Tom Gardner (L), CEO and Co-Chairman, The Motley Fool Company and Tien Wong (R), CONNECTpreneur founder have some fun Fooling around after a seriously informative chat.
“The best way to keep money in perspective is to have some.” — Louis Rukeyser, American financial journalist, columnist and economic commentator
“Every business opens a story.” — Tom Gardner, founder, CEO and Co-Chairman, The Motley Fool company
Georgetown natives, Tom Gardner and his older brother, David, co-founded The Motley Fool company in Alexandria, VA, in 1993 at ages 25 and 27. David had gotten the idea to create a newsletter to educate and enrich investors on long-term investing while he was writing for a newsletter called Wall Street, founded by journalist and economics commentator, Louis Rukeyser.
At a recent fireside chat at Big Idea Connectpreneur, Tom, now age 49, explained how David’s frustration with Wall Street’s lack of advocacy led the brothers to found a newsletter that has expanded, contracted, and evolved into a multimedia financial-services company with 300 employees and half a million subscribers.
The brothers value a more qualitative approach to investment advice. Tom explains: “David would write a column on why it’s so beneficial to work with a discount broker at lower cost, but then on the corresponding page, the newsletter would list all the reasons not to. While presenting facts this way can be a good exercise, it could also leave the reader unclear about what to do.”
David and Tom’s fondness for exploring what businesses would be fun to invest in started way before 1993. At age 7, 8, or 9 at least one day of every spring vacation would include a visit with a CEO or CFO at a company in which their father, Paul, an international banking attorney, had invested.
“There was some pain in losing a sunny day, but what we learned was that companies are run by people. We’d get in the car afterward and be laughing and say things like “I don’t trust that guy. Do you trust that guy, dad? I don’t know why you bought those shares.”
Business was a game.
“It wasn’t that corporations were distant from us and taking advantage of people and society. They were run by people that made mistakes, made brilliant decisions, that were innovative, that fell behind, and that changed the world.”
Their maternal grandfather, H. Gabriel Murphy, showed them that business can literally be a game. He was the largest minority owner of the Washington Senators/Minnesota Twins franchise of the American League.
So, when David asked Tom to co-found an investment newsletter with him, Tom agreed to leave his linguistics studies at the University of Montana and his put his BA from Brown to work championing shareholder values, advocate for the individual investor, and call out the industry’s lack of transparency and corruption.
“Besides,” he deadpans, “We were unemployable.”
Tom shared some highlights of their journey and lessons learned:
Why they call themselves Foolish in a serious industry?
One way to differentiate a brand is to acknowledge people’s complaints about the industry and show them you’re different.
David was looking in a Bartlett’s Quotation book and saw a quote about the Motley Fool from Shakespeare’s “As You Like It.” He and Tom liked the idea of being like the wise fools that could speak the truth to the king without getting their heads chopped off because they were amusing.
Being contrarians helped them differentiate their brand from the larger financial advisory businesses in the U.S. “These advisers have not been serving others as well as they have been serving themselves over the past many decades with their fee structures and conflicts of interest,” he says.
There’s more than one way to start a business
The brothers started offering subscriptions to a print newsletter in 1993. They sent out a mailing to about 1200 friends and family. They thought they’d get 600 subscribers at $48/year, but they got only 8. Tom says they realized they didn’t have a business, but lucked upon an April Fool’s joke that spiraled out of control and the Wall Street Journal wrote about it.
They had decided to use humor to call out the unethical, and probably illegal, penny stock promotion they were seeing in financial chat rooms.
“People were taking an 8 cent stock, telling an incredible story about it, it would jump to 38 cents, they would sell them and it would fall back down to 8 cents or lower.” On April Fool’s Day, after consulting their lawyers, they hyped a fictitious penny stock on an exchange that didn’t exist, the Halifax Canadian stock exchange. Over the weekend, they watched others in the online community start playing along.
Tom recalls the excitement when they recognized people understood what they were doing and supported them: “Someone posted ‘I got my shares! It was $4,000 and it’s $40,000 already, and two hours later, it spiraled out of control.”
Some financial advisers were taken in by their April Fool’s prank; others were furious.
Tom recalls: “We got death threats to our work phone line, which unfortunately was David’s home phone number.”
The Wall Street Journal published a piece about their April Fool’s joke.
This prompted a call from AOL, which had just gone public.
Ted Leonsis, whose marketing communications company, Redgate Communications Corporation had been acquired by AOL that year wanted to break through with new content. He invited Tom and David into AOL’s offices to speak with eight executives about starting an online business.
They almost blew their first investment
People following local investors knew about Leonsis, an entrepreneurial Georgetown University alum. Before selling Redgate to AOL, Leonsis had net $20 million when he sold his previous venture, a technology magazine focused on the personal computing industry, to Thomson Reuters for $40 million.
Ted slid a piece of paper across the table to Tom and David. They thanked him for the incredibly generous offer but stuck to their father’s pre-meeting advice and told him they didn’t want to sell any equity. They were looking to sign a partnership deal.
“That enraged Ted,” Tom recalls. “He was so mad.” This was before everyone had mobile phones. It took the brothers a half hour to drive back to their Alexandria offices before they could call their father and tell him what they’d done.
“What was the offer?” their father asked.
“He offered to buy 19.9% of the company that we would incorporate called The Motley Fool. And he offered $600,000.”
There was an audible pause on the other side of the line. Then Dad said:
“You said NO?”
“But, dad, you told us not to sell any equity!”
“Three thousand dollars in sales and a $600,000 investment for nearly 20% valuing at $3 million? I’ve never heard of anything like that! You have to go back and say yes!”
