Motley Fool Hidden Gems Investing - Motley Fool Money: 03.22.2013

Episode Date: March 22, 2013

The EU attempts to deal with the crisis in Cyprus.  Nike hits a new high.  And Lululemon deals with disclosure issues.   Plus,  Jonah Berger discusses his new book, Contagious:  Why Things Catch On. Learn more about your ad choices. Visit megaphone.fm/adchoices

The Royal Canadian Legion is celebrating its 100th anniversary and now our change has a $2 coin to mark this milestone. Honour the Legion's mission to carry forward stories of service and sacrifice to new generations and their dedication to supporting veterans and their families from coast to coast to coast. Celebrate this enduring legacy. Find the 100th anniversary of the Royal Canadian Legion $2 coin today. Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week, for Motley Fool Income Investor, James Early, and for Million Dollar portfolio, Charlie Travers and Ron Gross. Good to see you guys.

Good to see you, Chris. We have got the latest earnings from Nike, Tiffany's, FedEx, and more. We will talk about what makes a product or service contagious with marketing expert Jonah Berger. And as always, we've got a few stocks on our radar. But guys, we begin this week across the sea on the tiny island of Cyprus with about 800,000 people, a GDP of $22 billion, and a banking system that heavily invested in Greek sovereign debt. And as we've said before, really, what can go wrong at that point? Charlie, the EU is grappling with how to fix this situation. This is a story very much in flux. But as an investor in the U.S., when you look at this,

how worried are you about ripple effects? A little bit, Chris. And I think what we're seeing here is that history might not repeat itself, but it sure does rhyme. It looks a lot like Iceland did at the beginning of the financial crisis, where you have a tiny island nation that decides to become a global financial powerhouse, and all of a sudden you have a banking system that's way too big for the country to do anything about, and that's the situation we have with Cyprus right now. These are really big, mismanaged banks. They were paying out 4% interest to depositors, which attracted in a huge influx of money, just like happened in Iceland. And instead of being smart with it, they bought up a whole bunch of Greek debt, as you mentioned. And so when the Greek debt restructured last year, that hit the banks there for over 4 billion euros, which was 24 percent of the entire country's GDP for perspective.

They just could not take that blow. And so what they're looking for now is a bailout from the Europeans. And what you're seeing is that for the first time since the troubles began years ago, Europe is saying no, which has caught everybody off guard. And I think they might let them fail. They're trying to get at the bank depositors to get them to pay for some of this money they need to raise. But that doesn't look like it's going to fly. Yeah, James, as we talked about earlier in the week, this may be the EU sort of sending a shot across the bow, not just at Cyprus, but at Spain and Italy, just saying, you know what, we're not going to be doing this anymore.

Correct, Chris. And from a global perspective, I think the main risk here is feta cheese. I don't think anybody wants to see exports disrupted, but Cyprus did something risky. It bet its economy on banking, and then it bet its banking on Greece. So, now somebody's got to pay. Can't Berkshire Hathaway just acquire the whole nation and just restructure? It's not that much money they need for a bailout. He's got an elephant gun, he keeps saying.

Apple has a lot of cash on the balance sheet. Maybe they could dip in there. Ron, we actually got an email this week from one of our listeners in Cyprus, Michael Sangaris. And one of the things that he wrote was, all the noise has covered up the fact that the banks have done a terrible job over the past few years, and that management has not only gotten away with it, but also received excessive bonuses. We were talking earlier, you're not worried about the ripple effects, even though at its core, this is yet another one of those situations where the human beings running the banks just did a lousy job.

Well, I wish I could say that was true, but I am actually a little bit nervous about it, because why not? What else do I got to do? But what do I do about it? I was just going to say, so how is it changing what you're doing? Am I selling my holdings in Costco or Apple, or am I even lightening up on my S&P 500 index fund? No, I'm not. I'm not a market timer. If I learn anything from 2008, the disaster back then, it's going to work out. It's going to be fine. I can't try to time these things. I don't know how they're going to play out. I'm going to stay the course, own good companies for long periods of time.

