Motley Fool Hidden Gems Investing - Motley Fool Money: 02.05.2010

Episode Date: February 5, 2010

New York's Attorney General throws the book at Bank of America.  Bailout beneficiary AIG prepares to hand out big bonuses.  Toyota does damage control.  And Apple CEO Steve Jobs goes on the attack against Google. On this week's Motley Fool Money Radio Show, we'll tackle those stories, talk with How We Decide author Jonah Lehrer, and share three stocks on our radar. Learn more about your ad choices. Visit megaphone.fm/adchoices

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to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGamingOntario. Shirley and Shannon Zimmerman. Guys, good to see you. On today's show, New York's Attorney General throws the book at Bank of America, Steve Jobs calls out Google, and Toyota works on a fix. We'll also be talking with Jonah Lara about his bestseller, How We Decide. Turns out that contrary to what we were told by our teachers in school, there actually is a downside to doing too much homework. All that, plus we'll give you an inside look at a few of the stocks that are on our radar. But we begin with Friday's news that the unemployment rate in January dropped unexpectedly from 10% to 9.7%.

This despite the fact that employers eliminated 20,000 jobs. The Labor Department says the rate dropped based on a survey of households. That 20,000 job loss number comes from a separate Labor Department survey of employers. Seth Jason, what should investors make of these jobs numbers? Well, obviously the thing you do is you pick the number you like better and you make your decisions based on that. Did you talk to Jonah Lehrer about that? This is, okay, to get to the end of the story, the takeaways, the first one is that figures are kind of bogus if you don't know how they're gathered. If you ask a lot of people whether or not they're employed, et cetera, turns out that the ones who are no longer looking for jobs don't say that they drop out of the employment pool. That's how you can get an unemployment figure that drops at the same time that you actually have fewer jobs. Now, I don't want to be Mr. Negative Nelly the entire time, so I went through this and the ADP labor report as well to try and find some good things. And there are some good things. There's some stuff to look forward to here.

Declines are getting smaller. Medium-sized companies were actually hiring, according to ADP. And women, my beautiful sisters, you, I don't want to sound sexist here, but men are worthless because women, the unemployment rate for women is 7.9%. We're all the lazy dudes. Sexist pig, I know. Yeah. The headline for me coming out of this is, you know, unless the economy is adding about 150,000 jobs per month, it's getting worse. Just to keep pace with the natural growth of the labor pool, that's how many jobs the economy has to create. This is the best we can do right now, man.

Well, the best that we could do happened in November, where we had, for the first time in two years, net job creation. That number got revised so that it looks a little bit better, but the December number got revised so that it looks much, much worse. Yeah. So, you know, it's good news that if you put it in a pretty picture and you chart it, that the declines are getting smaller. But overall, the story remains the same. Things are getting worse, more silly. And I think a company called Trim Tabs, which also makes diet pills, I believe, showed that instead of the BLS's 20,000 job loss, there was actually 104,000 job loss. But even back to the government figures, even if it is a bogus figure, at least it's a better bogus figure, right? Exactly. Than last time.

And as a final- Talk about defining good news down. I know. Well, at least it's a better bogus number. Come on. Oh, okay. I'll get back on the pessimist train here. These are hard times, buddy.

The pessimist train I'll finish with is that you wouldn't call some of the areas where there were job growth, you wouldn't call that strong job growth. As we've said in the past shows, healthcare, temp work, leading, but also federal jobs and retail. So not the greatest. So investors basically should just close their eyes and ignore jobs numbers altogether. Well, investors, I think, are doing that right now. they're looking at other things. Sovereign debt in Europe and the market really dropped this week.

Panicking. That's the best thing to do in a time like this. Definitely. And just remind yourself that you're probably about 60% wealthier than you were this time last year. And ask yourself how much of that recovery is already baked into your portfolio. The sovereign debt thing is actually really, really important. And we talked about this last week with Greece. Now it's what we call the pigs. Portugal, Ireland, Iceland too, if you want. Greece and Spain. Italy. Don't forget Italy. Italy too now? Yeah, there's a lot of eyes in pigs.

