Will the economy pick up anytime soon? What can companies do to recession-proof themselves in the future? And will Wall Street and the banking system ever change?
Tom Gardner, CEO and co-founder of the financial advisory company, The Motley Fool, offers his insights on those topics—and explains why the financial industry needs a Hippocratic Oath.
Be Inkandescent: Tell us about what you think is coming, in terms of a potential uptick in the economy. Will the economy get better soon, or will businesses continue suffering through more months of recessionary drama?
Tom Gardner: I get asked that question a lot, and like everyone else, I can’t say for sure. But I wouldn’t be planning for a quick turnaround. There is a lot of fluctuation happening, and I believe we’ll continue to see ups and downs as we work our way out of this bad financial situation. Nonetheless, I am an optimist. I see a lot of opportunities for tremendous innovation. Just look at what Apple created during the last two bear markets.
Be Inkandescent: In the last few years, there has been a lot of discussion about what landed us in this financial mess, and who is to blame. What is your take on the situation?
Tom Gardner: I believe that most business owners don’t realize what we’re actually going through now commercially in the US. While there is something very good about technological change, I think the problem for a lot of companies is that they aren’t built to last.
What’s worse is that when you have a very big company, such as Enron Corp., or WorldCom Inc., and have it collapse, the fallout is devastating. Not only does it impact the people who work, supply, or have invested in those firms—it impacts the impression of US business around the world. And that is disgraceful.
I have to say that Wall Street and our banking system are a big part of the problem. In fact, last year I heard Whole Foods’ CEO John Mackey talk about the issue regarding how corporate greed is ruinous to the brand of entrepreneurship and business.
Be Inkandescent: Indeed. Mackey wrote on his blog, “Virtually all of our societal organizations seem to have either forgotten or have never really known why they exist and what their higher purposes are. Instead, they have often elevated narrow individual and institutional self-interest into the only purposes that they recognize as valid.” [Click here for more.]
Tom Gardner: Right. Look at Whole Foods. Mackey will be the first to tell you that he has made mistakes. And at The Motley Fool we are transparent when we say that we don’t always pick winners when it comes to stocks. Every basketball team will miss shots—but that doesn’t mean we have all lost touch with our core values.
What I think we need is a Hippocratic Oath for everyone who practices in the financial industry. Right now, there is a lot of doing harm. We need to change that.
Be Inkandescent: Talk some more about making your company recession-proof, or as recession-proof as possible—specifically, when you look back at how you fared in the 2000-2002 recession. Explain if, and how, that prepared The Motley Fool to better handle the recession that hit in 2008.
Tom Gardner: In 2000-2002, we took a big hit because we were reliant solely on subscribers and advertisers. So when their businesses took a hit, ours did, too. After that, we made sure that what we were doing wasn’t built on quicksand. We created offerings that didn’t rely on the one-off sale. We created a model that I love most, one that feels more like a partnership with a continuous revenue stream.
In our present model, we have a couple hundred thousand customers, and their contracts are from one to three years. Most importantly, we have a great relationship with them. We also have loyal advertisers who have been with us for years. As a result, when the current recession of 2008 and 2009 happened, there wasn’t a heavy blow to our business.
Be Inkandescent: What advice can you offer other companies struggling to stay afloat amidst the recession that seems it won’t end?
Tom Gardner: I encourage the small businessperson to look at his or her customer base, and ask, “What do I have in terms of bankable long-term commercial relationships?” If nothing else, at least be aware of the fact that you may not be in the best position to succeed in turbulent times. If this isn’t your situation, don’t treat the good times as a reflection of what your business is going to look like in every environment.
Be Inkandescent: What else should we do when times are rocky and the stock market is in flux?
Tom Gardner: Don’t run and hide. Rather, pick up a copy of LouAnn Lofton’s book, “Warren Buffett Invests Like a Girl—And You Should, Too!” (That’s Lou with Warren Buffett, pictured at right.)
It analyzes what will make or break your performance as an investor—your brain, you emotions, your personality. If you harness them, your investment returns will lead you to financial freedom in the Foolish fields of opportunity.
But if they harness you, close your eyes because the chili won’t stop hitting the fan. You’ll sell when you should’ve been buying. You’ll believe what you should have doubted. You’ll shout while you should’ve been learning. You’ll trade when you should always have been investing.
Be Inkandescent: You agree with Lofton that the key to investment success is mastering your temperament, right?
Tom Gardner: Definitely. That’s something that my brother David and I knew years ago when we founded The Motley Fool. If you want to sustainably make more and more money in the market—using common stocks or mutual funds—do the exact opposite of what’s on offer in the high-octane world of Wall Street.
There, men will be men, right up until they ask taxpayers to bail them out. So be smart, stay calm, and follow these simple Foolish rules that are inspired by the world’s third-richest man, Warren Buffett.
Five Rules to Investment Success From the Motley Fool
By Jeff Fischer
Advisor of Motley Fool Pro, and Motley Fool Options
1. Don’t: Panic. Volatility happens. Long-term investing success depends on how you manage your emotions during the rocky times. Keep your cool! Otherwise you’ll be more likely to make rash decisions that will hurt you in the long run. Take a page from Warren Buffett’s book, arguably the most successful investor of all time: If you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
2. Do: Focus on the Long-Term. Volatile markets are often compared to roller coasters—clearly because they both have their violent ups and downs—but a better reason might be that both can make you a little queasy. Instead of obsessing every hour on which way the market goes, invest in solid companies that you know will be around for the long haul.
3. Don’t: Cash Out. We only have to take the Way-Back Machine to 2008 to learn the lesson about how cashing out when the market takes a fall is a bad idea. Amidst the lowest lows of the recession, many people worried about losing even more money, so they pulled all of their money out of the market. Unfortunately, when you pull out of the market at the bottom, you’ve locked in your losses and won’t benefit from the returns when the market recovers. According to a recent Fidelity study, people who pulled out in 2008 and didn’t enter back into the market until 2011 only saw returns of 2 percent compared to those who stuck it out and saw returns of 50 percent.
4. Do: Re-Allocate and Diversify. Creating an all-weather portfolio that can withstand the ups and downs takes more than a few cherry-picked stocks or parking it all in a mutual fund. If you want to dampen volatility in your portfolio, keep 10 percent to 20 percent in cash for great opportunities that come along with a decline. If you’re a more advanced investor, you can use options and “sell short” to smooth returns and earn gains during declines, too.
5. Don’t: Let Opportunity Pass You By. Even companies that are solid long-term buys can be affected for the worse by a volatile market. While The Motley Fool doesn’t suggest you try to time the market, dips in the market are a great opportunity to buy blue-chip stocks while they are on sale.
About Jeff Fischer
Jeff Fischer, advisor of Motley Fool Pro and Motley Fool Options, started working at the Fool in 1996, soon after he won the Fool’s first year-long online portfolio contest. Jeff co-managed the original Fool Portfolio with co-founders David and Tom Gardner, and co-founded and managed the Fool’s Drip Portfolio. Jeff also wrote “Investing Without a Silver Spoon” and served as editor on several other Motley Fool bestsellers. All four of the real-money portfolios Jeff has managed or co-managed publicly since 1996 have beaten the S&P 500, although that isn’t his first objective, which is steady returns with reasonable risk.
For more information, visit www.fool.com.