Motley Fool Hidden Gems Investing - Motley Fool Money: 03.02.2012

Episode Date: March 2, 2012

Retailers and automakers post strong results for February. Online review site Yelp goes public.  And Google's new privacy policy goes into effect.   Our analysts discuss those stories and share three stocks on their radar.  Plus, we talk Apple, China, and the business of habits with New York Times investigative reporter Charles Duhigg, author of The Power of Habit:  Why We Do What We Do In Life and Business. Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGaming Ontario. For Motley Fool Inside Value, Joe Mager. And for Motley Fool Pro, Jeff Fischer. Gentlemen, good to see you. Howdy, Friday. We have got a hot new internet IPO, and we're going to talk about Google's new privacy policy. We've got Charles Duhigg from the New York Times to talk about his series of articles on Apple and Foxconn, as well as his new book, The Power of Habit, Why We Do What We Do in Life and Business. And as always, we've got a few stocks on our radar, but we will begin with the big macro.

So, a lot going on this week, guys. A bunch of retailers posting some strong results. Auto sales in February, much better than expected. Oil is still hovering around $108 a barrel, and the Case-Shiller Index showed home prices down to their lowest point since mid-2006. Let's just go down the line. Joe Mager, what's your big macro headline of the week? Oh, it's auto sales. They've really bumped up, and I think there's a lot more room to run here. There's about 12 million cars worth of pent-up demand from the past few years, where people have just delayed buying new cars because of a tough economy. And right now, that's finally coming due. I think you're going to see that really start

to ramp up over the next two years. O' Jeff? Oil prices. But Europe is more vulnerable to rising oil prices than the U.S. A couple reasons for that. We have so much natural gas, shale gas, here in this country. Abundant, cheap. And our winter has been mild. So, most households here ... O' To say the least. Yeah, I'm wearing ... Anyway, most households here have had very low heating bills all winter. So, that offsets the rising price of fuel for their car. Europe does not

have either of those advantages. And, as the Euro is losing value to the dollar, oil is priced in dollars, of course, so Europe gets hit on that as well. Jason, your headline of the week? I'm going to go with two headlines, actually. I think it was kind of the tale of two macros here. The retail sales we talked about yesterday were these stores like Gap and Limited and Macy's, Target, they were all posting much better numbers than analysts expected, both on sales and on same-store sales. So, that, I think, was really impressive. But then you look at the housing data, which I think most people were expecting to see

some sort of ramp-up in there. I don't know that that's really realistic to think, with unemployment the way it is, and also sort of a feet-on-the-ground thing, where you're ... we refinanced our home recently and spoke with lenders, and they're not seeing really much in the way of purchase mortgages, either. It's refinances only. We've still got one in three people who are underwater on their mortgage. Yelp, the online review website, went public on Friday at $15 a share. And Joe Mager, within the first hour of trading, the stock was up 60%. You've got to be excited. I know you love these IPOs. Oh, I think it's great. Chris, I've

got a great business opportunity that I want to sell you. Now, it's currently losing money, over 90% of revenue comes from volatile advertising markets. And over 50% of our traffic comes from someone that's trying to actively build a rival service. You can buy it for 17 times sales. Are you excited? Somebody's excited out there. Well, that's what people are paying for Yelp today, which is just such a ridiculous price. I think it's a great product, but a great product doesn't equate to a great business. There's no real viable long-term model here. And just for perspective on this valuation,

Google is selling for about five times sales. Apple's four times sales. You're paying $17 for Yelp. No thanks. Well, and yeah, as you alluded to, they are dependent on Google in the way that a company like Zynga is dependent on Facebook. Jeff, I'm guessing you're not buying shares. And secondly, they depend on small businesses for most of their advertising. And these companies have much less reliable cash flow. The third thing to watch is, about half of the businesses reviewed on Yelp are restaurants and retail stores. Yelp itself says that has to change. It needs to broaden to doctors and entertainment and travel and hotel. Otherwise, the business

