Motley Fool: Lessons from Buffet and Lay

Tom Gardner, co-founder of the Motley Fool Web site, talks about what individual investors can learn from the careers of Warren Buffett and Kenneth Lay.

Copyright © 2006 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

NEAL CONAN, host:

Today, taking stock of the markets. Last week, billionaire investor Warren Buffett announced that he would donate some $37 billion dollars to charity, all of it in the form of stock in his company, Berkshire Hathaway.

This week, Kenneth Lay, the founder of the scandal-plagued Enron, died while awaiting sentencing for his role in the massive fraud that brought that company down.

It's a tale of two very different CEOs and Tom Gardner says there's a lesson here for individual investors on how to pick a winning stock. He joins us now as part of our monthly chat with the Motley Fool, a multimedia company devoted to helping people sort through their investment decisions.

If you have questions about investment trends, hot or cold economic sectors, healthcare, retail, international markets or about the overall conditions of the market - not so good lately - our number here in Washington is 800-989-8255. That's 800-989-TALK. The e-mail address is talk@npr.org.

One caveat first. Neither Tom nor I will offer any advise on whether to sell this particular stock or buy that one. If you have questions about the way things work or the way they ought to, about trends, about philosophies of investment, give us a call. Again, 800-989-8255.

Tom Gardner with us now from the offices of Motley Fool in Alexandria, Virginia. Nice to have you back on TALK OF THE NATION.

Mr. TOM GARDNER (Co-Founder, Motley Fool): Great to be here, Neal. Thanks for having me.

CONAN: Two well-known CEOs in the news this week for very different reasons. What can individual investors learn from the stories of Warren Buffett and Kenneth Lay?

Mr. GARDNER: Well, I think the first interesting thing about Kenneth Lay is that up until Enron started to fall apart he was celebrated as a charismatic and dynamic and innovative leader of a company that had grown to be worth tens of billions of dollars, so it can be difficult. Certainly pre-internet - I think the Internet is changing things, but it has been difficult to get information on who the people are running the companies and what sort of culture they're creating. So I love the idea of trying to evaluate the very best and the very worst public company leadership, as an investor myself, and try and see, well, what traits travel with greatness among leaders and what traits travel with impending failure.

And I guess I'd cite, in distinguishing Mr. Buffett versus Mr. Lay, first - and I have a couple different thoughts on it - but the first is just if you look at the cultures of the company, and you could get some sense of that, Enron really had a very arrogant and hard-driving culture, very focused on the next three months of business; and Warren Buffett is very well known throughout his professional career for having demonstrated humility. I mean, I think he has spoken to business-school audiences and said just, you know, I think 99 percent of this is luck. I happened to be born in a great place in a great time that valued highly someone who knows how to allocate capital, so I think humility and arrogance is something that anyone should look at, whether it's an organization you're working at or a company that you're thinking about investing in.

CONAN: A lot of us, if we're thinking about investing, tend to look at charts and graphs and statistics. You say the CEO. Look at him, too, or her.

Mr. GARDNER: Yes. I love to see how much stock the CEO owns and how long the CEO's been with the company. I also like to try and get some sense of whether or not I think the business is using conservative or speculative accounting. And I think those travel with humility and arrogance as well. You will find the more humbler leader will often be more conservative in their approach to reporting to their shareholders how they're doing. The more arrogant leader will feel entitled to push the accounting rules as far as he or she possibly can in order to overstate the success of that organization.

So, I'm always trying to evaluate, in my investments and in my recommendations at the Motley Fool, whether or not I think the leadership group is treating outside shareholders - the smallest shareholder, somebody with $2,000 invested - as a partner that they have to report to simultaneously all the information that they know, or as somebody they that, maybe they even feel entitled to take advantage of. I mean, there was a lot of insider selling at Enron when the news was bad, but it hadn't been released.

And that is just such a loss of perspective by people who already had millions and millions of dollars. To be selling stock in advance of bad news getting out there shows that you've lost perspective of what money is and isn't in life.

