Motley Fool Hidden Gems Investing - Motley Fool Money: 12.07.2012

Episode Date: December 7, 2012

Our analysts discuss the jobs report, Citigroup layoffs, and the SEC investigation of Netflix CEO Reed Hastings  Plus, Nassim Taleb discusses his new book, Antifragile: Things That Gain from Disorder. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Motley Fool Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Fool Inside Value, Joe Mager. From Motley Fool Income investor, James Early, and for Million Dollar Portfolio, Ron Gross. Good to see you guys. How do you do, Chris? We've got a big show. We've got a big deal in the energy industry. We've got big layoffs on Wall Street, and we've got a consumer brand with big plans for the future. As I said, it's a big show. It's a lot of pressure to live up to.

I think we're up to the task. We're going to start with the big macro, and that is the November jobs report. Here are the numbers, Ron. 146,000 new jobs added. That's against a forecast of 85,000, so better than expected. Unemployment fell to 7.7%. It's the lowest in four years. What do you think? I hate to be a downer. Oh, my gosh. I was trying to be excited. I'm not impressed. I'm just not. It's better than expected, so I'll put that in the plus column. But the unemployment rate went down because another 350,000 people left the labor force, basically got tired of looking for job and not getting one, and have exited the labor force.

The labor participation rate is at 30-year lows. Unemployed people remain at around 12 million. It's better than losing jobs, where we're kind of getting on the right track, but it's nothing to be high-fiving about. It is the lowest rate since the last time it was lower, right? Correctly. And that's a function of the fuzzy math. Four or five years, something like that.

The fuzzy math is what's doing it there, so I'm not impressed. James, are you impressed? Chris, I don't know enough to be impressed. It was a very dirty report. We had the hurricane. We had early Thanksgiving. We had, what else did we have? We have the election workers, fiscal cliff coming that maybe might be causing employers to postpone. If anything, I'm a little bit more positive. I think there might be employers postponing hiring because they're worried about all the tax stuff. And then in January or later on next year, we'll see that. That's a good point. One other thing in the plus column was

that it appears that Hurricane Sandy really did not have a big impact, which is great to see. I've read some reports that think it might show up in next month's numbers. We'll have to see. But so far, it looks like we kind of got out easy. I don't think this report is going to change anything, the Fed or the market. I don't think this is like a mover of a report. Yeah, that's fair. Yeah, Joe, to Ron's point, we see revisions pretty much every month.

Fair to say that there will be revisions with all of the X factors at work here. But what did you make of the report? I liked it. I mean, I hear Ron's point on labor force participation being low. that said, it was an expectations-beating growth number. And on the whole, I'm happy with that. When you look at that in conjunction with all the positive housing data we've seen, housing is going in the right direction on every metric that we follow. I think both those are very heartening pieces of data that pretend well. Yeah, I think the market popped on that,

on kind of the headline. And then when people dug in a bit, the market started to trail off. We also got some bad consumer sentiment numbers, and that combined with digging a little deeper into the jobs report and the market kind of gave away its gains. Let's say, just for the sake of argument, that what America's economy wanted to do more than anything in the world was impress you, Ron. Is there a number? Is it if it drops to 7.5 or 7 or even lower than that? Or is it that overall, that U6 number that you're looking to come down?

It just needs to get a Costco membership. I don't have a basic number, but I would like to see people who want to work being able to go to work. So people reentering the workforce and then the unemployment rate slowly coming down over time as a result of the fact that companies are hiring and people are going back to work. That would make me very happy. Get to work, America. Back in July, Netflix CEO Reed Hastings congratulated his employees about the fact that subscribers had watched one billion hours of video the previous month. Hastings did this in a message that he posted on Facebook.

book. On Thursday of this week, the SEC notified Netflix it is considering taking action in what may be a violation of Reg FD. Joe, that, of course, refers to regulation, fair disclosure, that public companies have to disclose material information, make it available to the public at large. What do you make of this story? Well, we're for Reg FD here at The Fool. We're actually a big driver, and you could speak to this better than I could, but a big driver of having this push through for transparency for investors. It is a very complicated issue because we're moving into this realm now where people can, where investors and companies and CEOs communicate in very different ways. It's not just

on a conference call anymore. And I think Hastings makes a very good point that he was sharing information in a public venue with 200,000 people who follow him. Now you could say Facebook is maybe not public because you have to register to be in it. That said, is it any less public? Is that less public than a press release that goes out on their website? Now, you might say, well, of course it's public on a company, a Netflix PR site. But practically speaking, 200,000 people are going to see this, including many reporters. All it has to be, it has to be open to the public. So if I have a meeting, I announce I'm going to announce some announcement, and people come to my meeting, that counts.

