Motley Fool Hidden Gems Investing - Investing in the Age of Trump

Episode Date: February 22, 2017

What would a cut in corporate taxes mean for investors? Which stocks will benefit most from the new administration? Our analysts tackle those questions and discuss investing for income. Plus, we revisit our conversation with Brian Christian, author of Algorithms to Lie By: The Computer Science of Human Decisions. To check out our brand new service, Motley Fool Total Income, go to TotalIncomeRadio.Fool.com .     Learn more about your ad choices. Visit megaphone.fm/adchoices

stop wasting your nights on a mattress that doesn't get you experience the most comfortable mattress in the world the sleep number smart bed at the touch of a button you can personalize your comfort choose firmer or softer adjust cooler to warmer and right now save up to twenty five hundred dollars during our massive labor day event hurry into your local sleep number store today because we have your number. Support for Motley Fool Money comes from Rocket Mortgage by Quicken Loans. When it comes to the big decision of choosing a mortgage lender, work with one that has your best interests in mind.

Use Rocket Mortgage for a transparent, trustworthy home loan process that's completely online at quickenloans.com slash fool. Everybody needs money. That's why they call it money. The best things in life are free But you can give them to the birds and bees From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show.

I'm Chris Hill, and joining me in studio this week, from Motley Fool Pro and Options, Jeff Fischer, and from Motley Fool Total Income, Ron Gross. Good to see you, as always, gentlemen. How are you doing? Hey, Chris. Doing something a little different this week. We're actually in Arizona for a Motley Fool investing conference.

So we're tipping a little early. we're stepping back from the week's news and talking about a couple of sort of big-picture topics. We will get into income investing in a little bit, because this is a question we've been getting a lot more frequently here at The Fool. But, Jeff, I want to start with something that you and I talked about a few weeks ago. And I walked by your desk, and you looked deep in thought. And so, of course, I rudely interrupted you. And I just said, you know, what are you working on? And you said, you know, I'm starting to think a lot about Donald Trump as our president and how to invest. Because if you think corporate taxes are going to be cut,

and if you think that trade deals are going to be renegotiated, then as an investor, those are two big macro things you need to factor into your thinking. Certainly, Chris. And I think we've been thinking about that since November, and a lot of the market has as well. And that's why many stocks have done so well. counting on, for instance, the hope for lower taxes or less regulation. The portfolio that I manage is doing well as well, but I still wanted to really dig in. And it takes time to see if there are changes that we should make. Well, so this gets to probably an important question. Given the rise of the market, Ron, are we way too late with this conversation?

Is all of this already priced in? It's a case-by-case basis. Sometimes, if you're just starting to think about it now, and others have been thinking about it for months, conventional wisdom would tell you the market's quicker than you are. But sometimes things can sustain for much, much longer than people think. So people make their quick 20%, 30%, especially the traders out there that like to play themes, where perhaps there actually is a multi-year potential opportunity in front of you, which is where buy and hold can actually end up being better than trading in and out of these quick themes. So anytime a president takes office, a new person occupies the White House, it is very natural for all of us to start to think about the investing world in terms of industries.

Which industries are going to do well under this particular president with that particular Congress, etc. In the case of corporate taxes being cut, Jeff, is it a situation where it doesn't matter what the industry is? If everybody's corporate taxes get cut, then if you're making profits, you're going to benefit. It still does matter because a lot of the multinational companies are set up to already have low tax rates here in the U.S. A lot of the smaller companies that only operate in the U.S. pay some of the highest tax rates. And that's partly why we've seen the Russell 2000 soar, or Russell 3000 soars, both of them, and the 1000. All the Russells. They're all soaring. We're all jumping happy. They've really gained a lot, Chris, because

investors are banking on smaller companies in particular of having lower tax rates in the future. And if you really want to play the theme, you look for companies that are 100% or close to 100% domestic from a revenue perspective, and therefore their taxes will be taxed solely on U.S. tax rates. So whether it's a paychecks or a CVS, who are really almost solely here domestically, that would be the way to play this. You got to remember, though, getting tax changes through the Congress is easier said than done. And even though you have a Republican White House and a Republican Congress, these things take time, and you never know how they're going to actually shake out. So you're making a bet on something that may or may not happen, and you

don't actually know when it's going to happen. Yeah, and you can easily look up online either through SEC filings or more easily Google, because a lot of people have written about this lately, companies with the highest effective tax rates, and so which ones may benefit most. And large ones here in the U.S. include Goodyear or Alliance Data Systems. Another one is Shake Shack, General Mills, Chipotle. They all pay high taxes right now, so they could stand to benefit. But like Ron just said, I think the bottom line is you still have to invest in a company you believe in strongly no matter what, because the laws may not change or may not change in the way that you thought. And the reality is, any stock you buy, you should be buying it for at least three years.