But Charlie, you're changing a little bit of what you're doing. Yes, I am playing the market timer card, even though we tell people not to do it. I just decided that I have no interest in exposure to financial market catastrophes. And while this looks a little scary over there, I am raising more cash and hedging a little bit more than I was previously. All right, bringing it back to American Shores, shares of Nike hit an all-time high on Friday after third quarter earnings came in better than expected. Ron, for all the talk of Under Armour as a growth stock, looks like Nike's doing a pretty

fine job of growing on its own. Yeah, Nike's doing a really nice job. Profit was up 16% if we adjust for the sale of Cole Haan, which was more than a $200 million gain. We've got to back that out. But they're doing really well. Nike's now, for me, a story about China. And they're making progress, but they've had their struggles there. And they've got excess inventory that they need to get rid of, and they need to get it right there. But if they can get that right, then the stock looks interesting to me. If they can't, then you have a stock trading at 15 times EBITDA, which it's a wonderful company, strong balance sheet, good earnings, but it's a little too rich for me. China's the wild card.

Well, in the conference call with analysts, much of the conversation was about that slowdown in China and Japan. It seems like at least some people who watch this company closely are pretty worried about it, even though, as I mentioned, it didn't really affect the stock on Friday, but it seems long-term that that is really the red flag. Right. And it's not easy. Getting it right in China, getting the right product mix there for those markets, I mean, they're going to have to do some trial and error. I do think they're smart people. They do know what they're doing. I have a feeling they're going to get it right. But there might be some losses here and there until that happens.

What do you think of the valuation of the stock? All-time high, I automatically think, well, it's got to be a little pricey. Yeah. I thought it was actually a little bit pricey before Friday's run-up of 10%. So, now, it's obviously even a little bit more pricey. But if they get China going, then the stock will probably continue to rise. But it's impossible to guess onto the timing of when they work that out. Third quarter profits for FedEx fell 31%. Shares were down for the week. And James, we talk from time to time about companies that miss by a penny. This wasn't missing by a penny. This was a pretty substantial miss on FedEx's part.

FedEx is great, Chris, except when people don't need FedEx. That was kind of the problem this quarter. They actually shipped a lot. They shipped full planes. And the Wall Street Journal put it best that customers were just more okay with slower, cheaper delivery. And the question is, is that a long-term trend? It might be. This is one of those stocks that people tend to think of as a bellwether stock.

I personally was surprised that when their earnings came out and they missed in this manner, that people weren't really freaking out. I should say I was pleasantly surprised that people weren't freaking out. Is that because people are looking at FedEx as sort of due for a pullback of sorts? I mean, the stock has had a pretty good last 12 months or so. I think that's part of it, Chris. You know, the older I get, the less I believe in bellwether stocks to begin with. I think the economy just moved in that direction. So that's probably a factor, too.

Do you like the stock? Obviously, it's cheaper now than it was a week ago. I wouldn't be a buyer. For the first time in over a year, Tiffany's reported a growth in earnings per share. Fourth quarter results were good, thanks in no small part to the Asia-Pacific region. Ron, it's almost like sort of the opposite of Nike. You know, Nike's struggling a little bit over there. Tiffany, it looks like that's their best region.

It is their best region. The quarter was kind of eh for me. Same-store sales were flat, and profits were up just slightly. The company is doing fine. But this year is, I think, going to be a little shaky. Their guidance was, for the first quarter, maybe a 20% decline in earnings for the first quarter. But the market didn't freak out too much about that, because the guidance for the full year was decent. So, I don't think we're going to see Tiffany knocking any covers off the ball this year. We'll have to look maybe next year. A recovery in the U.S. certainly would

help a continued economic recovery um but their their margins are pressured their their product mix isn't great because they're selling less silver actually which has higher profit margins than than other types of precious metals so to me it's just kind of eh do you see tiffany is fundamentally good for humanity or or is it more well it depends that little green box can go a long way um wait green box kind of bluish aqua aqua blue yeah yeah kind of i'm colorblind but Not really? No. Just a lame excuse.

Coming up, we've got an early nominee for CEO quote of the year. You're listening to Motley Fool Money. Hey, it's Chris here. Is your business protected from data loss? If not, join the 80,000 businesses who trust Mozi to protect their important information. Mozi automatically backs up your critical files to world-class data centers with maximum security. It's easy to use and costs up to 80% less than other solutions. Learn more at mozy.com. That's M-O-Z-Y dot com.