CONAN: Well, in an odd way, you and Warren Buffett, you're a lot alike. I mean, he does many of the same things you do.

Mr. GARDNER: Well, let's...

CONAN: On a slightly larger scale, I think, but...

Mr. GARDNER: Yes, and his success rate, even from his beginning years as an investor. One thing - one interesting thing I'll say about Warren Buffett that most people may not think about, in his personal accounts when he invests, he invests in much smaller companies than Berkshire Hathaway can.

So I think a lot of - if you're a bit of an enterprising investor trying to get returns like Warren Buffett did throughout his career, you wouldn't be necessarily buying Berkshire Hathaway stock. It's already a company valued in excess of $100 billion. Buffett would be - if he didn't have so much money to allocate, he would be looking for smaller companies.

He said that if he said than, I believe, $10 million to invest, he thinks he could get about 50 percent investment returns per year, and I believe him. But you're really going to get that out of finding small, unknown, obscure but well-run companies that the rest of the investing community doesn't yet know about.

CONAN: Let me turn your attention, briefly, to another story today. Coke's secret recipe was reportedly stolen, and three thieves allegedly tried to sell it to Pepsi. This is pretty interesting example of industrial espionage.

Mr. GARDNER: Well there's a - you know, if you're thinking about going to law school, I think intellectual property law is the area you want to get involved in. We're moving into a world, a global marketplace, where we're seeing all over the place knock-offs, the theft of intellectual property, whether it's music videos - that will be a big issue online is how movies and other video creations are passed around without rewards to the original creator.

So this is just another smaller, slightly - I mean it's - on some level its huge, but on another level, Neal, I'd say, I know I'll probably offend some of your listeners by saying this, but I think the distinction between what a Coke is and what a Pepsi is is small enough, and I think Pepsi, as an honest organization, knows they wouldn't have benefited from that information anyway.

But these are drinks - the real issue for Coke and Pepsi is not about the information that might get passed between those two companies, but about their products being under pressure. Their brands are being under pressure now by natural sodas, the things that you might buy at Whole Foods, that don't have 39 grams of high fructose corn syrup. So the same issues that faced companies like offering Wonder Bread and Krispy Kreme Donuts that were hit for dietary concerns by the medical community, I think these artificial sugar soft drinks are really under pressure in the years ahead because of the new nutritional instructions we're going to get from our doctors.

CONAN: All that being said, the value of something like a secret formula, the Colonel's 17 spices and herbs, or whatever it is, these things do have some, you know, do effect consumers. They help shape the perception of the product.

Mr. GARDNER: Absolutely. It's an intangible asset and I think that, so the real risk there is just that the idea that a secret formula is gone, that there's no more secret recipe for the company that's held onto that as a patented and private piece of information for many, many decades. So - but I think in actuality, even if Pepsi had the formula, I don't think they'd change their product at all because of it.

CONAN: No, they tried changing that formula once. It didn't work out so good. Anyway...

Mr. GARDNER: That's right.

CONAN: ...let's get some listeners into this conversation. We're speaking with Tom Gardner, co-founder of the Motley Fool. If you'd like to join us, 800-989-8255. E-mail is talk@npr.org.

And let's begin with Kenneth(ph). Kenneth calling us from Salisbury in North Carolina.

KENNETH (Caller): Hey, I have a question for, I guess for Tom. I'm trying to find information on investing in companies that have better moral values, as far as the environment or in the way they treat their employees. For example, I work for Norfolk Southern, and while we're reporting record profits and paying the CEO's multimillion-dollar salaries, they're cutting employee benefits back, which seems questionable morally. Is there any way to invest in companies that are a little bit better? Not necessarily better investments, but...

CONAN: Well, Tom Gardner, I know that there are so-called green portfolios.

Mr. GARDNER: Sure. And the Calvert Family of Funds has socially responsible index funds, socially responsible funds, and I think, you know, I think that's it's a personal decision. That's how I view it as I look at my investments.

