David Kuo talks to Fool UK co-founder Dr David Berger.
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David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and today I am joined by Dr David Berger, one of the co-founders of the Motley Fool. Now, on the 23rd of September, 1997, the Fool published its first article, and we are going to turn back the clock, together with the help of David, and have a look at the Fool 12 years ago, and when it first came into existence. So David, first of all, welcome to the podcast.
Dr David:
Thanks very much, I'm really pleased to be here, I hope it's not going to be as embarrassing as David Cameron and the Bullingdon Club, but I'm sure you've got a few surprises for me – we'll see how it pans out.
David:
We have got a few surprises for you! Now, we would like to kick off by asking you to tell us how the Fool was first born.
Dr David:
Well, early '90s, I was a junior hospital doctor, got interested in investing, this was around the time that obviously the internet was being born, early to mid '90s, and I came across the Motley Fool US site in early '95, it had just gone on the web as an article in the International Herald Tribune, I started reading it, I thought, "This is great – refreshing, iconoclastic, absolutely fantastic". After several months, I started writing articles, which were published on the site, the whole thing was just a kind of voluntary, had this sort of air of this kind of self-help group, I started writing articles published on the US site.
David:
So this was in 1997, I take it?
Dr David:
This was '96, early '95 I came across it, was reading it, through early '96, started publishing articles, mid '96, started publishing articles on the US site, became the sort of foreign correspondent, if you like, bringing "Foolishness" to the UK shores, and then it just became absolutely obvious that somebody had to challenge the prevailing investment personal finance orthodoxy in the UK.
This was about the time when the first endowment scandals were starting to break, and people were starting to realise just what terrible investments some of these had been, with enormous front-loaded commissions, and so I proposed to David and Tom Gardner, the founders of the US site, that we should bring the Fool to the UK. So they invited me over, I made a trip to Fool global HQ in Arlington, Virginia, and we hit it off, they said "We'll do it", I said, "I can't do it on my own", and they said (and this is the amazing thing), "Well, we'll see if we've got any other UK users of the US Motley Fool". So they did a search for anybody else with a dot.co.uk email address, and they came up with one guy.
David:
Just one?
Dr David:
One guy, who was Bruce Jackson, who at the time was an accountant at the BBC, and he'd posted one message, and he was the only person that they could come up with a with a dot.co.uk email address. So I emailed him, and I said, "Hey, we're the only two UK users of the Motley Fool – shall we start the UK Motley Fool?", and he emailed back, and said, "Yeah, that sounds a good idea", and so we met up, we really hit it off.
David:
Where did you meet?
Dr David:
We met at the Buenos Sera restaurant in Clapham.
David:
That's very posh.
Dr David:
It's very nice, sitting outside with David Gardner, it was a classic, wear a red carnation and I'll recognise who it is, and so we had dinner there with David Gardner one night in June 1997, and put together a plan to go live in September, which we did, September 23rd, just after Diana was killed, and it took off from there. At the time, I was living in North Devon, Bruce was in London, we were both writing from home, we both had full-time day jobs, we were moonlighting in the day, we were writing articles in the day, and it was like, "How are we going to get the site updated today?", and we somehow managed, and it was an incredibly idealistic time, the internet was new, loads of people hadn't heard of the internet, and in fact we launched solely on AOL, within the AOL client, the AOL walled garden, and at the time, I mean it's incredible to think now, the debate was: which way is the internet going to go? Is it going to be open access, worldwide web? Or is it going to be all walled gardens, like Compuserve, AOL, and what have you? And really, nobody knew, there was a big debate – are we going to launch on the web as well, which I was very keen to do, and after four or five months we started simultaneous publishing on the web as well, that's how it all got going.
David:
So how difficult was it to get that brand out there?