So wait a minute, the pigs? The pigs are the subprime country, so to speak. So we have a sexist pig and a xenophobe here. Yes. Hey, I'm speaking the truth here. And the pigs basically are sort of like the world's subprime borrowers as far as developed countries go. And they're worrying the stock market, and this could mean bad things for the euro too. It also means that people who predict doom for the dollar may have to think a little bit more about that

because what's the dollar going to die against if the euro is also dying? It's not going to, you know, the Chinese aren't going to let their currency get stronger. Did you see that Moody's, though, is threatening to downgrade the U.S. debt from AAA? And they downgraded Berkshire. I know, I know. They downgraded Berkshire. Moody's is really hateful. He's sketchier than Johnson & Johnson.

That's going to worry me. I think we should downgrade Moody's. Yeah, I totally agree. Didn't they drop the ball last time? All right, let's move on. On Thursday, New York Attorney General Andrew Cuomo filed fraud charges against Bank of America and its former CEO, Ken Lewis. At issue, whether the company misled investors and federal officials about losses at Merrill Lynch,

which Bank of America was in the process of buying. James Early, break it down for us. This is a pretty good financial soap opera, so I'll explain it as best I can. Basically, Cuomo says this, that Ken Lewis and Joe Price, the CFO, chief financial officer of Bank of America, basically hid $16 billion in upcoming losses in Merrill Lynch that they supposedly know about, according to him, as well, I guess, as $3.6 billion in bonuses forthcoming,

hid that from shareholders until shareholders had voted to approve the merger. They also hid that from the government, allegedly. And then at the last minute said, wait a minute, we're going to evoke a material adverse clause and back out of this merger unless you, government, come in and give us $20 billion. So that's a pretty serious charge. We'll have to see if it sticks. I think they might have some meat there.

Where did he hide it? Was it in his freezer? You know, that's a good question. I mean, $20 billion. That's a lot. If you've read some of the memos on this, it'll look bad for Bank of America because, of course, in a company this big, you've got to assume there was somebody who did know about this and who raised some kind of a ruckus. And so even if that ruckus didn't get to the top levels where the decisions were being made, they'll probably have enough evidence to make it look like it should have.

And I'm a little worried. This Cuomo guy is aggressive. It's only a matter of time before he comes after Motley Fool money for it. Yeah. Or the presidency. One can only hope. All right, time for another installment of As Toyota Turns. On Friday, Toyota's CEO apologized for the massive recall and said the company is still deciding what to do about brake problems in the Prius. Toyota dealers have started fixing the sudden acceleration problems. But guys, more than 8 million cars have been recalled worldwide. What can Toyota do to fix its reputation? Well, the issue, Chris, is the Prius is now involved, and that's a huge seller. I mean, I have myself a 2010 Prius, and, yeah,

Toyota had a terrible first round, I guess, of handling this from a PR sense. The Financial Times reported that the spokesman came out with one of those surgical masks on to make the initial announcement, which just looks bad. It might be acceptable in Japan, but it looks so bad. You should have worn, like, a Mexican wrestling mask. It would have been so much cooler. Wait, that would have made a mile of difference in my book. But, yeah, this could be $2 billion just to fix the accelerators.

And as we mentioned last week, they're losing probably $250 million a week in sales. So this is starting to look pretty serious. So, James, you told us last week that, based on some Japanese honor system, that the competing companies such as Honda were not sort of taking advantage of Toyota's woes. Is that likely to continue? It's hard to say. I mean, I don't think they'll explicitly take advantage. But, obviously, if you're in the market for something and you want Japanese reliability or image,

or at least what we thought was there, you might buy a Honda now or a Nissan. Time for some quick takes. AIG is planning to pay out as much as $100 million in bonuses. Yes, that's the same AIG that received a $180 billion bailout from you, me, and Uncle Sam. James, why didn't the government demand that AIG pay back that money before handing out any bonuses? Well, ironically, Chris, I think AIG thought this would be good news because it was supposed to be $200 million in bonuses before they negotiated down, and a lot of people agreed to give back the money.