Mozy. It's always there. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here in studio with James Early, Charlie Travers in Ron Gross. Guys, time for a little something I like to call This Week in Great Management. Shares of Lululemon are down this week after the company pulled its popular black yoga pants from the shelves after realizing that the sheer material used to make the pants was, in fact, see-through.

The company lowered guidance for the quarter, and when asked about the fabric on a conference call with analysts, CEO Christine Day said that the only way to know is to, quote, put on the pants and bend over. Charlie? Yeah. At least she didn't say working as intended. Yeah, yeah. I mean, there are any number of jokes that have already been made about, you know, the transparency of this company and, you know, the great asset management and all of that sort of thing. But fundamentally, once you get past the jokes, this seems like a company that has some very basic problems to it.

I would agree with you, Chris, and I think what it is is that this is fundamentally a very good business selling popular products that is running into growing pains as they try to adjust to the demand. Lululemon has tripled its revenue over the last three years. That puts a lot of stress on their supply chain and getting product out to the customers and product that meets their quality standards, and this time they missed. And so what's going to happen is that they're still going to grow 15% this year. It's not catastrophic. It's not the end of the world.

I think they did the right thing by getting them off the market and accepting any returns from their customers to protect their brand. So I just think, you know, in the long run, this is a bump in the road. And, you know, it maybe wasn't handled in the best way, but they're going to be fine. I'd wear overly sheer pants. Yeah. Yeah. Well, it's a radio show. I got a lot of body hair.

I was sitting here waiting for James to say something. I was saying, what's he going to say? Moving on, shares of Oracle down more than 10% this week after third quarter earnings were weak. Again, sticking with this week in great management, in a conference call with analysts, Safra Katz, the president and chief financial officer, blamed Oracle's sales team for the mess. That's a nice morale boost there, James. Yeah, either they weren't urgent enough, as she said, they lacked urgency, or Oracle just isn't making things that people want, which is option B, and I would tend to go with that one.

Oracle was slow to the cloud computing party. We all know that. Larry Ellison poo-pooed it, and since sort of, you know, starting to make a big drag on their business, he said already hardware is supposed to start growing again. It's not. Even their software licensing and cloud computing business came in below expectations. So this is simply not a business firing on all cylinders, to use a Ron Gross-ism. And I don't think it's the Salesforce's fault as much as it's just a business.

Well, and also, this is one of those areas that the competitive landscape is pretty tough when you consider they're going up against the likes of IBM and Microsoft and SAP. Salesforce.com. Yeah. I mean, again, I don't think it lays with the Salesforce team, but ultimately, when you look at the overall success Oracle has had over the last couple of decades, is this a company that interests you? I mean, it makes cash, which I like.

With technology, you've got the risk of you could do everything right, and the whole ground just shifts under you. It's not so much your fault. It's just things change, and I think that's starting to happen with Oracle. Guys, remember the KFC Double Down, the sandwich where the bun was replaced by two pieces of fried chicken? Who doesn't? McDonald's has upped the ante by unveiling the Sausage Double Beef Burger.

That's two beef patties topped with two sausages, mustard, and a bun. No vegetables whatsoever. Iran. It is only available in China at the moment. No word on if it is coming to the states. What do you make of something like this? I mean, as we've talked about many times, and Charlie, you're with me on this, we're carnivores. We love us some red meat. But I look at this and just think, I want no part of it. Logistically, it's too hard to eat, because they're sausage links on top of the two patties. Circular buns on a flat patty.

If it was a sausage patty maybe nestled nicely between the two buns, I could get on board here. But, you know, you're going to bite down, it's going to squirt you in the eye. It's not good. It's not good. I agree with Ron. It's not the concept. It's the execution. I've eaten chili on a burger or pulled pork on a burger.

