Jan. 26 -- David and Tom Gardner, co-founders of the Motley Fool, the investment and financial-advice Web site, have started the year with a new investment book, "The Motley Fool Million Dollar Portfolio."
With the 39 percent decline in the Standard & Poor's 500 Index last year, this might not seem like the time for an investment guide. The authors say their recipe of picking companies with low leverage, strong balance sheets and quality management will yield results if you are patient.
Chief Executive Officer Tom Gardner, who co-founded the Alexandria, Virginia-based company with his brother David in 1993, spoke with Bloomberg News about investing lessons from their book as well as plans to start an asset management business. Excerpts from the interview:
Levinson: How does "Million Dollar Portfolio" vary from advice you offer on the Web site?
Gardner: "It's been about five years since we published a book. Each one of our books up until now has taken on a single theme. This book is a collection of the different philosophies that we advocate on the site. We wanted to give people a full look at our investing playbook and help them put it together in a single portfolio."
Levinson: Much of the advice in the book seems to focus on investing basics such as "invest in what you know" and "know who the owners" are. Is this too simple a strategy for these times?
Gardner: "One of my favorite investors is Jack Bogle, the founder of Vanguard, and he said on our radio show years ago, 'The average investor needs the extra emphasis on what the basic principles are in order to succeed.'
"The most important lesson we're teaching is that to be a successful stock investor you're going to fail three or four times out of every 10 and you have to come to terms with that or if you can't handle that you really should index or be in mutual funds."
Levinson: Motley Fool has announced plans to introduce retail investment services and funds. Does that put you in a bit of a conflict with your current role as the outside observer and commentator?
Gardner: "We view it as an extension of membership for us. We have heard from a certain collection of our visitors to our site that they like to do it themselves and they're here to gather data and second opinions. Then there's a big cut of people who have asked us to do it (invest) for them. It's something we've resisted. We aspire in different ways to be a next generation asset manager with regard to transparency and communication. It will be a separate subsidiary."
Levinson: Will you shy away from criticizing your own funds if they don't do well?
Gardner: "Even if we were such an insecure organization not to hold ourselves accountable, our community is there. There's no stopping them. It's not unusual that in any given week that someone has blogged something that's critical of our company. Our approach is to learn from it."
Levinson: Will you have lower fees than other mutual fund companies?
Gardner: "We're going to have a fulcrum fee which is a little-used feature in mutual funds and it ties to performance so it swings like a fulcrum based on how well you do against the benchmark. We definitely feel some pain if we underperform." According to a regulatory filing, the fund's performance will be measured against the MSCI World Index.
Levinson: Do you have a million-dollar portfolio?
Gardner: "A lot of my wealth is wrapped up in the ownership of our company. A lot of it will depend on the value we're able to create as a business. I have a lot less capital today than I did 15 months ago or even four months ago.
"The direction you're headed is more important than the present location. It's the aspiration and setting goals and targets that help you understand the principles that drive compounding your portfolio that will give you a shot at assembling a million-dollar portfolio. Our hope is that we can teach and train people to be more patient and through that patience get their own million dollar portfolio."
Levinson: What's your net worth?
Gardner: "I really have no idea. I don't sit around counting my net worth. I think a better thing to focus on in our lives is how much you're giving back than what you have accumulated."
Levinson: Many people feel they have been burned by the market results of the past year. Do you think it's still a good time to invest?
Gardner: "I do, but it's going to require a steel stomach. When things are getting darkest for the economy usually equity values begin to turn at that point. I do think it's a good place to put your extra savings but for us it's got to have a minimum of a three- to five-year holding period."
Levinson: What kinds of stocks do you like right now?
Gardner: "I'll give three factors that I like today. I love companies where the CEO is active and the founder and has a large stake. Second factor I look for is a pristine balance sheet. We're definitely learning the risks of leverage. Third, in this environment, consumer staples, basic necessities, I certainly think oil companies. I like to focus on businesses where I know for the next several years people will be buying Procter & Gamble products, Johnson & Johnson products, buying from Costco, buying from Wal-Mart."
Levinson: If someone doesn't have time to read the book, what are three things one should know?
Gardner: "The first thing is know thyself. Warren Buffett was asked why he's so successful and his answer was because I've learned to manage my temperament. Know your temperament, know your time horizon. Number two, have a diversified portfolio with a minimum of 12 to 15 stocks. For a lot of new investors, they should be a lot more liberal in the number of stocks they buy. If you own 50 stocks you get two benefits, you'll get a cross section of many different industries that you can learn from and you won't get emotional about any one of them failing. Finally, the importance of knowing what questions to ask if you're working with an adviser about how your portfolio is being assembled, what the fees are.
"If you took those three things away and handed the book to your cousin or aunt to read, that would do it."
"Million Dollar Portfolio: How to Build and Grow a Panic- Proof Investment Portfolio" by David and Tom Gardner is published by Collins Business (260 pages, $26.99).