Harris: We welcome now to our guest microphones Tom and Dave Gardner, who run the Motley Fool area on America Online and Fool.com on the Worldwide Web, and wrote The Motley Fool Investment Guide and are now in the process of publishing a couple more books that will be out in early 1998 on just basic financial stuff. Welcome back, guys. It’s good to see you again.

Dave Gardner: Always good to see you, Paul.

Harris: Let me ask you one basic question here and I’m going to put myself in the shoes of every person in the consumer press who knows nothing about the stock market and everybody else who thinks they want to know something about the stock market. I’ll start with the simplest possible question: What the hell’s going on with the stock market? Up 100 points one day, down 100 points the next day.

Dave Gardner: That’s all you’ve got to do and you’ve got a job for Money magazine, Paul.

Harris: Thank you. What’s the story, what’s happening on Wall Street?

Dave Gardner: Well for one thing, while it sounds like a big number, 100 points on a percentage basis does not really matter much at all. Our analogy here, Paul, is the weather. Imagine if the temperature rose 1% today. Well, it was 70 degrees yesterday, so that’s .7 degrees. And if the weatherman on TV were saying, “Whoa, we’re like .7 degrees over what we were yesterday…” Basically, that’s all the stock market is doing. It’s just that over time the Dow Jones Industrial Average, which the media uses to measure the stock market, has gotten bigger and bigger and bigger because American business has grown, and now we’re up to seven and eight thousand. So, 100 points is only 1% on those. I think the media gets caught up in these numbers too. I don’t think there’s a lot of people even in the financial media who really recognize that 100 points is not that big a thing. So you’re right, the hysteria is almost getting boring.

Harris: Because that’s all you see written about the stock market. The Dow dropped 77 points. Peter Jennings will report that as if to say, “Don’t ever buy anything ever again. I hope you got out of stocks when I told you to because it was down 77 points. And those are not Canadian points, they’re real points!”

Tom Gardner: There’s always a fascination with catastrophe in the media and also when the ’87 crash came along there were a lot of magazines saying “We predicted it,” “Our magazine predicted it,” or “This individual predicted it.” So they started selling newsletters and whatever. So there’s always this fascination with catastrophe and wanting to be the predictor.

Harris: But there are people who, when the stock market went down over 200 points one day, they were walking around going, “I told you! I told you to get out! For the last three years I’ve been telling you to get out of stocks!”

Dave Gardner: And in the next three days it went up 250 points. That “Down 200” was on the front cover of The Washington Post the next day. Of course, the next Wednesday the market had actually risen above where it had been, but there were no front page articles because it doesn’t merit front page articles.

Harris: So this is the basic kind of stuff you guys teach online. I’ve been a fan of you guys for a long time and we’ve e-mailed back and forth and gotten to know each other. One of the things the Motley Fools do, and I mentioned this introducing the fact that you were going to be here today, is you tell people “If you don’t understand it, don’t invest in it. Instead figure it out and then get on board because it’s a nice train to be on. It’s a good ride to go on if you can figure it out and it’s not that hard.” Wall Street makes it hard, don’t they?

Tom Gardner: Right. They’re going to make money if you’re ignorant about this. You’ll give your money over to them and they’re going to start charging you fees that you’re not aware of. If you just start reading a couple books and learn this, you’re going to end up investing in things that you know about, that are right around you. You go to McDonald’s, buy Coca-Cola, go to The Gap — these are the greatest stocks. They’re stocks that have grown at a rate of 20% to 30% per year. So you’ll double your money every 3 years investing in great stocks like this. It may not happen forever, but if you look at great companies you’re going to end up making a lot of money, you’re going to know about it, you’re not going to have a broker that’s bothering you during dinner, you’re not going to be paying them a lot of money to do something that you can do yourself very easily.

Harris: Tom and Dave have The Motley Fool Investment Guide that’s been out, they’ve got a couple of new books coming out next year, and you’re syndicated in newspapers now, right?

Tom Gardner: That’s right. We don’t have a local paper yet. We’re waiting for The Washington Post and The Baltimore Sun to pick us up.

Harris: Those rags. Why do you want to be in those?

Dave Gardner: OK, should we shoot for The Washington Times?

Harris: I think you should go for the City Paper. “Single, white, bi female seeks investment counselor.” You’d be perfect for City Paper. Anyway guys, what’s the new book coming out next year? Is it going to be personal finance instead of just stock market stuff?

Dave Gardner: It really is, Paul. With our first book, the intention was to arose an interest in the stock market which few people know about and teach people how to beat it. Our second book is…we started realizing that a lot of people are totally intimidated or scared of or have no interest in the phrase “stock market.” In fact, most people have to get into a position first where they can invest in the stock market. And we talk about credit cards, for example, which most people have six or more of. The average American is carrying $4,000 over to next month unpaid on a credit card.