So there's a way to do sausage right. And they just, you know, they should maybe consult with us. I think we can work it out. It is kind of cute, though. I mean, just having returned from China. I mean, in so many ways, this represents this aggrandized, over-the-top view the Chinese have about the U.S. You know, we're all gun-toting, meat-eating people, engaging in shootouts and oozing venereal disease. I mean, that's kind of how they picture us in this massive meat thing.

It's just one more nod to that. Do you think, in all seriousness, do you think that McDonald's, given how big it is, given the challenges that it faces in terms of growing attention for the company, Do you think that's ultimately why they do stuff like this and why KFC does something like the Double Down? Because it's a way for them to ultimately get attention. Yeah, it's the limited time only offering. It's not going to be on the menu permanently. So it creates some buzz.

We're here talking about it on the radio. But it isn't going to last. But if it comes to the States, you're absolutely going to get one, aren't you? I'm going to turn the sausage sideways, though. So if it squirts, it gets my neighbors. Sauce is squirting that big a problem for you? I mean, you brought that up three times in the past. Yeah, a good sausage has a little bit of squirt to it.

You don't want your meat all dried out. That's no good. It's a very big problem. And Ron is a grill master. I mean, Ron has some game. But, yeah, I can attest to that. All right. We will wrap things up in this segment with stocks on our radar.

And, Ron Gross, we'll turn to you first. I'm still laughing. Actually, let's bring in our man, Steve Broda, from the other side of the glass. Steve, you've talked in the past about your love of the Olive Garden. Absolutely. I'm just curious, though, when you hear about something like the sausage double beef burger, are you even a little bit intrigued? Not really.

It sounds kind of gross. Does the squirting bother you at all? It's not the squirting. It's just logistically it seems very complicated. Yeah, that's fair. That's fair. All right, Ron. Someone intellectual.

The stock on my radar is a little spicy company called Apollo Group, A-P-O-L, one of those controversial for-profit education companies. I'm mostly interested in it because we have an investment in a similar company called Bridgepoint Education, BPI. So when Apollo reports on Monday, I really want to hear what they have to say. They're going through a lot of the same things all of these companies are going through, enrollment problems, accreditation problems. So I want to get a little bit more color, and this should give it to me. Steve, question about Apollo Group?

From a capitalist's point of view, should education be something that we charge for like this? Interesting. Well, even if it's not for profit, you still pay for it, obviously. So I think if it's done right, there's a place for nonprofit and profit. A lot of the regulation pointed at this industry is towards them doing it right and making sure the education is worth the cost. And if that ends up happening, I think it's fine. James Early, your stock this week?

Chris, I'm going with Cato. This company makes low-priced women's clothing in Walmart's, or it sells it in strip malls near Walmart's. Its income investor recommendation had a weak quarter revenue up, but costs went up even more. Increased its dividend about 20% about a month ago. Yields 5%, which I like. However, the question is, this is a well-run company, but is the concept fizzling out? I'm weighing that right now. And the ticker symbol?

C-A-T-O. Steve, question about Cato? Can I bank on that 5% being good for the next two years? I think so. I think so. This is a solid company. They have plenty of cash, a good history. The question is, long term, like 10 years, are women just not going to want cheap clothes sold next to Walmart or not?

And have they had any issues with the fabric being a little too sheer? Not to my knowledge. Charlie Travers, your stock this week? I'm going with Intuitive Surgical, Chris. The ticker is ISRG. The stock has been crushed over the last six weeks, down over 15% over safety concerns and concerns about the cost effectiveness, I'll say, of their DaVinci surgical robot. So management said that the board this week has increased their share buyback authorization

by a billion dollars to take advantage of that downturn. I think this is a company that's no doubt the industry leader in robotic surgery. Great balance sheet. They generate a lot of cash. I think this is just a short-term problem for them. Steve? Full disclosure, I am a shareholder. My question for Charlie is, where are they going next?

What's the next operation that their robots will be performing? So I think their big markets right now are prostatectomies and hysterectomies, and they've got their hands full growing in those two markets. There are approvals in other types of surgeries, but I think they need to maximize what they have. Steve, Intuitive Surgical, Cato, Apollo Group, you mentioned you're already a shareholder of one. I'm going Cato. That 5% sounds awfully delightful. Any concern that the surgical robots team up with Watson from IBM and just start the robot revolution?

