Co-founders Tom and David Gardner look back on The Motley Fool's journey with Amazon.com (AMZN +2.05%) since first purchasing it in September 1997. The brothers discuss the ups and downs they've seen with the stock, now a 100-bagger for the Fool.
Owning Amazon for 16 years has been an adventure for David Gardner, as the stock rose and fell, then rose again. In this interview, he discusses what drew him to the company initially, why he held onto it through the rough times, and what it really means to be a long-term investor.
Tom Gardner: Hi, Tom Gardner and David Gardner here, co-founders of The Motley Fool, and we're here to talk about the incredible investment that has been Amazon.com.
Since buying Amazon.com in 1997, the stock is now up 100 times in value for you, so part of this is a celebration of long-term investing, of finding great businesses, and of getting incredible results. But the first part of our conversation today, Dave, I just want to hear a little bit about how you found Amazon, what you were looking for, and a little bit about the Rule Breakers methodology, particularly as it applies to Amazon.
It's a $165 billion company today, but if you rewind and take it back the 100-bagger, it's a small cap at that point, or a relatively small company. What were you looking for, and why did you make your first investment in Amazon?
David Gardner: I think there are three things I'll just point out right out of the gate, Tom.
Number one, it was a company that had a visionary leader, and it was a leader at the time. It was perceived to be that. It's was "Earth's Biggest Bookstore" -- I still have the mouse pad, by the way -- when I first recommended it, but it was very clear they'd named it "Amazon." It wasn't "OnlineBooks.com," so you saw a visionary leader in play.
Second thing, the stock had already doubled from its IPO, before we bought it on September 9th of 1997.
Tom: Now, that would be a reason that a lot of people would stay away from it.
David: Absolutely. I asked myself, "Did I miss this? Oh, darn." Obviously, we'd be talking about a 200-bagger today had we bought three months earlier, but absolutely no regrets. In fact, so often in my style of investing, we're buying the company after it's already doubled. That's happened any number of times in Rule Breakers and Stock Advisor among our best picks.
Third, I was in touch with it, as a consumer. I was using Amazon; I'm pretty sure you were, too. You couldn't really miss it. It was for people who loved e-commerce -- and there were big doubts at the time, maybe we'll talk about that later -- big doubts that e-commerce would even work or could work as expansively as it turns out it has.
I'm by no means the visionary who was saying, "Look at what e-commerce would become." We were kind of thinking through it, looking for it a little bit, ourselves. But to be a consumer, to be using it, to be in touch with that -- helpful.
Tom: I just want to put those three factors in the context of finding the next 100-bagger.
Maybe just give an example. You don't have to give a specific company, but what sorts of trends and themes are out there today that are bringing together the visionary leader with the broad approach -- the Amazon-like name, rather than in the narrow niche -- and the consumer experience that you have?
David: Of those three factors we talked about, if you're looking for the next 100-bagger, I think the primary factor of those three would be the second, which would be the business itself, and the momentum and the technology and the disruption.
Amazon, in a sense, is just a poster child for e-commerce. E-commerce was the real story in 1997, and it has been for the 16 years since. E-commerce has been unbelievable, and Amazon is the greatest brand and greatest example of that.
But e-commerce benefited many companies; eBay was an early pick of ours that we still have maintained. It's done very well. So, Tom, I think looking and thinking ahead of trends and asking yourself what's going to be really big, would be the best way to locate the next 100-bagger.
Tom: How about sales growth? We were talking off-camera beforehand. If you go back to -- I could only date back in the SEC filings online to 1999. It was two years after you bought.
David: For Amazon? OK.
Tom: For Amazon. Amazon, in that single quarter, did about $350 million in sales and, in the same quarter the previous year, was $150 million in sales so, they had at least a run rate of more than $1 billion in sales, but their growth rate was north of 100% in revenue.
Is that a factor that is an indicator for you of whether there's a huge market opportunity and a big theme, is the top-line growth rate?
David: Yeah, I think it is. As a Rule Breaker, obviously, I'm never going to say "That's it and that's always it," because there's all kinds of exceptions. It's always about context. But I think that's a pretty good indicator.
When we talk about big things like e-commerce or two recent trends that we've been early on and it's been to our benefit -- 3-D printing and cloud computing -- both of those in the Rule Breakers and Stock Advisor services, we had early picks in those. Those are really big stories and they had big sales growth. It wasn't just a hope and a dream. And there are many examples of it.
It doesn't always have to be the biggest thing of all. I mean biotech in a big way -- but also small ways, like just genomics or just a given cure -- exhibits these characteristics on a more microcosmic level.
Anyway, it's not always about the next big trend, but, Tom, sales growth is definitely a factor.
Tom: Okay, I just want to put these factors together. I'm really restating what you've said.
If you're looking for the next 100-bagger today, you would be looking in a big trend that has a visionary leader, high sales growth rate, and you have connection to it as a consumer. That's not the only place to find the next 100-bagger, but those four factors would be a useful way. And maybe the fifth is that it's a relatively small company. There are visionary leaders at Google, but it's not going to be a 100-bagger over the next 10 years.
So, it's a smaller company -- let's say market cap sub-$2 billion -- visionary leader, big trend, high sales growth rate, with consumer connection to you. That would be a good way for somebody to look out for it.
