Playboy's 20Q: The Motley Fool

Brothers David and Tom Gardner wanted to loosen what they perceived as Wall Street's grip on investment information. Their principal tool: the Internet, where investors can share advice and compare strategies.

The Gardners, both English majors and fiercely proud that they hold degrees in neither business nor finance, have dubbed their outfit the Motley Fool, after the colorfully garbed court jester.

The brothers--who claim to have "grown up with common stocks" and began investing family money in their teenage years--started "Ye Olde Printed Fool," an investment newsletter in 1993. It sputtered, but a year later the Gardners offered free copies over the Internet. The reactions that they encountered proved more interesting than the hard copy, and their online forum was born.

The Motley Fool advises beginners to invest "money you don't need" in index funds and large, well-known companies for the long term. As investors grow more interested and sophisticated, they might wish to try a shorter term, higher pressure, higher risk way of investing.

The Motley Fool does not manage investors' money, though the Gardners run several portfolios in public view. The organization--originally built around a cadre of volunteers--has attained something of a cult status among online investors. But the Gardners' ambition has been to build a media company around their online offerings. They now oversee 120 employees, host a weekly radio show, sell software and even offer a line of merchandise with their jester logo, called Foolmart. They've also written several best-sellers, beginning in 1996 with "The Motley Fool Investment Guide." Subsequent books have taken aim at credit card debt, state lotteries and casino gambling, all of which the Gardners perceive as bad deals for consumers.

Contributing Editor Warren Kalbacker journeyed to Alexandria, Virginia to meet with the Gardners at Fool headquarters. "I didn't expect to find pinstripes and button-down collars, but the game room, cots for employees who write on the night shift and the foolscaps came as a surprise," Kalbacker recalls. "The Gardners spoke for several hours in a conference room and had pizza delivered for lunch. One of their mantras is 'invest in what you know,' and they've advised investors to 'look in your refrigerators' when considering a food company's stock. Sure enough, when the pizza arrived, the talk turned to the outlook for that particular chain as well as the taste of the pepperoni."

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[Q] Playboy: You quote Shakespeare and tout your backgrounds as English majors. But aren't you the latest in a long line of opportunists seeking to get rich from investments instead of pursuing rigorous scholarship in literature, science and the classics?

[A] David: Who doesn't want to profit from investments? We try to work literature and science and the arts into our writing. That's some of our appeal. I'm reading a book about mercantilism in the Renaissance and I included a passage in my portfolio report about the book trade and how it joined cultural innovation with business opportunity. That's exactly what's happening in our society--look at Amazon.com.

[A] Tom: There are a lot of businesses that should have English majors writing their business plans, because then people could read them. I taught linguistics and English at the University of Montana and then taught summer classes on the stock market and how to get started in investing. I had a lot of fun teaching. I didn't have training that would have put me on a tenure track. The University of Montana is not as rigidly structured as some of our Northeastern liberal arts schools.

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[Q] Playboy: What's with the bell-bedecked caps and the funny name?

[A] David: We saw one too many Super Bowl ads where guys in flashy suits claimed they were "wise" and told people: "Invest your money with us." We decided if they were wise, we were going to be fools. The fool was the fellow who could give advice to the king without having his head lopped off. We try to instruct and amuse. We love Shakespeare. We pulled our name from act 2, scene 7 of As You Like It. It's the greatest fool scene in Shakespeare.

[A] Tom: We had a good head start. We had family money and a father who didn't bore us to death. When we were kids, we'd go to the supermarket with him and he would say, "Look, kids. There's chocolate pudding over there. We own stock in that company. Let's pick up some boxes of chocolate pudding."

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[Q] Playboy: You failed in your effort to get a stock market newsletter off the ground. Did you price subscriptions too low?

[A] David: We should have charged about $10,000 a year for that newsletter. We would have had to sell three copies. What separates us from most of the other people quoted in the financial press is that they're managing other people's money. We don't actually manage anybody's money. We have no aspirations to do so.

[A] Tom: We didn't intend to start a business. We were publishing that newsletter for friends and family. A lot of people who subscribe to financial newsletters know there's no great value to them, but there's some allure to the tip, the secret source. People pay for the dream. The Fool subverts the idea that you have to be an expert. Financial advertisements on TV promote this giant disconnect between daily life and personal finance. People can do this themselves. Poking fun at Wall Street is great fun for us, but we can provide guidelines for a secure approach to investing.

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[Q] Playboy: The Motley Fool has been credited with moving a stock price after a mention in your online forum. Isn't that heady stuff for a couple of guys who insist they invest for the long term?