So they did. That was their first investment and they raised about $55 million before the great recession of 2001.
“David’s idea was to hire people who are smarter than we are,” Tom says, “and it ended up pretty easy to do so.”
A painful lesson about what drives value
Being on AOL’s platform while it was growing rapidly helped The Motley Fool company grow. They earned about 40 cents for every $4 AOL earned. They loved the organization.
But when the great recession hit in 2001, AOL could not sustain them. They realized, too late, they needed to grow their business beyond AOL.
Tom explains: “We built our business up with the financing and had 10 advertisers that were generating 90% of our revenues. We didn’t see anything wrong with that because we raised so much money we thought we’d be fine.”
Unfortunately, 8 or 9 of those advertisers were discount brokers. When 2001 happened, one after the other informed them they were cutting spending either 80, 90, or 100 percent.
“We watched our entire business fold over a six-month period in 2001 and realized they had way too concentrated a business in advertising and too few customers. That’s why subscription really saved us and aligned us with the people that we’re working for.”
By that time, funding was scarce and temporarily out of reach for their company.
What doesn’t kill you…
The Motley Fool had been careful with its money. Up until 2001, it had raised $55 million and grown to 80 employees. At some point that year, the company had $1 million in cash and $5 million in debt with a 20% interest rate. After one year of interest, they needed to have a few rounds of layoffs. To its credit, the organization prided itself on being transparent and posting its numbers internally. The layoffs didn’t come as a shock.
“It was a beautiful, painful experience,” says Tom. “Each time, people got in line to say thank you, make it work, what you’re doing matters to people, it’s worth it. Let’s figure it out. Some of them are here with us today.”
By 2007, The Motley Fool company began the highly unusual process of buying back all of their venture investors and choosing to remain private. One investor sued them to try to force them to go public.It was resolved.
“That gives us tremendous flexibility,” says Tom. “As a privately owned company of our size we generate sufficient cap to expand. We’re in a great position. However, in order to buy out those investors between 2007 and 2012 we had to pay about $120 million. We have sat and watched organizations run past us with huge financing rounds and be able to innovate in ways that we’ve dreamed about. But we made that decision going back to our dad’s initial advice: ‘If you can, maintain control of your vision.’”
The net result, now we’re on the other side of it and age 49, 24 years into the Motley Fool, I’m more excited than I ever have been because we have the resources, the ideas, and the network to deliver much bigger changes in the world of finance than we have.
Differing points of view enrich companies
Though both Gardner brothers have ideas for keeping their business relevant, they see them through the lens of different, complementary personalities. Tom’s the self-described people person who practices his listening skills while he’s talking. David’s the systems thinker, who in middle school at the exclusive St. Albans prep school in Washington, DC, organized an underground, 24-team strat-o-matic baseball league. He kept track of statistics, compiled standings, and organized the league’s complicated schedule.
Tom and David still co-lead The Motley Fool Stock Advisor, the company’s flagship subscription offering and David is the lead advisor on The Motley Fool Rule Breakers advisory service. David invented the Motley Fool CAPS site, which features community intelligence of 75,000+ ranked stock picks drawn mainly from the Motley Fool Community. Their company reaches millions of people each month through its website, books, newspaper column, television appearances, and subscription newsletter services.
How to remain relevant
The Motley Fool company is organizing its intellectual property more efficiently so members can view the data from different investing styles to see which is right for them.
At the moment they’re also creating subsidiaries and taking outside investment in those from investors with a super long-term perspective.
They’ve made available the FoolWorks tool at the core of developing a motivated, committed corporate culture. The brothers have learned to work through conflicts, rather than avoid them.
Tom says: “We’re interested in helping businesses develop their cultures with solutions for organizations and entrepreneurs that want to build great long-term properties.”
Tom’s advice: “We should all be looking at the companies we’re invested in and the businesses we’re involved in to make sure they are rapidly accumulating digital assets. Wherever your asset base is not digital you’re going to become rapidly irrelevant as a business in the next 10 years.”
“The worst thing you can do is sell a winner too soon,” he cautions. “Mathematically, we’re really rewarded for thinking long-term. In the private markets and the public markets, the best decisions we can make are the ones we plan to hold onto for the next 10-20 years.”
How the Motley Fool Team Approaches Investing
The single idea The Motley Fool stands for most is a long-term holding approach to building a personal investment portfolio. The team brings a qualitative view to investing. They favor founder-run businesses, which tend to beat the market by 2%. There are about 550 of them in the U.S. They contact all the CEOs and get to know the founders and teams. Their network is key. There’s someone on their team whose full-time job it is to point to interesting people to get to know.
“Thirty-five percent of my investment decision relies on mathematics,” Tom explains. “Sixty-five percent relies on a review of the products, the competitive advantage of the business. But, really more on the leadership team who owns that business, who invested in that company along the way. What’s the decision-making structure of the leadership of that organization.”
Tom says he is wrong 40% of the time and about 10-12% of his investments drive 85% of his returns. Other investors at the company are right 80% of the time and their aggregate returns are lower but their portfolios are less volatile.
David approaches the market as a venture capitalist would. He seeks out the highest-growing emerging businesses that have founders actively involved with the business and are truly innovative and disruptive. He’s always looking out of the next Amazon, Priceline or Facebook. Investing in search of the next great growth company means being right less frequently, e.g., a few companies drive 90% of your portfolio’s returns, and you’ll best the market in an open market like the U.S.
The wise Fool distinguishes actions depending on the stage an investor is in.