As long as the opportunity was made available, I think the rub issue is, was this known as an established channel for analysts to be receiving stock-specific information? I tend to side with Reed Hastings. I think the SEC is trying to look tough and stand up about this and set some sort of precedent, but they're kind of picking on him as a way to do that. But that's the key issue. Do you go to Facebook to get investing information? I don't know. Yeah, I was going to say, as SEC violations go, this is not a big deal to me. But I think it's kind of sloppy on Reed Hastings' part.

I mean, if you've got news, like, stay off of Facebook. You know, let's all keep all CEOs off of Facebook for a while. I think he was just letting it slip, right? He wasn't actually trying to make that the way he disseminated the news. Is that correct? They had blogged about it earlier and said they were approaching kind of that number. So I don't think he felt he was really giving away anything that was earth shattering. And he's probably right, but I just think it's kind of sloppy.

But at its core, this question, whether we're talking about Netflix or anyone else, the question on the table is, is posting on Facebook, does that count as adequate fair disclosure? And the SEC appears to be saying, no, it doesn't. Well, I suppose it depends. I mean, if I post something and it only goes out to just my friends and family and that's, you know, I'm friends with, what, 200 people on Facebook, then no, I'd say that's probably not. But if I'm a public figure with 200,000 followers, that's a different story. And the SEC, if you have material new information and you release it in the press release, you're also supposed to file a Form 8K with the SEC disclosing that you have disclosed something new. And if you don't do that, then the SEC says, well, you failed to meet a disclosure requirement.

Would disclosure on Motley Fool money count as public? Do we have enough listeners for that? But this news involving the SEC overshadowed what was previously a pretty good week for Netflix because earlier in the week they announced the deal with Disney that Netflix is going to pay Disney for first-run rights to Disney films starting in 2016. Shares of Netflix are up overall this week, even when you factor in the SEC stuff, Joe. But what do you make of the Disney deal? Because they're paying a lot of money, but it is really the first time we've seen a major studio make this kind of deal with Netflix as opposed to HBO or Showtime. Yeah, I think this is a big win for them. It's an end around the traditional model, and they're going to have original, not original, but new, fresh content coming on that people really do care about and want to see quickly. It's going to be a differentiator, and it's three or four years out.

And I know people say, well, it's not going to help them until then, but they're also not going to be paying for it until then. And that gives them a chance to kind of grow into the cost that it's going to be. It's going to be expensive, and I wouldn't be surprised if between now and then you see them change their cost structure or change their pricing, I should say, maybe come up with tiered pricing for different strategies, different content feeds. But ultimately, I think this is a good move for them. And look, I mean, this is what the business is. It's about getting great content on there and exciting people. And if they're not going to take shots downfield getting great content, then what are they doing? But the deal is estimated to cost $300 million a year, which is, I think, more than their entire net income, right?

So isn't that kind of a minor hurdle that they have to clear? But I do think this will also bring more customers to them. I was just going to say, does this deal make Netflix stronger as a standalone company? Does it make them more valuable as a takeout candidate or both? Yeah, content is king in this business model. If we were going to criticize them when they lost the Starz account, which was mostly Disney content, a lot of Disney content, I should say, I think we have to give it to them by getting this deal done and getting Disney content back. I think it makes the company

stronger. I think it makes it more appealing to potential acquirers. I know even this week, Apple has been bandied about in the media as potentially being interested. I've always thought Netflix eventually gets acquired and it isn't a standalone business. It needs somebody's strong balance sheet to pay $300 million a year. This is just one deal, let's remember. So eventually, I think it becomes part of a bigger company. Shares of Citigroup up more than 7% this week after announcing the company is cutting 11,000 jobs. James, more than half of those are coming in the consumer banking division.

What do you think? Well, and they're even leaving Pakistan altogether, Chris. I didn't know that that was a big part of it. I've spent some time in Pakistan, actually, in Malta. Citigroup has long been kind of the sick man of American banking, and they were really bloated. When you're too bloated, you have to unbloat, right? All the banks were basically staffed for the heyday of 20-plus percent returns on equity, so those are gone, so they have to unstaff. This is 11,000 people now.

