Motley Fool Hidden Gems Investing - Motley Fool Money: 11.23.2012

Episode Date: November 20, 2012

Our analysts talk about some stocks they're thankful for and discuss a few turkeys.  Plus, New York Times columnist Nate Silver shares some investing insights from his new book, The Signal and the Noise: Why So Many Predictions Fail - but Some Don’t. Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Honeigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder? I want Comet dead.

Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. everybody needs money that's why they call it money from fool global headquarters this is motley fool money welcome to motley fool money thanks for being here i'm your host chris ellen joining me in studio this week from motley fool inside value joe mager from motley fool income investor james early and from million dollar portfolio

Ron Gross. Good to see you guys. Happy Topic Day. Yes. Right off the bat. It is the one show of the year. Long-time listeners know this. It's the one show of the year where we actually have a sound effect.

Thanksgiving weekend, Black Friday weekend, it gives us the chance to sort of step back from the news and sort of look at stocks that we're thankful for, as Steve Reuter, our man behind the glass, indicated with the sound effect. That's actually Steve people don't realize. That's not a sound effect. Stocks that are turkeys. But before we get into sort of the Thanksgiving-themed stuff, Ron, I want to start with you. We're heading to the end of the year.

We've seen some interesting activity over the last couple of months where you look at mid-September, the market was kind of at a high, and it's kind of come steadily down from that. As we head into the last month of the year, what is a stock-centric question that you have that, as an analyst, you're sort of wrestling with a little bit? I really want to understand what is next from Microsoft. I've got a big stake here, professionally, personally, and there's a lot going on here. Smartphones, tablets, PCs, Windows 8, a lot of unknowns. I'm going to be watching really closely.

I have them on a short lease. The numbers tell me it's cheap, but there's a lot of uncertainty. I think just based on his body language, Joe Mager would like a rebuttal. I was just trying to – I didn't want to say anything snarky. I mean, come on. Come on. What did I say that you don't agree with? Well, I don't want to parse what you said, but I think you're right that there are certainly

a lot of opportunities out there in terms of... And I think... Exactly. Exactly. And I think this is important. An analyst can make a mistake by just looking at the numbers and saying, that's cheap. What you have to do is you've got to look behind the numbers, and I'm a little concerned, and that's what I'm going to be doing.

When do you think you're going to get an answer? Obviously, there are a lot of moving parts, but... Probably when it's too late, Chris. But like the middle of 2013? Is it the next quarter? Six months. So I'll have probably a good handle about whether this thesis is playing out or not. Yeah, I mean, I'd say Windows 8 is pretty crucial.

The problem with the Windows or the Microsoft thesis is it's always like one year away, one iteration of Windows away, and people say, well, you know, I'm going to hang on through this catalyst. That's true. And it never does. James Early, what's your question? Chris, I'm going to step back and think more macro for a moment and talk about the dividend tax rate.

This is something that affects a lot of people. And we're likely, with the fiscal cliff, we're likely to see some sort of a rise probably more for higher-earning people. I'm doubtful that we'll see the whole dividend tax rate revert to ordinary income rate for everybody, but how that hashes out is something that I'm obviously watching as an income investor advisor very closely. We saw recently Walmart come out,

and they were going to pay out a dividend the first week of January. They moved it. It's now the last week of December, so obviously that's a tax benefit for their shareholders and certainly for the Walton family itself, as we get closer to the end of the year, do you expect to see more companies doing this type of thing? I think you talked the other day about Wynn Resorts and sort of the one-time. Do you think we're going to see more of these sort of like one-time payouts?

I think we will. I think that's a good prediction. Joe Maker, what's your question? Well, I think James' question was great. And to bring it back down for macro a little bit, though, I'm wondering at what point everyone stops being a macro armchair economist. Like, everyone thinks that they're a supreme, brilliant thinker on the macro economy, and it's so difficult to think about what the world is doing in a macro sense. Instead, it's a lot easier to look at company-level fundamentals. And I just wonder at what point investors stop trading in baskets, risk on, risk off, and go back to looking at companies.