will never grow beyond restaurants and retail stores. Warren Buffett's annual letter to shareholders came out last weekend. Let's just go down the line. Jeff, I'm curious, what was the most interesting part of the letter for you? The big takeaway is, Warren Buffett remains bullish on America, bullish on American banks, namely Wells Fargo, and he remains bullish on housing. And in his own witty way, he said hormones, or we might call it love and marriage, is going to drive a long-term housing recovery. And he also remained humble and big picture and patient. He admitted his company owns a lot of subpar companies, but they're keeping them for the long term. They're committed

to them, and that creates goodwill. Because when other companies, strong companies, are looking to sell, they know Berkshire is a dependable partner to potentially sell to. And that's a great big picture. Thank you. Jason, what's your go for you? Yeah, two quick lessons I take away from this. One, just his ongoing humility. When he gets it wrong, he's the first one to step out there and say it. He did it in regard to housing, in regard to a natural gas bet he made. So, I think that for investors in general, just that humility is something that serves us all very well in the future. The other thing

that he mentioned was just in regard to their wholly-owned subsidiaries. It's just neat to put this into perspective, because they have eight companies now that essentially would belong to the Fortune 500 at this point. And then for him to say that, well, that's only 492 left to go, and he says, my task is clear and I'm on the prowl. And it just kind of paints a picture in your head, this guy's still sharp as a tack. Joe? You know, there's a subtle little nugget in there that jumped out at me, which was that the incentive structure he set up for the two young guns who are managing money

for Berkshire now, who might eventually take over that role from Buffett. His incentive for them is to work together. I know that might sound simple and obvious, but that's not how most investors are incentivized. Instead, by having these guys work together, they're going to get better results, just like Buffett and Munger have done by working together over the years. Instead of competing and trying to be the next Warren Buffett, he wants them to be the next Warren and Charlie. That is really exciting if you're a long-term shareholder. Google's new privacy policy went into effect this week. Jason, Google says this is going to help the company provide more helpful services and customize ads. Critics say Google is trampling

on people's privacy rights. What do you think? I mean, I don't know that if you had, probably nine out of 10 people who read this article probably said, oh, really? I thought they were doing that already. I mean, ultimately, they're just taking the data that they sort of siloed and essentially aggregating it all now. So, from their perspective, they can really target their audiences better. It's not a surprise that they're doing this, and I really do think a lot of people thought they did that already. The interesting thing to me, and we talked about this earlier, was just in regard to when you look at the social media aspect of this, and when you have Facebook,

for example, that's getting ready to go public, and then you have Google, who's in there trying to compete with their Google Plus product, and you have Facebook. We had this recent survey that was out on the Wall Street Journal, which mentioned the average minutes per visitor to social media sites in January. Facebook had 405 minutes per visitor, and Google Plus had three. And so, to me, that shows, number one, obviously, there are more minutes being spent in Facebook's universe. And then, when you consider the 845 million registered users for Facebook to Google Plus's 90 million, you know, when Facebook goes public and it's going to be a competitor directly with Google, that, to me, is going to be very telling.

I think we're going to see Facebook really benefiting from that. Joe, I mean, if you think this move, regardless of the privacy issues, if you think it is helping Google's business, doesn't this inherently make Google's stock more attractive? Oh, it absolutely does. I don't think the market's giving them any credit for this. By combining all these different points of data that Google has about you, what they can do is serve you more relevant ads that you're more likely to click on. That's going to drive more clicks, and advertisers are going to pay more per click for it. If you're a user, it's a better experience, too, because now all of your experience can be very seamlessly

put together, which is a win for everyone. Unless you're a privacy advocate. Well, exactly, Joe. I would say, bring it on. I don't care if Google knows that I like to search for fishing gear and tropical islands. Or whatever else. Jeff Fischer. If they can better serve me, great. Privacy online is a misnomer. One more thing. We talked before about Procter & Gamble, which ran that advertising campaign recently on Facebook for Secret. I think this was just another really good example of how Google aggregating this data is going to help them. Procter & Gamble ran