I think they've cut, I read, maybe 100,000 or something like that over the past five years, so it's been a gradual process. The question is, is this enough, or are they actually going to have to break up Citigroup? I've always been a fan of breaking up the big banks. We'll see. When you look at some of the other big banks, Bank of America, J.P. Morgan in particular, their stocks rose in concert with Citigroup's, even though they weren't announcing these kind of major job cuts. Do you think other big banks are looking at Citi and saying, you know what, we need to do an even better job of unbloating, to use your word? Well, I read in the Wall Street Journal, Chris, that some have cut.

Goldman cut 20 jobs and Barclays cut 50. Not much, right? But I think it's kind of a joke. I think that could be a precursor to something, but who knows? Yeah, all these guys have cut headcounts, and I think you're going to see a lot more of that. I think B of A especially has a lot more room to wring people out of the towel, and that's unfortunate, but it's definitely going to happen. They're going to reduce headcount substantially over the next two, three years. If you think there are enough Starbucks locations in the world, we have got some really, really bad news.

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 in studio with Joe Mager, James Early, and Ron Gross. Big deal in the energy industry this week, guys. Freeport-McMoran Copper and Gold announced it is buying planes exploration and production and McMoran exploration for a total of $9 billion in cash and stock.

And, Joe, we've got a mining company buying oil E&Ps. It all makes sense. This is diversification at its best, isn't it? Yeah, this was terrible. So Freeport's stock fell about 15% that day, and I think that's totally justified. Look, if you bought Freeport-McMahon, it's because it was a play on copper. And they went out and bought some assets that have nothing to do with that. You know, traditionally with a merger, you can ring out value.

It's horizontal or it's vertical. If it's vertical, you're doing something like Apple buying a component supplier. If it's horizontal, it's maybe two different carpet companies coming together to ring out synergy. This is a total case of diversification where there's no value in adding the oil assets to this business. Management doesn't have a unique expertise in oil and gas. Very, very upset. I mean, if I was a Freeport shareholder, I'd be checking out. James?

Maybe this is a thinly intellectual point, but nobody else thinks it's weird that a company called Freeport Mac Moran is just now buying Mac Moran. Okay. Isn't it like someone with a hyphenated last name, like finally marrying a guy like Sixers? Well, in 1994. Yeah, they used to have it. Right. They spun it off in 94. And what makes this worse is that the executives at the top of the companies are basically at the top of both companies.

So there's- Anyway. Yeah, there's some back and forth between the CEOs and the board. So there's not really an independent perspective on this. And they did set up independent panels with the board and whatnot. But give me a break. Joe, how about if I retorted, though, and said that copper is very economically sensitive? So this gives them some maybe positive diversification.

Many of the other big resource companies, BHP, who else, they're somewhat more diversified. So this sort of helps them. Is that true? Well, at the company level. But the thing is, with commissions, $10 in the market, I don't need my companies to go out and diversify for me. I can do that on my own, and I'd rather have a basket of pure place stocks. Yeah, but we're talking about their needs, Joe, not yours. These are the managers. That is true. The managers are definitely better off with this deal.

Starbucks announced this week it plans to open 3,000 new stores in the Americas over the next five years. That's a pretty big number. Ron, what do you think of this? I like it. I think Starbucks is doing a really good job. Lots of avenues for growth. This will increase their store count by 20% over the next five years. Then they've got the Teavana.

They've got the Evolution Juices, the Verismo Coffees, the Package Good Business. Lots of avenues for growth, which they better have because the stock's not that cheap. And they've got to grow into their 30 times P.E. But as long as they execute, which is the key to, obviously, any well-run business, I think they've got a lot of great growth evidence. Where are they going to put the Starbucks? I mean, inside other Starbuckses? Is there any more land left?

They will. They'll be mostly in the Americas, but they're actually going to go big into China. China will overtake Canada as the number two market. So some interesting growth opportunities there. And Mars. Mars, of course. I guess my only concern here, as a longtime shareholder, is you mentioned Tivana Holdings. I would also throw out the acquisition of La Boulange, the bakery chain.

I'm just concerned that this type of growth or attempted growth will undercut their ability to integrate those other things. Definitely an execution story. And they've spent a lot of money, maybe a billion dollars or so, including Teavana, on acquisitions recently. So they've got to integrate those successfully, not take their eye off the ball, don't ruin the core business. But the balance sheet is still strong. $2 billion in cash, $500 million in debt. Stock's up 16% this year. Things are going well for Starbucks.

