The Motley Fool began as a hoax. Now it is a serious player in investment advice
Jamie Doward
For a while it was a very successful company. It was the new, new thing and everyone wanted a slice of the action, despite the fact that details of what it did and where it operated were more than a little hazy.
The company was called Zeigletics, and it was responsible for the development of innovative technology linking sewage disposal systems in Chad.
But the company, and the stock exchange its shares were listed on, did not exist.
The entire thing was an invention, the brainchild of the two brothers who founded the Motley Fool, the irreverent financial- advice firm which started as a newsletter and is evolving into a cross-media empire with global pretensions.
“We started the hoax on April 1 1994 and we suggested people should be buying these shares because they were going up. More and more people began paying attention.
“We were getting e-mail from brokers saying ‘my client wants me to look into this and I can’t find the Halifax-Canadian exchange’,” recalls Tom Gardner, co-founder of the Motley Fool.The move was designed to warn investors about the risks of investing too heavily in penny shares.
Back in the mid-Nineties, as the Motley Fool started to transfer its advice to the Internet, moving away from being a pure tip sheet, Tom and brother David became frustrated by investors’ appetite for small stocks which often feature in “pump and dump” scams.
That is the sort of scheme where companies’ shares are hyped online, causing a quick surge in their value only for this to dissipate as those who talked up the firm sell their stake and make a killing.
“A lot of people just wanted to trade penny shares online. We kept trying to talk about the Gap or General Electric and they were saying ‘look at the shares I’ve bought. They’ve gone up six times in value, but the Gap’s only gone up 20%’.
“We couldn’t get a conversation going,” Gardner says.
The prank created its own dynamic as followers of the Fool started to participate in the illusion. “In typical Foolish spirit people began joining in saying ‘I’ve already made $6 000’,” he said.
The point was to show that people were trading very thinly traded stocks.
The stunt created a blaze of publicity, despite the fact that the Fool newsletter had only 360 subscribers and had a staff of two.
“We never had a business plan. We began doing this without any expectation that we would be striking it rich,” Gardner says of the early attempts to found the newsletter.
“We sent out 2 000 copies of the newsletter to anyone we had an address for – including those we had drawn from my cousin’s wedding invitations.
“At the end of the first month we had 36 subscribers who were paying $48 a year. We were told later that this was a 1,8% response rate, which is pretty good for direct mailing.
“However, it was mailed to a lot of people who we knew and who were blood relatives of ours.”
The Wall Street Journal picked up the Zeigletics story and soon America Online was knocking on the Gardner brothers’ door looking to run the Fool’s service on its network.
The timing of the alliance between the Fool and what was to become America’s biggest Internet service-provider was another lucky break for the Gardner brothers. More were to follow.
Back in the mid-Nineties, America Online had no content and only 300 000 subscribers.
“They had nothing to put on their main screen and our Fool button was up there and so everyone had to click it. We had an overflow of people and there was just me and Dave working 12 hours a day.”
The pair decided to dump the newsletter and concentrate on developing the Fool’s online presence.
In a sense, the Motley Fool (the name comes from an idiot savant character in Shakespeare’s As You Like It, who highlights the absurdities of others) was an Internet company before the Internet, building interactive communities by encouraging investors to write in and swap information.
“We wanted our readers to be our contributors because we didn’t feel we were good enough or smart enough to do all of the writing.
“That’s really been the spirit of the Internet site because so much of the knowledge is contributed by the users,” Gardner explained.
That spirit was not without problems at first. “Our live chat rooms contained the regulars who had been with us from the start – money managers, analysts from Wall Street – but then, when we got the mainscreen promotion with AOL, we would find the chat rooms would be full of 13- year-olds who just wanted to talk about Pearl Jam. It was total chaos.
“One person was saying ‘what do you think about wireless communications, is that a good industry to invest in?’ and the next post was ‘I love the Spice Girls’. It was a truly Motley collection.”
The exposure brought further lucrative spin-offs. The New Yorker wrote an article featuring the Motley Fool which prompted a raft of book deals.
An investment column was syndicated to more than 120 newspapers.
Soon the brothers had their own radio show broadcast across more than 150 stations. Some of the guests reflected the Fool’s more eccentric side.
“We get legitimate guests on the show now. We’ve had the chief executive officers of Yahoo! and Starbucks on. In the past we’ve had people like Kenny Baker, he’s a dwarf. He was the guy who was inside R2D2 in Star Wars. He had no idea who we were.”
The success meant the brothers were able to hire some staff and move into plush headquarters in Virginia.
Today the Fool employs more than 300 people and has operations in the United States, the United Kingdom and Germany. Operations in Japan will follow soon.
One day the business will float, a move which will bring new challenges for the company whose US site attracts two million clicks a month.
“There is a natural fascination with what we do when the market does well and that can ebb when the market doesn’t do well.”
Such serious expansion plans are potentially at odds with the Fool’s playful image as the pricker of pompous City egos, the more touchy-feely side of capitalism.
Tom Gardner, however, argues that the original ethos of the Fool continues. “Anytime an organisation grows as quickly as we’re growing, determining how to develop your culture takes a lot of work. But the spirit has been maintained. We love the mix of intellectual curiosity and base popular culture.”
Gardner suggests that such a mix is the only way of encouraging more people to get serious about their finances.
“The humour is the sugar around the medicine. We wouldn’t get people interested in treatment if we gave them just the hard numbers.”
Or, as Shakespeare’s character would have it: “Give me leave to speak my mind, and I will through and through cleanse the foul body of the infected world, if they will patiently receive my medicine.”
For now the Fool is king. His real test, however, comes when he is answerable to shareholders.
Investors, as the Fool knows, don’t always have a sense of humour.