Dr David:
Well, actually it was surprisingly easy at the time, because there just wasn't an internet, I mean in 1997, I guess it sounds a long time ago now, but really it isn't, 12 years ago, and the internet just didn't exist, and so anyone doing anything interesting on the internet, this new thing which nobody was sure – is it going to be significant, is it not? – there was a lot of interest, so we had a lot of media interest, obviously spawned by the enormous success the Fool had had in the US, and we were very lucky to get a publishing contract very early on with Boxtree, a subsidiary at the time of Macmillan, which was really instrumental in getting the name out there.
David:
So how difficult was it to get finance in those days? I mean, if you can sort of wind your mind back to 1997?
Dr David:
It was before the big internet boom, it'd be the first internet bubble, and we were financed essentially by the US Motley Fool. What's really interesting is just the way the business models have changed, I mean at this time, when I first started reading the Fool, there weren't even any banner ads on the website, so the concept of banner ads hadn't really arrived, and the Fool was funded entirely by user fees within AOL, and that's how we started off in the UK.
David:
So AOL actually paid you?
Dr David:
AOL actually paid for page views, funded ultimately by their subscriptions, and then obviously the business models have just come around, gone around, since then, but in terms of financing, at that time it was quite hard to get financing, and then obviously within a year everybody was just queueing up to throw money at you.
David:
So what made you think that, back in 1997, there was this appetite by the UK public for investing?
Dr David:
A big dirty secret – I mean the big dirty secret was the enormous power, the hegemony, if you like, of the financial services industry, and I think it was symbolic, I was in medicine, I was already seeing a shift away from traditional authoritarian structures in medicine, you were seeing increasing power shifting to the patients, it was very shortly after this we had the Bristol Children's Hospital scandal, and it was just apparent that there was a huge appetite for democratisation of finance, of medicine, of everything, and it seemed to me that the Fool in the US had absolutely cracked it, and indeed they had, and that that could be translated to the UK, and it just seemed to me an absolute no-brainer, I was 100% convinced of success, I was totally deluded, and if I met myself now, I would just say, "You are smoking something highly illegal", but that's the way it was – I totally believed it, and I think it was that total belief, and Bruce totally believed it, and we just knew it was going to be a hit.
David:
And was it fun?
Dr David:
It was fantastic, it was incredibly exciting, incredibly stimulating. I knew absolutely nothing about business, I mean just less than nothing, absolutely zero, and so it was a tremendously fun learning curve, and we were all incredibly naïve, and we really didn't know how far it was going to go, we just didn't know what the revenue streams were going to look like, but we just all knew that it was going to be big, and it's very interesting now, because in the aftermath of the 2000/2001 internet bubble, everybody was saying, "You know, these naïve children, throwing vast amounts of money into a marketing budget, they talked about the real estate grab, and all this kind of stuff, and look how deluded they were – just another bubble", well actually, I think when you look back, I think it was the correct approach, or in many ways the correct approach, and we knew at the time that a lot of people would die, that a lot of companies would die, they wouldn't make it, but that the survivors would do well, and certainly you see companies that established themselves back then have done very well, and you look at Amazon, I mean everybody was saying Jeff Bezos was a nutcase.
David:
So what do you attribute the Fool's ability to sustain its business model over 12 years?
Dr David:
Well, flexibility, obviously I've been out of the Fool for a while now, but I've kept in touch.
David:
But the Fool is actually a very recognised brand out there.
Dr David:
Oh, that's fantastic.
David:
I do a lot of media work for the Fool, and when I got out there, people of all ages say, "The Motley Fool – yeah, I've heard of them".
Dr David:
Well, I mean obviously the brand has been sustained through integrity, and a desire to really tell the truth, to really help people out, to really service the customer, and to do one's best. In terms of business model, I think the Fool has been courageous and innovative, and prepared to try new things, and as you know, you've been in the Fool – how many years have you been in the Fool now, David?
David:
I have been here, what, it must be about nine years now?
Dr David:
Yeah, well you've seen business models evolve, and go away and come back again, but I'd really attribute it to integrity and flexibility, I think.
David:
OK, so can we also have a look back at 12 years ago – what were the kind of things that people were interested in investing in? Was it everything to do with the internet – did everybody want to invest in things that were …?
