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How has your investing approach changed in the past 25 years?
David: Back in 1995, I had this conviction that Yahoo was going to be a good stock. And — spoiler alert — it ended up being a very good stock for quite a while.
But in 1995, Yahoo was trading for $29, and I had calculated my own valuation for it. I had it at $25.60, or something like that, so I was waiting for Yahoo to get down to $25.60 so I could buy. It never did. What it did, though, was rise to $2,560 without my (or maybe your) money on it — and that was the last time I was going to sit there and dig in that I had a valuation in my head that was superior to the market's and that I was going to insist that the market conform to what I thought should happen so I could get rich. It changed me forever into saying, "It's about buying greatness. It's not about my discounted cash flow analysis out to the second decimal."
Tom: First, find people that you believe in so much, and I mean this in the public markets, since that's primarily where we're investing. We think of it with entrepreneurs and start-ups, but I mean it with companies of any size and in the public markets. Find people you believe in so much that you wouldn't feel bad if you lost money with them.
I think of the quality of the leadership team. What can you learn from them? Finding investments where, again, if they lost you money, you would learn because you believe so much in them that something else must have gone wrong that you could learn from. So starting with the people has been a big change.
Which brother holds the record for the best return on a stock over the past 25 years?
Tom: First place goes to David probably 7 times over with seven different stocks like Amazon, Netflix, MercadoLibre, Priceline, AOL. It truly is incredible what David and his team have created from an investment performance standpoint.
And I want to highlight one thing about that: It is a very contrary approach, so at certain points along the way, there were skeptics, too. "Well, listen, when the market goes down," they said. All of our stocks go down more than average — or many of them, because we're growth stock investors — but Dave's stocks can really take a hit and bounce back, and he has stuck to his approach all the way through, and now you see the amazing returns that come from it that we're all enjoying.
What's a good stock idea for a young graduate looking to start investing?
David: I don't think there's any reason to say that a stock would be more pertinent to somebody at that stage of life than any other stage of life, unless you're retired and want a dividend stock. But for the most part, I just think we all do well looking for excellence.
So, for that new graduate, I think the most important thing we could give that person is a stock or company that they already know and admire.Some of my best experiences are like, "Oh, wait. That's a stock. I could own that." And there's a lot of people who haven't been switched on yet to that realization. They're wearing clothes. They're going to stores. They're having experiences online. They haven't yet realized that they could be a part-owner of all that.
I think every cup I've ever bought at Starbucks has been more than paid for by the profits I've made. I know my Netflix subscription fees have more than paid for themselves thanks to the stock. So a lot of stuff's free because the stock I own has let me buy all the product I possibly could. That doesn't take any real genius. It just takes somebody switching on.
Tom: I would start with the people around you. I've always loved the Warren Buffett line, "Look around you as a high school student or college student and ask yourself, if they were a stock, who you would invest in?" Maybe if you want to be nasty, you can figure out who you would short.
And, of course, you'll be surprised by the result. There are a number of people who didn't thrive in the academic atmosphere of sitting at a desk hour after hour, and they ended up being really wiry and couldn't sit still — and very entrepreneurial in their thinking and they created something great. So, Buffett causes you to think about stocks and businesses like people and vice versa, and I think that's a great place to start.
Then I'd go to the people company out there. I would buy shares of Facebook because to bring home David's point, these companies are right in front of us. They're amazing. They're controversial as they get large — it's impossible to be the size of Facebook and not be very controversial — but they're amazing companies with amazing cultures and we should start with the things right in front of us and buy a few shares of those.
One of my favorite moments is when I talk in a classroom. I understand how this would happen, of course. I say, "I think Facebook would be a great stock," and they're like, "Pfft, Facebook is over. I don't go on Facebook at all. I only go on Instagram." And I'm like, "They own those guys." So, I think Facebook is a great starting point for any investor.