. And then there’s a whole host of other business-related advice that we can give, guides we can give to entrepreneurs. We’re such big fans of the creative process of starting an organization, having investors, and the blend between entrepreneurship and investing is really what the Motley Fool’s all about.

ABERMAN: Which is, I guess, one of the reasons why you started the venture fund and so forth, right?

GARDNER: That is right, and I think you’ll see from the Motley Fool more and more work with entrepreneurs and businesses. And we get celebrated for our culture a lot at the Motley Fool, and I think there are really two reasons for that. We have an incredible people team, but then we also get to sit and study companies all day. I mean, for 25 years now, we’ve been studying public companies. I mean, we have looked at thousands of companies. We’ve visited them, or we’ve met with a CEO, or done interviews with them.

And what we’ve been able to do is just pluck the best practices out of them, and start to deploy them at our own company. So, we have those best practices to share, whether it’s around compensation, or how to raise capital from the right investor, how to recruit, how to train and develop the people who are working, how to set your strategy up, how to allocate capital and reinvest in your business, how to ensure that your balance sheet is rock solid through any environment.

We’ve been through everything, and by being through it, we’ve made a lot of mistakes. But we have a lot of principles to share with entrepreneurs and business leaders, and other larger organizations, or nonprofits, or government agencies. We’ve had a lot of great interactions over the last 25 years, and I think we’re going to start turning that more into solutions that we can provide.

ABERMAN: So one of the reasons why I wanted to have you on the show is, you and I had an opportunity to talk with a bunch of students at the Smith School a few weeks ago, and your optimism, and the way you approach things, you’re so against type for the way people tend to think about Washingtonians. When I travel the world, I often find myself, when people say, where are you from, and I say Washington, D.C., and I’ll immediately say, I’ve got nothing to do with the government. You know, people associate us all with so much with what goes on downtown. Do you think that you’re an outlier, or do you think that the way the media portrays D.C. obscures how many people there are like you?

GARDNER: I’ll hedge my answer there and say: both, and.

ABERMAN: Well, you could do that.

GARDNER: It might not be the answer that we’re expecting, but I really think it is both. And I think that there is so much of a focus on government, and all the political process, and all the incredibly important decisions that are being made. So that’s natural. But, there’s also a lot of wealth in the D.C. area, and where there is wealth, there is a reinvestment methodology, if there is a belief in entrepreneurship, and creativity, and finding solutions, in taking risks. And Silicon Valley, in a way has captured the whole essence of that in the U.S. at this point, but there are other communities.

Austin, Texas is a great place. Boulder, in Colorado. Motley Fool has an office in Colorado. Seattle has been an awesome home for business and entrepreneurship. So has Minneapolis. So, there are a lot of great areas, and I do think that the D.C. area is becoming more and more a place for things like cybersecurity, data analytics. And we are very proud to be in Alexandria, Virginia. We love having been here for 25 years, and making it our home. And so, I think with each passing year, I’m attending an event or at a dinner, or being contacted by an entrepreneur, and I’m really excited by the creativity in the D.C. area.

ABERMAN: I’ve got a few minutes left with you. Let’s reach out to the entrepreneur who’s thinking about starting something. What are the three most important things you want any entrepreneur to really think through before they start?

GARDNER: Awesome. I’d say, number one, that you’re really going to enjoy doing this, because you’re gonna end spending way more time than you’re expecting. I mean, almost every successful entrepreneur I know would deliver the cliched line: If I had known what I was getting into, I would have thought twice before going for it. And that is all the way up to having the opportunity to get to know Howard Schultz over the years, who is an investor, and through his venture fund, at Motley Fool. The founder of Starbucks, Howard Schultz. I said to him once, Howard, it’s got to be awesome to wake up in the morning, and know that millions of people around the country are just thinking about your products as they go to work. I mean, that’s just a blessing. It must be so calming for you.

And he said, you must be insane, Tom, because the larger we grow, the more problems that we face. We’re in multiple countries, we’ve got food quality standards, there are so many things to figure out. The problems are bigger, more impactful. We make a mistake, it could hurt many people. When we were just one coffee shop, that was kind of delightful. So, I think the first thing is to make sure you really want to solve these problems. I think the second thing is that you know you need to save capital. You need to be able to weather storms.

So, don’t raise money and start spending it recklessly to build a great story. Make sure you’re building a business that has staying power. And the third is, look for people that are really passionate about your mission. Every person that you hire that cares deeply about what you’re creating is going to do three to ten times more than the person who’s just coming to work for a job. And hopefully, everyone who’s listening has had the opportunity, or is working in an environment now, where they really feel on fire for the purpose of the organization they’re going to work for.

ABERMAN: Well Tom, I really enjoyed this time we spent together. There was some great insight, I’m sure that many people are going to feel like they’re much better equipped both to understand the markets, but also to launch their careers in great directions, so thanks for joining us.

GARDNER: Thank you very much.

ABERMAN: That was Tom Gardner from the Motley Fool.