Motley Fool Hidden Gems Investing - Battle in the Beer Industry

Episode Date: October 9, 2015

Anheuser-Bush InBev makes another bid for rival SABMiller. Domino’s Pizza serves up strong sales in the U.S., while Yum Brands continues to struggle in China. Plus, Credit Suisse Managing Director Michael Mauboussin shares some insights from his latest book, ''The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.'' Learn more about your ad choices. Visit megaphone.fm/adchoices

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It's the Motley Fool Money Radio Show. I'm Chris Hill, and joining me in studio this week for Million Dollar Portfolio, Jason Moser, from MDP and Rule Breakers, Simon Erickson, and from Motley Fool Pro and Options, Jeff Fischer. Good to see you, as always, gentlemen. Hello, Andrews. We've got the latest earnings from Wall Street. We will dip into the Fool mailbag, and as always, we'll give an inside look at the stocks on our radar. But it was a big week for beverages, so let's start with the continuing drama in the beer industry. Anheuser-Busch InBev upped

its offer to buy SAB Miller to $104 billion. That's billion with a B, Jason. Jason Moser. It's a bit of a scratch. For the third time, SAB Miller said no. But a little bit more intrigue, because some of SAB Miller's shareholders appear to support this offer. Well, B is for billions, and in this case, it's also for beer, because that's what these two specialize in. It's beer. And yeah, the obvious benefits of this deal are cost savings and growth, growth at least where AB InBev is concerned, because SAB Miller is a much smaller company. To put that into context, AB InBev brings in around $45 billion annually

in sales, SAB Miller around $17 billion annually. But you were referring to the sort of thank you but no thank you. And yeah, I mean, I think when you look at this situation, it's interesting that you see SAB being courted here more than once. The issue there is that you have Altria and the Santo Domingo family as the two biggest shareholders of SAB Miller. So without the sign-off on at least one of two of those parties, something is likely to not happen. But you really need both of them. With Altria, Altria is for it, the Santo Domingo family is not quite for it yet. This seems like they're just playing this negotiation out in public more than anything. I wouldn't be surprised to see this actually happen at

some point. It seems like it's actually pretty reasonable. The offer that SAB is receiving is not all that bad. It values the company at around 32X trailing earnings today. You compare that to something like AB InBev, and AB InBev is trading around 19X earnings today. It's not as if they're two companies of equal size. SAB is smaller than AB InBev, but it's interesting to watch this play out in public. Well, and they are smaller, but we're still talking about the biggest beer maker looking to buy the second biggest beer maker. And so, if it does go through at some point, we're going to see more shakeout in the beer industry, aren't we?

Yes. And you'll probably see continued consolidation, Chris, because all the money is moving into specialty beers and higher-priced beers, actually, and that's what's really driven the results at Constellation Brands, which I know we're talking about next. Let's move on to Constellation Brands, because the stock hitting an all-time high this week after second quarter profits came in higher than expected. They've got wine, they've got spirits, but it's their beer portfolio that really got it done this last quarter. It really is, Chris. With their 2013 acquisition of the rest of Crown Imports, they also acquired Grupo Modalo, which is Corona and Victoria and Modalo beer. And that beer is really,

it's driving results. The company was pretty much flatlined for a long time, and the last three years, earnings have just surged 40%, 30%. And it's all, a lot of it's marketing driven. They're marketing, if anyone watches TV at all. The Corona, their 120 days of summer ads did an extremely good job of moving this product. So, Constellation Brands beer business business actually grabbed 45% of the total U.S. beer industry volume growth in the last quarter. So, of the growth that's there, which isn't that much, slow growth industry, they're grabbing nearly half of it. So, I haven't invested in alcohol, I didn't invest in tobacco, both have generated strong returns. I've invested in pizza and coffee, though.