Are you talking about individual investors, or are you talking about people in the financial media? Because if you're hoping for people in the financial media to step back from being armchair economists, I think you're going to be waiting a while. It could take a while. I mean, a few years ago, what happened with the financial crisis is suddenly everyone started saying, oh, well, macro matters. And it does matter, but fundamentals matter, too, at the company level. And I guess, as a bottom-up guy, I'm mostly happy that investors aren't paying attention to company fundamentals, but it's fascinating to watch. Let's move on to the Thanksgiving portion of the show. And Ron, we'll get to turkeys in a minute, but one stock you are thankful for, Ron? This year, Lumber Liquidators has been very, very good to us. We really – stock's a double for us. Actually, a triple for some folks. As the housing recovery took hold, stock shot up.

We had taken the opportunity early on to add to our position when it just got decimated. And I'm very thankful that we stuck to our guns with that one. I like the accent, too. Thank you very much. I was going to say, we saw some more housing data come out this week. and it seems like the drumbeat for the housing recovery is here or is getting stronger, just seems to be getting louder and louder. Is Lumber Liquidators, is the benefit to that already priced in,

or is this a stock that still has some room to run? Well, I'm going to go with both of those things. We actually lightened up on our position significantly, took profits at what we think is somewhere near the top, although it's obviously impossible to tell. We've kept a smaller position to hopefully ride out whatever is left. James, a stock that you're thankful for? Chris, I'm going to go, well, let me just phrase it like this.

So despite metal shavings in their medicines, despite chemical laced pieces of building shipping pallets, wooden shipping pallets, despite a mystery shopper recall scandal, Johnson & Johnson managed to rise a little bit more than 10% in the past year, or just about 10% in the past year. It's sort of at a near-term high, at least. So I'm thankful for that. This was a stock that a lot of people left for dead. The last time Johnson & Johnson reported earnings, we talked about how wonderfully surprising it was that there were no mishaps, that there were no recalls in the quarter, that kind of thing.

I don't want to get greedy as a longtime shareholder, but is that the kind of thing that potentially we could expect to see more of in the future, meaning more of these quarters where the story is all about the operations and not about, oh, by the way, we had another recall? Well, hopefully, Chris. The new CEO is mildly tainted with his own drug marketing scandal issue. But you wonder how – I mean, they can only screw up so many times, right? Another thing, though, counterbalancing is the consumer product segment is smaller than people think as a percentage of revenue, and it's growing smaller by the year as they get more and more into medical devices. And prescription drugs, the prescription sensitivity to the scandals is not that severe. In other words, doctors tend to keep prescribing the medications even despite the consumer issues. So don't hold my breath. That's what I heard you just say. Don't hold your breath.

Yeah. Joe, a stock you're thankful for? Visa. It's up about 50% over the last year. People keep swiping their debit and credit cards. Very happy with that. And it turns out the Durbin Amendment wasn't the huge sweeping piece of legislation affecting Visa like everyone thought it would be.

when you look a couple of years out and you look at how mobile payment is changing over time with startups like Square and that sort of thing, how do you feel about Visa's position within that universe? I think they're in a good position in that they can buy their way into a lot of relationships. They own about 10% of Square, and they have a lot of scale and relationships with banks and customers that they can tap. All right. It's the part of the show that Steve Broido has been waiting for. It's time for the stocks that are turkeys. Cue the turkey. Ron, what do you got? So many, so little time.

How about Dell? A company, as I've said many times, I've owned for, I don't know, a decade. Yep. And I firmly am in the camp of buy and hold, but I think it's a mistake to buy and forget, which, frankly, is what I've done. And I think you constantly have to reevaluate your holdings and your thesis and why you own something. And the stock has just gone down and down and down as the business changed and the world changed, quite frankly. and it has just been a disaster for my personal portfolio. James?