I feel so much better. Most of the people didn't who agreed, so they're still working on that. But these were contracts entered into specifically before the, I think it was September of 2008, government takeover. So they're contracts, and they're sort of grandfathered in, and maybe the problem was it wasn't done right at the outset. What do you do now? Well, and because they were contracts, they're subject to negotiation and renegotiation. To me, the broader point here is all of the financial reform that's being discussed in Washington right now should have been baked into the bailout from the beginning. It's going to be very difficult to get anything done now after the genie is out of the bottle, so to speak.

This kind of issue should have been addressed way back when. We talked a little bit last week about Tim Geithner, the incredibly shrinking Tim Geithner, it seems. Again, good news. He had nothing to do with this, I'm sure. Just ask him. Well, I mean, that's my question. He's the Colonel Clink of the White House. Oh, yes.

You know, it just seems like these types of stories just keep coming out over and over and over again. How much longer can someone like Tim Geithner stay in his present job? He can stay there for a long time, but, you know, they're going to keep him chained to the kids' table next to where the grown-ups eat. That's right, because it would just sort of compound the embarrassment for the administration to have to show him the door. Apple CEO Steve Jobs had some choice words for Google. According to reports, in a meeting with Apple employees after the release of the iPad, Jobs said that Google's don't be evil mantra was a bunch of bull. He also reportedly said that Adobe was lazy and that Flash was buggy.

Seth Jason, does he have a point? Sometimes Steve speaks the truth, but apparently it happens in secret meetings and not when he's on stage. He's right about Flash. He's right about Adobe. Flash is not the greatest platform. It causes computers to crash. And it actually, I got a virus on my work machine this week, and the only known routes for this virus are Adobe Acrobat and Flash videos. So I think he's right about Adobe being lazy, and I also think he's right, of course, about the don't be evil model at Google of being mostly a crock. Although Google, as opposed to just about everyone in the same space, at least did stand up to the Chinese and its internet censorship. Right, and that was an example of them not being evil,

but we'll see how that plays out over time. He was a bit more colorful than Bull, was he not? He was. We were couching it. There's some controversy over whether it was the BS line or a load of crap. Is there any truth to the rumor that he's now dating the CEO of Yahoo? Carol Bartz? That would be so great. Carol F. Bomb Bartz? No, she's just writing his speeches is all.

Perfect. Burger King reported a 13% increase in quarterly profits. Same-store sales fell 2%, but revenue increased 2%. BK said its $1 double cheeseburger promotion worked. Guys, is this proof that the creepy Burger King guy is actually helping? I always have a soft spot in my heart for Burger King. It was one of my first jobs, so I, too, wore the crown at Burger King. And so, I don't know if the creepy guy is working, but the dollar cheeseburger,

despite franchisees' protests appears to have done something good for them. If by working, yeah, you want to bankrupt a few franchisees, or at least they claim that's what will happen if this continues, it's hard to say, I think, with any of these companies, what's actually bringing people in the door. If it's true, it's not much of a surprise if you give people food that's really, really cheap

to wander into your restaurant. And pretty good. What kind of meat are you eating, though, if it's a dollar? Cheap meat. Do you need to know? 100% prime beef? Do you need to know? Come on. Am I the only one who's surprised that the Burger King mascot, that that creepy guy has lasted as long as he has?

It's been awesome. I have four video games for my Xbox based on that guy. Really? Yeah. A couple years ago, they did a promotion. My wife went out and bought every single one of them one day. So your wife's a big fan. Yeah, they're pretty weird.

And one of them, you actually sneak around. You know how he sneaks up on people? One of them, the object is to sneak up and give people food before they realize you're there. But that's what I'm saying. That's the creepy part. I know. There were ads where there was that one classic ad where the guy wakes up in bed, rolls over, and standing right outside his bedroom window is the creepy Burger King guy.

It's better than seeing the horse head. The peeping Tom? You said that. Emails go to Shannon Zimmerman. All right, finally. A 1960 Alberto Giacometti sculpture sold for over $104 million to become the most expensive artwork ever sold at auction. The piece is called Walking Man 1, and personally I'm looking forward to the sequel, Walking Man 2.