[A] Tom: It's such a shame. Some organizations promote the idea that they move the markets. It happens for us in the smaller companies we invest in, but we don't want people to duplicate the portfolios we manage. We're trying to defeat the herd mentality--unless the herd has done its research. A lot of the focus in the financial world is: What can I make today? If a broker has 200 clients and he can send a trade through all 200 accounts, he can make a substantial amount of money in just a day. Others see great opportunities to sell their advice through books, newsletters and faxes. If someone has a great marketing pitch and shows extraordinary performance over a short period of time, and implies that this can be duplicated, he gets a lot of attention.

[A] David: It's pretty much a one-day phenomenon. We'll announce that we're buying something the next day. That's radical. Wall Street always loads up ahead of time and then announces a strong buy in the stock. But because we're long-term investors, that one day is insignificant to us. It catches headlines, but it's of no importance because we're going to be holding the stock for three years or longer.

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[Q] Playboy: Do stock symbols dance in the Gardners' heads?

[A] David: I know about 150 out of 9000. I check 20 stocks a day on the computer. That may sound hypocritical, because we say you don't have to check stocks at all. We encourage people not to sit and watch the ticker symbols go by, or react to every zig and zag of the stock market. The nightly news and movies such as Wall Street show guys running around the exchange floors. It looks like high-energy action, but it's a tremendous waste of time.

[A] Tom: You know more symbols, Dave. You have the 30 Dow stocks plus the top 150 S&P. I know a few hundred. My favorite is DJT, Donald J. Trump. I never watch the ticker. The message we send out is to be in control of your money and know how you're doing relative to the market.

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[Q] Playboy: You made the cover of Fortune a while back. Doesn't that represent the guru status you claim to hold in such low esteem?

[A] Tom: It was fun. You're not going to resist Fortune when it wants to put you on the cover. But as we were doing the photo shoot we became cognizant of what was going on. The guy who put the article together was telling us to look nervous and anxious: "Remember, the market's moving right now! Things are happening!" We told him that's not our approach to the market. That story is not one of my favorite Fortune pieces.

[A] David: It was a good cover. How many financial magazines show guys in crazy hats hanging from a Wall Street lamppost? We don't want anybody to describe us as experts. We put on foolscaps every time we speak in public to remind people to be skeptical of what we say--and also because we're funnier when we have them on.

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[Q] Playboy: Where will we find the Gardner brothers when the next stock market crash occurs?

[A] David: We'll be at the Bayou Pub, a block from here, with our laptops, signed on to the Internet. People react in different ways. There will be panicky newer investors who can't believe the market crashed a week after they bought their first stocks. And there will be old-timers who have been through it numerous times. Unless we're about 72 years old and planning to pull a lot of our money out of the market the next day to live on, we won't be that troubled. We're the first to say, "Let the market crash 30 percent tomorrow." Crashes matter only to people who need money, and we speak to people who invest money they don't need. That's the core of our message.

[A] Tom: Warren Buffett says that when the market crashes, it just means all the stocks are on sale. A lot of people refer to the Bayou as our employee lounge. We've talked stocks with motorcycle gang members we've met there.

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[Q] Playboy: Warren Buffett and Jimmy Buffett: Explain the differences.

[A] David: Warren and Jimmy are cousins. Most of the world knows Jimmy Buffett. He has a lovely, relaxing and lyrical sound to his music. Most people don't know Warren, who is a lot richer than Jimmy. He got that way by being patient. Warren's approach goes against what the average person would expect from a rich investor. You would think he made his money quickly, and that maybe there is something fishy about how he got it. But Warren took his time. No big secret. No hot tips. He wasn't buying some unheard-of technology company that the rest of us could never figure out. He bought Coca-Cola, and at various points he's had one third of his net worth in the stock.

[A] Tom: Warren has a lovely, lyrical approach to the market. He's shy compared with the sharp, well-dressed wise man in those brokerage advertisements who is going to take care of everything for you. And you have Warren, who also owns a minor league baseball team in Omaha, saying, "You know what? I've eaten Wall Street's lunch for four decades." Jimmy Buffett brought out Cheeseburger in Paradise, while Warren bought out International Dairy Queen.

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[Q] Playboy: The Motley Fool has been described as a cult. Is it because of those hats? Or the Internet? Or both?

[A] David: I used to resist the term, but Star Trek was considered a cult. It started small and grew into Paramount's most valuable property. Let's be a cult! We attract fanatical people who love making jokes about Wall Street and all its pretensions. Let's grow that.

[A] Tom: It's Mao's revolution. We tie the brokers to stakes in the town square and berate them. We follow as much as anyone. That's how our forum is structured. I'm ignorant about oil exploration, the environmental effects of that business, global demand, how oil gets priced and the costs of the business. And I'm not going to learn much about it any time soon. But if I wanted to learn, I'd go into an area of our forum where 20-year oil-industry veterans talk. I believe the people who come to our forum have good intentions, such as telling those starting out, "This was my dumbest investment. Make sure you don't do this."