Harris: $4,000 in debt? Maybe not having six credit cards would be a good way of handling that.

Tom Gardner: Have you read an advance copy of our book, Paul? The average percentage that people pay on interest is about 16% to 18% on their credit cards. So one of the first things we tell people is to take a half-hour out of tomorrow afternoon and call their credit card company. Look at your statement first, just look at that little percentage line to see how much you’re paying. Mine said 18%. Then just call the company and say, “You know, guys, I’ve enjoyed our business relationship, but there’s this other credit card company.” You can make up a name if you want, because there are thousands of them out there and it’s so competitive. You say, “These guys are going to give it to me for 12%, so I’m going to close my account.” And then what will happen more often than not is that they’ll say right on the phone, “OK sir, you’re now at 12%.”

Harris: They’ll actually switch you to a lower percentage?

Tom Gardner: Yep! And that’s a 33% reduction right there! It literally takes a half-hour to do it and people can just call their credit card company directly. You should also pay attention to your monthly bill, making sure they’re not jacking new charges in there because that will happen with credit cards.

Harris: You know, I get credit card things. Every other day someone wants me to get a new credit card.

Dave Gardner: OK, here’s a great idea for those. If it’s a self-addressed stamped envelope that you’re supposed to return it to, put all the junk mail in that like a football. Lick it and stick it in the mailbox and send it right back to them.

Harris: Because they have to pay for that.

Dave Gardner: They have to pay for that. Fight junk mail.

Harris: OK, that’s a great idea. Give me another tip that people should know, a basic way to get in front of their money.

Tom Gardner: OK, here’s another one. When you’re buying a car, never go down do the dealership and negotiate, ever. Go and test-drive the car that you want and then fax your bids.

Harris: Well how are you going to test-drive it if you don’t go down there?

Tom Gardner: You’ve got to go down there and test-drive it, but just say “I just want to test-drive it, I’m not looking to buy right now.” Return home, get all the local dealers’ numbers, get the fax numbers, and just fax the requests out and say, “I need to know within 48 hours. I’m ready to buy. Here’s my color. I want the headlight washers.” Never go down there and negotiate, because when you do, they’ll have 6 salesmen, they’re going to run all these different ideas at you, all these legal contracts and stuff. If you do it from home, you have home court advantage. You’re sitting back there, you fax it to them, you say, “Two days later, and I’m going to take the best bid.” And you’ll see these guys, there will be a difference of $3,000.

Harris: $3,000???

Tom Gardner: If you’re buying a new car. And then you take the $3,000 and buy a lot of copies of our paperback book for $9 a shot, just to thank us.

Harris: That’s when you splurge on those headlight washers. The kids love the headlight washers.

Tom Gardner: You gotta have ’em.

Harris: All right, great tips. And by the way, Tom & Dave’s stuff that’s online comes at no cost to you, the computer user, or investment consumer. Is that right, guys?

Tom Gardner: That’s the way it has to be on the internet. If you charge money, people don’t go to your site and we’re bitter about that. No, what’s happening is that in the business, so many people have put out so many really expensive newsletters or charge $2,000 to attend a seminar that this internet is great. It’s about mass consumer access to information that they couldn’t have gotten before. The guy’s who are hocking these $2,000 seminars are promising some pretty impressive returns.

Harris: I wanted to ask you about this because you hear about all these guys if you read Investor’s Business Daily or The Wall Street Journal sometimes. You hear about these guys who say, “If you do my plan, you could make 20-30% a month on your money.” Where for most people, if they can make 20-30% a year, they would be ecstatic!

Dave Gardner: Absolutely ecstatic. The stock market has returned about 11% a year. So to say that you can get 20-30% a month — we had our news writer, Randy Bufumo, sit down and run the numbers on that, and if you have $3,000 today and you start with one of these plans to get 20-30% per month, 10 years from now you have over thirty-nine trillion dollars. So, why write the book?

Harris: I believe that is 10 times the national debt of the United States, thirty-nine trillion dollars!

Dave Gardner: Some of these books and newsletters, some of them actually sell.

Harris: Thirty-nine trillion dollars? I’m not taking the pay cut. We’re at 40 right now and I’m not coming for any less. So what is the story with this? Is this a scam? Is somebody out there telling people bad information or overcharging for information?

Dave Gardner: I think what most of it comes from, Paul, is that most of us never get an education about money and investing growing up. So you end up either in debt, so you’re a little desperate possibly, or…

Harris: That’s the lottery concept right there.