this ad for Secret on Facebook, which targeted their audience. They were able to get relevant data on who this ad was getting out to, how many clicks they were getting, and it resulted in substantial gains in sales and market share for Secret deodorant. So, I think that you're going to see benefits from that. O' It was so effective that Jason now uses it. I used to, you know. As a matter of fact, it's strong enough for a man. O' On that note, let's move on to the stocks that are on our radar. We'll do it a little early this week. Jason, I'll start with you. You're pitching Steve Broido, our

man on the other side of the glass. He's ultimately going to make the choice among the three stocks. What is your stock? I am pitching Steve Broido directly. Steve, I want you to listen here. I know you just had a kid. I've got two. Both times I gave my wife a gift, a thank you for carrying that child, and I gave her a gift from Tiffany. Tiffany is the retailer that I'm keeping my own right now. We all know the Blue Box. It's a brand that is good for a long period. It's just going to last forever, I think. Women love it. I've got a seven-year-old and a five-year-old girl at home that are already talking about when they're going to get their first Tiffany's stuff. So, I think it's a retailer with some

excellent growth prospects, and that's where you need to go, Steve. And the ticker symbol? T-I-F. Jeff Fischer, the stock on your radar? Steve, I'm talking about Panera Bread. Ticker is P-N-R-A. Ten years ago, my parents took me to one of the earliest locations in Naperville, Illinois, telling me why they love it. Healthy food, reasonable cost, community setting. I had the most expensive turkey sandwich of my life that day. Expensive because it didn't wow me, and I wrote off the whole idea. The

stock is up 700% since then. I've since become a big fan, and I don't think it's too late. They have 1,500 locations. They could still double that. They could consider small footprint cafes as well. So, they have a long way to go. Panera Bread, delicious. I was hoping you were going to say you bought your wife a turkey sandwich after having a kid. Jeff, you won me over on Panera already. Joe? Mine's not quite as flashy. It's Wells Fargo. It's one of the most conservative

banks in the U.S. I think they have a lot of room to monetize the Wachovia acquisition that they did during the financial crisis. A lot of cash during out there. Big upside on higher interest rates in a normalized market. O' And the ticker? WFC. O' Okay, Steve, I think this is plainly obvious here. You're either going to go home with your wife, you're going to give her something from Tiffany, you're going to give her a bagel, or you're going to give her a checking account. What's it going to be?

Steve, what do you say? It's going to be Wells Fargo, because we went into Tiffany when we were looking at engagement rings, looked at the prices, and promptly left. And I've been to Panera Bread, and I don't understand what Panera Bread is. It feels like a cafeteria, but it's not a cafeteria. The food doesn't seem remarkable. Wells Fargo, I understand, and I think the banking industry has still been hit pretty hard. Boom. Fair enough.

That's where I was 10 years ago. You'll come around. You'll come around. Joe Ager, Jeff Fischer, Jason Moser. Guys, thanks for being here. Thank you. Thank you. Coming up, Charles Dohig from the New York Times talks about your buying habits and how retailers are using them to predict what you're going to buy next. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Now, everybody has habits, but how much are companies trying to profit off of our habits? Charles Duhigg is an award-winning

investigative reporter for The New York Times, and he's the author of the new book, The Power of Habit, Why We Do What We Do in Life and Business. Charles, thanks for being here. Thank you so much for having me. This is your first book. Why did you choose this topic for your first book? Well, I got interested in this about eight years ago when I was a reporter in Iraq. And I met this army major down in a city named Kufa, who his assignment had been to stop riots in the city. And so what he did is he took out all the kebab sellers from the plazas, and the riots ceased immediately because people would get hungry and go home.

And I asked him, how did you know to do this? And he said, oh, the military is like this giant habit machine. And this just got me fascinated. And once I came back, I realized how much habits have to do with businesses and companies and organizations. And it just totally captivated me. So obviously, as a show that focuses on business and investing, I'm particularly interested in the habits that you point to in your book as they relate to business. So let's touch on a couple of the examples in your book. And the one that is getting all the headlines is this story that Target knew that an 18-year-old girl was pregnant before her own father did. Right.