Dr David:
Not in 1997, no, absolutely not. It wasn't really till late '98, '99, that people started thinking, this really internet thing's really taking off. At that time a lot of people actually hadn't heard of the internet, I mean in 1997 lots of people hadn't heard of the internet, and in terms of investments, there was very little personal investment, there was next to no discount share dealing, there was no online share dealing, or the very first online brokers were just setting up. Investments took the form of endowments and managed funds as specified by financial advisors with large front-end loaded charges, and I think we forget just how much less open and how much less accountable the financial services were, I mean I know we've had a little hiccup over the last year, but I think we forget just how much things have changed actually.
David:
But one thing that you did believe in back in 1997 was long-term buy and hold, isn't it?
Dr David:
I know where this is leading!
David:
Do you really? Right, can I just tell you that, back in September 23rd 1997, the FTSE was at 5,027 points. Today, 12 years later, the FTSE is 5,163 points, so effectively it's gone up 136 points in 12 years. Now, I've worked that out to be roughly eight points a year, David – I've seen snails move faster than that, so how can you justify long-term buy and hold for anybody that's listening to this podcast?
Dr David:
Yeah, you've seen snails move faster and with a lot less variability, I mean my gosh, it's been a rollercoaster ride. I guess the thing to say is what we were saying back then, which is, you get paid to take risk, and there is risk in equity investing.
David:
But you're not being paid to take risk here, are you? – because that money, if it was left in the bank would …
Dr David:
Well, in the last 12 years – absolutely, you haven't been paid in the last 12 years. When you invest in equities, it is more risky, it has not performed, I guess (well not I guess), as we would have hoped, I think it's pretty clear to say that, over the last 12 years. There have been many periods since the Twenties when it's done that, and the most notably the Thirties through to the late Forties and early Fifties, and we wouldn't want to repeat that. That's the risk you take when you invest in equities – what can one say?
David:
Are you lost for words?
Dr David:
I am, I wish it had done better, but one thing is, we always talked about a five-year time horizon.
David:
Well, this is a 12-year time horizon.
Dr David:
It's a 12-year time horizon, and during that period, I mean the temptation to time the market, it's just …
David:
Would have worked, wouldn't it, yes?
Dr David:
… well, it's an interesting question – would it have worked?
David:
Well, if you had got out at 6,000 points?
Dr David:
Well of course, but as you know, the question is – when do you get out, and when do you get back in, and the reality is, it's those …
David:
So get out at 6,000 and get back in now, yeah?
Dr David:
… well, yeah, but it's those few days when you get the big upgains which you tend to miss, and of course, if you can time the market perfectly, you'll be a billionaire, you'll be richer than Warren Buffett, but it's the difficulty of timing the market. Now we'll get loads of emails from people who just say, "Yeah, I was out at this, and now I'm back in at that, and I made a fortune!", but it's a tricky business, timing the market, I think you'll agree. How have you done?
David:
Well, I've done OK. I want to point out another statistic, just to get things into perspective. Now, I said the FTSE has gone up 136 points in 12 years, now 120 of those points came about in the last two days – so what does that tell you?
Dr David:
It tells us that there's extreme volatility, and as I say, it tells us that those gains happen, and we know historically, if you look back at the Barclays Capital Surveys, those gains happen in a very few days, so that's the difficulty of timing – if you can time the market, great, but it is difficult.
David:
Now, another thing that you're very well known for, David, and this is something that you wrote in the Motley Fool UK Investment Guide, and this is something called "obviously great investments" – can you explain to the listeners who are not familiar with obviously great investments, or OGIs, what exactly the OGI is first?
Dr David:
The obviously great investment was based on a concept from the US Motley Fool, basically looking at companies that were the backbone of the economy, making products that we'd all need, that had a good track record behind them, so we looked at those as long-term buy and holds, and now I'm really looking forward to a hearing how they've done – I'm going to quibble with the detail!
David:
I feel like some prosecutor with the defendant standing there saying, "Right – what is he going to bring me now?"