I'm going to go with Intel. This is a stock that was very good to me for a while. Analyst Joe Tenerbruso recommended it and it was a great pick for income investor. It's been dropping about 16% year to date. The CEO just suddenly bailed recently. We've been hearing this rhetoric about their chips having power parity with AMD's chips

and that's been the issue about getting them into mobile devices. The Intel chips just use too much power. But I just got to wonder, when's that going to happen? Where's the beef here? I don't know, Ron. There's the old saying about if everyone in the room sort of took their problems and shoved them into the middle of the room, you would take your own problems back. So, I mean, you just talked about Dell.

James just talked about Intel. I was going to say, do you want to trade him straight up your shares of Dell for Intel? Anytime. I was going to say, because I'm not indifferent to what you're saying, James, but it just seems like that's a much smaller turkey. It's like when they ask you what your biggest weakness is on a job interview, and you're just like, I'm just too darn diligent. I work too hard. I work too hard.

I'm a workaholic. Joe Mager, what do you got? I'll round out the PC trinity with Hewlett-Packard. These guys got scalped this week. PC sales were down again. Every business unit was suffering. The only one that did somewhat okay was software. But within software, they did an $8.8 billion write-down on autonomy, which is a wildly overvalued business.

they bought about a year ago. They're claiming that there were shenanigans. I don't know which is worse, that they overpaid so much for autonomy or that it took them almost a year to realize they were cooking the books. In any case, it's a total disaster. We've talked about CEOs being on the hot seat. When you look at Meg Whitman heading up Hewlett Packard, how much time does she have to fix this mess? I don't know. I think she'll end up quitting. I would if I were her. I I mean, in fairness to her, it's not her fault. Right, she wasn't there at the time of the acquisition, was she? No.

But she did approve it when I think she was a board member. Is that fair to say? Yeah, I mean, she walked right into this. It was definitely a bad job to take, frankly. Can we give Best Buy an honorable mention for this segment, please? Absolutely. That's a good turkey. Yeah, I was going to say, for all the times that we've – you know what?

We should bring in Steve as well because, as we've talked about, and as longtime listeners know, Steve Brito, a very involved investor. Did you say prescient? I don't even know what that means. I don't either. Steve, I'm just going to be unfair and say you don't get to give the stock you're thankful for, but I know you've got at least one turkey that you'd love to rip on, and you've got your finger on the sound effects button. So what's a turkey stock for you? I bought something called Pulse Electronics recently, and I paid this insane dividend, and I was like, this is just great, and it's just gone nowhere, nowhere but down. What does Pulse Electronics do? They do electronics things.

That pulse. They make parts for electronics, and they just paid like a 25% dividend. And I'm like, this is great. This is terrific. And it's just, yeah, it's just died. It's terrible. Coming up. Very affordable, though, right now.

Very affordable. Bargain hunters out there. Coming up, Black Friday means bargain hunting, so we will look at a few stocks that are trading at bargain prices. That's next. Stay right here. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here with Joe Mager, James Early, and Ron Gross. Guys, before we get to the bargain stocks, the Black Friday portion of the show, I don't know about you, but Thanksgiving means not only second helpings, but third helpings, fourth helpings for me. But let's just go with second helpings. And in this case, it's a stock that you already own that you'd love to just double down on,

that you're inclined to maybe go back and buy a few more shares. Ron, what do you got? At the risk of Joe ringing my turkey neck, I'm going with Apple. Stock's off 20% from its high. Sure, there are some issues. It isn't infallible. They are human, even though it's a company. But I think there's significant upside here at current prices, and I would go back for more.

Joe, do you want to ring his neck? I'm tired of always being the bad guy. James, what do you got? I'm going with waste management. I see a 39% upside from here, 4.5% yield while we wait for that to happen. The trash business is surprisingly cyclical. The stock hasn't really rallied like I would have hoped. But just like we're not going to stop flushing our toilets, we're not going to stop generating trash.

You know, we're always going to do that. So long term, it's a steady business. Is that something that goes hand in hand with housing? Construction generates a lot of trash. And that's why, as part of the reason, it's not been doing as well the past, let's say, four or five years. Joe, second hopping? TD Ameritrade is a business I love, and I've talked about it on the show a bunch of times. They keep adding new clients faster than their rivals, which is great, adding new assets.

