Almost two weeks ago another missive in the ongoing saga of the Motley Fool came across my desk, and I was so appalled at what I read I put it away. Another look didn’t make it any better, though. Purporting to be from co-founder Tom Gardner, it says, among other things, this:
For the past six months, I have been working on a special research project with an ambitious goal:
Isolate the single investing factor that was found in nearly every one of The Motley Fool’s most successful stock recommendations…
As I began to analyze all the recommendations The Motley Fool has ever made, I quickly noticed a clear pattern emerging:
THE SMALLER OUR RECOMMENDATIONS, THE MORE MONEY INVESTORS HAVE MADE.
In other words, the smaller the total capitalization (“cap”) of a company they had recommended, the bigger the profit.
Tom, given how you stated it, the first criticism is that this is just standard math. Forget all the crap about share price, number of shares, etc – when you buy a piece of a company, the percentage at which the company’s total capitalization appreciates over the period that you hold that share of stock is also the percentage at which your holding also appreciates[1]. Let’s make up a totally artificial example. Suppose someone has guaranteed you that in five years time four companies will each have a $10 billion cap. Suppose further that right at this moment the four companies have caps of $5 billion, $1 billion, $500 million, and $100 million.
Which company should you buy? Ignoring all other variables, and that’s one helluva big “ignore”, you buy the one worth $100 million because the appreciation percentage is the greatest[2].
But this leads to my second criticism, which are misstatements. There are misstatements in the mail and misstatements in what I just wrote, so I’ll go first – I implied that the risk of each investment is the same. They never are, and that’s the main challenge of any investor, understanding the risks of each investment.
But Tom just glosses over the same point. If Tom had said,
Despite the higher risks implicit in microcap stocks, The Motley Fool’s picks in this area of investing have far outperformed all of our picks outside of microcaps!
then I could have respected what he’d written. That would speak to both the novices and the experienced investors, as the novice may not realize how important risk evaluation is during the investment process, while the experienced investor would realize it was an honest statement that explicitly notes this area of investing is not for beginners.
And then we come to the “herding the buffalo off the cliff” phase of the promotion.
To make sure only committed, long-term investors have the chance to benefit from these recommendations…
Not only will we be accepting just 1,500 additional new members into The Rising Stars Portfolio, but the only way to officially receive YOUR invitation before we reveal the entire portfolio is by filling out our brief “New Member Application.”
With over 500,000 active investors in the Motley Fool community, you can see why we expect those 1,500 seats to sell out fast. Installing this “New Member Application ” ensures our interests align when it comes to investing alongside The Rising Stars Portfolio.
Ah, they’ll sell out fast. Quick action is required. Turn off the brain and get yourself positioned, eh? It’s not a really respectable way to run a sober investing service. Indeed, if you carefully examine the statements, you’ll realize that they really don’t relate to each other very well. Consider the first paragraph vs the second. Or what does it mean to “install” an application?
But I fear rationality is not part of this promotion, despite rationality and refusal to run with the herd being historical parts of the Motley Fool business.
Instead, reading this, the heart starts pounding and you hit that button that says you’re interested before everyone else does, and now they have a shot. It’s not a guarantee for them, of course. Some folks will realize microcaps represent far too much risk for them – Tom’s new service may even give them that warning. But I won’t know that, because I won’t push the button.
As I was thinking about this promotion, it occurred to me to wonder if Tom and David Gardner have actually sold the Motley Fool to some nameless conglomerate, and as part of the sales agreement they agreed that the personas of Tom and David may be used by the new owners to promote the company. The zombie Gardners, if you will.
Now I’m a little frightened of doing the actual research to falsify the hypothesis. What if I’m right?
1Minus fees and taxes, of course, once you sell. Also, if the company sells new shares of stock in order to raise capital for various purposes, current shareholders are diluted and will then not profit as much. This is common with microcaps, which are usually still developing their initial product. Speak to a licensed financial professional for more detail – don’t depend on me!
2And if this is not immediately obvious, please find a remedial mathematics course which will help you develop your mathematical intuition.