I would say, I've invested in alcohol indirectly, right? If you're contributing to the market, wouldn't you? You're realizing some benefits, right? Yeah, it helped the companies. Well, and when you look at this stock, Constellation Brands, up more than 50% in the past year. This thing's on fire. And it's expensive now, Chris. Although it's not outrageously expensive, the stock trades at around 15X expected EBITDA, which is in the ballpark for a high-quality, reliable business where you know the cash flow is going to keep coming in. But that said, it's expensive on multiples to earnings and cash flow. Definitely

But, obviously, Wall Street likes its position, especially in the beer market, and sees more growth ahead. Yeah, it seems like beer is actually making a little bit of a comeback here. Obviously, Boston beer is continuing to do well. I recently read where Dogfish Head pulled in a new investor as well, brought in a good amount of capital to help grow their operations as well. I think we're seeing this renaissance, so to speak, of this craft beer industry, even though it's so localized. I mean, it's all over the country now, so you're seeing a lot of beneficiaries. So true. What will probably happen next is, they'll go international, as counterintuitive as that is, because it's easy to sell a popular

American brand in Europe, say, once you get some traction. Let's move to non-alcoholic beverages. Shares of Pepsi on the rise this week after third quarter profit and revenue came in better than expected. They also raised guidance for the full fiscal year, Simon. So that's the nice one-two punch we like to see. Well, if people are drinking more beer, Chris, they're certainly not drinking more carbonated beverages. It's something that Pepsi's had to get over, that there's just a secular trend in less sodas being sold and consumed, especially in North America. Pepsi saw their soda sales down 2% in North America, but non-carbonated beverages up over 10%. These are things like Gatorade,

Aquafina. We've talked about Tropicana. And Pepsi's got such a good position in distribution that if they can pivot from carbonated to non-carbonated beverages, they're going to do just fine, which is what we saw this quarter. They also have the snacks, too. And it's not just the salty snacks. They've got Quaker Oats as well, presumably something healthy in there. But we like the salty snacks. We're big fans of those in the Erickson house.

They're actually now changing the Lay's chips to being, instead of in a 10-ounce bag, an 8-ounce bag. I saw an article in the Washington Post this week about how soda sales are declining sharply, and yet the photo showed everyone drinking that soda company's bottled water, where the margins are quite good, I assure you. I feel like we're getting some inadvertent lessons here from Pepsi and Constellation Brands, because just as investors, we like to have a diversified portfolio. Probably no coincidence that these two companies have diversified portfolios themselves.

I mean, as I said, Constellation Brands, their wine division wasn't all that great, neither was their spirits, but the beer division really lifted things. And as you said, Simon, with Pepsi, they've got different segments that can offset the decline, this steady, well over a decade decline of soda consumption in the United States. Oh, yeah. And as you look at it as an investor, you see gross margins grow 120 basis points this quarter, year over year. Earnings per share up 14%. Revenue was still up 7.5% when you pull out foreign exchange risks. So, yeah, if you're diversified and you can pivot, that's fine.

Now, what's interesting along the food lines there is we've seen Pepsi do such a good job of diversifying the revenue stream. We've criticized Coca-Cola a decent bit as being more pegged to the sodas and getting out of the sodas into the non-carbonated beverages. But they also own Honest Tea. And Honest Tea is no longer just Honest Tea, it's Honest Juice and whatnot. And they're also getting into food. So, it'll be very interesting to see how Coca-Cola gets behind that and really pushes it here in the coming decade in order to diversify their revenue stream as well. True, Jason. And Coca-Cola owns 16 or $17 billion brands, just in beverages alone.

Amazing. Yeah, you're right. The bottom lesson with giant companies that have distribution is they can plug different things into that distribution, just give them time. Yum! Brands is the parent company of KFC, Pizza Hut, and Taco Bell. Investors completely unimpressed with third quarter results earlier this week. Stock down around 20%. And once again, China continues to be a massive struggle for this company, Jason. Jason Moser. I'm not entirely convinced that we're not actually seeing a real image problem here, because it seems like we've talked about Yum's China Woes for going on two years now.