I think there are some situations, for example - and I don't know the story of Norfolk Southern, it's not a company that I follow - but there are certain situations where an executive team would actually be rewarded for bringing greater efficiency to a company that may have been managing itself sloppily for many, many years. And I know that's contrary to say that, but there are certain situations where that's the case.

Now, there are other situations where the executive team is benefiting by cost-cutting and taking a nice little reward for themselves over the couple years that they're going to be in the executive office. I mean, the real danger with executive leadership in the U.S. that I see is that the average tenure of a CEO is about four or five years, which means that they don't have necessarily top of mind of putting that organization in a position to succeed for the next 20 to 25 years, which is what investing owners should be thinking about when they invest.

So, in terms of looking at companies and evaluating whether or not you believe in who they are and what they do and how they act and whether they abide their mission and core values, after all, I think the second core value in Enron's annual report was integrity.

(Soundbite of laughter)

Mr. GARDNER: So, I think what it requires you to do is look at your own life, where you spend your money and your time, what you believe in as a consumer, and then I do think using the Internet to go to the Web site of the company, you can Google and search the backgrounds of the CEO and CFO and the board members; there are SEC filings that are available for free online, where you can look at the 14-A filing and see who these - who are these board members, what are their backgrounds? How much stock does the leadership group own?

In general, you're going to find that executives that own a lot of stock in their company treat their company like a house that they own or a car that they own, rather than a car that they're renting. After all, how many people rent a car and then take it to the car wash before turning it back to the parking lot once they're done with it. It doesn't really happen. So, people take care of what they own, and I like to find that in the executive groups that I invest in.

CONAN: Isn't that one of the secrets of life - nobody ever washes a rented car? Yes. Kenneth, thanks...

Mr. GARDNER: You said it more succinctly, Neal, than I did. Thank you.

CONAN: Kenneth, thanks very much for the call. Good luck to you.

KENNETH: Thank you.

CONAN: We're talking with Tom Gardner, co-founder of the Motley Fool. And you're listening to TALK OF THE NATION, which is coming to you from NPR News.

And lets see if we can get Laura(ph) on the line. Laura's calling us from San Francisco. Hello?

LAURA (Caller): Hi. I have a daughter who is ten years old, and she is incredibly frugal. And she has about $700 in cash, and she's interested in investing it. And I was just - I wanted to know what the best way for her to invest that would be.

CONAN: Talk radio futures.

LAURA: Something that I hope would include her tracking, being able to track it.

CONAN: Go ahead, Tom, I'm sorry.

Mr. GARDNER: That's a wonderful situation for your situation for your ten-year-old to find themselves in. I mean, many adults don't have that when you factor in how much credit card debt they're carrying. So she's well ahead of the game.

I think there are a number of different ways for her to get started. Without wanting to proper plug ourselves, the Motley Fool Investment Guide for Teens, sounds like something your ten-year-old would be able to understand if she's already set aside $700.

And I think that what you should do is set up a custodial account and begin making some investment decisions with her. You could put a custodial account at a discount brokerage charging as little as $7 or $10 a trade.

And I would say, for you, but for any parent listening to this show, I love the idea of setting up a matching savings program for kids. We've seen it in a number of people at the Motley Fool, among our membership base, are doing it. Where, if their child agrees to put aside a dollar for five years or more, the parents will match it with another dollar. And that crates an incentive and creates a game and builds an enthusiasm for being a net saver rather than a net spender.

But I will also say that a frugal ten-year-old that has set aside $700, you might also want to teach her how to spend some of that money, how to think about what are some of the things she'd like to do. In our case, we had the benefit of two parents that wanted to teach us that they felt very strongly that spending money on experiences rather than things would lead us to greater happiness, and it has. So it's - maybe a trip or some experience that she would like to take, a little bit of that savings and put it to use. Because, after all, we don't want her to pass away with $57 million in her brokerage account and very little of life's joys in the process.

CONAN: And, Laura, if she's already got $700 saved up, it sounds like if you start one of those matching funds, this could start running into some real money pretty soon.