We're all in trouble if that happens. I've seen Terminator. All right. Charlie, James, Ron, guys, thanks for being here. Thank you, Chris. Coming up, a conversation with bestselling author Jonah Berger about what makes certain businesses contagious. Stay right here.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Every business has the same goal for its product or service, and that is to make it popular. But what is, in fact, the best way to gain attention or buzz? That's the topic tackled by Jonah Berger. He is a professor of marketing at Wharton and author of the new book, Contagious, Why Things Catch On. Jonah, thanks for being here.

Thanks so much for having me. One of the things I've read about you is that The Tipping Point, the worldwide bestseller by Malcolm Gladwell, was sort of an early influential book for you. It was a book that I enjoyed as well. And one of the things that you've said is that you wanted to write essentially a more research-focused version of The Tipping Point. So talk about the book and sort of what you've discovered through your research that maybe Malcolm Gladwell didn't. The Tipping Point is a fantastic book. And I wouldn't be here today without that book as an inspiration. But I think, you know, in the emphasis of telling great stories, sometimes some of the details get lost.

And further, in the 10 years since that book was written, we've learned a whole lot. You know, we've learned that to make things catch on, we have to understand why people talk and share. And that's actually, there's no part of the tipping point talks about that. Why do people share some things rather than others? Why do certain products or ideas get more word of mouth? Everyone agrees that they want to make their product popular, but to think about how to do it, we really need to understand that underlying driver. You know, tipping point is great, but it's like having a car without an engine. It's only going to go so far.

And so we spent the last 10 years, decades worth of research, understanding these questions. Why do people talk and share? Why do they talk about and share some things more than others? And how can companies, organizations, and individuals harness these ideas to help their products and behaviors catch on? So one of the things that really sort of leaped out at me in your book was the whole notion of word of mouth, which is obviously sort of this ethereal thing. But one of the things you write about is how we tend to overestimate online word of mouth and underestimate actual word of mouth, people actually talking to one another. This is one of the most shocking statistics that I found while doing work for this book. You might think that most word of mouth is online, right?

Things like Facebook and Twitter and blogs and online reviews. I mean, it's got to all be online, right? But when researchers actually looked at the data, they found that only about 7% of word of mouth is online. Not 70, not 17, 7, very small percentage of word of mouth is actually online. Much more of word of mouth is in everyday conversations. You know, sitting around the breakfast table, having lunch with your colleagues at work or going out with your friends or grabbing a drink in the evening. Most word of mouth is about actual face-to-face discussions or even phone calls, but it's not all online. And so while marketers always love shiny new toys, it's always great to think about the next social media website that's going to change everything.

It's more important to think about the psychology and less about the technology. Word of mouth wasn't invented when the web came around. Word of Mouth has been around forever, and so it's about understanding why people talk and share, whether it's online or offline. So, you know, we're a show that focuses on business, and when I hear something like that, it makes me think that, you know, maybe people who learn this, businesses that learn this, and think, well, gosh, why are we spending so much money online? You know, what does something like that mean for a business like Facebook, for advertising executives who are trying to figure out where to spend their money? Facebook has spent a long time trying to crack both the revenue puzzle and the advertising puzzle. I mean, you might remember a couple years ago when it was Facebook GIFs and people were giving each other, you know, little $1 trinkets or birthday GIFs.

Or, you know, everyone was playing Farmville and spending on that. and then lots of Facebook was getting resources from that sort of spend. But I think what people are realizing is people don't look at most of those ads on Facebook. We're not interested in ads. We're interested in word of mouth from our friends. And so just like we don't believe television ads, just because something pops up on the side of Facebook that says we're going to like this doesn't mean we necessarily tune in.

You know, it's almost like ads are an interruption, right? You have to interrupt your daily life to find out about something. Word of mouth is integrated in everyday life. If your friend tells you about a product or service they like, they don't say, you know, hold on, let me interrupt the conversation. This is brought to you by Joe's Used Cars down the street. You know, they have that as part of the conversation because it is the conversation. You're listening to Motley Fool Money, talking with Jonah Berger, author of the new book, Contagious, Why Things Catch On. Let's talk about some of those primary factors.