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[Q] Playboy: Patience ranks far ahead of faith, hope and charity on the Motley Fool's list of virtues. Please explain.

[A] Tom: Everyone's out to rush you, from the car dealer to the stockbroker to the real estate broker. But in more cases than not, another train is coming. The chef at the summer camp where I once worked had an opportunity to invest in Marvin Hagler when Hagler had only three fights in the northeast and was three and zero. The guy passed. The story sounds like the fish that got away--one speculation that would have dramatically changed his life. It would have. But if you talk to the guy you learn that methodical and patient investments in other things have done extremely well for him.

[A] David: Patience comes down to compounding returns. Warren Buffett has (continued on page 160)The Motley Fool(continued from page 122) made more money in the past five years than he did in the previous 35. You can be sold on the newsletter that promises you the ten of spades, but patience is the ace, the strongest card you have in your hand.

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[Q] Playboy: Admit it: Every once in a while, a Gardner stock pick turns out to be a dog.

[A] David: Styles on Video was absolutely my dumbest investment. I introduced it to my investment club, where I'm the youngest member by about 25 years, and the club bought it. Styles on Video involved taking a picture of your face and then digitally changing the image to show a number of hairstyles. It was mainly for women. The company was a big growth business. The stock went from $5 to $20. The problem was that when presenting the product to hair salons, the salesmen said, "Take this and pay us later." The accounts receivable on the balance sheet mushroomed, but sales and earnings were what the market was focused on. No doubt that stock will always be associated with my name in the investment club, and it came crashing down.

[A] Tom: I invested in the CML Group, which made the NordicTrack. It was a larger company, a financially strong business. The problem was that NordicTrack eroded overnight. It was a cumbersome exercise machine, and if you did two or three weeks on it, you were tempted to call it a day and go have a martini. And people were reselling them, posting notes on bulletin boards: "Here's my NordicTrack, take it away. It's taking up too much space in my house."

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[Q] Playboy: Baby boomers have a less than sparkling reputation when it comes to saving. Any advice from the Motley Fool about funding kids' college educations?

[A] David: I have a friend whose daughter has her heart set on a college out West that costs $30,000 per year. But there's a college here in the East she can attend that costs half as much. He can't pay the 30 grand and he asked me what to do. The answer: Get her to go to the cheaper school. The college experience is enormously overrated. If she really wants the expensive education, maybe she can contribute $10,000. There are a lot of high-paying jobs in California.

[A] Tom: If I had attended Brown as a nonpaying student, nobody would have tracked me. I could have sat in the back of the classrooms. I would have spent time at Oliver's, a campus bar, and I would have come out of college looking like an entrepreneur somebody would want to hire. I would have gone for a job interview and said, "Here's the deal. I don't have the degree, but I took all the classes. Here are my notes and we can talk about how I fit into your workplace. I just decided not to pay the $20,000 a year." I would have been a celebrity on campus.

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[Q] Playboy: You frown on credit card debt, casino gambling and lotteries. Do the Gardners hold bluenose views on dancing and sex?

[A] Tom: I don't dance well. Answering my e-mail is pretty much the beginning and end of my social life. What I really want to do is purchase a lottery ticket every day for the office, just to demonstrate that it's putting money down the sinkhole.

[A] David: I'm not a puritan. Our main point about a state lottery is that it's ludicrous for the government to enjoy a monopoly. Open it up to competition. The puritanical notion would be that there should be no lottery at all.

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[Q] Playboy: Surely you can enjoy Las Vegas without gambling. Have either of you seen the Siegfried and Roy show?

[A] David: I got snowed in once in Las Vegas and I wasn't interested in Siegfried and Roy. I gambled in the Bahamas when I was underage. I've been to horse races where I tried to create a system, but it never worked. If you want to gamble, gamble with your friends. If you lose, you might as well have your friends take your money.

[A] Tom: I walked into a casino in Reno, Nevada while driving across the country with my friend Eric. I put a single quarter into a slot machine and won $50 in quarters. Then I went to make a telephone call, and Eric, who's usually careful with his finances, took my $50 worth of quarters and blew half of it while I was gone. Gambling casinos and the stock market are both speculative. Some people spend their entire lives trying to beat the casino. The nice thing about the stock market for gamblers is that at least they're making bad short-term decisions in a world where the market appreciates 11 percent per year.

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[Q] Playboy: Isn't the ease of buying and selling stocks on the Internet an invitation to trade, trade and trade some more?