This time it's personal. So guys, let's just go around the table real quick. If you could buy any piece of artwork, money is no object, any piece of artwork, what are you buying? Shannon Zimmerman, I'll start with you. I guess the Salvador Dali Museum, or the biggest collection of his work in this country is in St. Petersburg, which in some ways is the most surreal thing about it.

What would it be down there? There's a big portrait of Lincoln that's sort of rendered in a pixelated way. It's called Lincoln in Dali Vision. That'd be my pick. Okay, James Early? I'm going to go with Michelangelo's David. I don't know why. Just put some underpants on him and clean him up.

You'd clothe him? I would, you know. Hey, children are here too, you know. It wouldn't be the first time he'd been clothed. You know what you could do, though? You could sell that. You know, just like stadiums have naming rights to the stadium, you could sell clothing rights.

Yes. Oh, that's brilliant. Make a couple of bucks off that. Yeah, that is good. Seth Jason? This is difficult for me because I don't know if you know or our listeners know, but I studied art history for about a billion years. And by that, he means at least three.

I was an art history major. Then I am ABD, which means I did everything except my dissertation at the Institute of Fine Arts of New York University. So you're a quitter. I'm a quitter, exactly. I'm a quitter, exactly. But even though it's not my favorite work of Renaissance art, which was my focus, I'm going to have to go with the entire Sistine Chapel for a couple of good reasons.

One, I want to charge admission, and everybody loves that place. Sure. It's always packed. Two is, I want them electing the Pope at my house next time it happens. So you're moving the Sistine Church. Yeah. I'm going to take control of the papacy. I'm going to charge two bits ahead to get in.

I've got a good plan. All right. Drop us an email, motleyfoolmoney at fool.com. We want to know what you think. We want to know what art you're buying. We want to know what you think of Steve Jobs' comments about Google. And also, if you missed any part of the show, you can visit us online at motleyfoolmoney.com. The guys will be back later to talk about the stocks that are on their radar.

but coming up after the break, what does Warren Buffett have in common with the Super Bowl? Our next guest. Stay tuned. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill, and joining me in the studio, Lou Anne Loftin, a Motley Fool contributor who heads up our New Orleans office. Lou, welcome. Thanks, Chris. Good to be here. So one of the things that sort of got lost in the news cycle last week was the fact that the S&P is adding Berkshire Hathaway to the S&P 500 index. What does that mean for investors?

For one thing, for Buffett, it's a point of pride. I mean, he's happy to finally be in there. And I think the more interesting point here, though, really speaks to the temperament of Berkshire Hathaway shareholders. Buffett's temperament as an investor, which is a large part of the book I'm working on about Buffett, really has trickled down to the shareholders of Berkshire Hathaway. They hold the stock of Berkshire Hathaway an average of 6.7 years. If you compare that to the second longest holding period for a comparable company, it would be Procter & Gamble, at 324 days. These people love Buffett. They love Berkshire.

They don't want to sell. They have adopted his long-term mentality. You know, he often says his favorite holding period is forever, and this is clear. So what that means with the S&P 500 and Berkshire's eventual inclusion into it is that index fund managers have to buy the stock. They have to find a way to pry the shares out of the hands of the shareholders. Yeah, there can't be that many shares available. Exactly. It's a pretty tight float out there. So stock's going to have to rise. It will.

It'll just go up because the index fund managers are going to have to pay a premium to convince these people who love their man Buffett to give up the stock and turn it over to them. And how crazy is it down in New Orleans now that the Saints are in the Super Bowl? It is a little insane. I mean, this is a team that has had nine winning seasons out of 43. We have had a long, dry spell. We just cannot believe we're actually here. And it's bittersweet that we're here against a hometown boy, Peyton Manning, and his Colts.

You know, the whole Manning family, they're born and raised in New Orleans. Peyton played high school ball there. People love him. His brother Cooper, his friends with Drew Brees. Like, it's a very tight relationship. But, of course, we're all behind the Saints. I think it's going to be a tough game. I think we have to rush the passer.

We've got to get Peyton off his game. He's a tough guy to rattle, so I'm a little nervous. I was going to say, it's all one big family until the whistle blows and then it's trying to knock Peyton's block off. Yes, we want to. So win or lose, we're excited we're there. We just want a chance to at least say we played in a Super Bowl. Lou Anne Lofton, heading up the Motley Fool's New Orleans office.