How does something like that even happen? So Target has this very, very sophisticated division that looks at shopping habits. And it's not just Target. It's almost every major company at this point, although Target's among the best at this. And they can actually figure out from your shopping habits if you're pregnant, if you're going through a divorce, if you're buying a new house. They are looking for these moments in your life when all of a sudden everything is kind of changing because they know at those moments, your habits are particularly flexible and they can get you to buy new stuff. And one of the comments you make is that pregnant women are the holy grail.

I'm assuming that's for any business, not just Target, but why is that? Any business at all. It's because when you have a new baby or you're pregnant, you're exhausted, right? Like most people go to five or six different stores to buy all the stuff they need. But Target sells everything, and so they know that if they can get a pregnant woman in there to buy her diapers and formula, they can get her to start buying her cleaning supplies and her clothes and her lawn furniture, everything. Because if you have a new infant, you are exhausted. All that you want is to go home and fall asleep. So Target wants to get at you before everyone else when they know that a baby is on the way. Well, I think sort of the average consumer is used to the basic proposition of going to a store, that stores are collecting information on you, and that certainly in the case of grocery stores, you're getting discounts, you're getting coupons of the things that you buy.

But how does a company like Target walk the fine line between offering discounts, sending coupons out to entice pregnant women into the store without, for lack of a better word, creeping them out? This is the biggest problem Target has, right? They actually, when they sent out these ads at first to women that they knew were pregnant, they would send them all the baby stuff. And the women would just get completely freaked out. they wouldn't come into the store because it was obvious Target knew they were pregnant and they had never told them. So one of the executives said, let's try an experiment. And he sent out a small number of ads flyers that had coupons for diapers right next to a lawnmower and then coupons for formula right next to wine glasses. So that to the average viewer, it looked like the

baby ads were all random. And it worked. The women who got those ads in the mail looked at them and said, oh, everyone else on the same block must have gotten the same ad. And I need these coupons for diapers and formula. And they came in and used them. So Target had to camouflage what it knew. And if your kid, let's be honest, if your kid is drinking baby formula out of a wine glass, then there are other issues going on. Then that's an interesting household. One of the other companies you profile, Procter & Gamble, which is a company that we talk about frequently on our show. And Febreze, which is now a billion-dollar product for Procter & Gamble. But early on, that was really a product that P&G was struggling with. In fact, it was such a failure

that P&G was thinking of canceling it altogether. But some of the marketers figured out that they could create a Febreze habit. And we go into exactly how this happens in the book. They piggybacked on existing cleaning habits. And by doing so, they suddenly got mainly housewives who buy Febreze to start using this stuff by adding more perfume into the formula. So that at the end of a cleaning ritual, someone would look at a clean carpet or a freshly made bed and spray Febreze to make things smell as good as they looked. And all of a sudden, Febreze went from a huge flop into selling $200 million worth of product in its first year, and it's now a billion a year. It's one of the biggest products in Procter & Gamble's arsenal.

One of the other products, which frankly, I wasn't even aware was still being made, is Pepsodent. And the reason I thought that is because it's no longer sold here in the United States. How did Pepsodent revolutionize the world of toothpaste? So 100 years ago, almost no one in the United States brushed their teeth. It was basically something that rich people did once a week. And it was such a big deal. It was kind of a status thing, right? And it was such a big deal that in World War I, when they were recruiting troops, the military actually said that dental hygiene was a national security risk because so many soldiers had rotting teeth. And nobody could solve this problem until this marketer named

