How We Beat the Market by 1,800% Over 16 Years

Is that confetti I spy? ------------------------------------------------------------------------------------------------------------------------------------------------------ [View this email in your browser]( Is that confetti I spy? That's because we're celebrating the 200th consecutive month of Tom and David Gardner sharing their best investing ideas in Stock Advisor and explaining the approach behind the service. Also, this week, check out an interview with investing legend Howard Marks, defense stocks to watch, and some AI predictions. – Katie Carrera, Stock Up Editor Stock Advisor: Born from a Long-Term Investing Strategy --------------------------------------------------------------- If you happened to join Stock Advisor at its outset in March 2002 and acted on every single recommendation, then you would have enjoyed a market-obliterating return of 1,955% over the past 16 years. This has been a particularly sweet year, too, with the service cruising to a 45% gain as of mid-October while the broader market has yet to leave the driveway. Of course, we Fools don't spend much time reveling in short-term gains (or dwelling on short-term losses). And this story, much like Stock Advisor's approach to investing, is all about the long term and the big picture. [This is the service Tom and David Gardner started 16 years ago,]( never guessing it might someday help hundreds of thousands of investors become savvier, wealthier, and (most importantly) happier. In 2002, the market and The Motley Fool were reeling from the dot-com crash. As the Gardner brothers fought to pull the company back from the brink, they realized we had yet to discover our true purpose — a business that could not only thrive, but also change the world for the better. Eventually they turned to a project that had existed since 1993 — a monthly newsletter featuring one stock pick from Tom and one from David. It was a friendly competition: Both aimed to beat the market by investing in one stock every month. They tracked the performance of their real-money portfolios and published the results, as well as the lessons they learned. By 2002, they felt ready to turn it into a service that would create value for investors around the world. Stock Advisor was born. It was designed to be a simple product with a simple investing strategy. Tom and David — who had spent years studying the likes of Warren Buffett, Peter Lynch, and Benjamin Graham — knew that the clearest path to long-term wealth was to buy great companies and hold them for years, if not forever. "One of the things that I love about Stock Advisor is that we've created a service that is so easy to use," says David. "There's a lot of other advice out there that's so short-term, and if you try to follow that, it can exhaust you. It's not easy at all." Each issue included a pair of stock recommendations, a detailed explanation of each pick, some updates on previous recs, and some clear, levelheaded commentary on investing. The straightforward, anyone-can-do-it style of advice resonated with readers, and within a year, Stock Advisor had tens of thousands of subscribers. Since then, the strategy hasn't changed much. Tom and David, both supported by a crack team of analysts, continue to recommend one stock apiece every month. They still like companies with visionary leaders, sustainable competitive advantages, and unrecognized potential. And why mess with an approach that has beaten the market by more than 1,800% over the last 16 years? If you're not yet sold on a buy-and-hold approach, consider that Stock Advisor's most absurdly successful picks are among its earliest. Take Netflix, which was recommended shortly after Tom and David interviewed CEO Reed Hastings in 2003. That position is up more than 14,000%. Amazon is now up more than 11,000%. Read how David pitched it back in 2002: Amazon.com has emerged as the biggest pure-play in ecommerce. The company is generating billions of dollars in annual sales and — the key for us going forward — these are finally profitable sales. What's behind the success? A company fanatically focused on customer satisfaction, and a brilliant, entrepreneurial CEO. Of course, Stock Advisor's recs haven't all been grand slams. However, as every Fool knows, one big winner can make up for a lot of losers — and then some — when you have the conviction to stick with a long-term approach. We're certainly proud of the returns Stock Advisor has achieved. The true success story, however, is in how those gains have changed our subscribers' lives. Whatever your financial dreams, we hope to help you achieve them. Our work means more to us than percentages on paper. [Head here for more on Stock Advisor](. --------------------------------------------------------------- Watch: The State of the Marijuana Industry --------------------------------------------------------------- [A Marijuana Market Roundtable: What It Is, How Big Could It Be, And Top Stocks To Buy Now]( On a recent episode of Industry Focus, we gathered three of The Motley Fool's top contributors on marijuana stocks and asked them to help investors navigate the opportunity presented by the emerging industry. --------------------------------------------------------------- 3 Defense Stocks to Watch Earnings season is getting underway and October is an important month for several defense stocks. With few exceptions, many defense stocks have been flat over the course of the year and the industry continues to trade for above-average valuations. That means [you may want to monitor these defense stocks]( rather than rush in to buy. Let's take a look. - Northrop Grumman Corporation ([NYSE:NOC]( The defense contractor's profit margins over the last 12 months is at a historic 13.3%, according to data from S&P Global Market Intelligence. Northrop has only hit that number once before, back in 2014, which means something's probably going to give. Defense stocks are cyclical, and this level of profitability can't be maintained indefinitely. Recent changes to its business mix — aerospace systems sales making up a larger proportion of total sales — may cause the profit margin to begin returning to Earth. — [Rich Smith]( - Boeing Co. ([NYSE:BA]( Given that defense stocks look pretty expensive right now and that hyperpartisanship could lead to wild Pentagon budget fluctuations, it makes sense to find companies with a presence in the defense sector that don't completely rely on it. That's