And really, we say three to five years, longer than that. And within three and a half years, we could be looking at a new administration. Another good theme to answer the question, are we too late? And will it ever happen is the infrastructure theme. And I've been thinking a lot about that, actually, from even a personal portfolio perspective. Trump wants to put in a $1 trillion infrastructure plan. That's a big, big number. I don't think it would even be that big if it went through. But we certainly might see money go towards our bridges and our roads and our infrastructure here. So how do you play that? A lot of people have played it already. and you see the caterpillars of the world and Vulcan Materials and Nucor have risen significantly.

And so then your question is, are we too late? And that's where you have to kind of look at the valuations, where these things are trading at. Is there a three- to five-year opportunity? Because when the traders get out because they're happy with their 50%, can we still ride that up? And you have to think about a little policy there and you have to think about a little politics to say is a $1 billion infrastructure plan is much, much different than a $1 trillion. And they will flow through the cash flow statements of these companies in very different ways. Another broad theme, of course, is defense sector spending. And a lot of defense stocks

have gone up on the hopes of more defense spending. But you have to remember, those contracts are very long-term in nature and usually slow to put in place. And what you expect, again, may not happen. A lot of people, when Obama was elected eight or nine years ago now, people expected green energy to do very well. And it turns out, for the most part, they didn't do well at all. Even though they are growing in importance, it doesn't mean that the stocks did well. I want to go back to the tax thing for just a second, and bear with me, because this gets a little bit in the weeds. There's nothing sexier than tax radio. But one of the issues

that has come up. There's the corporate taxes and will they be cut and to what extent. And that's a situation where a lot of companies will benefit. Then there's the border adjustment tax, which is being pushed mainly by, I believe, Congressman Brady, who heads up the House Ways and Means Committee, which essentially says, hey, if you are importing goods from other countries, there's going to be a tax on that. That's not taxes getting cut. That's additional taxes being levied. And earlier this week, we saw management from Walmart come out with their latest earnings report, and they made it very clear on that call, like, oh, by the way, if the border adjustment tax goes through and our cost of goods go up, we are absolutely raising prices.

Right. Reminiscent of when Trump said he was going to raise a 20% tariff on Mexican imports, and all of a sudden everyone said, well, that's going to hit the American consumer. You're not really going to be hurting Mexico. Same thing. The American consumer will eventually end up paying for those kinds of things. And this is kind of like economics 101, and you would think it's kind of cut and dry, but nothing in economics ever is. You can plot it on a chart, and people still see things differently, whether you have supply-side economics, you have people who are more traditional, and yet both think they're right. And there are arguments to be made, but I fall on the side of the fact that if you raise prices, these companies are definitely

going to pass it through to consumers, which ends up, therefore, being a tax on the consumer. Yeah, that's why I'm skeptical that that'll actually happen at any point. The border adjustment tax. The border adjustment tax. Because, yeah, you're just penalizing your own citizens. But it does make you, it reminds you how everything, there's a yin and yang to everything. You do that expecting one thing, you're going to get the opposite. The same may be true to some degree with oil and energy. The administration is saying, we're sitting on trillions of dollars worth of oil and natural gas. We need to pump that out and export it and this and that.

Well, it's maybe worth trillions of dollars right now in the ground, but if you bring too much of it up and flood the market, the price goes down. There's no easy way to suddenly turn a commodity into riches when that commodity is in abundant supply already. Yeah. I also think with the border adjustment tax, if you just look at the politics of it, when you consider huge retailers like Walmart, Home Depot, and Lowe's, I have to believe Even though they're all part of the same party, the Republican senators in Arkansas, Georgia, and North Carolina might not smile when it comes to the idea of a border adjustment tax. Before we go to the break, in terms of the CEOs, one of the things that we've seen over the last couple of months with President Trump is a parade of CEOs going to meet with him. Some of them catching flack from their own members or either customers or, in some cases, employees or people that they work with.