Claude C. Hopkins, who's totally forgotten today but was kind of famous 100 years ago, until he decided that he was going to take on Pepsodent in exchange for a bunch of stock in the company. And what he did was he created a habit around it. He created, every habit has three parts. There's a cue, a routine, and a reward. He found this cue, the film on people's teeth, right? If you run your tongue over your teeth, you feel that film. Nobody had ever minded it before, but Hopkins taught people, that's bad. If you feel that, you got to brush your teeth. But most importantly, he delivered a reward. In Pepsodent were these chemicals that made people's gums tingle. And it's probably still true today, right? When you brush your teeth, I'm sure your

gums and tongue tingle afterwards? Oh, sure. Once a week when I brush my teeth. Right. Exactly. Whether your teeth need it or not, once a week. That reward revolutionized toothpaste and it revolutionized toothbrushing because suddenly people started feeling like their mouth wasn't clean if they didn't have tingling gums when they walked out the door or went to bed. And that made it a habit. That was enough of a reward to spur this daily pattern of behavior. And in fact, right even today, toothpaste companies add a chemical to make your gums tingle that have nothing to do with cleaning your teeth. It's just to create a daily habit. Coming up, we'll talk more about habits, including how to change your own habits. Stay

right here. This is Motley Fool Money. You're listening to Motley Fool Money, talking with Charles Duhigg, author of the new book, The Power of Habit, Why We Do What We Do in Life and business. There are other companies that are trying to sort of tap into that tingly feeling that Pepsodent did. And one of the things you write about is sunscreen, how we aren't using, I'm certainly, a pale Irish guy like me is certainly not using enough sunscreen on a daily basis as I should be. Am I just missing the tingle? That's exactly it. There's no reward for sunscreen. So when you think about it, it's crazy that everyone brushes their teeth. No one dies from having unclean teeth, but lots of people die from skin cancer every year.

So why does everyone brush their teeth every day, but people don't put on sunscreen every day? Because we know doctors tell us we could eradicate skin cancer if we all put on sunscreen. The reason why is because they haven't figured out some reward that sunscreen delivers so that when you put it on, it feels like you've done something good. And if you forget to put it on, there's something that reminds you. They've tried to make it tingle, but some people's skin is too sensitive. So they keep on looking for some reward that will trigger a daily sunscreen habit. So what are some of the other products that companies are tweaking in the hope that we're going to change our habits? Well, one of the most interesting is actually cigarettes, right?

So most people think about cigarettes as being addictive, something you don't even have to sell as a habit. But it turns out that a lot of people who start smoking can put down cigarettes on their own by sort of diagnosing their own habits and trying to cure themselves. So some cigarette companies actually vary the level of nicotine in cigarettes so that it delivers more of a reward and less of a reward, because we know that intermittent rewards are the most powerful kind. We actually know this primarily because of slot machines and video games. The video game industry has been overhauled by the science of habit formation. Now when you play a video game, every reward you get is specifically designed to make that game habit forming. And it works. That's why you have this

urge as soon as you get one badge, you want to get the next one. Everywhere you look, you can actually see rewards that are trying to create habits in our lives. What surprised you the most when you were working on this book? What surprised me the most is how malleable habits are. I think most people are programmed to think about habits as something that we're kind of powerless over, right? Like, when you pass that box of donuts, it feels so compelling. And you say to yourself, I'm a successful person. Why can't I just ignore the donuts? It turns out in the last decade, what we've learned in neurology laboratories has completely transformed our understanding of habits. And we now know how to change them. We know how to create new habits. We know how to

break old habits. In labs, they can actually do this, almost like flicking a switch There's people who give up cigarettes and lose 30 pounds and companies that completely transform themselves and it's because they target their habits. We're not prisoner to them. We know how to change them now. So what's the key to changing your habits? The key to changing your habits is understanding this habit loop, that every habit has a cue, a routine, and a reward. And most people, when they think about habits, they focus on the behavior, the routine. But that cue and that reward is really, really important because that's how you influence the behavior.

I kind of have an example, like a personal example, if it's interesting to you. That was going to be my next question. What if any habits of your own change? So there's a lot of, I've actually lost 21 pounds in writing this book, which is great for it. I had 21 to lose. So it was, it's a big, it's nice to do. And I had this bad habit when I started working on the book that every afternoon I would go up and I would get a cookie from the cafeteria and I would chat with my colleagues and this would drive me crazy. So every time I was talking to a psychologist, I would ask them at the end of the interview, so how can I change my habit?