Dr David:
There's sweat on my brow.
David:
I mean, some of those companies that you identified include Rentokil – you bought at £2.74, today it's £1.15. Thankfully, the company is still around, it hasn't exactly gone bust, but it's down 58%, David?
Dr David:
In retrospect, they'd had a huge amount of growth when I advised them, and there wasn't that much growth in that market, very sensitive to the economic cycle, obviously, and now they would be, so not great. Come on, give us some good ones.
David:
OK, I'll pepper some of the good ones with the bad ones. Now, Marks & Spencers – would you consider that to be an obviously great investment?
Dr David:
Well, what I'd say now is retail's a very tricky sector. Yeah, I would have at the time, and M&S was the gilt-edged stock, so tell me how it's done.
David:
Well, Marks & Spencers, you bought at £6 – today it's £3.71, so that's down 38% - not such a good investment, was it?
Dr David:
Not such a good investment.
David:
Not such a good one. Shall I give you a good one now?
Dr David:
Go on then.
David:
Unilever – do you think Unilever has been a good investment?
Dr David:
Well, if you're thinking about an obviously good investment in terms of a company with its footprint right in the home, integral to modern life, then I'd say Unilever is one, so go on – hit me with Unilever.
David:
Unilever has gone up 60% in 12 years.
Dr David:
Oh, fantastic!
David:
So an obviously great investment. Give you another one – Ericsson, and this is the mobile phone company, it also makes telecom equipment and also …
Dr David:
Well of course, it was a tough choice, Ericsson, Nokia – what are we going to bet on? Well, in the end here we are, browsing the internet on our Apple iPhones, so go on – tell me about Ericsson.
David:
You flipped the coin, and unfortunately you picked the wrong one. Now, Ericsson was in 1997 worth 156 Swedish Kroners, today it's 72 Swedish Kroners, so that's gone down 46%.
Dr David:
Yep.
David:
GlaxoSmithKline – how do you think they've done?
Dr David:
GlaxoSmithKline – I think they've done OK, go on then – hit me with GlaxoSmithKline.
David:
OK, GlaxoSmithKline – you bought at £14, it's £12 today, so it's not that bad.
Dr David:
It could be worse.
David:
It's gone down 15% in 12 years. PizzaExpress – now, what do you think about PizzaExpress?
Dr David:
I love PizzaExpress! Tell me about PizzaExpress.
David:
Well, PizzaExpress, you've actually done quite well, because whatever price you bought at, it finally got acquired, and so therefore it's come off the board now. Another one – Microsoft, how do you think Microsoft has done? Is that an obviously great investment, do you think?
Dr David:
Absolutely. How have we done with Microsoft?
David:
It is the gorilla, I mean Microsoft has gone from $15 to $25, so that's up 67%. So I mean, out of those 12 companies that you picked, and we're going to give you an average score for those 12 companies.
Dr David:
Go on – did we beat the market?
David:
It wasn't that difficult to beat the market anyway, was it? – because the market's got nowhere. Now, out of those 12 stocks that you picked, the average was 7% over 12 years, not 7% per year, but 7% over 12 years. So that's before dividends, so you've got some dividends there as well.
Dr David:
There's some dividends, I mean it could be worse – we have beaten the market, it would have been a rollercoaster ride. What does it tell us? – I mean, we've had a hell of a 12 years.
David:
Some people might say that money would have been better off just sitting in a savings account, wouldn't it?
Dr David:
They'd have been correct. Of course, you come down to …
David:
Why are you squirming, David?
Dr David:
Of course I'm squirming! – because we've always talked about a five-year time horizon, I don't think anybody suspected that we'd be sitting here 12 years later with the FTSE at the same place, although I'm very very glad we're not doing this podcast back in March 2009 – because that might have been a different discussion! – so thank you for delaying the podcast until now.
David:
No, not really – it's meant to coincide with the Fool's twelfth birthday. Now, can you explain to the listeners, because every guest we've had on this podcast, we've asked them to in some way try and explain what has been going on in this financial market – why do you think the banks have collapsed the way they have, David?