I'm thinking primarily of Kevin Plank, the CEO of Under Armour, getting some flack from Under Armour-endorsed athletes. But then I think of Bob Iger, CEO of the Walt Disney Company, who just seems so good at walking the line between embracing a particular politician and embracing the idea that if you're leading a large multinational company, it is inherently a good thing to keep an open line of communication with whoever is in the White House. I think that sums it up perfectly. When you're a CEO of a public or a private company, for that matter, you discuss politics at your own peril. There's always going to be some people that like it or some people don't. But just having a discussion with the President of the United States and hearing him out, if you're a pharmaceutical company, and you hear him tweet that he wants prices to come down on drugs, and he invites 10 pharmaceutical CEOs to the table to chat, well, that makes perfect sense. You go and chat. what you want to say you know on your own twitter feed about politics you know again you do so at your own peril yeah i don't know if you guys noticed the country's kind of polarized right now i didn't notice that but but i agree that you want to keep dialogue going like elon musk of tesla has taken a lot of flack for going to the white house and meeting with trump a couple times but i why wouldn't he and why don't we want that discourse to happen um yeah there's the

whole CEO forum, which kind of makes it kind of this thing that you're on. It means you're kind of like in Trump's camp. I don't necessarily buy that. I think that's a little harsh. CEO forum is just that. It's a forum for CEOs to come together and talk and help the president and inform the president, hear what his thoughts are, and get a dialogue back and forth. Right. It doesn't mean you necessarily like him or dislike him. Plank at Under Armour came under fire mainly because he He was espousing his respect and admiration of Trump and, you know, in a polarized environment, that's going to get you a response. Up next, we're going to help you increase your income. Stay right here.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio with Jeff Fisher and Ron Gross. As I mentioned earlier, guys, we have been getting a lot of questions lately from listeners broadly about income investing. And we'll get to the definition in a second, Ron. But I think there are a bunch of reasons for this. And I think one of them is the run that the market has had over the last few years, where investors who have done well in the market the last five, 10 years are starting to look at their portfolio and think, OK, I feel like I've done a pretty

a job of growing my wealth. Now I want to move somewhat into wealth protection mode. When you think about the phrase income investing, how do you define it? Well, studies show that 7 trillion people are going to be retiring over the next 10 years. I was surprised about that number, but it seems to me- It's a big number. The whole world. That's nice. No, but as people age, their thoughts turn to generating income and retiring and recreating a paycheck that they perhaps once had and no longer do. A lot of it is what you said,

wealth defender mode, wealth protection mode. And it's kind of a demographic shift. As you get older, your thoughts kind of go away from growth to a certain extent and to safer income generating investments. So, Jeff, there are a bunch of different ways to generate income. I mean, the first thing I always default to is just the blue chip dividend payers that you're getting that. You know the company's not going anywhere. Maybe the stock isn't going to light the world on fire, but you're going to get that steady dividend, and if they have a track record of increasing it over time, even better. But I know, given what you do for a living, you like to generate income with options.

It's true, Chris. And one way to do so on a dividend-paying stock is to sell covered calls, which is a common retirement strategy, where you own at least 100 shares of a stock, and you sell away. Effectively, you are selling away its upside above a certain price. So, say a stock is $50, you sell a covered call with a $55 strike that says, if the stock gets to $55 or higher, I'll sell it to you at $55. So, you are giving away upside, or selling away upside, but you're getting paid for that. And you can generate 1% a month, typically, more or less, sometimes considerably more, option yield or income through this strategy. O'Reilly. Jeff is way smarter than us. I'm with you. Dividends is the way to go. But you know,