And in reading through the call, there wasn't really anything good going on there. They're recovering the KFC brand slightly, but that was more than offset by just a lugubrious There you go. That's a 50-cent warfare. A lugubrious performance on the part of Pizza Hut there. Just to put this in context, Pizza Hut is responsible for a third of China's profits. China is responsible for a third of Yum's overall operating profits. You can see that, when China runs into headwinds, they really have some problems. They can't just say, KFC is going to pick up the slack for Pizza Hut, or vice versa. They both have to really perform, or else there are going to be problems. So, the company consequently

guided down for their full-year earnings per share guidance, expecting now growth to be low single-digit positive, where they're typically looking at double-digit growth. That's why the market just fled on the stock. It was like George Costanza fleeing from the apartment, yelling, flee! It is sad, because when they had such a bad year last year, what you can say to yourself as an investor, well, wow, next year, the year-over-year comparison should be strong, you should see a big bounce. But no, when they're down again, or weak, that's just a one-two punch.

The shares are still trading at 28x full-year estimates. With a big fast food maker, that's not really that compelling of a deal at this point. You would think, after a 20% sell-off, maybe shares would look compelling, but I don't think so. Maybe too much optimism in China. China's a big country, large, growing middle-class, but you can't just say that everything's automatically going to work there. Well, and this is a smaller point, but it seems like part of what happened this week for them was, they were getting punished for bad guidance. I mean, this is an executive team that really was promising analysts, hey, the second half of our fiscal year is going

to be a lot stronger. And as you said, the KFC comps in China were up around 2%. They were guiding for around 10%. Sure. And I think, also, it's poor guidance, and I think they underestimated the competitive environment there in China, because they did bring that up. They're more mom-and-pop operations taking advantage of these newfangled delivery models. So, I think There's just far more competition there now than ever before, and I just don't think they really saw that coming. I mean, long-term, I'd rather own Pepsi than Yum! Brands.

And interesting they used to be together. Coming up, a struggling board of directors finally gets something right. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio with Jeff Fischer, Jason Moser and Simon Erickson. Third quarter profits for Domino's Pizza came in lower than expected, shares sold off a bit, Jeff, but their same-store sales looked pretty solid. Oh, very solid. 10% in the U.S. Really strong growth. What's happening with Domino's and Papa John's is a not-so-widely-reported resurgence, if you want to call it that, or

just outright smashing success. Domino's Pizza is up more than 600% in the last five years. Papa John's is up more than 400%. And what's happening is, they have both found a way to make the international markets work, and they're growing rapidly there. They're doing extremely well in the U.S. as well, actually, with online sales, with app-driven sales. They're taking away market share from small mom-and-pop locations that slowly close up. So, can't cry for Domino's. It's still up 30% the past year alone, and the outlook still looks good long-term, at least the next three or four years, I would guess, until maybe some competition. Yeah, we've got our operations in Australia, and our colleague Matt Joss, one of our analysts

there, I remember when he was visiting Fool HQ, he was talking about Domino's, how strong they are in Australia, and just really dominating the market. Yeah, I just wonder if eventually, we've talked about this in Motley Fool Pro for a few years, eventually is quick-serve pizza that's healthier going to enter the market? I would think at some point. And sure, Domino's and Papa John's can try to get into that, But if you're not the fresh brand, it may finally bring some competition, but that's well down the road if it happens. This week, Twitter's board of directors made it official, confirming Jack Dorsey

as CEO, with Adam Bain as chief operating officer. And Jason, Twitter shares back above $30 for the first time since July, so Wall Street seems to approve. Yes, and we approve at MDP as well. We hold a stake in Twitter in the portfolio. is something where we've always felt like there was a lot of upside with a very limited downside where the price was. You just don't run into businesses with these kind of network effects very often. But I think the main reason why the market is feeling a bit more optimistic here is that, for the longest time, with former leadership, the employees at Twitter, the people working the product, they felt somewhat constrained in what they could try, things

they could experiment with to try to help the product evolve and change as demands changed. There were never any real, awesome innovations with the product, so to speak. Now, with a founder back in the driver's seat there, and he's giving that green light to innovate, try new things. This is not some sacred platform that has to stay the same. You're seeing this rebirth, I think, within the walls there at Twitter HQ. It's certainly playing out. As the core user I've seen over the past three months. Certainly, there's been more rolled out over the past three months than there has been over the past two to three years. And I think the real shining star right now is the new Moments feature that was AKA Project