And what they said was, you have to diagnose the cue and the reward and then shoehorn in a new behavior. So I started paying attention and I realized that every time I had a cookie urge, it was usually between 3.15 and 3.45 in the afternoon. And then I did some experiments. Rather than getting a cookie one day, I got a candy bar. Then the next day, I just got some hot tea. And one day, instead of going to the cafeteria, I took a walk around the block.

And what I figured out is that the reason why I craved that cookie was because it gave me an opportunity to socialize with my colleagues. The cookie was just a convenient excuse. Once I had diagnosed the cue and the reward, I could change the habit. And now at about 3.30 every day, I look around the newsroom because I work at the New York Times. I find someone to go gossip with. I gossip with them for 10 minutes, and then I go back to my desk. And the cookie urge is gone. But I would have only known how to change that habit by figuring out the cue and the reward. And that's kind of the, it gets a little bit more complicated. In my book, I go into all the details of how to diagnose the cue and reward and how to

change them. But that's kind of the lesson here is that you can change any of them once you figure out how the habit works. You're listening to Motley Fool Money, talking with Charles Duhigg, author of the new book, The Power of Habit, Why We Do What We Do in Life and Business. Let's talk about your work at the New York Times because you were part of the investigative team that did the recent series about Apple and the working conditions at the Foxconn factory in China. Paint a picture for me. What did you find when you visited there?

The factory, Apple's factories in China, and I have a colleague in China who did most of the on the ground reporting. Apple's factories in China, by American standards, would be considered extremely harsh. People are often inside that factory for 12 hours a day or more. They're asked to work two shifts, one right after the other. They're very frequently standing or sitting on these backless chairs. And when they go home, they go to these dorms where anywhere from 7 to 15 people might be stuffed into one dorm, into one room. It's not a pleasant life. And what we wanted to do is we wanted to figure out why this was occurring and what Apple knew about it.

Because there has also been situations where people have been killed by being exposed to explosions or to poisonous chemicals and manufacturing iPhones or iPads. And so that's why we did the project. Obviously, there are different working standards in China than here in the U.S. How did the Chinese see these jobs at Foxconn? Are they considered good jobs relative to the other employment options? it's a kind of complicated answer because china is transforming remarkably fast right a lot of the people who work in foxconn factories are enormously grateful to have those jobs they're earning more money than they could have otherwise and foxconn factories are better than a lot of

very small factories small factories can get awful foxconn because it's so big has to standardize everything to some degree. And so when you talk to people, they say, look, I moved out of my village into this city so I could get this job and I'm sending money home. But that doesn't mean that they're happy with the conditions, right? They're tired, they're exhausted. Some of them are scared for their safety. And so even though things are different, that doesn't necessarily mean that they're okay. But it's such a rapidly changing country that things are in flux so much there That there's very little chance to kind of catch your breath and say, so how should the world really work? Unless a company like Apple steps in and says, we demand these changes, which has happened, actually, since we published our articles.

How important is Foxconn to the economy? Foxconn is incredibly important. It is the largest manufacturer of electronics in the world. 40% of all electronics that you touch have been assembled by Foxconn. So if you've got a phone in your pocket, or if you're listening to this over a computer, there's a pretty good chance that Foxconn assembled it. It's a huge company. So we're obviously talking about Apple, but is it safe to assume that Microsoft, Dell, HP,

a lot of the other big tech companies are working with Foxconn as well? Absolutely. Absolutely. And the conditions, any major tech company that manufactures actual products is working with Foxconn. And those laborers are working in the exact same conditions that Apple laborers are. So how much leverage does a company like Apple have when it comes to improving work conditions in China?

They have enormous leverage, right? Because everyone wants to work with Apple. Particularly Apple has this leverage because if you're an Apple subcontractor or contractor, it's this badge of approval. And this actually gets back to the habit stuff. Because one of the things that's interesting about Apple is that Apple has always cultivated this culture of secrecy, right?