One of them is something you refer to as making things more public. One of the examples that you used to illustrate it is Steve Jobs, the late, great Steve Jobs, who was someone throughout his career who was so focused on the customer experience, making the products that Apple made just as perfect as possible for the customers. And yet, when it came time to roll out a new laptop computer, maybe for one of the first times in his history leading Apple, Steve Jobs sort of pivots away from the customer experience and starts to focus on people observing the customer. Yeah, so, you know, you might look at your laptop and you look at the logo on it and you just assume it was always the way it was. But as you mentioned, Steve spent a lot of time thinking about the customer.

How is the customer going to experience this product? Remember the first time you opened up your iPhone and you were looking for the instructions, how do I use this thing? And then you realize, wait, there are no instructions. It's just that easy to use. And so there was a problem with the laptop, very simple. When you take it out of your bag, you need to figure out how to position it on the table. You know, you want to make sure the latch is towards you, but you have to look a little bit. So they always used the logo as a compass, as the North Star.

If the logo was facing you and the laptop was closed, then you knew the latch was in front of you and you could open it right up. But what they found, unfortunately, is if the logo is facing you and the laptop is closed, it's actually upside down when it's open facing everyone else, making it harder to see the logo. So they actually flipped the logo. They now make it upside down for the consumer but right side up when the laptop is open to make it easier for other people to see because people have a tendency to imitate others. When they're trying to figure out what restaurant to go to, we look and find one that's full because we assume it must be good.

But we can only imitate what others are doing if we can see it. And so there, Apple flipped the logo because they wanted to make it easier for people to see what others were doing. One of the other factors you cite is social currency. And I was thrilled to read this because, essentially, as someone who studies business and talks about business every week on this show, there are mysteries in the business world that I haven't quite been able to crack. and in reading your book, you cracked the mystery of the McRib, the popularity, the success of the McRib, which, by the way, all kidding aside, I think it's in their most recent quarter. McDonald's cited the sales of the McRib right up top of the press release in terms of helping deliver

some pretty good results for them. But how did McDonald's get the McRib to be this significant driver of revenue for them? The McRib is a funny story. It actually started out with a problem with chicken. So McDonald's had chicken McNuggets were shooting through the roof, and they didn't have enough chicken. So they had to figure out another product. And you think McDonald's not having enough chicken, what kind of problem is this? But they needed another product to sort of plug the hole that wasn't chicken. So they hired a chef, and he came up with a new product, and it was called the McRib. And it's a little bit of a misnomer. There's not a lot of real rib meat in the McRib. It's more less desirable parts of

a pig, let's just say, you know, even some stomach and intestinal meat there, but it's at least shaped like ribs look, and it's formed into a little rib-like patty, and it comes in barbecue sauce. And there's a lot of sauce. They just load up on the sauce. Lots and lots of good sauce. And they introduced it in stores, and it did okay at the beginning. You know, it didn't do badly, but it also didn't do as well as they'd hoped.

And so they sort of took it off the menu, and they tried to retool it. They tried to figure out, well, is it the taste? Is it something else? But then they ended up having a stroke of marketing genius where they actually reintroduced the product, but they only have it at certain stores at certain times. So one month it would be in Indianapolis. Another time of year it would be in Denver. Other times you would be in D.C. And suddenly, because it was harder to get, because it was more scarce, people actually started going crazy.

They'd say, oh, my God, the McRib is in town. We've got to go try it. There's even an online locator. locator. It's a McRib locator where you can find which particular cities happen to have this sandwich. And it all makes sense for a second until you sit back and think about it. This is for a mix of stomach and intestinal meat shaped like a rib, yet everybody's going nuts for it. And it's because they leverage this idea of social currency. When people feel like insiders, when they feel special, they have access to information that not everyone else has or

is scarce or exclusive, they tell others because talking about it makes them look good. I'm just sort of marveling at the notion. Like, I understand everything you're saying about social currency and being an insider and all that. I'm just trying to figure out how that syncs up with the McRib. Like, when I'm thinking about luxury brands and sort of insider status, the McRib doesn't really leap to the top of that list. Exactly. And I think that's what's so amazing about it. I mean, if some of your listeners in California, In-N-Out has done the same thing, basically.