Dr David:
Well, it's very interesting, because in my current role as a GP, I've spent the last 18 months/two years developing a GP property, a big property, worth about £2 million, and of course bank financed, so possibly the worst time in history, in my life, to be developing a GP property. I've noticed just an enormous difference in my personal dealings with the bank, and our bank manager, in terms of availability of credit, and it went from really very little due diligence, and of course I represent a gilt edged government-backed industry, so a good investment, but really almost nothing in terms of due diligence, to neurotic over-obsession, and so I think the banks, like anyone else, are subject to irrational exuberance, to over-anxiety, and I think they overreacted one way, and I think they're overreacting another way now, and I think it is smoothing itself out, but I think it comes down to human nature really.
David:
I mean, what we're hearing now is that people who want to get on the housing ladder, and they're almost being told by the banks, come up with 40% deposit and we will lend you the other 60% - well, I mean if you're buying a £200,000 house, where are you going to find an £80,000 deposit? – it is almost impossible, and in London, £200,000 will not buy you an awful lot.
Dr David:
Yeah, absolutely, and confidence is a phenomenon of mass psychology, and when that comes back, then everybody'll start going again. But I think the banks are simply demonstrating, I think they are simply a reflection of the people who run them, and I've seen that with our commercial bank manager, and over the last year – 18 months, he has developed an enormous fear of his credit control department, and I think he's just scared about losing his job. If he gives out – whereas previously he was able to give out loans of x, now everything has to be underwritten. So I think it is just confidence, I don't think the banks are any different to anybody else in the market, and when they are confident, then they'll start lending again. I think the whole thing is founded on the collective belief that our society and our economy has resilience and it has balance, and that has been more sorely tested in the last year than at any other time that I can remember in my life, and until that returns, which I think it is gradually, we're going to have those problems, but I think to look for any kind of more complex explanation, I think, is unrewarding.
David:
So my final question for you, David, is, for the people who are listening – what words of encouragement do you have for investors out there?
Dr David:
Well, I've been really encouraged, obviously since the low points earlier in this year. I mean, the thing I think about is, I think about the dark days after 9/11, when I remember that, just that feeling of how the world had changed, and it could never be the same again, and it almost felt like everything was caving in, and I remember when Lehmans went down last year, and that hellish October last year, and it just felt like, where is this going to stop? And these horrendous images of 1929, and people throwing themselves off skyscrapers, and it's extremely infectious, that fear and that panic is very very infectious, very very depressing. But again, I come back to it – if you do take the long view, we are a resilient species, human nature is very tough, and we're pulling ourselves out of it. So I think it's not a bad time to be a long-term buy and hold investor. Don't interview me in 12 years!
David:
So you don't believe that capitalism is dead, then?
Dr David:
Oh God, no! I mean, that's just facile, no no.
David:
A lot of people were saying that capitalism had died?
Dr David:
Of course, but patently not true. Everybody overreacts all the time – try not to overreact.
David:
That's wonderful. Well, thank you very much for coming in today, David, on this twelfth birthday of the Motley Fool. Now, you may not know this, but I end each podcast with a quote, and I found something …
Dr David:
Oh my God.
David:
… something quite sage to sum up the podcast, and today's quote comes from a man called John Egan, Sir John Egan, and what he said was, "The absolute fundamental aim of any business is to make money out of satisfying customers" – do you think the Motley Fool does that?
Dr David:
I absolutely do, and as I said earlier, I think that's the foundation for the Fool, that's why it's been a success, and I wish him many more happy years.
David:
Well, thank you very much. Now, this has been MoneyTalk, I have been David Kuo, and my guest has been Dr David Berger, the founder of The Motley Fool UK. If you have a comment about today's show, you can post it on the MoneyTalk blog, which you can find at fool.co.uk/podcast, and if you have a suggestion about future topics, you can email me at moneytalk@fool.co.uk. Have a great week, everyone.
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