There's essentially an organizational habit within Apple to be very secretive about what's going on. In fact, I would talk to people inside Apple and they wouldn't know what their neighbor was working on. You go into people's offices inside Apple and they'll have these tents over their desks so that you can't see anything that's on their desk. There's this culture of secrecy that kind of pervades the company

and therefore also pervades Foxconn Because Foxconn takes its marching orders from Apple. And one of the things that Tim Cook is trying to do right now is he's trying to change that culture of secrecy. He's trying to change this institutional organizational habit to constantly be secretive about what you're doing, to be more transparent. But the challenge is that once you set up an organizational habit, once it starts unfolding, it's very, very hard to adjust. It's hard to go into Foxconn and say, after 10 years of learning our habit of secrecy, we want you to become more transparent. Because that's the thing about habits.

Once they take hold, they're hard to shift. You can, but you've got to work at it. Adam Lashinsky from Fortune magazine was recently on the show. He just wrote a book entitled Inside Apple that really gets at that culture of secrecy that you were talking about. And one of the points that he made when we were talking about China is that Apple employees here in the U.S. are very idealistic and that it was Lashinsky's opinion that this story was potentially a bigger problem for Apple in part because of employees here in the U.S. having that idealistic view, having that highly ethical view of the work that they're doing. and that this Foxconn story is really going to undermine all of that. Do you agree with that?

It's a really interesting, and I'm a huge fan of Adam's. I think Inside Apple is a great book, and his reporting has been fantastic. And I think that's a really good point, that when I talk to people who work at Apple and who used to work at Apple, they love that company, and they are proud of being part of it. And most of them had no idea what conditions were like in China. Again, it gets back to this culture of secrecy, this kind of habit of not being transparent. And so they're as shocked as anyone else to find out that there's people being poisoned making iPhones, or that there's people who are dying because of explosions in iPad factories.

And I think it is a real issue. I think when Tim Cook, after we published our piece, Tim Cook sent an email to the entire company, all 65,000 employees, recommitting his dedication to improving factories. And I think the reason why he did that, why it was so important, is exactly what you just said. That it's very important to Apple employees that they feel good about their work. Because they're working all the time. Any of them could go to any other company. And so they need to believe in what they're doing.

And that means the company has to be kind of the virtuous model that it holds itself up as. Coming up, more with Charles Duhigg about Apple, and we'll play a round of Buy, Sell, or Hold. Stay right here. This is Motley Fool Money. You're listening to Motley Fool Money, talking with Charles Duhigg, author of the new book, The Power of Habit, Why We Do What We Do in Life and Business. Apple is now participating in the Fair Labor Association. It's allowing inspectors to go into the Foxconn factories.

There's going to be a report, I believe, out later this month. First, how much weight should we give the inspections? I'm wondering, we talked recently on the show about to what extent these were legitimate and to what extent that conditions had been improved in the way that it's more of a dog and pony show for inspectors or for the media coming in. That's a really hard question to answer, and I think we have to wait to see the report to answer it. You know, the head of FLA, Fair Labor Association, right after the announcement was made that they would be going in, gave an interview where he said that he thought that everything was OK within Foxconn. And some people said, look, you just went into the place.

How can you say that? You haven't done your research yet. And then he walked that back and he said, well, there's a whole bunch of issues that we need to look at. Some people have raised this issue that they don't think the Fair Labor Association is an independent arbiter, that they feel like it's compromised because it takes money from Apple. I think we have to wait to see what the report says. If the report is a clean bill of health, then you're going to hear from people who say, look, that just doesn't line up with my experience.

And so I say we hold off judgment until it comes out. But the bigger question almost is, can the culture within manufacturing overseas change? Can we establish these new patterns of transparency, of listening to consumers that can change how electronics manufacturing works. It happened in textiles. It happened with shoes. Nike became transformed because so many people were outraged about sweatshop conditions. And I think it can probably happen for electronics too. I'm going to ask you to prognosticate here. In terms of the Fair Labor Association report that's going to come out. What do you think would have to be included in that report to make a significant number of people change their own habits about buying Apple products?