Lightning. Having messed around a little bit, I've got to say, this is really, really clever on a lot of fronts, and I imagine that we'll continue to see it do nothing but get better. So certainly, I think 2016 is shaping up to more than likely be a little bit of a better year for Twitter. Shares of GoPro getting hit on Thursday after one Wall Street firm put out a report cutting their price target on GoPro's stock by more than 40%. And Simon, they're basically calling GoPro's newest camera a flop. How bad is this? This is the Hero 4 session they don't like. This is GoPro's newest model that's

out there. It's a very small camera, but even GoPro themselves has lowered the price from $400 to $300. We saw a prominent investment bank cut their price target for GoPro down $35 and $62. So, a lot of hesitation on the company right now. I think, though, the bigger story on this is whether or not GoPro is able to expand from their action sports enthusiasts. Maybe we go amateur instead of GoPro on this. But they have no problem selling cameras. They sold 6.4 million cameras over the last 12 months to sports enthusiasts. But there's only so many people that are willing to jump off of mountains and video record it for everybody. And I think that GoPro has got to start monetizing other things. They've got GoPro licensing now, similar

to Shutterstock, where you can actually put content up and get money for that. Drones, I think, is a really big opportunity. They're going to be launching their first quadcopter in the first part of next year. And then the one that I'm really interested in is going to be the virtual reality one. Facebook is going to have an Oculus Rift commercially available the first part of next year already, and GoPro is already starting to work with Google to develop a 16-camera array to capture 360-degree footage. I think it's going to be interesting, but we're in the lull between waves right now, Chris. We've got to see if these new things are going to take off. We're not too far off from the holidays.

It seems like this is yet another year where they kind of need one of their gadgets to be the must-have gadget. Yeah, definitely the story for these guys, especially right now. And again, you're going to be seeing a lot more of that in the next year. I think the story for GoPro is outside of action sports, though. Going to keep that momentum going to other areas. Shares of the Container Store falling more than 20% this week after second quarter profits fell 62%. They are really spending a lot of money over there, Jason. They are, and they really have to. They've got to figure out a way to gin up interest and convince people that they need

organization in their lives. I feel like this is a company that would have been better off staying private. Unfortunately, I don't think it was really up to them. Leonard Green and Partners, I think, holds a large enough stake in the business where this was something that was bound to happen. You know, I recently wrote of investing mistakes that I had made and lessons that I had learned from those mistakes. I think it's always a good idea. One of those stories was that, you know, you can find a business that has lots of wonderful qualities like ownership, they're invested in the company, they have a great culture, their customers who love the product, etc. But those don't always necessarily make good investments. And I think the container store

probably falls into this type of investment. It is a good company. It's a good business. It has good people. They look out for their employees. A lot of positives there. But I think that when you look at the fundamentals of a business, there's not a big market opportunity. I think they are pushing very high-ticket items. When you talk about a strained consumer, it's just going to be very difficult to convince someone that they need to finance a closet project. And that's really what's happening here with these $10,000-plus big-ticket items that they're selling. So, they may run into a situation here where they may have to raise some equity to help grow, because they are faced with some debt constraints. And if they

do that, then shareholders are going to feel some more pain there. So, I'm not necessarily convinced that this is the bottom for them. I'd probably stay away. We've got about 30 seconds left. You have an underrated container. A lot of containers in the world. There are a lot of containers. I'm going to go with the ball mason jar, or like a jelly jar. You know what I'm talking about there? Sure. You know, people, they'll can vegetables, but you can also drink beverages out of it.

I like it. Versatile. Simon? Thermally insulated coffee mug. Always a winner. Jeff? A pizza box. You can...

It is underrated. Steve Broido, behind the glass? I'm going with the acrylic baseball display container. What? How many baseballs do you have, Steve? Well, zero, but I'm daring to dream here. All right, guys. We'll see you later in the show.

