Interview with Tom Engle: Investing Legend
You might not have heard of Tom Engle. He was born poor in Louisville, Kentucky, where his family shared a two-bedroom house with his grandparents.
He watched his parents quickly climb out of poverty by investing, and learned at a young age to invest what money he could, and most importantly, to keep it invested. This mindset changed his life forever – after working just nine years at a gas station he was able to retire.
Tom’s now been an investor for over 40 years, and a legend in the Motley Fool Stock Advisor investment community. By implementing his advice I was able to become a millionaire by age 35.
I consider Tom my investing mentor, and I’m excited to share this interview I did with him. It’s lengthy, so let’s get started.
Tom, you don’t have a financial background. Why did you start investing? Did you have a goal?
No, I didn’t really have a goal. My grandfather and parents explained to me that if I bought stocks then someday those investments would allow me to live well. When I was 12-years-old my parents opened a brokerage account for me, and I got to pick what stocks to buy. My family had made some money in a company called Combined Insurance, so this was the first stock I bought.
New investors oftentimes feel overwhelmed and scared. How should they approach investing?
Corrections, bear markets, and recessions can look scary to new investors. I panicked during the 1973-75 recession and sold because it looked as if the world was going to end. The market recovered in a reasonable amount of time, and I learned a big investment lesson:
Corrections and recessions are great times to buy stocks, not sell them.
With this in mind, I was ready when the 1987 market crash occurred. Like a kid in a candy store I bought stocks under $4 that previously had sold for over $25. This crash was a picnic compared to the previous one, but people were again afraid.
Fear can be a powerful force. It prevents people from investing, and causes them to sell when they should be buying. The simplest way to become a successful investor is to make small investments. This way no matter what happens you’re determined to keep that money in the market.
I was forced to use small investments because I didn’t have much money, but because of that I learned another big lesson:
Small amounts invested in quality companies grow into very large amounts if you leave them alone.
So my advice is to attack the fear using small amounts of money, and be determined to keep it invested.
What would you recommend to someone who wants to build wealth, but with a hands-off approach?
If I were going to pick a fund, I would find one with a long-term track record of beating the market. You’re placing your trust in a fund manager, so learn their name and philosophy. And if they leave, there’s usually a reason to be concerned.
I would much rather invest in stocks of simple businesses so if the CEO leaves, it doesn’t matter so much. In the words of Peter Lynch:
Go for a business that any idiot can run.
He was a great fund manager, which is hard to find. I think with a little research, investors can find the best stocks and then learn to value them. It’s impossible to value a fund with its many working parts.
Jim Mueller, an analyst at The Motley Fool, has shown it’s easy to beat the market–the S&P 500–with a portfolio of individual stocks. What mindset and behaviors are critical to do this?
Investors need to understand market corrections happen regularly. When this happens, it’s a great time to buy. If fear causes them to sell when prices are falling, then they invested too much money in too narrow a time frame.
Pick quality stocks, buy at better valuations over time, and think long-term.
When Macy’s has a sale, people don’t run out of the store in fear because the price of merchandise is falling. Instead, they’re buying, and investors should consider quality stocks during corrections similarly. It’s then that investors can buy at prices that give them the greatest future returns, and help build significant wealth.
What’s a good stock for beginners? Maybe a simple business which can grow for decades.
That’s easy, Starbucks. They have many interesting businesses in the nascent stages of development.
For example, their partnership with Tata Global Beverages–the world’s second largest tea producer–could grow their newly acquired Teavana chain even larger than their coffee business. Globally, more tea is consumed than coffee, so this could be huge for Starbucks.
You’ve labeled 20 stocks “super stocks”. What’s special about them, and which ones are your favorites?
The “super stock” list is a fun project I started for the The Motley Fool boards. I own all 20 so I study them regularly, and they’ve done well for me. Every one has a growth hook that makes me believe they could grow for decades.
My favorites are Chipotle, Buffalo Wild Wings, Starbucks, and a newer entry – Ulta Salon.
The list contains simple-to-understand businesses, so investors don’t need to spend a lot of time studying them. If the price goes down, it’s quick and easy to understand the reasons why, and to calculate a great value point to add more.
How many stocks should an investor own to be properly diversified?
First you have to define diversification. Is it to provide safety or growth? If it’s safety then a stock like Starbucks and cash are sufficient. But if it’s growth, then buying a large number of companies shouldn’t be as important as diversifying over better value points, economic conditions, and greater levels of knowledge.
10 to 20 stocks provides plenty of diversification.
Investors shouldn’t attempt to add them all at once though. For example, in 2007 an investor could have purchased 100 different stocks. By November 2008, every single one would have been down. Owning more didn’t help. I don’t want to fill my portfolio with mediocre stocks for the perception of safety, because growth is sacrificed when the market recovers.
What are the top mistakes you see investors make?
There’s a few. Investors sell too soon, both their winners and losers, and they tend to look at the stock price when making decisions, rather than the valuation.
The biggest investing mistake is trying to out-trade a world of traders.
Let the traders take short-term profits. Instead, crush them by accumulating shares at better value points over time, and holding long-term.
What investing tools or resources do you recommend?
I love finding companies in which to invest, but it’s getting much harder for me to do this. By subscribing to the Motley Fool, they bring me the best stock ideas. I think they offer the best resources for both new and experienced investors.
If you could give your 20-year-old self one piece of investing advice, what would it be?
Buy Walmart! It’s 1975, the middle of the worst recession since The Great Depression, and Walmart is selling for $0.02 a share (split-adjusted). Even though I didn’t have a lot of money, I wish I would have gotten a second job to buy as much as possible.
Lastly, anything I didn’t ask you’d like readers to know?
Investors should maintain a list of their favorite stocks along with valuation targets so they’re ready to buy when corrections occur. But more importantly:
Whatever amount you invest be determined to keep it there. Time will do the rest.
Thanks so much for the great answers Tom!