I want people to be careful because dividends have been so hot lately because interest rates have been so low. So people have been chasing yield and moving into dividend stocks, which bids the price of them up, and they're not undervalued as they once were. So you can't just pick a dividend stock and say, oh, I see that stock has a 4% yield that matches my income needs. I'm going to go buy into that stock. Because if the stock comes down and you lose principal, what have you really achieved? Not much. So you need to be really careful, especially in this market. It's a stock picker's market with respect to dividend stocks here because they've been bid up so much. Should you be thinking about diversifying

across industries? I mean, once upon a time, dividend stocks came in a certain form. And now that you've got Apple paying a dividend, it's almost like throw out the rule book. You could absolutely diversify. I think you always should have an eye towards diversification, whether it's through sectors, types of dividends, whether they're high-yield dividends or perhaps companies that are growing their dividends. The Dividend Aristocrat Group is one of the most famous group of growers. S&P 500 companies that have grown their dividend every year for 25 years consecutively. That's a pretty powerful group to be in. But again, a lot of those stocks are not cheap, so be careful. That still blows my mind, one, that that name exists, but that there are

enough companies that they've demonstrated that type of track record. That takes huge discipline, doesn't it, Jeff? It does. And it tells you the truth about long-term investing. These are companies that have grown value over probably almost any rolling three-year period. They've grown value. Now they've had, when we hit a recession, they may contract a tiny bit or not grow that year or two. But if you're an investor who stays with it, they're going to keep growing the dividend. And overall, they're going to grow value no matter what. But yeah, it's tough to be a Medtronic or a Coca-Cola or any of these companies that grow, or J&J grow their dividends a year after year, but those that do are creating great value.

Yeah, one other sector I think it's worth mentioning is real estate, specifically if you're investing in the stock market, real estate investment trusts, which by law have to pay out 90% of their profits as dividends. So, you get some nice juicy yields there, plus you get to participate in the real estate market, which perhaps helps diversify your portfolio. Pick the right ones, though, because as I said, people have been chasing into them. At the top of the show, Ron, I introduced you as being from Motley Fool Total Income, and I'm sure alert listeners ears perked up at that. This is actually a brand new service. And I think in part because we've been getting all these questions and we are seeing this increased

demand for this type of investing. For anyone interested, give me a little thumbnail sketch of Motley Fool total income. Yeah. As you say, people have been really asking for us to help them generate income from their portfolios for whatever reason. It's often people that are either near or close to retirement, but it certainly doesn't have to be. So our new service, Total Income, helps you generate income from your portfolio. And we do it with stocks and dividends, as we spoke about, options, thanks to Jeff's help, bonds and bond funds, REITs, as I just mentioned, and REIT funds. So we go to real estate as well. So we diversify out, give you the best ideas from across the full universe, and help you to generate income.

Yeah, I like one way you've done it, Ron, is you've divided it into growth stocks with dividends, and I think you call them safe. Lower risk, growth, and high yield. You can choose what you like, what kind of dividend stock you're looking for, and invest accordingly. That's important because not all dividend payers are the same. And then when it comes to option income, we teach you how to write covered calls on some of the stocks that you own that you want to earn additional income on. Yeah, it's actually pretty exciting. Total Income members do get access to Jeff over at Motley Fool Options. And specifically, he'll be bubbling up ideas that are good for those who want to generate income. And as he said, they're the covered calls of the

world. All right. If you want to check out Motley Fool Total Income, just go to totalincomeradio.fool.com. That's totalincomeradio.fool.com. And you can kick the tires on our brand new service. the dividend aristocrats, is there a ceremony for that when you hit the 25-year mark? Do you get jackets? I'm picturing Letterman jackets. There should be something. It's a pretty impressive thing to have achieved. And they've done quite well from both a dividend and a stock perspective, which translates to total return. Don't forget, that's important, too. All right. Ron Gross, Jeff Fischer, guys, thanks for being here.

Thank you. Coming up, we'll revisit a conversation with Brian Christian on the computer science of human decisions. Stay right here. This is Motley Fool Money. All right, before we get to Brian Christian, I'm going to say a word about Rocket Mortgage by Quicken Loans. When it comes to the big decision of choosing a mortgage lender, it's important to work with someone you can trust and has your best interests in mind. And with Rocket Mortgage, you get a transparent online process that gives you the confidence to make an informed decision. Don't waste time searching through stacks of paperwork. With