Right now, trading volumes are near historic lows, very low levels, same with interest rates. And when both of those come back, profits are going to rise in a big, big way. I don't know about you guys, but Black Friday has never really interested me. the whole facing the crowds and all that sort of thing. But there are people who love to shop for bargains in the mall, and then there are investors like you guys who love to shop for bargains on Wall Street. So when you look out there, and Ron, you just mentioned Apple off 20%. It's high of a couple of months ago.

It's not the only one trading at a discount. What do you see out there? We follow several consumer retail stocks, but I think Aeropostale. I'd love to see people head to the malls, buy a cheap T-shirt, help us out. Stock looks cheap there. And also a Perielis I actually like very much, P-E-R-Y, looks undervalued to me. Aren't you dapper? I didn't say wear it.

We own it. James? I will actually second Ron's suggestion of mall-based retailers. I guess I feel it's pretty cheap. If you want something a little bit riskier and you're willing to take macro risk, France Telecom has been pounded like 50% in the past, I don't know, year and a half. yields 9%. That's after a dividend cut. So, that's a little bit spicier, but potentially more upside. Does the fact that they cut their dividend make you at all nervous that that may

be something that continues into 2013? Oh, yeah. It could definitely happen. But it's still not bad to get 9% return on cash. True enough. Joe Mager, what do you see out there in the bargain world? Well, if you're willing to pay up for your bargains, I still like Amazon. That doesn't work. Amazon's volumes are up about 40% year over year, and I think the market's really missing a lot of the story here. Revenue isn't growing as fast as volume because the volume, much of it is coming from growth on third-party sales,

which are higher margin for Amazon. And so as a result, you're starting to see gross margins sneak above levels that analysts have been expecting. Balance sheet's in great shape. They're incredibly competitive going into the holidays. You look at Amazon.com, they've got eight times the number of televisions carried at Walmart and that level of selections kind of just ringing true all throughout the site. And that's why you see them growing very, very quickly online and the rest of their

competition losing share. Since I gave you the chance to rebut what Ron said, I kind of feel like I need to give Ron a chance to rebut the notion that Amazon is a bargain right now. I love it as a Black Friday play. I think that's where I'll be shopping, quite frankly. Whether the stock is cheap, I'm going to leave that to Joe. You're a gentleman. We will wrap up with a round of undervalued, overvalued, but it's the Thanksgiving edition, so we're not talking stocks here. We're just talking about things in the universe of Thanksgiving, and I'll just start, Ron, with the Macy's parade.

Do you think that's overvalued or undervalued? Well, my wife participated in it back in the day when she was a buyer for Macy's. Really? So there's some nostalgia there for us. What did she do? She was, actually, I think she held the Snoopy. Did she buy the balloons? She held, I think, I hope I'm not talking out of school here, I think she held the Snoopy

balloon. Those giant balloons? Yeah. Wow. She was one of the holders. I don't think she could hold it on her own. Yeah. But, yeah, we're not watchers of it in our household, but we do have some nostalgia for it.

I don't know, Joe. What do you think? I mean, it seems a little overvalued, but I could be wrong. It just seems like something to fill the time until football comes on. Yeah, kind of boring. James, pecan pie, overvalued or undervalued? You know, I have never, never liked pecan pie. I've never understood pecan pie.

Just something about it. I don't like cheesecake either. I don't like cheesecake either. Nothing to do with Thanksgiving per se. It's just, what's the point? Thank you, Steve. It's delicious. I don't think I've tried it, actually.

How can you just sit there in judgment of something you haven't even tried? Maybe I've tried it. It just doesn't look like something. I wouldn't like asparagus. And I tried it, and I was right. Joe Mager, the Charlie Brown Thanksgiving TV special, overvalued or undervalued? I actually haven't seen it. Wow, really?

Yeah. So no pecan pie and no Charlie Brown. But it's – no, it's definitely – it's great. It's a classic. You know what? Here's what I'm saying. It's undervalued. It's undervalued because the Christmas Charlie Brown special gets all the attention, and that's the one that's overvalued.