They have a secret menu. And if you go in, there are only four or five things on the actual menu. but you can order something off the menu, like a two-by-four or a Flying Dutchman. And people do this because it makes them look like in-and-out VIPs, right? It makes them look like, oh, I come here all the time, everybody knows me. And it sounds ridiculous, but then if you think about it, you know, it makes people look good, so they're going to talk and share. Coming up more with Jonah Berger, including a round of Buy, Sell, or Hold.

You're listening to Motley Fool Money. Welcome back to Motley Fool Money, talking with Jonah Berger, author of the new bestselling book, Contagious, Why Things Catch On. What do you think of the business of Twitter? And specifically, I'm referring to companies who pay for promotional placement on Twitter or companies that, and yes, they're out there, that pay someone like Kim Kardashian $10,000 to tweet about their products. I think paying Kim Kardashian $10,000 to tweet about your product is one of the worst decisions you could make as a marketer. And if you'd like to throw money away, please just write me a check for $10,000, and I promise to spend it more effectively for you. I thought you were going to promise to tweet about it, because I'm thinking Kim has a few more Twitter followers than you do. You know, she does, but what's not clear is whether that moves the needle anymore in terms of sales.

You know, Twitter's great. It's an interesting technology, but it's not clear that having more Twitter followers leads you to be any more influential in terms of changing people's behavior. You know, there's this notion out there that if we could just find the special people and give them our product, it's going to be a hit. And that notion is just misguided. You know, a lot of people took away from the tipping point that if we can find those mavens, connectors, and salesmen, that'll make it work. There's no data backing up that idea that people are repeatedly influential over time and that marketers can target them in a cost-effective way. So rather than focusing so much on the messenger, we really need to focus more on the message, about understanding why people talk and share and how we can build messages so that someone will pass it on whether they have 10 friends or 10,000. You've been studying social influence for the past decade or so.

What has been the biggest shift in your thinking when it comes to how things catch on? uh the the biggest shift for me uh has just been you know it's not about advertising um and it's not about necessarily doing the craziest or most off the wall stunt you know people when they think of viral they really think about oh we got to do something nuts and really you know really exciting and really surprising and yep you know that does move the needle in some cases but it's really more about thinking about the product you have and figuring out how to turn your customers into advocates. Whether you're a small business or a large business, a non-profit or for-profit, somebody out there supports your idea and likes you. And you have to figure out how to make it

easier for them to tell others. The other big finding for me is just, you know, it doesn't, not like this works for certain products and not others. It's not like you have to be naturally remarkable to get this to hit. Really, you can happen even with mundane products, you know, like blenders or toilet paper can actually get lots of people talking if they think about the underlying drivers of social transmission. That's one of the first stories in your book. I love that, this blender tech company where the marketing guy comes in and essentially discovers that the CEO has been spending time with the blenders, basically trying to crush things, trying to break the blenders by shoving

things into them that, you know, that aren't food, that aren't liquid. Instead, they're like two by fours. Yeah. And again, you think, well, hold on. Look, blenders are great, but no one's going to talk about and share a blender. Who cares about blenders? Yet they've gotten over 100 million views for this set of videos. And all the videos are really simply is the CEO doing what he was already doing, throwing things like golf balls or marbles or an iPhone, right? An iPhone, yeah. Into a blender. Imagine throwing an iPhone into a blender. You can watch it. You can check it out online. It's remarkable. You have to share it with someone else. It's so amazing and invokes so much emotion, and it's so remarkable. You just have to pass it on. But along the way, you're sharing word of mouth about the Blendtec brand, and sales shot up after this. I think they went up something over 300%, even though the blender's quite expensive, because again, people were talking about this product that they hadn't been talking about before. And it's, I think, a great example of how even the most mundane product in the world, a blender, can get people to talk and share.