Rocket Mortgage, you can securely share your financial information to get a mortgage approval in minutes. You can even adjust the rate and length of your loan in real time to make sure you get the mortgage solution that's right for you. So whether you're looking to buy a home or you're looking to refinance your existing mortgage, you can lift the burden of getting a home loan with Rocket Mortgage. So skip the bank, skip the waiting, and go completely online at quickenloans.com slash fool. Equal housing lender, licensed in all 50 states, NMLSconsumeraccess.org number 3030. Welcome back to Motley Fool Money. I'm Chris Hill. What can computer science teach us about decision-making? That is at the heart of the new book, Algorithms to Live By,

the Computer Science of Decisions. It is co-authored by Brian Christian, who joins me now from San Francisco. Brian, thanks for being here. It's my pleasure. Thanks for having me. Algorithm, for me anyway, and I'm not a math person, but it's always one of those words that instantly takes me to abstract thoughts. I associate it with abstract thoughts, but really one of the things that you and Tom Griffiths, your co-author, do a really nice job right at the outset of your book is just sort of laying out that it's really just an algorithm is just a set of rules. And in this case, you're taking computer science and looking at ways just to make better decisions in day-to-day life. I'm curious, what got you interested in this topic in the first place? Yeah, I mean, this is something, you know, Tom and I, we've been friends for, you know, 10, 11 years at this point.

And we both come from a background that's rooted on the one hand in mathematics and computer science. And in the other hand, in philosophy and psychology. And so I think for both of us, I mean, certainly for myself, I have always thought of, you know, the problems that I was facing in my own life in the language of computer science. And I think it's attractive to want to find the underlying structure or the underlying rules that help you make sense of the things that you're kind of grappling with in your everyday life. And, you know, I really found over the years that the vocabulary and the conceptual arsenal of computer science contained, I would say, a surprising number of tools for helping me think about my own everyday decision making. And so this book was both a chance to, you know, convey some of what I learned along the way, but also an opportunity to go a lot deeper and see what else was out there. Well, let's stick with you since you brought this up, and let's stick with your life. Because, again, when you think about the decisions that we make, just separate from whatever we do for a living, when we think about dating, when we think about making decisions about where am I going to live, how do I pick an apartment, how do I pick a restaurant when me and my five friends are going out to dinner, how does that come into play? And also, how much of that did you share with your friends?

Let's just use the dinner example, because that's one that you use in the book. I'm curious, do you actually share with them that you're working out algorithms in your head of how you're going to decide where you go to dinner, or do you just use it and not really tell them? No, I actually am pretty explicit about this, and I think it's a testament to my friends that they either put up with it or find it somewhat endearing. um but the example that you raise of deciding where to go out to eat um resembles very closely one of the canonical problems in computer science i'm sorry i'm sorry what was that word uh canonical you're gonna have to explain that for me oh sorry sorry it's uh deciding where to go out to eat whether you go to your favorite restaurant or you try something new this is one of the classic problems in computer science. It's called the multi-armed bandit problem.

But the basic idea is, you know, you have a bunch of options. And in the computer science literature, they think of them as slot machines, but you can just as easily think of them as restaurants. And, you know, some of them are better than others, but you don't know ahead of time which are which. And so the basic idea is what strategy is going to get you the most money or the most pleasure, it's going to involve some combination of trying out different options, which in computer science is called exploring, or mixed with spending a certain amount of time just going to the places that you know and love, and you know you're going to have a good experience. And in computer science, this is known as exploiting. So in regular English to most people,

the idea of exploitation has a very negative connotation. But to a computer scientist, it just means going with the thing that you know and love. And what we've learned specifically about this exploration-exploitation trade-off is that it all depends on how much time you feel you have left. And so in the restaurant example, you know, if you've just moved to a new city, the very first place you go on your first night in town is literally guaranteed to be the the greatest restaurant you've ever been to in that town um and the second place you go to has a 50 50 chance of being the best restaurant you know in that town um but as you stay longer um two things start to happen one is the odds of a new restaurant being better than the best one you

know about just go down the more you explore um secondly as you start to run out of time you know if you're about to move out of town, let's say, well, then not only is it pretty unlikely that you're going to find a new restaurant that's better than your favorite, but even if you do, you've run out of time to enjoy it. And so for both of these reasons, the math tells us, we should be basically on a kind of a trajectory from exploring more at the beginning of our time and exploiting more, spending more of our energy on the things that we know are good when we're at the end of our time. And that's something that you hit upon with looking for a place to live. This concept of optimal stopping and just sort of how,