I'm going to bring in Steve for a second here. Steve, football, watching football on Thanksgiving Day, overvalued or undervalued? Totally overvalued. Just not interested. I don't like football. I don't care. Just not my thing. It's never been my thing.

Sorry, guys. Sorry, America. You want to take the other side of that, Ron? Yes. What else do you do? How long can you talk to your family? You've got to put on the TV and fall asleep on the couch watching some football. You've raised a very good point.

I might be reconsidering right now. I was going to say, because you've got a little one. When he gets a little older, let me take it from someone who has three kids. Every once in a while, just the whole, I think I'm just going to watch a little football. You're going to need that move. You're going to want that move. You're going to need the Dallas Cowboys. You're going to need the Dallas Cowboys.

You're going to need, dare I say, the Detroit Lions. That's the other thing, though. I mean, to Steve's point, I mean, some of the football, the quality of football. Yeah, they're not all, they're not all stellar. All right. Ron Gross, James Early, Joe Mager, guys. Thanks very much for being here. Thank you.

Coming up, we'll have an encore presentation of our interview with Nate Silver. Stay right here. You're listening to Motley Fool Money. Nate Silver is a statistician, writer, and founder of the New York Times political blog FiveThirtyEight.com. His new book is The Signal and the Noise, Why So Many Predictions Fail, But Some Don't. Nate, thanks for being here. Yeah, thank you, Chris. The rare in-studio guest on Motley Fool Money. I love it. Early in your book, you write, we have a problem, we love to make predictions, and we're not very good at it. Why is that? Why are we bad at making

predictions? Well, I think maybe the first question is, why do we enjoy making predictions so much? And I think it has to do with we have all these things that are uncertain in our lives. And we feel that if only we could predict them, then we exert more control over our lives. Everything would be great. Right, yeah. Of course, you could predict which stocks are going to increase by 50% over the next five years. And you'd have a very nice life eventually. But the problem is that we aren't as good at using all this information that's out there as we think we are.

So what happens in prediction is you have data, information, juxtaposed against human judgment, right? And often things go wrong when you have kind of hard facts and kind of our human intuitions collide together. And so the book considers cases where there have been people who have achieved success making prediction, but also cases where you see widespread failures like the failures that led to the financial crisis, for example. you know the failures of political pundits on on tv or if you go back and look at uh at the mclaughlin group for example which they'll have their authors come on at the end of the show it's the end of it yes at the end of every hour yeah he'll go around give me a go around give me predictions actually i went and looked and i took a while right i went through the transcripts

and and wrote down all their predictions and then went back and evaluated how they had done right and they got they got exactly half right right so they were as good as as flipping a coin and uh and know better. But part of it is there's a demand for expertise, I think. There's a demand for someone to come on TV or radio and play the role of the expert. But it doesn't have very much to do with the actual accuracy of their information sometimes. It's more like how do they sound on TV or how crisply presented is their idea, and whether it's factual or not is maybe less important, especially. It shouldn't be less important, but often is less emphasized, I think. One of the things that you also write about is that there's no such thing as true objectivity,

that these predictions are always going to have some level of bias or subjectivity. Is that something you can solve for in polling? Can you solve for bias? Is that where sort of the margin of error comes in when we're looking at polls? Well, so there are some polls that can poll 100,000 people, but they're still kind of aiming at the wrong target where they have bad algorithms that they're using. So, for example, there are polls that don't call people who have cell phones, which is now about a third of the American population and people who rely on their – excuse me, people who only have cell phones and don't have landlines, right? And those people tend to be younger, more urban, more democratic-leaning, more minorities. They have different characteristics that make them vote differently.