So how much of investing is skill and how much is luck? We will tackle that question next with our guest this week. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Michael Mobison is Managing Director and Head of Global Financial Strategies at Credit Suisse. He's worked in the financial service industry for more than 25 years, and he's the author of several books, including his latest, The Success Equation, Untangling Skill and Luck in Business, Sports, and Investing.

Motley Fool columnist Morgan Housel recently talked with Mobison about investing, and he kicked off the conversation by asking Mobison about the role that luck and skill play in investing. Well, you know, the way I might think about this, Morgan, is to take a step back. And if you consider a continuum from, you know, one side being all luck activities, so, you know, roulette wheels or lotteries, and the other side being all skill, pure skill, perhaps, you know, running race or something like that, or chess would be over there. you can array activities between those extremes. If you do that, it turns out investing is toward the luck side of the continuum. But I have to say really quickly as to why that is. And I think it's

a little bit confusing. The idea is what we call the paradox of skill. It wasn't my idea, but that's what we called it. The paradox of skill says in activities where both skill and luck are important, it's often the case that the skill increases, luck becomes more relevant in your outcomes, right? So that doesn't seem to make sense. And the key idea is to think about skill across two dimensions. The first is absolute, and the second is relative. And I think that what we can say is we look around the world in business or sports or certainly the world of investing, absolute skill has never been higher. So that's the key thing to emphasize is most investors have extraordinary information at their fingertips, computing power, and so forth.

And certainly, if I put you back in the 1960s, say, or 70s, with the resources at your disposal, you could probably run circles around the competition. But the second dimension is relative skill. And I think what we've also seen is that relative skill has narrowed in a lot of domains, which is to say the difference between the very best participants and the average participants is less today than it was a generation or two before. So the skill, the absolute skill improvement gets offset by competition. So a great deal is being left to luck, but it's not because participants aren't skillful.

It's actually because they're highly skillful, but their skill is offsetting. And so as a consequence, yeah, luck seems to play a very strong role. Now, I'll say one other thing that any careful analysis I've ever seen of past money manager performance requires, to explain the results, requires differential skills. So I don't want anybody to understand that all investors are, everyone's the same. That's clearly not the case. There remains differential skills, just not as much differential skills, say, as 20 or 40 years ago. So let's say we have two investors.

They've both outperformed the market by two percentage points over the last 10 years. How could you come to the conclusion that one of them was lucky and one of them was skillful? Well, if they both outperformed by 200 basis points, they may both have been skillful. But one of the ways I would try to address that question is to look at their process. And specifically, we know in realms where there's a lot of luck or it's probabilistic in terms of outcomes that an emphasis on process probably makes the most sense. And for me, the key components to a quality process would have sort of three elements. One is an analytical component. So does it appear that their analytical process in finding edge

and their portfolio construction principles make sense and are repeatable? The second thing I'd want to see is kind of behavioral. So do they understand sort of the behavioral mistakes that many of us make, and are they taking steps, concrete steps, to manage or mitigate those things? The third, I would say, is organizational, which is, you know, we know that basically in any business, but certainly in the investing business, There can be agency costs. Is that organization structured in such a way that those are minimized to the degree they can be? So if those three kind of core components seem like they're pretty good, pretty vibrant,

then I would be inclined to say that there is some differential skill there and potentially persistently differential skill. You write about reversion to the mean in the book, the idea that if you have an extreme event that's an outlier, we're going to, the odds increase that the next event will be closer to average. But when we're looking at financial markets, do things change over time? And what comes to mind for me is the CAPE ratio, which is one of the, which is, you know, it makes so much sense intuitively, but when you look at the data over the last, I think, 25 years, it's been above its long-term average 95% of the time. So do things change over time or how powerful is reversion to the mean, even over really long periods of time?