All right, let's move on to the stocks that are on our radar this week. And we'll bring in our man, Steve, from the other side of the glass with a quick question for you. Ron, you're up first. Deckers Outdoor, ticker symbol D-E-C-K, footwear company primarily known for its Uggs brand. Stock is down 60% from its 52-week high. Has bounced back off its low, but the company has been struggling with some weak sales, higher raw material costs. Stock looks really cheap. Could be an interesting value play.

Steve, I know you're a fan of Uggs. Question for Ron? Ron, do you own a pair of Uggs? No, but my daughter owns several, so we're good. Thank you for asking. James? Chris, I'm going with a company called Bob Evans. The ticker is B-O-B-E.

This is a greasy spoon restaurant, the kind of place you don't take anyone to impress on a date. In 2003, after a week-long backpacking trip, I went to a Bob Evans and ate a whole Bob Evans pie because it was the only place that was open. And I have not really thought about this company because of that since then, But it's getting some media play because they're going to sell off an underperforming business called Mimi's Cafe. An analyst upgraded them because of that. It's a tough business, but it pays a 2.8% yield. I'm taking a look at it.

It's just on my radar. What is the ticker symbol? B-O-B-E. Steve? How many areas is Bob Evans actually in? I know they produce meat, don't they? And they've got restaurants. Yeah, they sell some of their items.

It's mostly a restaurant business. That's the mainstay. So what did you eat there? What kind of pie? I think of Bob Evans as a place that you would- I'm going to say it was a pumpkin pie. It is a place I would normally never go to, but when you're desperate, there was nothing else open.

So I went there, and they didn't have much. Maybe they were closing or something. So I got a pie. That's what they had. So I got a pie, and I drove in my car eating the pie. I ate the entire pie, and I felt sick. And that's what I think about when I think of Bob Evans. That sounds like a wonderful business.

Yeah, awesome. Joe Maker, your stock? eBay. I know I've pushed the stock on the show plenty of times before, but they had a killer holiday season. But what's one more time? Right, pylons. Sure. The marketplace business had an outstanding November. So eBay.com,

according to Channel Advisor, which tracks us, saw same-store sales up 27% November. It was 18% last November. That's a really impressive acceleration. I don't think the market's paying attention to that. PayPal's still growing at about 30% a year. And the GSI acquisition is now just looking brilliant. Balance sheet's in very good shape. Stock's not expensive. Very nice. Steve Broido? How many man hours do you think are wasted on people bidding, listing things on eBay for insane prices, and no one buys them, and the auction's over, and no one wins it, and it just seems like a giant waste of everybody's time.

Sounds like Steve got burned. Well, it's not pie, but the auction business is actually falling about 20% year over year, but fixed price sales are growing almost 40%, so fixed price is definitely where it's at. All right. No more wasted time. And it's people hours, not man hours. Thank you. Ryan Gross, James Early, Joe Magert, guys, thanks for being here.

Thank you, Chris. If you got it, you don't need it. If you need it, you don't got it. You don't get it, shame on you. Funny, funny, funny, what money can do. Up next, Nassim Taleb, the best-selling author of The Black Swan, joins me in studio to talk about his brand-new book, Anti-Fragile, Things That Gain From Disorder.

Stay right here. You're listening to Motley Fool Money. Every time it rains, it rains Pennies from heaven Welcome back to Motley Fool Money. I'm Chris Hill. Nassim Taleb is Distinguished Professor of Risk Engineering at NYU's Polytechnic Institute.

He is also the best-selling author of books like The Black Swan, Fooled by Randomness, and his latest book is Anti-Fragile, Things That Gain from Disorder. And he joins me in studio now. Wonderful to see you. Thank you. Thank you for inviting me.

But to get the book, you have to describe what I am. When you tell people he's a professor, they think I'm some professor. But in fact, I'm an option trader disguised as a professor in second career. I was going to get to that eventually, but let's start there then. I mean, because you're not the typical professor. You did really start out as an options trader. What sort of got you out of options trading? The book is because when you're an option trader, and this is why this book is directly linked to my experience rather than the other ones, more intellectual efforts.