Lou, thanks for being here. Thanks, Chris. now it's time to dip into the full mailbag and steve breit our engineer on the other side of the glass what do you got for us this week chris a couple comments on last week's show we talked about how netflix didn't really have any serious competition well joe from florida disagrees he writes i think in the area of online streaming television you are seriously overlooking hulu As far as pricing is concerned, it's very difficult to beat free, and the around two minutes of time you watch commercials per one hour of show is a very acceptable opportunity

cost. Len from Colorado weighed in on whether the iPad is a threat to the Kindle. He writes, For the iPad launch, I will take my Kindle with me to while away the hours reading a novel while I stand in line. Although I'll try iBooks, I'm quite sure the Kindle will remain my device of choice for curling up, long form, immersive, and get away from my computer reading. He also writes, in the battle for e-books dominance, I bet Amazon's CEO will be a more stubborn and passionate champion

than his counterpart at Apple. We welcome your comments on anything we've talked about. Netflix, the iPad. Heck, maybe you've got some good advice for Toyota. The email is motleyfoolmoney at fool.com. Coming up, author Jonah Lara talks about the business of decision making. Turns out we're not very rational, but that's not always a bad thing. You're listening to Motley Fool Money.

Welcome back to Motley Fool Money. I'm Chris Hill. So why do we make certain decisions and pass on others? Jonah Lehrer has written for The New Yorker, The Washington Post, The Boston Globe, and he writes a blog on matters of the mind called The Frontal Cortex. He is the author of How We Decide, which is now out in paperback. Jonah, welcome to Motley Fool Money. Thanks so much for having me. So the book is organized around two questions.

How does the human mind make decisions, and how can we make those decisions better? Let's just start with the first one. How do we decide? Well, it turns out the brain has two basic ways to make decisions. On the one hand, we all know we can be rational sometimes. We can be deliberate. We can crunch the numbers. We can read the Wall Street Journal.

We can, you know, make long lists of pros and cons. So that's one way to make a decision. And that turns out to rely on a part of the brain called the prefrontal cortex. It's that nub of flesh just behind your forehead. But we also know that we can use our emotions. We can trust our instincts. We can not think at all and still make decisions, just go with what feels best. And that relies on a whole different system in the brain.

So those are the two basic ways we make decisions. And it turns out when you look at the brain and look at all these experiments in recent decades, you see that each of these two systems comes with distinct advantages and disadvantages, so that how you think should really depend on what you're thinking about, whether or not you're deliberate or trust your instincts. And how do we make decisions better? Because I think the average person in a given week is probably making decisions that they regret, whether it's in their personal life or their professional life.

Yeah, well, the key to, I think, making better decisions gets back to that whole strength and weakness element of decision-making, that we've got these two ways of making decisions, and each is very well suited to a particular task. One of my favorite metaphors for the mind is that it's a bit like a Swiss Army knife. It's got all these different tools stuffed in. That's partly what makes it such a useful organ, those three pounds of meat. And the key to using a Swiss Army knife and the key to using your brain is to make sure you're using the right tool at the right time. So, you know, if you're an NFL quarterback and you've got to make a quick decision in three and a half seconds and you've prepared for the game, chances are you don't want to be too rational.

If you think too much, you're going to get sacked. But if you're, you know, taking out a mortgage, you probably don't want to trust your emotions. You probably want to read the fine print. So there's, I think, a lot of scientific evidence that outlines which particular situations benefit from a more emotional thought process or a more rational thought process. And that's what the book tries to distill. Now, you've said that there are two broad categories of decisions. There are math problems and there are mysteries. So because we're investors at The Motley Fool, which camp would you put investing in?

Is investing a math problem or a mystery? I think it's mostly a mystery, unfortunately. There are people I know who will claim it's a math problem, and they're probably trying to sell you something. But I think for the most part, investing is really a mystery. And the larger reason for, I think, distilling the world into math problems and mysteries is that math problems, of course, really benefit from a very rational process.

