While passive index funds are all the rage, top-performing investor David Gardner says he still thinks investors will do better picking individual stocks than they would buying index funds – if they have the energy, time, and interest. And in a recent interview with WealthTrack, Gardner – the co-creator of The Motley Fool – talked about the stock-picking approach he has used to produce exceptional returns over the long haul.

Gardner says he has made a key change in approach over the course of his career: He now pays a lot more attention to what the company does and who is running it. Initially, he says, he was “very numerical,” focusing primarily on quantitative factors. “Today, I care a lot less [about factors like price/earnings ratios],” he says. “I think valuation is much more a nearer-term phenomenon, and it washes away and becomes irrelevant over the course of time that I hold stocks, usually 10-plus years.”

Instead, Gardner says he is concerned now with quality and where the world is headed. He looks for innovative companies that, through their innovation, are able to improve the world in ways that companies following the status quo cannot. Netflix is a great example, he says.

Gardner says he looks for industry leaders who have been “first movers” — that is, they have led the way in changing important industries — and whose shares have strong momentum. If these companies have strong management, they and their stocks can excel for years and years. He says he hates the adage, “Buy low, sell high” because it indicates that the only way to find winners is to look at stocks that have been crushed, and also leads to excessive trading as investors try to figure out when to “sell high”. The momentum behind hot stocks isn’t a negative, he says; it’s often a sign that a company is performing well and has more room to grow — and Gardner likes to give his picks many years to show how much they can grow. His preferred motto: “Buy high and try not to sell at all.”

In fact, Gardner says he prefers stocks that are “‘grossly overvalued,’ according to the financial media.” It’s not that you want to buy anything that’s overvalued, he explains. “But … if you are a ‘top dog’ and a first mover in an important emerging industry with a sustainable advantage, strong past price appreciation, you have excellent management, smart backing, and a good brand — and then someone is telling you it’s crazy overvalued or it’ll never work … that’s a beautiful situation.”

Gardner says that stocks of great, innovative companies can rise by so much that it becomes irrelevant whether you bought them at $25 a share or $30 a share. He also is quick to note that he has made a lot of bad stock picks over the years, and that his losing picks probably outnumber the winners. He says you have to be prepared to lose on a good amount of picks if following a strategy like his. But finding just one great company and riding it over the long haul can negate numerous losers, he says.

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