An option trader views the world in two categories, things that are long volatility and things that are short volatility, things that gain from volatility and things that are harmed by volatility. So you have this black and white bimodal view of the world, and it's very hard to communicate outside options, that concept. And the word anti-fragile, for me, is long volatility. It's nothing else. If I explain it to an option trader, they find it's trivial. But it took me hours to try to drill it into other people's minds that it's not robust. It's not resilient. It's not adaptable.

It's just something that loves volatility. Well, and that's, I mean, that gets to sort of the first thought I had in looking at your book was if someone had asked me what is the opposite of fragile, I would have said – I would have used a word like resilient or robust. And in fact, in the book, you put things into these three categories, fragile, robust, and anti-fragile. What puts something – or in this case, since this is a show for people who are interested in business and investing, what puts a particular industry in one of those three categories? Okay. To see clearly, you can see very clearly to which category you belong if we define fragility, all right? Once I was able to define, and it took me 25 years to do so, to define fragility as what does not like volatility, you see this cup on the table, this coffee cup.

Actually, I was looking at a coffee cup that I figured out. This coffee cup does not like earthquakes. There's nothing that can help it. It has absolutely no upside from random events, nothing but downside. Therefore, it's like short volatility. So once you're able to define fragile as short volatility, then automatically you can identify and measure fragility. You can measure it, and of course you can figure out what's robust, and you can figure out what is antifragile. What is fragile is something that has an exposure that is asymmetric to random events.

You have more downside than upside if an event happens. If, for example, the market, say your sales go down 10%, you're harmed a lot more than you gain if your sales go up 10%, then you are fragile. You have an asymmetry. Or you could look at it another way, another way to view it. If the sales go down 10%, you're harmed. But if they go down 20%, you're harmed more than twice, then you're fragile. And this is how I figured out that anything that we have that has survived is not linear to random events, but is asymmetric. And once you can prove it, and mathematically it's a little elaborate, but you sort of can prove it,

then from there you can identify the fragile, identify the robust, identify the antifragile. Well, one of the examples I saw you make included – sort of grouped two industries that I wouldn't have necessarily grouped as being anti-fragile. One was restaurants. Yes. And on the other side, you had banking. So you have restaurants, which typically what you hear about the restaurant business is it's a very tough business. And so I would automatically put it just reflexively in the fragile category. But, in fact, you make the case that restaurants are very anti-fragile.

Exactly. I mean, have we had any bailout of the restaurants in Washington here where you had the government have to step in? No. Why? Okay. Simple. Because just like transportation, you see, a mistake is never wasted by the system. So an individual restaurant is fragile.

So like airline industry. Exactly. Or air transportation. Maybe the airline financially may not benefit. But let me use the airline and then go to restaurants. It's next because it's air transportation. Every time a plane crashes, okay, the probability of the next plane crashing is lower. That's a good system where you exploit the mistake, the fragility of an individual plane to make the system overall more robust.

So you gain. Whereas in a bank, every time a bank crashes, the probability of another bank crashing is higher. Or a bank crashing in the U.S. increases the probability of a bank crashing in western Siberia, you see, the connectedness. So it's not a good business. It's not a good industry. The idea of antifreeze, you can generalize along volatility to anything that converts error, okay, for the improvement of individuals, for improvement of the collective, of the system. So you need the fragility of the restaurant individually for the sake of the stability of the overall system. Because if restaurants were not fragile, we'd be eating Soviet-style cafeteria food.

And believe me, I've tried it once, not very good, right? I mean, I'm still trying to recover from it. You're listening to Motley Fool Money, talking with Nassim Taleb. His book is Anti-Fragile, Things That Gain From Disorder. One of the other things that you touch on in the book counteracts sort of this common phrase we hear about investing in Wall Street all the time, which is that the market hates uncertainty. And one of the cases that you make is that uncertainty is a necessary thing and maybe even a desirable thing. It's actually immensely desirable. People in trading understand that outside of trading, they don't.

And let me start with an example of two brothers, all right, the careers of two brothers, where you realize what variability and volatility helps one of them. And from there, we can translate into markets. In the book, I have the example of two brothers, one who is a taxi driver and his twin brother, who's actually even born in the same place, Cyprus, who's a bank, works as a clerk in a bank, all right, and doing something that earns about the same amount of money, and they both live in London, same suburb. The taxi driver has a volatile income. The one employed in a personnel department has a very stable income. He's been employed at the same bank for 38 years,

and you know you get a gold watch every 25 years. So the taxi driver has very small risk of ending up with zero income, or being unemployed because he entrusts all the time, every day he's fit to the exact needs of the environment. Every error he makes, every wasted afternoon

teaches him something about neighborhoods. So he converts error and into his variability, converts into activity and information. Complex system, anything organic, communicates with the environment via stressors. A stressor teaches you something.