(Soundbite of laughter)

Mr. GARDNER: Yeah. She could sink her parents.

LAURA: Thank you very much. Do you have a discount house in mind that would be a good place to start for her, oldie discount, or, I don't know.

Mr. GARDNER: If you come to Fool.com, which is a free service, you'll find our discount brokerage center where you can read about seven different discount brokers and the different prices they charge and benefits of using each one. I think you'll find one that's relevant for you all.

LAURA: Hey, that's great. Thanks for your help.

CONAN: Good luck, Laura, and to your daughter, as well.

LAURA: Thank you.

CONAN: Bye, bye. Let's go now to, this is Bill. Bill's calling us from Boise, Idaho.

BILL (Caller): Hi. Say, Tom, I wanted to ask you a question kind of on the theme of the Warren Buffett investment style that you had discussed. Along the theme of IPOs, and you see more of them, and they seem to be coming back these days. And, you know, it's really tough, I think, for an individual investor to make that kind of call. But, like, Shutterfly, I think was going to launch last week. And how would an individual investor make an investment in something like Shutterfly?

Mr. GARDNER: Well, the initial public markets really, and it's a wonderful question, because there's such an interesting part of the marketplace. Individuals can be swept up in the enthusiasm of IPOs, and when they are, that usually means the market is moving toward a top and should get you concerned. Because, in fact, the stock market is essentially an auction market; and, in general, we don't want to be bidding on merchandise that everyone else is bidding on. We'd rather find something great on a corner table with an auctioneer that no one's listening to, that we get to buy at a deep discount.

So what happens on the day of an IPO is that company is getting more exposure in the financial community than it has - than it certainly will be getting, on average, six months later. So you'll see that the average IPO is trading below its initial price six months after the IPO. And what that says to me is don't be concerned about getting in on day one.

Wall Street and the investment banks may want to create some bubbling enthusiasm in the marketplace to help them sell their positions, but in general, you're better off letting the company come public, have it go through a quarter of its earnings as a public company at least, and then start to evaluate the business at - usually what you'll find is a lower price than what existed on the first day.

So I would just discourage you from feeling that the train leaves the station on IPO day and you can never board it again.

BILL: Okay. That's good advice. And do you feel the volume is coming back up, though, from an IPO standpoint?

Mr. GARDNER: Certainly, there are more IPOs than there were in 2002. And it's not - we're not seeing the feverish pitch of, wow, another one doubled the day that it came public!

CONAN: Right.

Mr. GARDNER: So when you start feeling that, even use your intuition and gut a little bit, and as you go through a couple cycles you'll learn. You can also track IPO numbers so you can be more quantitative about it. But you'll begin to sense that, wow, the market's getting a little bit pricier than it was when nobody wanted to buy stock and no company could find a marketplace of investors ready to buy its IPO.

CONAN: Bill, thanks for the call. Good luck.

BILL: Yeah, and thanks Tom for the service you provide on Fool.com, too.

Mr. GARDNER: Thank you.

CONAN: And, in 30 seconds, Tom, any advice? The market is up 50 points today on Wall Street - but 60 points last time I looked, but it's been a rough couple of months. I know you say long-term, five, ten, fifteen years, but oooh boy!

Mr. GARDNER: It's been a tough market, and I think that it's not often surprising to find that going into the summer. A lot of the investing community goes away on vacation. The volumes trail down. I think if you look at industries that are out of favor, I happen to still love healthcare. The stocks have been beaten down, and if you think about the aging population you know you've got a marketplace where there'll be some great companies and great investments going forward.

CONAN: Tom Gardner, thanks very much.

Mr. GARDNER: Thank you, Neal.

CONAN: Tom Gardner, co-founder of the Motley Fool. You can find a link to his Web site at the TALK OF THE NATION page at npr.org. He joined us from Fool global headquarters - ha! There is such a thing - in Alexandria, Virginia.

This is NPR News.

Copyright © 2006 NPR. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to NPR. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.

Web Resources

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.