I think one of the businesses that maybe is a poster child for this is a company like Costco, which doesn't really do any advertising whatsoever. And yet there's incredible loyalty among its members, and they are, if the people I work with, including our producer Matt Greer, who's a Costco member, are any indication, they are very passionate advocates. They are word-of-mouth machines in terms of promoting Costco's business. I think we all have a friend, or maybe it's been us, you know, comes back from Costco and goes, oh, my God, can you believe I got three pounds of smoked salmon for, like, $10? dollars. And you think it's silly and you think, well, sure, okay, great. But that makes you want to go to Costco as well, right? It makes you think about, wow, I must be able to get amazing deals there. And so, I mean, I talked about this idea of practical value a lot in the book, but it's every product and idea, whether it's Costco or the newest high-tech Apple product, whether

it's blenders or Hollywood movies, word of mouth drives success. And so you need to understand why people talk and share and how to harness it and make it work for you. All right. We will wrap up with a round of Buy, Sell, or Hold. This company is embattled, but its most recent phone has gotten some good buzz online. Buy, Sell, or Hold, the future of BlackBerry smartphones. I'm going to have to go with Sell. I don't know about BlackBerry. As a matter of curiosity, what is your smartphone of choice? I think like many of your listeners, I happen to have an iPhone, and not because it's the actual most exciting product ever.

I've heard a lot about Google Now, and I'm really excited about what they're doing. But I think it's an easy-to-use phone that has created a lot of barriers to switching. And so many people have moved to it that to get people to move off it, you're really going to need to do something, not only one thing, but a few things that are really amazingly different. This is a billion-dollar industry in America. Buy, sell, or hold fantasy football? Oh, fantasy football, I'm going to have to buy. So I myself joined fantasy football for the first time a couple years ago, and it's a great example of why you don't need to pay customers to spread word of mouth.

Nobody pays you to play fantasy football, yet the amount of hours I devoted to making sure I would win was amazing. I would be up late at night. I would be checking, you know, the scores of games I didn't care about. I'd be figuring out which players were unknown that I should be drafting. It's a great example of intrinsic motivation and how intrinsic motivation drives us to do things that extrinsic motivation like money never could. This may be the most unexplainable popular thing on the Internet. Buy, sell, or hold cat videos.

I'm going to have to go with selling cat videos. I think that if you look online, one of the biggest explanations for why things go viral are cat videos. I love, you know, LOL cats, and I can have cheeseburger just as much as the next guy. But they're not the only thing that goes viral, and thinking that that's why things go viral doesn't really help us get to the right answer. And finally, Mayor Bloomberg's recent proposed ban on large sodas in New York City has more people thinking about the possibility of banning unhealthy food. items. Buy, sell, or hold the future of the Philly cheesesteak. Oh, wow. That is a tough one. I'm going to go, I'm going to hold that one. So I think, you know, it's hard to say Philly's been known for its cheesesteaks forever. I think that a lot of folks in Philly are obese. We're trying

to lose the weight. We're trying to move on to the vegan cheesesteak or the tofu cheesesteak. Oh, no. A tofu cheesesteak? You know, I like the chicken. I don't like tofu myself, But the chicken cheesesteak is great. You know, you can have the chicken, you can have the cheese, you just lose a little bit of the steak. You're equally happy and you're much healthier. I have to believe that there are establishments in Philadelphia that, on principle, refuse to cater to the tofu cheesesteak market. Yeah, that's definitely true. Most affiliate isn't going to want to go tofu.

The book is Contagious, Why Things Catch On. It is already a Wall Street Journal bestseller and an Amazon bestseller. Jonah Berger, thank you so much for being here. Thanks for having me. That's going to do it for this week, but the conversation continues each day throughout the week on Fool.com, The Motley Fool's flagship free website, Fool.com. And if you're looking for more commentary throughout the week, check out our daily business news podcast, Market Foolery. It's our daily take on what's going on in the stock market.

Market Foolery, it's rated number one on iTunes among all business news podcasts. So check it out. And while you're there, get the Motley Fool's free app for your iPhone or your Android smartphone. You'll get articles, easy access to Motley Fool money, and market foolery, and it's all free. That's going to do it for this edition of Motley Fool Money. The show is mixed by Rick Engdahl. Our engineer is Steve Broido. Our producer is Matt Greer.

I'm Chris Hill. Thanks for listening. We'll see you next week.