This is how we learn, not through lecturing. Now, his brother has no idea. By the way, that's hilarious that you're a professor and you're saying we don't learn through lecturing. Have you passed that on to your students as well? I mean, I actually teach students along that, that optionality is vastly more important than intelligence. And this, I mean, other academics don't like it. And I can tell from, I can predict the book review of my book and the emotion in the book review based on the name of the reviewer.

I don't have to read reviews. I can tell you exactly how angry and how what he's going to say, all right, based on this idea of intelligence. Anyway, the second one, the second brother, therefore, is much more fragile. So let's compare to political system and then to economic system. Saudi Arabia, zero political volatility, zero, zero variability compared to Italy where you have since the war, the Great War. That's a great war. Second war, it was 65, 75. I don't know how many governments. Nobody counts anymore. Italy is much more volatile. Saudi Arabia is much riskier. It's the same thing with markets. We have tried currency control, exchange control, everything. It destabilizes. Markets are information. The problem in finance is that people want to fear volatility, so they do a green span. A green span, green spanization, is you try to artificially stabilize everything.

And just like a forest in which you repress every small fire to stabilize, the flammable material and hidden risk accumulate, and then the big one is monstrously bad. So this is what happens in the economic system. You have to learn to love volatility for the sake of the system because variability, if you embrace, gives you information that makes you adapt very quickly and, of course, protects from these big tail events. And you can apply it to so many things, like in life. You can have no variability in your life by spending six years in bed, hopefully reading now that I have all my books and complete works. I have 600 pages of math, so you can probably do that. That would take me about six years to get through. Or you can have the soprano entire episode.

But anyway, you spent six years in bed. You had no volatility. Now what happens to you when you get out of bed? Atrophy. Your bones, you know, break a limb very easily. Your bones would be brittle. And the first term, you know, you may not survive a subway ride, particularly in New York. So, this is this illusion of wanting that if you embrace volatility, you get a lot more out of it than if you fear it.

And I know that people who invest in fixed income instruments and sell tail options, their income is so steady because they want steady income. And all these people end up blowing up. And they know, oh, I only lost money once. like the banking system, like Citibank. In 1982, they blew up, lost everything, you know. Money Best Seller Bank lost everything made in the history of banking in one. They said, oh, we only had one done quarter. You know, that's what they say.

And it happened to them again, of course, in 2007, 2008. How do you invest your own money? I'll tell you what I have, all right? And I'll tell you what I'd like to have. I got nervous with gold. I bought gold after the crisis, you know, fears of monetary policy. and I have the feeling I want a repository of value, things not to worry about.

And gold scares me a little bit, so I'm getting out progressively of gold. I bought real estate for rentals where you get cash flow. I'm mostly motivated by hedges against inflation. I own some stocks visibly, but mostly as hedges against inflation. I have some hedges against long-term interest rates rising. some complicated hedges

but they'll pay me if that happens I own land okay, visibly also as hedge against printing money and I would do a deal with anyone if I could get my purchasing power, 95% of my purchasing power

back 20 years from now you see I'm done, but the problem is I'm nervous that what I own doesn't really track my consumption inflation but so it's a very difficult environment today you don't know what your inflation rate is i mean some things are going up in price others are not uh and you don't know um i mean companies are are doing very well in the united states this is for the time being and they have you know this

is a lot better than government bond and you earn it you know you're and they have cash flow so i'd like to i own some i'm not worried about about owning companies but i'm really worried about the situation we're in, in which the 1% of the 1% are getting richer while at the same time the median

American or Westerner is getting poorer. So this is not a long-term steady situation so I think there may be social unrest and I'd have no hedge against it. Coming up more with Nassim Taleb you're listening to Motley Fool Money.