If you're doing a math problem that's like taking out a mortgage, you actually want to see what your interest rate's going to be and you want to see if, you know, that's why subprime mortgages are, you know, if you treat them like a math problem, you never take out a subprime mortgage because the math makes it clear

that paying a higher rate for the, you know, In the last 28 years, your mortgage is a terrible idea. So that's when you want to be rational. I think mysteries come when simply crunching the numbers rarely will get you the perfect answer or the best answer or make the decision any more clear. And I think that's almost always true of the stock market. That's why the best mutual fund managers,

the ones who beat the market one year, rarely beat it the next year. There are so few outliers in the game of investing. and in general when you're dealing with mysteries that suggest that the much better approach is to trust your emotions and this gets back to the ultimate

virtue of the emotional brain is that it can take far more information into account that it can deal with variables that our rational brain which we're aware of really just can't even comprehend We're talking with Jonah Lehrer author of How We Decide

which is now out on paperback. How do you handle your own investments? Do you do that on your own, or do you work with someone? You know, I just got a low-cost index fund. I'm just in it for the long haul. It's a mystery that I don't want to devote the necessary mental resources to. So I just let time do its thing and just trust in the gradual upward slope of the market.

But one experiment I often think about, When I'm investing in the market, this is a study done by German psychologists. And they had people watch basically a version of CNBC. So they're watching from talking heads. And at the bottom of it is a stock ticker. And they'd carefully rigged their stock ticker. So there were 20 different stocks. And over the course of this half an hour of video people are watching,

the stock ticker contains the 20 stocks, and the stocks go up or down in value. And so the scientists tell the subjects in the study to watch the ticker. And then when the video is done, they ask the subjects, so which stocks did best? Which of these 20 stocks went up the most and which of these 20 stocks went down the most? And, of course, the subjects said, gosh, I have no idea. I couldn't keep track of everything. There was way too much information on the screen, and these talking heads were so distracting. I was just completely overwhelmed.

I have no idea how the stocks did. And so the scientist said, okay, fair enough. Well, here's a list of the 20 stocks. Just tell us which stocks feel the best to you. You know, which stocks are associated with most positive emotions? And now all of a sudden, these subjects who were convinced they had no idea which stocks did best could actually pick out the best stocks very, very reliably. That even though they weren't aware of all the information on the screen, their emotional

brain was, in some very real sense, tracking the information over time. And so the stocks that did the best were associated with the most positive emotions. So, I mean, that's another example of how sometimes our emotional brain really does know more than we know. And why, when you're dealing with a mystery or something that just seems so inherently mysterious, I have no idea how these stocks did, trying to tap into your emotions, into the wisdom of your emotions, can actually let you in on an important secret. So that's interesting, because so much has been written about the negative role of emotion in investing. And, you know, tomes are written in honor of people who take a very clinical approach to the way that they manage their money. But it sounds like you're saying it's probably a good thing to let a little bit more emotion into your investing decisions. Well, at the very least, I think you want to take your emotions into account.

You know, there are, of course, all sorts of emotional biases. And I talk about a lot of them in the book, things like loss aversion, which I think are very, very important consequences for investors. So there are all sorts of biases and heuristics and flaws you have to know about or else you're going to be vulnerable to them. And all sorts of studies showing that mutual fund managers, for instance, are also vulnerable to loss aversion. So these aren't just emotional mistakes that amateurs make. These are emotional mistakes that everybody makes. So I think it's really important to take those flaws that have been identified into account. But I think once you do that, I think it is very important to also take into account these positive emotions,

these emotions that are based on experience and all the information that we can consciously comprehend. Simply, when you look at the way the brain is built, you quickly realize that the rational brain, while it can do many very, very important things, is a really limited processor of information. It's a very tiny and feeble computer. And so when you ask it to make decisions that involve lots and lots of information, and investing decisions certainly involve an astonishing amount of information, chances are you're going to overwhelm it. You're going to short-circuit your prefrontal cortex, so to speak.