And if you exclude that one-third of the population, then you could survey the other couple hundred million Americans, right, who do have landlines, and you still would have a biased sample in that respect. So people think, oh, you just kind of collect more and more data and more and more information, and you'll get better and better. But you reach a limit that is far, far short of perfection if you're doing the wrong process. And that's often what you see, not just in polling, but in a lot of types of prediction where people keep collecting more and more information. But if you have a bad model, if you give a computer program bad instructions, you wind up with garbage in, garbage out. And computers can't spin straw into gold. You say that weather forecasters and gamblers are success stories when it comes to predictions. Yes.

How so? So, well, the difference with weather forecasters and gamblers is that they're both used to thinking in terms of probabilities. So you see on the Weather Channel that there's a 20 percent chance of rain, for example. Some people get very frustrated with that because they're like, why can't these guys tell me exactly what's going to happen? And the reason is that, well, they can't, but neither can anyone else, and they know they can't, and that helps to make them better. Weather forecasts, they're considered a joke by some people, and that used to be kind of true, that really they would miss the high temperature by an average of 7 degrees, right, a couple days in advance. But now that error has been cut in half, and for something like hurricanes,

where if you have a hurricane setting right now in the Gulf of Mexico three days before landfall, They can pinpoint, on average, the landfall location 72 hours in advance by about 100 miles, which means you can evacuate, say, the southern tip of Alabama or Mississippi or a certain part of Florida, not with guaranteed success, but where it's prudent and saves lives to evacuate. 20 or 25 years ago, you couldn't do that at all, where literally if you had a hurricane in the Gulf of Mexico, it was equally likely, as far as they knew, to hit Tallahassee, Florida, and Houston, Texas. So the whole kind of crescent of the Gulf Coast was in play. So that's a case where there have been very tangible, practical improvements. And it's because the weather forecasters knew that if we can think probabilistically and say, here's what we know and here's what we don't, despite having more and more powerful computers, then you can start to make progress. We're trying to close that gap between what we think we know and what we really know. If you can work on both ends of that, and the book tries that, it says, well, first of all, let's admit that some things are going to be very hard to predict.

Predicting the direction of the American economy more than a couple months in advance is intrinsically a very hard problem. On the other hand, we can do some things to be more data-driven and make us better and smarter. And so we up our skill level at the same time. We're a little bit more humble and modest about what we're likely to accomplish realistically. You're listening to Motley Fool Money, talking with Nate Silver. His new book is The Signal and the Noise, Why So Many Predictions Fail but Some Don't. let's stick with the economy because the conventional wisdom is that the stock market is a leading indicator. And right now, we're at about a four-year high for the stock market.

Does that, in your mind, predict a faster recovery for the economy overall? So, what's interesting is that I think investors and kind of economists have different biases. So, I've gone back and looked at cases where you had, so right now, for example, the forecasts of GDP are quite bearish, where people still think it's going to chug along at 1.8% or 2.1%. So it's been rare historically, when you had a very bullish market and a bearish GDP forecast. And what happens is actually, you do tend to beat the GDP forecast when the market's going up as much as it has. Investors seem to be, I think one good thing about investors is that they don't have to worry about being politically correct. Whereas if you're making a prediction

where you have reputation on the line more than money, your incentives are different. You might not want to stick out too much, right? It might be easier to say, well, the economy has been bad for a long time, so I can stay more in consensus by saying it's going to continue to be to be bad, right? And of course, investors have their own issues with kind of believing maybe too much in the sentiment sometimes. But, you know, there is a lot of power in having a lot of independent information coming together. The kind of 90% of the time I say that markets are functioning well, that can be a beautiful thing. And of course, there's either 10% of the time where you have bubbles and you have panics and you have, you know, kind of collectively very

irrational behavior. But taken on the whole, there is macroeconomic information as far as I've found in the S&P 500 and the Dow. Coming up, more with Nate Silver. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money, talking with Nate Silver, author of the new book, The Signal and the Noise. Why do you think more people didn't predict the financial crisis that we saw in 2008? Why didn't more people see that coming? Well, part of it is you had a number of dominoes unfolding, and I think this is almost kind of more of the kind of Taleb-Black Swan type argument, right? But where I think people don't realize how the risks in different parts of the economy are correlated with one another.