what makes Boeing compelling. It has booked nearly $22 billion in new defense contract awards, adding to its backlog in the sector. More important to its stock, though, is the commercial aircraft backlog. Boeing is ramping up production rates to improve profitability and lifting operating margins. Although it's not cheap, trading at 23 times earnings, but it's not absurdly expensive either. — [Tyler Crowe]( - BAE Systems ([NASDAQOTH:BAESY]( Its stock price is down since peaking in mid-September, but nothing has fundamentally changed with the business, which is built on a number of diverse offerings for air, sea, land, and cyber defense. BAE Systems has a $26 billion deal with Australia which could drive growth over the next decade and continues to reel in small deals with western military clients. Its lower-margin results should cause it to trade at a discount relative to its peers, the market may be discounting a high-quality business by too much right now. — [Jason Hall]( --------------------------------------------------------------- FEATURED PODCAST --------------------------------------------------------------- [Rule Breaker Investing]( Get Started Investing! From opening and funding a brokerage account to picking your first stocks, Motley Fool co-founder David Gardner and his all-star cast will walk you through the basics of how to become an investor. [Subscribe on iTunes]( --------------------------------------------------------------- Howard Marks: Why the Word 'When' Is Dangerous Investing legend Howard Marks recently spoke with The Motley Fool's Bill Mann and their wide-ranging discussion covered investor psychology, how his team prepared and steeled themselves during the financial collapse, why it's so important to know where we're at in the market cycle, and plenty more. For those who aren't familiar, Marks' Oaktree Capital ([NYSE:OAK]( earned billions by investing heavily during the lowest points of the financial crisis. Marks' memos, which he has written since 1990, have long been priority reading for some of the world's top investors, including Warren Buffett. He's written two books on investing, and the latest, Mastering the Market Cycle: Getting the Odds on Your Side, was released in October. You can [listen to the full interview here](. If you'd rather read the entire interview, [check out the transcript here](. --------------------------------------------------------------- 5 Artificial Intelligence Predictions Investors Should Know Artificial intelligence or AI is already becoming a part of our daily lives in the form of driverless cars, smart-home speakers, and more. But the potential for the technology has yet to be realized. If you're skeptical of AI, [here's a list of reasons why you may want to reconsider that position](. And if you're already invested in the tech, here's some context to consider as you research companies. - Artificial intelligence won't just change businesses — it will transform the global economy. A Pricewaterhouse Coopers report estimates that AI technologies will add $15.7 trillion to the global economy by 2030. The biggest benefit is expected to be in China, where gross domestic product is expected to increase 26%. - Autonomous vehicles are made possible by AI, and millions of these vehicles will be on our roads in the coming years. The number of driverless cars sold worldwide is predicted to skyrocket to 33 million in 2040, according to IHS Markit. NVIDIA's ([NASDAQ:NVDA]( self-driving computer, Drive PX Pegasus, is already helping make autonomous vehicles a reality by allowing cars to process visual information in order to understand what's happening around them. NVIDIA believes its market potential in driverless vehicles will be $60 billion by 2030. Meanwhile, Alphabet's ([NASDAQ:GOOG]( ([NASDAQ:GOOGL]( Waymo is leading the pack among automakers and tech companies, partnering with traditional car makers and conducting more than 8 million miles of real-world tests. Its self-driving taxi service could be work $175 million, according to Morgan Stanley. - AI could be a job creator, not a job killer. Recent data from Gartner estimates that by 2020, AI will create 2.3 million jobs while eliminating 1.8 million others resulting in a net gain. The number of AI-created jobs is expected to keep growing through at least 2025. It's also being used to make some people better at their jobs — instead of leaving them without one, such as Harvard pathologists who are using AI to help diagnose breast cancer with greater accuracy. - AI will continue to transform our homes. Nearly one quarter of Americans have a smart speaker in their homes. Google Home and Amazon.com's ([NASDAQ:AMZN]( Echo are two of the most popular speakers and both are powered by voice-recognition AI systems. Tech companies are looking to these AI assistants to create new sources of revenue, whether by increasing sales from existing customers or collecting more information on its users to sell better targeted ads. - AI will become increasingly important to how businesses function and generate revenue. In his note to investors last year, Amazon CEO Jeff Bezos commented on machine learning, a type of AI, that "drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more." The ability to make those types of improvements across industries are why AI algorithms and tech are expected to bring $3.9 trillion in global business value by 2022. --------------------------------------------------------------- Quick Reads - [Highway to the danger zone:]( For oil stocks, that is. Falling supplies from Venezuela and Iran could leave the market short of demand, which could cause crude prices to spike — and wreak havoc on the increasingly fragile global economy. - [IBM takes aim at Nutanix:]( Eighty-five percent of companies are using more than one cloud service and that's where IBM's new Multicloud Manager comes in to manage workloads. Except that role is Nutanix's bread and butter. - [What's your net worth?]( And how does it stack up to other people your age? Check out where you stand and take stock of other factors you should consider. --------------------------------------------------------------- TWEET OF THE WEEK --------------------------------------------------------------- [Tweet of the week: It's what you learn after you know it all that counts. John Wooden, former UCLA basketball coach]( [See all our Tweets]( Join the 1,300,000+ people who follow us! 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