David: That's not a bad template. One thing I want to point out is you've described, in many cases, just what cool businesses are. They have those things. A 100-bagger takes it from the realm of business, into investing and how you, as an investor, achieve a 100-bagger, which is what we've done in Amazon.
That's a little bit of a separate story, right? Because to get a 100-bagger ... Amazon is one of the few stocks that's actually done that, that you could have done in the last 20 years, and it took 16 years. It took watching that stock go from $3 -- our cost -- to $95, and then back to $7, and we held all the way through back to $95, and then $100, $200, $300. It took 16 years of patience in a world that is very myopic.
Tom: Six months is the average holding period.
David: A lot of people sell off in advance of bad ... worried about the next earnings. There's a whole separate story. We don't have to talk about it too much in this conversation ...
Tom: No, I like it actually. Were you worried? When it went from $95 to $7, did you second-guess yourself at any point? You had a 30-bagger as an investment, and you watched it fall.
David: To a two-bagger.
Tom: To a two-bagger. So, you still had the joy of saying, "I've doubled my money," but you watched a 90% decline and obviously in order for a stock to decline that much, most people have sold. What is it that allowed you to hold that? What are some factors in your approach to portfolio management or individual company investment?
David: Sure, and I'm going to be quick, because we're going to run out of time, but I'll just say for now, it's mostly looking at the business, not the stock. You know that; I know I'm preaching to the choir -- although, while Tom and I have kind of got it for about 20 years, I think a lot of the world doesn't think about things that way.
Every time I watch financial television -- which, by the way, I don't, really -- I'm reminded again of how people are thinking too much about stocks; wigs, wags, and short-term moves, and they're not really looking at the business. While Amazon's stock dramatically declined over that, the business did not nearly.
And it's not just Amazon, obviously. I'll just throw in another example near and dear to our hearts: Netflix.
Netflix stock dropped from a high in 2011-ish over $300, down to $55 within about 18 months. We held all the way down and we've held all the way back -- but did the business crumble? Even at its worst Qwikster moment, I think they lost about 500,000 subscribers from maybe 24 million to 23.5 million.
If you're looking at the business and you're not seeing any kind of drama there, I think it makes it a lot easier to continue to hold 30-baggers down to two-baggers, back to 100-plus-baggers.
Tom: Now, there are some of these huge multibaggers you've had, that have not come back.
David: Sure.
Tom: How does that fit into your approach as an investor?
David: Well, I can think about Iomega, which back in the day at The Motley Fool -- as you remember, we were on the cover of Fortune magazine and it was partly a story about Iomega. Celera Genomics was a nine-bagger in six months, and we ended up selling not far above cost.
Obviously, I can always think back on times that I wish I'd sold something that I held.
Tom: But the holds end up mathematically massively outweighing ...
David: Yeah, when you take it all and all. Absolutely.
In fact, I gave this talk internally; you heard this two months ago at our monthly huddle at The Motley Fool. I said, "Rule Breakers has had 32 stocks that have lost 50% or more." That's the Rule Breakers service. I know I'm speaking to some members today. Thirty-two stocks have lost 50% or more. That sounds horrible, and it's not easy. In fact, it's painful, and every one of those I'm accountable for.
The good news, though, is that the 32nd best pick in Rule Breakers is up 160%, so you've got to do the math. You've got to be mathematical here. It's not advanced math, but play that forward and you see the incredible benefits of being happy to occasionally give away a 10-bagger and end up at cost, or suffer a 50% loss because you're holding all these other great things as the world is reshaped by these companies and you're a part owner of them, measured in decades.
Tom: You're the best investor at our company. What does it feel like, to you, to have a 100-bagger investment in the portfolio, that you know members are buying and talking about? What is motivating you as an investor when you're looking for the companies that you're finding?
David: Well, this is the last thing I'll say for now. Basically, Tom, for me the purpose of our company is to help the world invest better and what I think about all the time is the people who are buying with us.
You're taking a risk when you buy companies with very high price-earnings ratios or Amazon.com -- all of a sudden Barron's comes out with "Amazon.bomb" on the cover in the year 2000 or so.
But if you stay focused on the businesses -- us as investors, Tom, your service's incredibly accomplished work in great numbers, and across The Motley Fool. Heck, Inside Value was recognized by Hulbert Financial Digest as one of the top three performers in the last five years, so, The Motley Fool has an incredible efflorescence of market-beating services and advice.
I think what unites us all, more than anything, is that we're business-focused. That's the number one thing that I see running right through The Motley Fool. We are essentially MBAs without MBAs. We love business, and we're doing that. We're just becoming part-owners of businesses; we're not playing with stocks.
Tom: A 100-bagger. Amazon.com. What an incredible achievement by you and the team in Rule Breakers, Stock Advisor, Supernova, and all the services you're running. I will just close with this point of emphasis -- although there are five or six or seven different great points here in this conversation.
Amazon, a 100-bagger, it took 16 years. That's just a reminder that that's how you get these multi-bagger, awesome returns. They happen over five or 10 or 15 or 16 years, and it can transform your portfolio. Dave, thanks for sitting down and talking a little Amazon, and best of luck finding the next 100-bagger. I can't wait to buy right along with you!
David: Thanks a lot, Tom. That was fun.