Welcome back to Motley Fool Money, talking with Nassim Taleb, author of the new book, Anti-Fragile, Things That Gain From Disorder. You mentioned sort of big events and how they come up, and all you have to do is pick up the newspaper or turn on CNBC to know that we've got our own sort of big event that we're facing here in the United States, and that is the fiscal cliff. What do you think of that? I have so little clue it's not even funny. But let me tell you one thing. You know, honestly, if people talk about it as if they're panicking, they're afraid of variation, I'd rather have the market deal with problems than politicians. You see, a little bit of volatility will shake people up and will cause solutions,

will bring things, rather than this artificial stabilization we have had with this quantitative easing, which continues, in fact, what Greenspan did and weakens the system even further. Let me come into the fundamental problem we have. When the world was smarter, in other words, when economists were confined to, you know, doing moral philosophy, the world was great. People never mistook the cat for a washing machine. And let me explain. A washing machine is a machine, or I like to call it, it needs continuous maintenance. It's never going to get better on its own.

And you don't want volatility for the washing machine. But something organic needs volatility, you see. The problem is when they started teaching economics to people, they started teaching the world how to blow up because economists are trained mentally to mistake your cat for a washing machine. In other words, to mistake the economy for something mechanical rather than organic

and something that doesn't respond to stressors, all right? And this is why the truth. And this is economic policy still. I mean, if you take the textbooks, I mean, economists have a problem. You take a textbook and you realize that they don't get the point. And everything they've done is fragilized. This is why I call them in the book fragilistas.

Have you patented that? Like, do you have a trademark going on all the versions of anti-fragile? It's okay. I donated to – if you patented this, you guys can take it, you know, like a motley fragilista. We talked earlier about your career in options trading. I am curious, what has been your biggest shift in thinking when it comes to investing over the last, say, 25, 30 years? Okay. I started viewing the world again, as I told you, and I took my idea to the natural conclusion and started realizing one thing.

I'm becoming obsessive about skin in the game. So I will tell you in a minute about my investment. But I have some rule there that the reason we have the economics profession and people make bad forecasts without anything changing, and we know they're not doing bad forecasts, it's because those who make the forecasts are never harmed by their mistakes. And as an ethical rule, I don't think that anybody should give forecasts. People should tell you first what they have. So I don't respond, you know, I'll tell you what I do. So in the book here, I said it's vastly better if you ask a doctor, don't never ask a doctor what you should be doing.

Ask him what he would do if you were you. And just psychologically, you switch and he would give you a different answer. So I don't say what people should be doing or my views of the world. I'll tell you what I would be doing or what I would do or what I am doing. So this is sort of like ethical shift. And I feel a lot better because I don't feel guilt if I make a mistake. I'm harmed first. I should be harmed more by my mistake than any other individual.

Your last book was The Black Swan, which refers to unexpected events. So my final question is sort of in that notion. It's a bit of a black swan question. One of the things I read about you is that you are something of a gourmand. This weekend, I'm going to dinner at a friend's house, and I know he likes wine, but I don't know what's being served. I don't really know anything else. Can you recommend a good bottle of wine that's not going to break my bank account? This is a very interesting question because I'm actually not that into fancy wine.

That's good. I'm not into buying fancy wine. Buy any bottle. Put the cap on a bottle of wine. All right? No more than $20. No more than $20. No more than $20.

And your odds are, empirically, you'll do a lot better than if you go higher. All right? Because a lot of these... No, there's also something, if you know more about me, that I don't like. Let me try to find a polite way to describe them. The people. Snooty? There's a word that, unfortunately, I can't say on the radio.

That describes the class of people, say, overly sophisticated, a little bit more than necessary. And usually you find them in wine. When you have a lot of money, what do you do? You can spend it on wines or vacation or interior decorator and swimming pool, that kind of stuff. So that class of people are into wine. Good wine is a wine your taste buds love. And typically, odds are you'll find it under $20. So put a limit.

The book is Anti-Fragile, Things That Gain From Disorder. He's not just a best-selling author. He is also a wine connoisseur. No, no, no. I'm not a wine connoisseur at all. I was trying to just broaden your resume. Not that it needed broadening, but… Plus, there's no such thing as wine connoisseur.

There isn't? No. I mean, if you take experts and you make them taste wine, their ability to predict the price of the bottle between $9.99 and $999 is uniform. It's like almost random. So there are a lot of pseudo connoisseurs. I mean, they may be able to tell you where it's from vaguely, but not if it's familiar taste. I think your next book needs to be an expose of the wine industry. I'm picturing like a blockbuster investigative journalism piece.

Oh, let me think about it. But if you volunteer to write half of it, I'll make it. I volunteer to write a blurb on the back. That's done. Deal done. Thank you for inviting me. Thanks so much for being here. Great, thanks.

That's all for this week's show. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. We'll see you next week.