I think it would have to describe conditions that shock people. And we know that a lot of those conditions already exist, right? There are a lot of people who work in those factories who, and some of them are 16 years old, because that's legal age to work in China. who are working 80 to 100 hours a week right and it's physically crippling work sometimes i mean you're stooped over or you're on your feet all day long i think if if that report can paint out what it's like inside these factories that so that someone knows when i'm playing with my iphone that came from human labor that i can't feel good about that's going to change people's buying habits, right? Because this is what we know about consumers. Consumers love their devices.

The buying instinct, the buying habit to get a new iPhone or a new iPad is too strong for us to say, you just shouldn't buy the device. People are going to continue buying because that habit is ingrained because Apple knows how to take advantage, how to market to that buying habit, how to design products that take advantage of that habit so strongly. So to change, people really have to be shocked. And there are shocking conditions over there. And last question on Apple and Foxconn. Ultimately, how do you think this story is going to play out?

Is it going to be sort of the manufacturing version of what you described with Nike? And we'll see a transformation of the manufacturing industry in the way that we saw with, you know, Nike and the production of athletic wear? Or is it going to play out differently? It's definitely not going to die away. And I think probably the Nike example is the best example. I mean, basically, Nike ignored a lot of these criticisms for a long time. And then it got to a point where it was damaging the brand.

They felt like they couldn't ignore it. Apple already has said that they're committed to this. They've said that they're going to create these changes. And it's our job as newspapers and as consumers to kind of keep them to their word and make sure that they are. But I think we're going to see a complete transformation in how manufacturing occurs in the next couple of years. And I say that because it's already started

and because there's so many people who have said, this is too important to us to not push it through. You're listening to Motley Fool Money, talking with Charles Duhigg, author of the new book, The Power of Habit, Why We Do What We Do in Life and Business. We are going to wrap up with a round of buy, sell, or hold. This is a company that's going with a more straightforward pricing model

and their CEO is credited with a lot of Apple's retail success. buy, sell, or hold the new JCPenney. I'm a huge fan. I would buy. I got to say, it's going to be fascinating to see how they revamp JCPenney in the image of Apple retail stores. But I'm looking forward to seeing it. It's ubiquitous and habit-forming, buy, sell, or hold Angry Birds. I'd buy. My three-year-old loves it. If you can play Angry Birds when you're three, then something tells me he's going to be playing that for the next decade. Yeah, yeah.

My six-year-old loves it, too. He's becoming a global sensation, and he's given the New York Knicks new life buy, sell, or hold Jeremy Lin. I got to say hold. I like Jeremy Lin. You know, we couldn't even watch his games for a long time here in New York because there was this cable blackout. But it's going to be interesting to see if this is like a one-season wonder

or if this thing becomes something that goes on into perpetuity. I can't wait to watch. Although if Jeremy Lin was a stock, he would be trading at a very high multiple right now. Very high premium. People would be, yeah. I would say it's, I'm not sure if it's a bubble or not, but whatever he is, he's at the top of it right now. Buy, sell, or hold, paying your children to do their chores.

my kids would say buy i say sell what one of the things that we know from creating from habit sciences is financial incentives don't actually work very well for kids basically you want to get people to a place where they have inherent rewards so you want to teach that kid willpower habits so that they start cleaning and doing their chores because they get a sense of satisfaction from it. A kid who makes his bed when he's five years old is a kid who learns a willpower habit and does his homework when he's in the sixth grade. The book is The Power of Habit, Why We Do What We Do in Life and Business. It is on sale now in bookstores, on Amazon, on barnesandnoble.com. Charles Duhigg of the New York Times, thanks so much for being

here. Thank you for having me. For video highlights of this week's show, you can go to fooltv.com. That's fooltv.com. You can also check out our daily podcast, Market Foolery. It's our daily take on business news and investing. You can check it out on iTunes. And if you're listening on iTunes, let us know how we're doing. We always love to hear from our listeners. So you can drop us an email, radioatfool.com, or you can just rate our show on iTunes. Cast your vote and let us know how we're doing. That's it for this week's show. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening. We will see you next week.

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