So you think, okay, so this is the whole problem behind, for example, the rating agencies thought, well, we're going to take all these different mortgages and bundle them together and repackage them. And, you know, by the miracle of diversification, we'll take a bunch of kind of B-plus, you know, B-rated crap. And they'll be AAA. Yeah, yeah, yeah, right? Because they assume that what happens to, like, a carpenter in Cleveland and a dentist in Denver are independent from one another, right? But, of course, if you have a housing bubble that bursts and everyone is facing the same conditions, then the risks are hugely correlated. correlated. And so the whole structure blows up and they defaulted at rates that were literally hundreds of times what was expected. And then you further leverage that with the fact that

in addition to just having the actual effects of people having mortgages underwater itself, I mean, just the sheer volume of betting, side betting on the housing market was astounding. For every actual dollar that exchanged hands with someone buying or selling a home, there were about $50 worth of side bets. And so instead of being a severe but localized problem, it became a global problem. The title of your book is The Signal and the Noise. When it comes to the stock market, what do you think is the noise that the average investor would be wise to just tune out? Well, I think a lot of the day-to-day fluctuations, right? Where if you look at the stock market over intervals of 10 years or 15 or 20 years, it does display certain types of predictable

behavior, right? Where if the PE ratios get too high, it's been a pretty reliable predictor of a market that will achieve below average growth or even maybe a favorite to decline over the long term. But over the short run, it's a bit different where I think, you know, when Alan Greenspan described the market as being irrationally exuberant, right? If you had invested your money at that time and had the hindsight or the foresight to sell right at the peak of the Nasdaq bubble, you would still have made three or four times your money back. And so, you know, in the book, I quote from the economist Fisher Black, and that's kind of where my 90%, 10% conception comes in. Because normally, it's a healthy strategy in life to pay some attention to what

your neighbors are doing, and to say, well, you know, it's probably not the case that if everyone else thinks this is a good idea, that my theory is better than theirs, right? And if everyone else thinks these CDOs are safe, then, you know, who am I to say differently? But there is that 10% of the time where that herd mentality kind of leads us off a cliff. And I think it's just kind at the price that we pay for having markets where people are reacting to one another, right? You know, the benefits to agri-information are sometimes compromised. People lose their independence. And one thing you worry about a little bit now, right, is kind of is that people become so efficient,

some of the banks are kind of developing their algorithms and so forth, that there's kind of no more almost species diversity as much, right? And so everyone's kind of doing the same thing. And if one fund goes down, then a whole bunch might as well. So it's a little bit frightening. It's also a little bit frightening, by the way, just how many trades are being made, right? There's some notion that, well, the market's becoming more efficient. Well, if the market's efficient, then you wouldn't have very much reason to trade.

But the volume of shares that change hands is increasing very, very quickly. So now the average share of common stock is traded once every six months, and it was once every six years back in the 50s and 60s. So it really has become an investment now where you buy stocks to trade them and not to hold them, and that changes the climate, I think, quite a bit. I was going to say, it seems like with so much more information available to so many more investors, individual investors, and of course institutional investors, fund managers, etc., it would seem like in some ways it's harder than ever for an investor to have any kind of edge in terms of predicting where a stock price is going to go. Well, maybe that's true, but it makes it easier for people to think they have an edge, right? So in the book, and this is going to come from a different kind of historical era, but I talk about what happened when you had the printing press invented. And all of a sudden, there were books when there weren't really any books before. And people had a lot more information, exponentially more than they had a generation earlier.

And the first thing that people did is kind of read books that proselytize different religious ideas. And so you had hundreds of years of holy war in Europe, right, where it's like, well, now there's way more information than I can get a handle on myself. So I have to pick and choose what I read. And people, I think, forget that the subset of information that you come across is not the only information in the world, but you become devoted into it and believe deeply into it. And that's kind of why you have people willing to make so many bets, I think, in the market, and the volumes are increasing so much, is that people kind of cherry-pick, whether consciously or not, what information they look at. And they assume that because they're in possession of it, because they read it, that this information is especially worthwhile, and often it's not. So you're saying the specious and incorrect information that's available, widely available on the internet today, that was going on in Gutenberg's time as well? Yeah, you see this precedent where, look, people eventually get better at processing information, right?