It's an awesome question. The first thing to say is that reversion to the mean occurs any time the correlation between two variables over some period of time is less than one, right? So any correlation that's less than one for the same thing over time, if it's less than one, then you're going to get some sort of reversion to the mean. So that's the first thing just to point out. And going back to the image, hopefully you still have in your mind of the luck-skill continuum, all luck one side, all skill the other side, there's another nice little heuristic you

can use, which is if your activity is on the all luck side, then you should expect complete reversion to the mean, right? So in other words, the expected value of the next outcome is a measure of the average. And if you're on the pure skill side, there is no reversion to the mean at all, right? So that means the same thing happens over and over. And so the rate of reversion to mean is actually related to where you are in that continuum. But to your point, and your point is an incredibly important one, which is, are the means themselves stable? And if the means move around, then sort of all bets are off as to where you're actually going back to. And price earnings multiples are a particularly interesting example of this. And we've written a fair bit about this

over the years. But the question is, is that a consistent measure or not? And one of the ways to think about that would be to decompose the elements, the core elements of a price earnings multiple, right? Some things you and I could probably just tick off quickly would be, you know, equity risk premium expectations, inflation expectations, real interest rates, growth expectations. And you can plot a lot of these things as time series. And, you know, provided that they're moving around a fair bit, there's no real reason to believe that the P.E. should be some sort of magic average of time. So the historical numbers may or may not have any relevance for what's going on today. Now, it turns out that, you know, numbers in the mid-teens tend

to be, they seem to be sort of attractors. The multiples tend to get there. But it is very, very contingent on those variables. And you have to think about those variables as you're thinking about what the appropriate P multiple is. So that, to me, is sort of the way to think about it is if the components, the underlying components are moving around a lot, there's no reason to believe that what happened before is going to be relevant for what's happening today. Within that context, do you think investors get too caught up looking at long series of historical data and thinking that the future is going to resemble the past when maybe the averages do change over time? And so the relevance of history probably depends a lot on what you're looking at.

So for some things, it can be quite a reasonable thing to look at. Other things, it might be more challenging. Another really interesting example would be dividends and dividend yields. I mean, it was until the 1950s that stocks always yielded more than bonds, right? In fact, when the yields on stocks went below the yield on bonds, many of the old timers, and this is the late 1950s, sort of said, this is the end of markets, you know, it's going to be horrible. And what's happened in subsequent years, of course, is then that continued to be the case

that dividends kept drifting lower as bond yields stayed above them. And then things like buybacks got introduced in the early 1980s, and now there's this sort of total payback, total shareholder yield, which has obscured sort of the underlying theory. So you just have to be very careful about where you apply historical theories. It's going to have more relevance in some areas than others. And like you said, if you're just blankedly using them for everything, I think it can be very, very misleading, and you're going to come to the wrong conclusions in many cases. So, as investors, no one wants to admit that their success may have been partially due to luck. It's very difficult for people to admit that. People want to attribute their own successes to their own skills, even if we know that some percentage of the investing

population who has been successful was due to luck. So, what would you recommend for investors to look rationally and objectively at their own process and their own skill to separate skill from luck? You know, the first thing is, and I don't know if that's your experience that you're reflecting, but my own experience is that many great investors and really many great business people as well are actually reasonably open to the idea that luck helped them out at some point. And if you read interviews with great investors, almost all of them will suggest that luck played a role in their outcomes but fees are never refunded what's that fees are never refunded but i'm saying that's that's right but still i mean they're they're um yeah so but but

yes that's a slightly different topic but yeah that's right and um so and and the other point is to make um i think almost to state the obvious in realms again where luck and skill both contribute to outcomes whenever you see an outlier right which is a great performance it has to be lots of luck and lots of skill together right because either one of them alone will not carry you so You need both of those components. And so outliers is another example. You know, streaks in sports are a great example where if you look at all the players with, you know, for example, baseball players with hitting streaks, 30 or more games,

their career batting average is over 300. They're really good players. And as a consequence, you could say something like not all skillful players have streaks, but all the streaks are held by skillful players, right, because it's skill plus luck together. But going back to your question, I would again be a broken drum and just say that the key there is to re-examine process and say, is the process that we're adhering to economically sound and repeatable? Those are the key things. Again, analytical, behavioral, and organizational. The second thing I would probably think a lot about is what other constraints get introduced

into the whole picture. And one example would be something like size. As organizations get larger, it sometimes is quite difficult to invest in the same way or the same style or the same opportunity set. So that's another thing to bear in mind is that what may have gotten you to one point was because the opportunities were such that when you get to a certain size, the opportunity sets are not quite the same and it's more challenging going forward. So yeah, focus on process I think is the ultimate answer to that. It's a great question, but that's how I would do it. My final question, you've been working in the financial services industry for a long time, and you've had a great perch to research and think about the industry as a whole.

