Destined for Foolishness

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The call came on a fall day in 1993. A man in Texas wanted to subscribe to the new Motley Fool Newsletter. On the receiving end, David Gardner gladly took down the gentleman's information, but he was perplexed.

"We only sent invitations to our service out to about 1,000 people -- mostly family, and some friends from school. Of those thousand, only 35 people were subscribing after one month. And this guy in Texas was definitely not on our list."

Later that same day, two more unknown people called looking to subscribe. David phoned his brother, Tom, to see if he could shed any light on the situation.

"Tom was out in Montana, working on his master's. It turns out he posted information on AOL about The Motley Fool. At the end of the posting, Tom gave my phone number for anyone interested."

Tom didn't expect it to work, but without that posting, The Motley Fool might not exist today.

A series with our chief rule breaker
Recently, I sat down with David Gardner, co-founder of The Motley Fool, to discuss his background and his investing philosophy. Last week, we took a look at David's background and where his drive for investing greatness comes from. Today, we will cover the beginnings of The Motley Fool.

There are more articles -- dealing with David's investing philosophy -- that are available to our paying members of Stock Advisor and Rule Breakers, as well. But because we offer 30-day trials to these services, anyone can access this information for free.

On the cutting edge
Once the Gardner brothers realized the power of using online services, things began to happen fast. They immediately knew they were onto something. "The Internet was going to be capital-A Awesome," David recalls. "It was going to provide more information to more people, and cost them next to nothing. We were lucky enough to get in at the very beginning."

The brothers set up shop on two different online service providers: AOL and Prodigy. Their experiences on the two services could not have been more different. Users of the AOL service were much like today's Fools -- long-term, buy-and-hold investors.

Those who frequented Prodigy, on the other hand, were cut from a different cloth. They were, for lack of better a description, penny-stock hounds. The brothers tried for months to interest Prodigy's users in tweaking their approach, but by late March 1994, they realized it wasn't worth it.

An April Fool's joke is born
Instead of quietly bowing out of Prodigy, the brothers decided to have some fun. Starting what would become a tradition of April Fool's jokes, the brothers feigned a conversion to the world of penny stocks.

In an effort to show how easy it was to manipulate others, they created a company from thin air -- and then zealously promoted its stock.

The company -- Zeigletics -- made portable toilets in Africa and had "enormous growth potential." Traded on the nonexistent Halifax Exchange, Zeigletics generated a lot of buzz among Prodigy users ... until they realized they'd just been had.

The illuminating stunt created so much noise that the story ended up on the front page of The Wall Street Journal, and was featured in an article by Jesse Kornbluth in The New Yorker magazine. That free press was followed, over the coming years, by dizzying levels of business expansion.

From printing Foolish books, to hosting radio shows, to hob-knobbing with Hollywood elite ("Barbara Streisand was a big fan of the Fool," David recalls), business started growing faster than anyone could have predicted.

Changing business models
In the early days, the Gardners worked out an agreement with AOL. The Motley Fool would be paid based on how many minutes users were spending in their chat rooms. For a time, business was great.

"Then, AOL -- in what was probably a good business move for them -- decided to change their business model. Instead of charging users per-minute, they would just charge a flat, monthly fee."

That turned the Fool's agreement with AOL on its head. "We went from being a valuable resource to a drag on their profits. If AOL was getting their money regardless of user habits, the increased traffic from our site actually strained their capacity, rather than bring in more revenue."

In part because of the popularity it had amassed, the Fool was able to survive by signing advertising deals with several financial institutions and brokerages. "The problem was," David explains, "we really didn't have any products to sell. We just had lots of free articles."

That weakness would soon be exposed.

The nadir of the dot-com bust
In 2001, things started falling apart quickly for the Fool. Having just hired a new CEO and secured a significant amount of capital from private investors, the year started optimistically. Almost overnight, though, ad rates fell. "By the end of the year, ads -- which were our primary form of income -- only paid one-sixth as much as they had a year earlier," David recalls.

Though the Fool started 2001 with 425 employees, the year would end with just 85 on the payroll. After a series of layoffs (one in February, one in June, and one in November), David and company were fighting for their very survival.

"All of the layoffs were bad, but the third was just the worst. We really didn't believe it would come to that. Then 9/11 happened. After that, the anthrax scare. And if that wasn't enough, soccer games and community events were being canceled because the D.C. sniper was on the loose."

The experience left a lasting impression: "I remember how lonely it felt. Empty desks and chairs were just sitting in the office, and we all came and went with zombie-like expressions on our faces."

Rebuilding
Determined to create a sustainable model, the brothers began to change things. Starting in 2002, The Motley Fool's main source of revenue would become subscription-based. That model still exists today and is largely successful because of the picks Motley Fool advisors have made.

David and his brother, Tom, have even gone so far as to create a list of "core" stocks for their services. David has five core stocks in his Stock Advisor newsletter and nine in his Rule Breakers newsletter that he thinks every investor should consider buying. You can gain access to these two services absolutely free with a 30-day free trial, and find out the names of these core stocks.

You'll also get access to a story on David's investing secrets of success. These secrets are the key behind the success of the subscription model -- as they have helped David's Stock Advisor scorecard wallop the S&P 500 by 107 percentage points. These very same tricks also help explain why Rule Breakers, David's other service, was recently named the No. 1 newsletter service in America.

At the time this article was published Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. You can follow him on Twitter at@TMFStoffel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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