And you're also going to be blocking yourself off, shutting out all this information that your emotional brain is taking into account. So I think the thing we've been aspiring to for so long is the idea of making decisions, especially financial decisions from a purely rational perspective. While it's a noble quest, I think the anatomy of the brain shows us that it's also a little bit misguided. We're talking with Joan O'Leary, author of How We Decide. One of the things in the book, you talked about willpower, and you had this great example, a study involving chocolate cake, fruit salad, and seven-digit numbers. Could I get you to share that story? Sure. This is a very clever experiment done by Baba Shiv, a behavioral economist at Sanford University. And he had two groups of undergrads come into his office.

He gave one group a two-digit random number to remember to, and the other group he gave a seven-digit random number to remember to. And he told them this was a test of long-term memory, but he was lying through his teeth. He then walked them down the hall and said, Wait, wait, wait, hold on, hold on, hold on. An economist was lying through his teeth? Well, you know, most of these behavioral economic experiments require, when you actually look at them in detail, they require the scientists to lie to their subjects. They require them to be mischievous.

So that's what he had to do, unfortunately. And then so he marches all these students down the hall and tells them it's snack time. He gives everyone a choice between a nice, responsible snack of fruit salad or a gooey, rich, decadent slice of chocolate cake. And to his surprise, and he ended up running this experiment numerous times because he couldn't quite believe the data, people given seven digits to remember were nearly twice as likely to choose the chocolate cake. And the reason, Shiv argues, is that because the rational brain is so feeble, that those five extra numbers, that's all it took, overwhelmed our ability to also exert self-control.

So the same brain area has to memorize those numbers and also resist the urge to eat chocolate cake. And all it took was five extra numbers to obliterate our ability to resist a high-caloric treat we really wanted. So that, I think, gives us some insight into just how limited the resources of the rational brain are. All it takes is five extra numbers to obliterate it. What can investors do? What are a couple of things investors can do to make better decisions? Well, the first thing I think is to really be aware of all these flaws and biases that psychologists have identified, things like loss aversion, things we've been talking about. There's a long list of these biases that have been identified, and I think it's really important to know about them and to be conscious of them, to think about thinking when you're making investment decisions.

because if you're not thinking about loss aversion, then chances are you're not going to sell stocks that have gone down in value because you want to avoid that loss, and that will lead to more losses over time. So know about these biases, be aware of them, and try to apply them to your own decisions. I think that's a very important first step. That will get you pretty far just in terms of applying all this new research and all this new science. I think another really important thing is just something else we've just been talking about, which is the dangers of information overload, of trying to take too much information into account. And this gets back to, I think, just an inherent weakness of the rational brain.

I think we assume that more information is always better, that, you know, just one more Google search is all it's going to take. But at a certain point, information starts to have negative returns that can actually interfere with our decision-making. It can lead us to eat that chocolate cake. So be aware of the danger of trying to stuff five extra numbers into your brain all the time. And I think the third thing is when you've got experience making these decisions, if you're a really experienced investor, if you've made lots of mistakes and learned from your mistakes,

I think it's wrong to aspire to some condition of pure reason. I think you should act like every other expert out there and at the very least take your emotions into account. You know, when you study NFL quarterbacks or chess grandmasters or really any successful expert, you know, what you find is that these experts tend to be profoundly intuitive, that they're less conscious of why they're making a decision than a novice, than a beginner. And I think it's really just in the realm of investing in large part because it's been so influenced by economics that we still see investors assume that we should always try to be rational. We should always, you know, analyze the decision and then analyze it again. But I think when you look at someone like Warren Buffett to refer to the most obvious example, he is not shy of following. He's not afraid of following his intuition, of doing the numbers, thinking about it for 10 minutes, and then making a decision, trusting his emotions. Because I think when you look at the brain, you realize that our emotions often know more than we know.

All right, final question. You've invoked this category a couple of times during our conversation. Which NFL quarterback are you betting on Sunday in the Super Bowl? Is it Drew Brees or is it Peyton Manning? Oh, gosh. You know, I've got to go with Peyton. The sentimental, you know, I really want New Orleans to win, but it's really hard to bet against Peyton Manning.