Dave Gardner: …they actually have some savings and nobody taught them what to do with it, so they end up giving it over to a financial professional and the financial professional charges them to manage that money. In some cases they do a good job. In many cases they overcharge and provide not a very good return. If you are the average person who doesn’t know a lot about money and suddenly you hear this fast-talking guy saying “Every two-and-a-half to four months you can double your money,” unfortunately there are a fair number of people out there who buy into that notion. You’re right, it’s the lottery. It’s the same thing the states are saying about the lottery, “You could be the next one. Just put consistent savings into the lottery and pay us 50 percent of what you have, like the highest possible tax you could pay us.”

Harris: You have a better chance of making money if you invest in the guy who tells you that he heard from another guy that we should get into this stock. Is that basically it?

Dave Gardner: Right, any kind of gambling you’re looking at a negative rate of return, whether you get lucky once or over a week.

Harris: But do you guys find that most people don’t even know how much money they have? Is that part of their problem?

Tom Gardner: Actually, if you do have a fair amount of debt and you have a number of credit cards, it’s somewhat hard to calculate. You obviously have to weigh those debits against those assets against maybe if you have a 401k at work. But that’s the first thing we counsel: get rid of all your debt. That’s the first thing that people should do. That’s why our first book was about the stock market and then we started thinking, “You know, some people shouldn’t be investing in the stock market because they have debt.” So once you get rid of that, you’re ready to invest your savings, and the irony for us there is that so many people don’t know how they did last year with their savings. So people will say, “I think I did all right.” Then I ask, “Well, how did you do?” and they won’t be able to tell you. It’s sort of like following Major League Baseball and not having any statistics to decide who should win MVP. So you really need to keep stats on yourself. Just see how much you had on January 1st, how much you had on December 31st, and just calculate the percentage difference. Last year, for example, the stock market was up just over 20%, 20.3%. So if you take your time at home or maybe you’re in your car and you have your statements right beside you and you take your hands off the wheel and you look at your statements, you might find you’re up 22%. If you’re up 10% or 11% and somebody else is managing your money, there were a lot of easy ways you could have improved your return and of course, we write about them all the time.

Harris: Your first book, The Motley Fool Investment Guide sold well over a dozen copies last year, didn’t it? No, actually, that one was damn successful.

Dave Gardner: I think that’s platinum, two dozen.

Harris: Two dozen it sold. And now they have a couple more books that they’ve been working on all summer long that are coming out early ’98, is that right?

Dave Gardner: January ’98, right.

Harris: And what are those books about?

Dave Gardner: Well, the first one’s called You Have More Than You Think, which we firmly believe, and which we’re telling people. You actually have a brain, you have time, and you should apply these things to your money because so few people actually do. That’s sort of the way the book touches off, but by the end it has you positioned to make your first investment and it’s teaching you all the stuff that nobody ever really did about money, in very simple language trying to throw in as many jokes as possible because these books can be horribly dull.

Harris: Yes.

Dave Gardner: And then the other is just The Motley Fool Investment Workbook which is the one where you roll up your sleeves, take your pencil and your calculator, and you scratch through our book. You’re learning all the way, we’re making jokes again, but you’re figuring out your own financial situation right in the book.

Harris: Because most people have no idea about that. Now, I also promised that we would give a couple of simple investment tips that people could learn right here on the radio. You were talking to Dave before about how people don’t even know that they should be trying to beat the market. They have no idea what the market’s actually doing, they have no idea what their money’s actually doing, and, when they look at their entire portfolio they should be trying to do that. So, give me a couple of ideas.

Tom Gardner: Well, the first thing Paul is, before we actually do this, we’re going to have to have people send us $2,000. So let’s have a little dead time while they fill out the check.

Harris: One of those seminars, yeah.

Tom Gardner: Really the first thing that we say to people is just recognize that you can start with as little as $50. A lot of people think you need $10,000 or $20,000 to get into the market.

Dave Gardner: What Tom’s really referring to are called direct purchase plans or dividend reinvestment plans. Horrible phrases that are very dull, but the basic idea here is that you can send money directly to a company and purchase stock from that company.

Harris: What kind of company are we talking about? Coke?