if you're looking for a new apartment, how much time do you give yourself before you actually decide on a place? And the number you've come up with is 37%. Can you help me understand how you arrived at that? And what's so magical about 37%? Yeah, absolutely. This is another one of these famous problems in the field. So if you're looking for a place to live, whether buying a house or renting a place, there's a very specific problem that you run into, which is that you have a series of opportunities, but they come up kind of one at a time. You know, if you're in a big city, you go to an open house, and it's mobbed with other people that are trying to get that apartment. You kind of have to decide on the spot. Do you just take the place in front of you

and never know if there might've been a better option, you know, still out there? Or do you walk away to keep exploring your options, but you lose the opportunity to have that place? You typically don't have enough time to change your mind and get it back. And so there's this classic tension between wanting to look at enough places to feel like you can set a meaningful standard, but not wanting to spend so much of your time just kind of gathering information that you miss out on your best opportunity. And I think this is a tension that we can all relate to in a lot of areas of our life. And there's this famous result, which is that you should spend exactly 37% of your time, noncommittally exploring your options. And after that point, be prepared to immediately

commit to the first thing you see that's better than what you saw in that first 37%. And this does not guarantee that you will always walk away with the best option that you possibly could have. But what it does give you is the best chance. And so that's something that I think is rather comforting when we find ourselves in that situation of even if we didn't get, even if things didn't go our way, we can rest easy knowing that we at least followed the best procedure and followed the best kind of decision-making process. Non-committally exploring your options is one thing when you are apartment hunting. What about when you're dating? Yeah, many people over the years have referred to the optimal stopping problem as an analogy for dating, where, you

know, you're dating someone and you inevitably have a decision to make about, you know, do you commit to that person? Do you go all in and never know who else might have been out there? Or do you walk away to, you know, you break up with them to date other people, but maybe you have a change of heart later, but it's too late there with somebody else. And so there is a sense in which, you know, you can think of our, you know, our typical dating life, our typical love life as an optimal stopping problem. And in fact, in the book, we give some cautionary tales of famous mathematicians and computer

scientists who have applied the 37% rule directly to their love lives, occasionally with disastrous results, I should say. And so, you know, that's an opportunity to look a little bit more deeply at the problem and say, you know, what are the mathematical assumptions being made to arrive at this 37% rule? And what are the ways that they do or don't map to everyday life? And in some cases, there are ways that we can adjust the strategy to try to take some of that real-world complexity into account. Although, let's face it, if you're using the phrase optimal stopping challenge in your romantic life, you're setting yourself up for disaster as it is. I think it's probably ill-advised, you know, to approach your romantic life in a purely by-the-numbers way. Um, you know, we, we give the example in the book of the Carnegie Mellon professor of operations

research, Michael trick, who, when he was a graduate student had this epiphany of, Oh my God, you know, my, my love life is basically an optimal stopping problem. And so he calculates, okay, you know, I'm, I'm hoping to find my partner somewhere between ages 18 and 40. Uh, what's 37% of that interval. Oh, it's 26.1 years old. And it turns out he was exactly 26 He was 0.1 years old at the time, and so the algorithm told him exactly what to do, and he proposed to the woman he was dating, and she rejected him. So he experienced firsthand one of the ways in which, you know, life is not always perfectly like the mathematical models that we have of it.

It's almost hard to believe it didn't work out for that romantic son of a gun. You're listening to Motley Fool Money, talking with Brian Christian, co-author of Algorithms to Live By, The Computer Science of Human Decisions. One of the insights from the book that you cite is that psychologists have found less information, less computation can improve accuracy. Absolutely. That's one of the usually counterintuitive things. So for people who are investing, what does that mean? Yeah, there's a famous example of this from the world of finance where the economist Harry Markowitz, who has won many awards over his career for his work on optimal portfolio selection, he was asked what he did for his own personal retirement account. And he said, oh, I just put 50% in the stock market and 50% in bonds. And he said, well, wait a minute, you know, you invented, you know, portfolio, modern portfolio theory, you know, how can you just, you know, have such a completely straightforward, simple, off-the-cuff kind of approach to finance in your own life?