[A] David: There is no question that we have a bunch of people in the Motley Fool who do not invest the way we do. It takes time to place the Internet in your life. People are more into it when they experience the initial excitement of their first online stock trade or getting their first great airfare. Late at night is the dangerous time. I don't read newspapers anymore. I have 20 sites I enjoy: half a dozen on finance and my baseball team page. I check to see how the North Carolina Tar Heels are doing and check new developments in computer gaming. I do all this at 2:30 A.M. rather than go to bed, which I should do since my wife is fast asleep. We've been married a long time and know each other's schedules well. She goes to bed around 10:30 and she knows I go to bed between three and four A.M.

[A] Tom: I've been dragged Dave's way. I go to bed later now. I've become an e-mail addict. The day trader does exactly what we think is really bad news, and we wouldn't want a first-time investor to get the idea that that's the way to make money. But that day trader may contribute elsewhere. He or she may say, "Be very careful about insurance. If you blindly buy a whole-life plan, you're going to get screwed."

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[Q] Playboy: You advertise jobs on your Web site and claim the Motley Fool is the "bestest company to work for." Do you keep track of employees who cross the street to buy lottery tickets?

[A] David: We're irresponsible in terms of overseeing our employees because we don't require them to be here at any given time. We don't count vacation days, so we're definitely not counting lottery ticket purchases. We have a game room with a pinball machine, a pool table and a Ping-Pong table. We're probably having too much fun. The health care plan is extremely good. Our first company health plan was a "you don't get sick" plan. Now you get free X rays and you can pick whichever doctor you want. Another key benefit: stock options. We recently downsized a little. We needed some organization because we're not really businessmen.

[A] Tom: We hired my best friend, Eric, who started the newsletter with us. He agreed to come back when we went online. And when he came to our office, which was then a little shack on the back of David's property, he walked in and found 80 uncashed checks from people who had ordered products from us. Dave and I weren't managing our accounts receivable.

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[Q] Playboy: Do you celebrate April Fools' Day in a big way?

[A] David: Last year we took one of our primary tenets--that 91 percent of mutual funds underperform the stock market--and published an open letter on our Web site that told how four years ago we pasted data into a shareware spreadsheet, which spat out the results upside down. We showed graphs. We said our premise was incorrect and we were wrong, and that we were very sorry and hoped it hadn't affected anyone's investments. Of the 2000 e-mails we received over the next 24 hours, 65 percent of the senders understood we were joking and 35 percent did not. That was a shock.

[A] Tom: There were financial pros who said they knew our numbers were wrong, that the majority of funds were high performers and that they were happy to see us fall flat on our faces. Two law firms said they were organizing class action suits against us. A radio show host in Charlotte said we should be thrown in jail.

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[Q] Playboy: You don't earn fees from portfolio management. Does Foolmart merchandise pay a large portion of the Motley Fool's freight?

[A] David: We have good quality. We heard about a cop who conducted a sting operation wearing a Fool ball cap. It's the ultimate sting garb. Anything can be made more fun with a little Fool on it. The Fool pin--sterling silver--has a happy little jester. And we've got golf balls. Actually, portfolio tracking products are what do very well for us.

[A] Tom: We sold 75 bell caps last year at 30 bucks a pop. But my favorite is the Fool ball cap. It's so dramatic--black with white lettering. You can wear a Fool tie into the office of your financial advisor when you ask why your account is up only five percent in a year. Or if somebody buys a stock we're into and for some reason it doesn't do well, he can tee up a Fool golf ball and smack it. We should provide golf balls to all the brokers who are angry at us for telling people they make money based on number of trades, and to all mutual fund managers who are angry at us for giving the basic numbers on what's happening in their industry. Then they can hammer us.

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[Q] Playboy: Financial pros warn investors never to "marry a stock"--become emotionally attached to an investment--because there may come a time when it's smart to bail out. Do you agree?

[A] David: There's a lot of overlap between marriage and long-term investing. You want to buy a stock you love and try to hold on to it. And if you end up not selling it, you'll have a richer life.

[A] Tom: I disagree. My married friends say marriage is an investment with ups and downs. You try to stick with it, but you're evaluating it and trying to be constructively critical. The more you can become a partner with the business you're investing in, the more you can affect its business. You can raise questions at shareholder conferences. You can say, "This product sucks and I don't like it for these reasons." The Internet allows that. When it comes to investing, and marriage, if you're married to someone and you fall in love with someone else and think you made a mistake with your first marriage, there's a way to make the move toward the person you're really in love with. Look at how Europe treats marriage.

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[Q] Playboy: Would you be able to deal with a young Gardner who wanted to marry a stockbroker?

[A] Tom: Our sister is marrying a stockbroker. He's a great guy. He's also much bigger than we are. We approve. We approve.

[A] David: We always say there are some very good stockbrokers. Apparently we need to find out more about the guy.