What has surprised you the most? Or what has been the biggest shift in your thinking throughout your career? I mean, I guess the things that are really interesting to me, one is that, you know, we went from in 1980, basically 100% an actively managed industry, to now, again, this blend between actively managed almost closet indexing and passive investing, indexing in ETFs. And that's an interesting question is about if that ecosystem, that change in that ecosystem, what repercussions that has for markets, market efficiencies, and opportunity sets going forward. The second thing I think is really a fascinating one has been really the rapid change in technology, not only to enable people to access information and to trade, for example, more cost-effectively

and so forth. But even from here, you know, this notion of do we continue to have quantitative strategies or can quantitative strategies take more and more away from what humans are doing today? I think that's a really fascinating question. Or you could even flip it on its head and say, going forward, what elements will humans add to the investment process that computers can't do or algorithms can't do? So to me, there are some really big changes. They're probably interrelated to one another but uh that that's the biggest change and i go back to when i started this business you know literally in my training program there's a guy that worked with an analyst who used spreadsheets not like computer spreadsheets physical spreadsheets to all

the analyst models right to from that to where we are today it's really astounding i mean fax machines weren't used certainly obviously there was no internet pcs were rarely used and how all that's rapidly changed so to me those are a couple of things that i think are have been such big changes, watershed changes, and where we don't really know exactly how they're going to play out. That was fascinating. Michael, thank you very much for your time. My pleasure, Morgan.

Coming up, we'll dip into the Fool mailbag and give you an inside look at the stocks on our radar. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. I'm Chris Hill. Joining me in studio once again, Jeff Fischer, Jason Moser, and Simon Erickson. Radioatfool.com is our email address. That's radioatfool.com. Question from Clayton Kearns

in Los Angeles. I'm 26 years old and new to investing. My personality has always been aggressive, so when I hear you guys talk about certain companies and how amazing they're doing, I want to go and buy all of them. My challenge is twofold. First, I'm not sure how much diversification is too much. I currently hold eight different positions consisting of many of your Rule Breaker stocks. P.S., I love that service. Second, I feel the need to load up on certain stocks quickly because I want to capture as many gains as I possibly can before the price gets too high. Would dollar cost averaging be the way to go for my situation? And Jeff, I'll kick it to you first, but first, I'll just say, hey, Clayton, you're 26 years

old, man, slow down. You have decades of debt. No need to go too quickly. It's outstanding that you are investing, and I believe you should, dollar cost average, especially given your age. As your savings grow and as your income goes up, put more and more into the market, and do it gradually. Put it in every two weeks or every month. And secondly, you only hold eight positions. You could safely hold, in my opinion, 20, 20, 30, or even more. And over time, you're going to see that probably the biggest mistake you can make in most cases is to sell a good company, to sell it too soon, especially at your age. Hold. Let your winners run. Your losers will become inconsequential, and your

winners will make your life financially. I mean, it's really true. Sam? First of all, Clayton, thanks for the shout-out on Rule Breakers. We love you being a part of the service, too. I agree with what Jeff said. You've got to let your winners run. We look at this a lot in Rule Breakers. Our batting average of number of picks that actually outperform the market is typically between only 40% and 50%, which is less than half, but we're still outperforming the market by an average return of about 80% vs. 40% for the S&P. It's the good companies that continue to outperform over time that