um and he said well you know it's very simple um i just i just figured if if the stock market went up and i wasn't in it i'd you know regret that and if it went down and i was too heavily in it i would regret that so i just hedged and i put half my money in it um and i think that that really points to um an area in which i think computer science has been able to contribute a lot, which is the use of heuristics or deliberately simplified strategies. In particular, there's this problem that can sometimes happen in computer science when your model of a system is too complicated, which is called overfitting. Basically, you would think intuitively that the more data you gather, the more variables you consider, the more complex you make your model,

the better predictions that it can make, you know, in this case of whether an asset's going to go up or down. But in fact, there's this very real danger that statisticians and computer scientists have identified of what's called overfitting, in which case your model only becomes good at predicting the data that it saw, and it doesn't generalize well into the future. And so there are many cases in which the correct approach, the most mathematically sound approach, is to deliberately simplify the model, even at the cost of what appears to be accuracy on the data that you have. And so this, I think, is just a tremendously powerful idea that, in many cases, more complex thinking, gathering more information, spending more time kind of stewing over the decision, not only fails to help, but it may, in fact, make the outcome worse. And so, you know, there is, in fact, a rigorous thinking person's argument against thinking too much. Coming up, more with Brian Christian. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio talking with Brian Christian about

his book, Algorithms to Live By, The Computer Science of Human Decisions. So because of the research that you've done on this book, are there examples from your life where you find yourself making different decisions? Yeah, I do. I think, you know, to go back to the restaurant example, one of the key principles, like we were saying earlier, is thinking about how much time you have left, that your strategy towards trying new things or just going with your favorites should really hinge on whether you feel you're at the beginning or end of your time period. And so this for me has come up. I just got engaged recently and my fiance has been living in Oakland and I live in San

Francisco. And so we originally thought that I was going to move into her place. And so this meant, okay, my time in San Francisco is coming to an end. let's exploit, you know, let's only go back to our favorite places while we still can. And even though we have a lot of places in Oakland that we like, we should nonetheless spend all of our energy trying to discover new ones because we have this whole new chapter of our lives in front of us. And then the plot twist was that we changed our minds and we decided she would actually move in with me in San Francisco. And so it was like, okay, wait, 180. Let's only exploit

in Oakland, let's only go to our favorite places in Oakland and only try new things in San Francisco. And so, you know, that is a case where having the language of the explore-exploit trade-off and having a sense of just at the broadest level that the strategy depends on kind of how much time you have gave us a way of thinking about the problem and a way of thinking, I think, just more clearly and more precisely than we would have, you know, just left to our intuitions. So that to me is an example of just being able to leverage some of those insights and apply them even just in these daily examples of things that don't seem like the kind of things where computer science would have something to say, but it really does. And when you proposed to your

fiance, did you get down on one knee, take out the ring and say, honey, will you reach an optimal stopping point with me? You know, she claims, and I do not remember saying this, but it is possible. She claims that shortly after we met, I, you know, because I was working on this book and I was researching it, and I explained to her that, you know, 37% of the average American male lifespan is 27.8 or 9 years old. And we met when I was 28. And so she remembers this very clearly, I said something to the effect of like, well, you know, you know what that means, which is if, if this really works, then I'm all in. And, you know, fortunately, it did work. And I did propose to her, but for her, it's kind of, it's tied to this cute story from the very beginning

when we met, which of course, I don't remember, but it sounds like something I would say. Before I let you go, I want to make sure I have this right. You graduated from Brown University with a degree in computer science and philosophy. And then you went to the University of Washington where you got a master's degree in poetry. Do I have that right? That is correct. That is a pretty uncommon set of degrees.

So my first question is, are most people as surprised as I am when they hear that about you? Yeah, certainly. I raised a few eyebrows at family gatherings and so forth when I announced that I was going from the computer science program to do a master's of fine arts and creative writing. But at the time, I was just following the things that interested me and excited me. And I don't think I quite realized how interrelated those areas would turn out to be. So it's cool looking backwards and realizing that I really was able to connect the dots. Brian Christian's book is Algorithms to Live

by The Computer Science of Human Decisions. 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. You can check out past episodes of Motley Fool Money by going to podcast.fool.com. Earlier in the show, we talked about income stocks, but if you're interested in growth stocks, you can go to the podcast center and check out David Gardner's investing service, Rule Breakers. The latest issue is out with two new stock recommendations from David and his analyst team. And you can kick the tires on Rule Breakers by going to podcast.fool.com. That's going to do it for this week's edition

of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening, and we'll see you next week.