But the volume of information we have in the world today is astounding, right? Where we're generating, I don't know the figure offhand, but it's quintillions of bytes of data each day, right? Where it would take all of humanity, all 7 billion people, hundreds of lifetimes to go through it, right? And so there's kind of this – the signal-to-noise ratio, I would say you call it, is becoming – is waning because you have more information than you have useful information. A lot of it's just kind of crap and kind of should go in your spam folder, so to speak. But people think that every – you look at CNBC or Bloomberg or you see all this data and you think, oh, there must be some real insight there. And, you know, maybe there is a little bit, but you have to sort through an awful lot of hay to find that needle that might give you some extra advantage. You're listening to Motley Fool Money, talking with Nate Silver.

His new book is The Signal and the Noise, Why So Many Predictions Fail But Some Don't. You are perhaps best known for your political forecasts and your blog, 538.com. What is the toughest part of political forecasting? Well, it's tough with presidential elections because you don't have very much of a case history, really, where we've had. I think this is the 17th election since World War II. And, you know, and if you have a complex phenomenon where a lot of things factor into how people vote, the economy and wartime, peacetime and incumbency and so forth. What you ideally want for a fiscal model is to have hundreds of cases to test it upon, right? Then you can say with some subtlety, for example, which economic variables matter more to people.

Is it the trajectory at the end of the fourth year of a president's term or over the whole four-year term, right? And is it jobs or income or GDP or the stock market or what else, right? But we don't have anywhere near enough data to test those assumptions for presidential elections, and things are also always changing too. And so you frankly have to make some educated guesses. You have to say, OK, here's what I think is the strongest theoretical justification for how voters might behave. But you can't be as purely empirical about it as you can in baseball where you have 700 players playing a season every year, right? then it is kind of the pure-edged sword. I'm just going to kind of fit a statistical model and then take it off the shelf and use it to make predictions, and you're fine. But in presidential

elections, if you're not careful, you can get yourself in a lot of trouble. You're listening to Motley Fool Money, talking with Nate Silver. His new book is The Signal and the Noise, Why So Many Predictions Fail, But Some Don't. I can't let you leave without asking you a couple questions about baseball, because once upon a time, you developed a system for forecasting baseball performance. You sold it to Baseball Prospectus. First question is, what did you think of Moneyball? The book or the movie?

I mean, I'm just curious because this is, you know, Billy Bean, as much as anyone, sort of is the face, at least the Hollywood face, of sort of this sabermetrics movement. And I'm just curious what your reaction was. So I kind of live – I used to work for a company called Baseball Perspectives, and we were doing the Bill James stuff and the Moneyball stuff. And so 10 years ago, I remember going to the winter meetings in New Orleans, and it was like a scene just out of Michael Lewis's book where you had kind of the nerds on the one side of the lobby and the jocks on the other. So conveniently the jocks occupied the hotel bar and were drinking a lot of whiskey, right? And the nerds were kind of circling around trying to hand them, like, resumes and pronounce of PowerPoints, right?

But there was a lot of tension because people thought that they were trying to take one another's jobs. But now that's just not the case at all where these teams have figured out. The one thing about baseball is that you have a scoreboard, right, where you know how well you did at the end of the day. You start to get to the long run fairly quickly. it takes 162 games, but so you can evaluate your decision-making processes, what work and what don't, pretty fast and get better at it. Scouts and stat geeks have a lot more in common than you might realize, because they both have that skill to say, here is that signal from all the noise that I perceive, and here's what actually matters. And that skill is quite rare.

In 2009, Time magazine named Nate Silver, one of the world's 100 most influential people, His new book is The Signal and the Noise, Why So Many Predictions Fail But Some Don't. Nate, thank you so much for being here. Yeah, thank you. That's all for this week's Motley Fool Money. We'll see you next week.