I think he's going to pick apart that defense. You're not going to let emotion affect your decision? you know if i if i had any experience if i had any successful track record i i would trust my emotions but i know my track record of betting um so so i'm definitely not trusting my emotional brain on this one the book is how we decide it is on the new york times bestseller list for paperbacks joan alera thanks so much for joining us on motley fool money thanks so much for having coming up after the break we'll give you the stocks that are on our radar so stay tuned you're listening to motley fool money

Chris Hill. Welcome back to Motley Fool Money. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks based solely on what you hear. I'm Chris Hill, and back in the studio with me, our trio of senior analysts, Seth Jason, James Early, and Shannon Zimmerman. Guys, time to talk about the stocks that are on our radar, and Shannon Zimmerman, I'll start with you. Shannon Zimmerman. All right, so I'm going to talk about a lousy company that suddenly became infinitely more interesting with about $8 million of lobbying money, and it's Sally May, ticker SLM. Basically, folks who have student loans probably know about Sally May. They're the

middlemen. And so they basically lend money and are subsidized by the government so that all of the risk of lending money basically is off their books and on the backs of taxpayers. Where have we heard this story before? So now they've taken a page from the recent healthcare so-called debate and they're doing exactly the same thing, going out town hall style meetings with senators to push back on the administration's effort to take all of that money that is currently just sort of being soaked up by this middleman industry and put it to use as grants or additional loans at lower interest rates. Well, they appear to be succeeding, and their stock is up 2% today. We'll see how much further it goes as the conversation continues. But,

Sallie Mae, like I say, not a strong company in fundamental terms, but one that is, thanks to politics, an interesting investment opportunity right now. And the ticker symbol one more time? SLM. James Ehrlich. Shannon the gambler. I am going down under with my stock. The name is Westpac Bank. WBK is the ticker. This is, I think, the most established bank in Australia. There are really only four banks there. And this is sort of the biggest, most conservative one. It has a 5% yield. Australia doesn't really have subprime in the financial crisis to the extent we have here. They've had a little bit of a recession. It's a very commodity-focused economy. But as the world grows, people will continue to use Australian minerals, and I expect this bank to do well.

Seth Jason? That all? It doesn't give me enough time to look for a stock on my radar or on my computer. You're supposed to do your homework. You're supposed to be prepared. Harsh on Sally May for me. Seriously. I got to go back to Adobe quickly.

Wow. Rick Munarriz on our Fool main page wrote about avoiding Adobe, and I think he is dead on. There's a couple of quick reasons. One is that a lot of Adobe's businesses, I believe, will be obsolete in 10 years or so. The whole Flash thing, the whole Photoshop thing, maybe even Acrobat. I think those are going the way of the dodo because of new technologies coming online. And it trades at 20 times cash, free cash flow anyway.

So it's expensive for a business that has enormous risk. So I would say stay away. And I'll give you a better idea. Just look to Apple, down 10% or so since the iPad announcement. even if that's a flop growing quickly enough with the iPhone and the Macintosh computers

to probably still be a pretty good idea even from here these days I'm amazed yeah well look at it 25 times earnings growing the way they're going

so is Bill Gates no longer cutting you checks and coming from Steve Jobs now well Microsoft's more fully valued right now he had him at don't be evil

all right Seth Jason James Early Shannon Zimmerman guys thanks for being here you're welcome next week we've got a lot more

companies reporting earnings including Disney, Coca-Cola, and Buffalo Wild Wings, so check us out. I want to say thanks to our special guests this week, Jonah Lara and Luanne Lofton. Our engineer is Steve Broido. Steve, just real quickly, can you share with the folks at home what you're doing this weekend? Yes, we're heading down to Raleigh, North Carolina, to participate in the Krispy Kreme Challenge. And the Krispy Kreme Challenge is? You run two miles, eat a dozen donuts, and run back.

Fantastic. I'm a spectator. I'm going to be watching. All right. Good luck to your wife on that one. Our engineer, Steve Broido. Our producer is Matt Greer. And my personal muse this week is Helen Mirren. That's it for this edition of Motley Fool Money. If you missed any part of the show, you can find it at our website, motleyfoolmoney.com.

You can also get a copy of our free report, The Motley Fool's Top Stock for 2010. All that and more at motleyfoolmoney.com. Thanks for listening, everyone. I'm Chris Hill, and we'll see you next week. Thanks for watching!