Tom Gardner: Big companies, great companies. And, once you’ve enrolled in that plan, once you’re set up, you can call any company directly and ask if they have a plan. And if you don’t know their phone number, for example, just look on their products. It has the number and just start asking and you’ll eventually will get through to the right people by asking for the direct purchase plan. But anyway, you can just send off a check every month after that for $10. Now, Coca-Cola of course right now is somewhere around $60 a share, so…well I can’t afford a share…well, what you get is one-sixth of a share. Ten bucks, plus ten bucks next month, you just keep adding to it like that. So over the course of time, you can build up good savings in a few great companies. And that’s when we talk about starting with a very little amount of money. Any money that you have as savings, that you can save for more than two years, should not be in your bank account, because you’re getting 3-4% there and that’s what inflation is. You’re not gaining anything. So people who are overly safe, risk averse with their money and just put it in a bank account are really gaining nothing. By just doing it to Coke, use Coca-Cola as your bank. Coca-Cola has grown at a rate of 16% a year and so that means every 4 or 5 years you’re going to double your money!

Harris: All right. Let’s say somebody’s in their mid-30s or even maybe 40 years old. They have 20, 25, 30 years before they’re going to retire, so they have 401k’s or IRA’s or 403b’s or pension plans or some sort of deal like that where they’re putting money away. Should that go into a money market fund or a mutual fund or what?

Dave Gardner: Definitely not a money market fund. That’s what people default to because they think it sounds safe, they’re not going to lose they’re money. What they should do…if you have more than two decades you should be getting aggressive with that money. Put it in a mutual fund that is a growth fund, a U.S. growth fund, not an international fund. And the second thing you should do is go to your 401k administrator and get an index fund put in there. Because what people don’t realize is that 80% of the mutual funds that are marketed out there during the Super Bowl and in magazines and newspapers lose to the market’s average each year.

Harris: Say that again. 80% of the mutual funds in America lose to the stock market every year?

Dave Gardner: That’s right, and people don’t know because they don’t know how the stock market did. And so fund companies get away with that all the time. And part of the reason they do poorly is because they have to take some of your money each year and spend it on advertising to promote, to get new customers, and to pay themselves.

Harris: Believe me that comes before advertising.

Tom Gardner: That comes before the advertising, correct.

Dave Gardner: But, what an index fund is is, it buys the whole market. It buys 500 stocks. It’s run by a computer so there are very, very low fees. There’s no manager to pay and they don’t really advertise very much. Vanguard runs that index fund and there are other index funds. It’s better than 80% of the funds out there with almost no fees attached to it. So we’d say get that in your 401k plan and then outside of your 401k, start adding $5 a month, $10 a month and definitely get your kids investing because they have 60 years ahead of them.

Harris: All right, now let’s talk quickly about the Foolish Four, four stocks that people can invest in and hold them for a year, two years, whatever, and then buy more stocks. These are big companies, right?

Tom Gardner: Yep. The idea here is to buy companies that are very sound, but have a lot of bad press about them at the time and Phillip Morris is the best example of this right now. Nobody likes Phillip Morris and it looks like it’s going to be paying a lot to a lot of different states for reparations and damages. But the fact is Phillip Morris owns Kraft Cheese, they own Jell-O, I think they make Ragu sauce, it goes on and on. They’ve got a huge business that’s temporarily depressed. And there’s a mechanical approach that we teach in our book that enables you to locate companies like this and you just buy and hold them for 12 — or 18 months now with this new tax law — and you do the mechanical approach again and make any changes necessary. The companies today for example are Phillip Morris, Exxon, DuPont, and Eastman Kodak. All huge names.

Dave Gardner: Not all of them are getting really bad press for very good reasons like Phillip Morris, there are going to be a lot of people out there who just don’t want to invest in that company. Which is fine too, but Eastman Kodak and DuPont, General Motors, Exxon. These are…when people get really excited about an industry like the internet, what this does is get you involved in an industry that people have forgotten about. International Paper. People say there’s going to be a paperless office. Sure, we’re maxing out more and more paper every year in offices, and so International Paper has been a great investment. So it’s buying out-of- favor very large companies that are going to bounce back.

Harris: So you’re saying I made a mistake when I invested all my money in those T-shirt sales on the mall that have just been banned by the government. OK, good tip, guys, thanks.

Tom Gardner: If you enjoyed it, Paul, then we celebrate that.

Harris: Thank you. You can find The Motley Fool on America Online at keyword “Fool,” and www.fool.com on the web, and the new books are coming out the first part of next year, and they’re in newspapers, but not The Washington Post.

Tom Gardner: So call them tomorrow and say, “I want my Fool! I want my fool column in The Washington Post!”

Harris: And they’ll say “I’m sorry, what department is that?”

Dave Gardner: Our final statement is “Go Skins.”

Harris: All right, there you go.

Dave Gardner: We’re Washingtonians, born and bred.

Harris: Thank you, guys.

Tom Gardner: Thank you, Paul!

Copyright 1997, Paul Harris.
Transcript by Doug Houser.