First, Break The Rules...

Cover Story, by Mark Robertson, Managing Partner April 1st, 2016

---

This month, we take a look at the track record of Motley Fool founder and rulebreaking leader, David Gardner.

… and it’s possible that the records (in the form of exceptional results) will follow. This month, we take a look at the track record of Motley Fool founder and rule-breaking leader, David Gardner. His monthly selections since 2002 have featured a generous dose of technology, entertainment and consumer brand leaders. He is also willing to invest in early stages of a company’s life cycle — you know, before earnings stabilize.

Hugh McManus is the leading knight in our Round Table series and he shares much in common with David. There are times when P/E ratios are uninformative and special situations can be, well … special. Educate, Amuse & Enrich.

“Stay hungry. Stay Foolish.” — Steve Jobs

The title is from Marcus Buckingham’s book of a similar name. The quotation was used by Steve Jobs during his commencement address at Stanford a few years ago. Many think of it as one of the finest graduation speeches ever. It was also a last message from The Whole Earth Catalog as they signed off with their final issue.

We last reviewed the exploits of the Motley Fool’s Stock Advisor newsletter a few years ago as one of our Dashboard Diagnostics features. David and his brother Tom and their respective teams each select a stock every month with the recommendation issued on the third Friday. We’ll cut straight to the bottom line.

$100 invested in the Wilshire 5000 via Vanguard Total Stock Market index (VTSMX) each month since February 2002 would now be worth $30,795. The total amount invested would be $17,100. This represents a rate of return of 7.9% (annualized) over the trailing 14 years.

David’s Stock Advisor selections are now worth $37,000. This is an annualized rate of return of 15.1% — beating the Wilshire 5000 by a +7.2% relative return. Several positions have been closed and the “proceeds from sale” total $6413.

Another way to look at it is that David has a net investment of $10,687 (effectively $62.50/month vs. $100) and he is a closed transaction or two from “playing with the house money,” a moment that we’ll share and celebrate when it comes to fruition. At that point, he will have withdrawn more than has been invested in the tracking portfolio and will likely still have a balance greater than the passive index fund we’re benchmarking against. So it’s not “just” $37,000 but the $6413 is added to the result.

53.8% of his selections have beaten the market. The absolute annualized rate of return of 15.1% versus 7.9% for the Wilshire 5000 qualifies David for Super Investor status for the trailing 14 years.

Morningstar identifies 1404 mutual funds with 15-year track records. How many of them performed better than David’s Stock Advisor selections? ZERO. NADA. Goose egg. That’s right. The top performing fund is CGM Realty (CGMRX), a formidable fund that checks in at 14.9%. It’s not an accident that Mark Hulbert features the Stock Advisor newsletter as one of the best.

Portfolio Design: Success

The return forecast is designed for success. We don’t see this very often with mutual funds or institutional portfolios. The current 10.5% return forecast is nearly in the sweet spot. Quality matters. The average quality ranking is Good/Excellent. Perhaps most significantly, the overall average growth forecast is 11.3% and the Rule Breaker clearly qualifies as all-of-the-above investing, a blend of small, medium and large companies that provide sufficient overall growth. Earnings stability is not required. But financial strength is. Like many investors who blend a non-core or special situations component in the mix, Gardner recognizes that some superior opportunities are to be found among companies with less stable earnings, particularly when they’re in the early stages of a successful life cycle.

Bring Your Weary, Your Disgruntled

Social media is unkind to investing demonstrations like the Stock Advisor Rule Breakers these days. Yes, that’s sugar coated. Skepticism reigns. I was reminded of Hugh McManus and his selection of Amazon a few years ago during a live Round Table at the national convention. When the sizeable audience was polled, Hugh and Amazon received zero votes, matching the number of mutual funds that have outpaced David Gardner over the last 14 years. Hugh’s non-core selection of Amazon is the top-performing all-time active selection in our Round Table tracking portfolio. Hmmm. Stay hungry and stay Foolish, David. Fool on!