compound returns and help your wealth. Yeah, a couple thoughts. I think if you're Rule Breaking investing, No. 1, that's awesome. No. 2, that's where you want to probably diversify more. We talk about in Stock Advisor all the time, you can have 20-40 different stocks and you can be well diversified. Another thing to think about, too, is dollar cost averaging. I think we probably all dollar cost average, if you think about it. If you're contributing to your company's retirement plan, or any sort of IRA or retirement plan that you have, typically that's something where that money is coming out of your paycheck every couple of weeks. That is a form of dollar cost averaging as well. Either way, I think

dollar cost averaging is certainly a great way to do it. Final thing, Clayton, I'll throw in here, Chris. Since you're only 26, and you said in your note, heck of a market right now to step into, because the market's been down lately. But really, you should be rooting for a down market, because you have the bulk of your savings to make yet and to invest yet. So, you're a net buyer of stocks the next 10, 20 years. You want lower prices. Before we get the stocks on our radar, I just want to say, if you're enjoying Motley Fool Money, hey, check out our other podcasts. The Motley Fool has four different other podcasts

you can listen to. They're all available for free on iTunes, Stitcher, Blog Talk Radio, Player FM, anywhere you find spoken word podcasts, Market Foolery, Motley Fool Answers, Industry Focus, and Rule Breaker Investing, a whole range of topics. And again, they're all free, so check them out. Let's get to the stocks on our radar. We'll bring in our man Steve Brodo from the other side of the glass to hit you with a question. Jason Moser, you're up first. Jason Moser. You know, Chris, as I received the email confirmation today that my recent shipment of Charmin toilet paper has been left at our house, got me thinking how much

I really love Amazon. And while it's no secret that's the stock on my radar this week, and I'll tell you why, ticker is AMZN, Amazon is far, far beyond just an e-commerce retail play. And I think we're starting to really recognize that. They're having their Amazon Web Services re-invent conference, and they're talking about this new platform that they're entering into with the Internet of Things, and making devices from cars and turbines to sensor grids and light bulbs and more, connecting to Amazon Web Services to communicate. Then you look at the fact that Amazon Web Services is now a $7-plus billion business with more than a million active enterprise customers. This is just a behemoth of a company.

I think its best days are still to come. Steve, my question is, is Amazon perpetually overpriced? I hear that criticism all the time. It's always overpriced. Right. And I think that argument generally comes from looking at it just as a pure e-commerce play. And I think what we're seeing now, they've lifted the hood, shown us a bit more about what Amazon Web Services can do and what it will do. And I think the price is a very fair one. Chris, first of all, happy birthday to my dad. His birthday today in Houston, Texas. Shout out to him. Thanks for giving me a chance

to do that. Back to the stocks. The stock on my radar is Hortonworks, ticker is HDP. is not currently a recommendation in any of our Motley Fool services, but they're one of the leaders in driving the adoption of Hadoop. Files are getting very large these days for big data because they're now terabyte and petabyte sizes. And Hadoop is distributed processing and storage is a more efficient way to get data that you need. And I think that they've got the open source kind of component of this figured out. They make their money on the service and support. This is one that's definitely on our radar. Steve? How big will my next hard drive be? Because right now I can get 8 terabytes. What's

the next one? What's the next size that's coming my way? 9 terabytes? O' I'd say at least 10 times bigger, Steve, depending on where you are right now. Alright, Jeff Fischer, we've got about 30 seconds left. Alright, we've talked about it this week, this might make Jason happy. Twitter I've started to look at. TWTR, $21 billion market value, which is not that big given their brand and their size in the market. And if they just start to monetize their traffic in some better ways, better days ahead for them, possibly. So, I started to look. The one thing is, their

financials are nowhere near Facebook's when Facebook had the revenue that Twitter has right now. Facebook was solidly profitable. Twitter is still kind of a mess, financially. Steve? Who are you following on Twitter right now? National Geographic, Smithsonian. Steve, three stocks. You got one you like? I like Hadoop. I don't know. Horton Works.

Horton Works. That's the one. I like Horton Works. All right, guys. Thanks for being here. That's going to do it for this week's show. We will see you next week. Subtitles by Subtitle Workshop