Motley Fool Hidden Gems Investing - Motley Fool Money: 4.11.2014

Episode Date: April 11, 2014

The Nasdaq records its worst day in more than two years. eBay and Carl Icahn decide to play nice. And Panera's CEO compares his restaurant to a mosh pit. Our analysts discuss those stories and share three stocks on their radar. Plus, Motley Fool columnist Morgan Housel shares his insights on market volatility, portfolio diversification, and T. Boone Pickens. Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill, I'm Chris Hill. Thanks for joining us. With me in studio this week from Motley Fool One, Jason Moser. From Motley Fool Supernova, Matt Argesinger. And from Motley Fool Income investor James Early. Good to see you guys. Good to see you, Chris. Great to be here. Earnings season has begun. We've got the latest news and results from retail, big banks, and technology companies. And as always, we'll give you an inside look at the stocks on our radar. But we begin with the market in general. And if there is a theme this week, it appears to be market volatility on the rise. Wednesday afternoon, the market shot up after the minutes from the latest Federal Reserve meeting were

released. But James, on Thursday, the market fell to the point where the NASDAQ had its worst single-day performance since late 2011. When you look at this week, do you think that we're just in for more weeks, more rollercoaster weeks like this? Chris, let me just debase myself and say the shameless thing first. I run a dividend newsletter, and the relative performance of my stocks has soared over the past several weeks, like 200% compared to the S&P. So, I'm very happy for that. I mean, absolutely, though. I say there's a narrative here, and there's a question. The narrative is that it's more of a multi-week thing. A lot of the names that rose, the fastest, the tech-type names have been the ones that have

fallen the hardest. The question, I think, and we were just talking about TV shows before we started taping. I don't know if you guys have seen a Lifetime movie. Lifetime is the women's network. They're all the same. My wife used to watch these all the time. So there's this guy. he's such a nice guy at the beginning, too bad he's about to become a creepy psycho. But all the way, there are these little foreshadowings, you know, like she goes to the apartment, there's something sticking out from under the bed, or he erupts on her at the Burger King drive-thru, or something weird like that. You just know it's so obvious, and you think, oh my gosh, this girl doesn't see this coming.

So that's the question. Are we getting the creepy foreshadowing from the market, or is this just kind of a one-off? So now, are you yelling at your computer in the news and stuff, like you might yell at the actual movie. No, don't go in there. No, it's so obvious. The all-time classic is, of course, the Torrey Spelling movie, Mother May I Sleep With Danger. So that's, I mean, just to put a fine point on it. You didn't take that from The Simpsons. That's a real headline. That's a real movie. Look it up on the IMDb. But back to the stocks, Matty, it does seem

like this is a good reminder for investors that you need to have the stomach for this. Well, unlike James, James' service, Supernova's been on the receiving end of market volatility. I mean, we've seen just a lot of our stocks just get crushed over the last few weeks. This should not be a surprise. I mean, if you look at where volatility's been really since 2011, we really have been little volatility. The VIX, which is a measure of volatility, has been at historical lows. It's just, we're kind of due for something like this, some kind of correction or dip

or whatever you want to call it, some volatility. Of course, it's always a great time. If you have names on your watch list that you've been looking at, great time to pick up bargains, potentially. I think investors need to embrace times like these. Markets go up, they go down, they ebb and flow. That's what happens in the short run. You do have to have the stomach for it, but I do feel like we do a pretty good job of communicating that to people. Certainly, our philosophy of being long-term investors helps to mitigate these types of volatile times,

especially if you can have a watch list like Matty's talking about, so that you can take advantage of the volatility like this. I was looking earlier today, and it's astonishing to me, when we see the credence that the financial media assigns to people like Mark Faber who get out there and they start preaching all of these doomsday scenarios where we're going to see a 30% drop in the market tomorrow. Let's be real here. You can't predict the future. No one knows exactly what's going to happen. But also, don't fall in the trap of listening to those headlines feeling like the world is coming to an end. Take a deep breath, step back for a second, take your finger off the button.

And watch Lifetime TV. Well, there you go. Let's just pretend maybe I'm not so placid, and maybe I'm holding some tech stocks. Certainly, all of us at Motley Fool are long-term investors, but if you look at the market up 30% last year, if you look at valuations on a PE basis, everything is kind of a little bit rich right now. If I do have something at the margin, should I be selling now to avoid a beatdown later, do you guys think? Well, I don't know that that's necessarily the case, because if it's something where you feel like you've got to time the market to be able to unload something at the top or if it's on the way down. I don't know if I would

look at it from that perspective as much as I would think, well, if I'm investing in growth names or where I see maybe valuations are a little bit rich, well, maybe I'm not adding at this point in the game, but maybe I'm going to add if the price gets back down to an attractive level. And I'll just use Twitter as an example. I bought a few shares of Twitter shortly after the IPO because I like the long-term prospects of the business, and I was fortunate to get in there before it topped out at about $70. I haven't had any problem watching the stock come back down, and I'm kind of hoping that this earnings season, maybe the market sort of perceives some weakness in the business model to send the stock price lower, because

then I feel like I'd be able to buy a little bit more. So, I think ultimately what this leads to is just, why not try your buying strategy, don't go all in at once. Maybe buy in thirds, buy in fourths, or heck, even buy in fifths, if it's really a smaller growth stock that has a longer timeline to play out. Earnings season officially kicked off this week. Bed Bath & Beyond's fourth quarter results came in as expected, but guidance for the next full fiscal year was weak. Shares down this week, as one analyst said. Bed Bath & Beyond appears to be, quote, searching for meaning. Jason, how complex is this business? They're selling pillowcases and bath towels.

How can they be searching for meaning? Well, I guess it's just people aren't buying enough pillowcases and bath towels, I suppose. What does that all mean, even if they're not buying it? You know, to me, Bed Bath & Beyond seems like a backwards-looking investment, with its big investments and all of its huge brick-and-mortar presence compared to what I would consider a rather non-existent e-commerce platform. And to put things into perspective, e-commerce today represents about anywhere from 2% to 4% of Bed Bath & Beyond's top-line sales. So, it's maybe $350 million of the overall top-line sales they're bringing in on an annual

basis. You look at something like Wayfair.com, for example, which is all e-commerce. That's a company that's already bringing in a billion dollars in sales and growing at a breakneck pace. They're selling those exact same pillowcases and towels and everything else under the sun. So, I think that you have Bed Bath & Beyond is extremely late to the e-commerce game, which to me, that's scary. I don't know why anyone would necessarily invest in this company, because if you look at the market position that they hold today with just over 1,000 Bed Bath & Beyond stores, they see a market opportunity maybe of 1,300 stores overall. So, I mean, I think it's fair to start wondering, well, where's the growth going to come after

that is all said and done? And so, they resort to all of this couponing to try and gin up some more traffic. And that's fine, it brings some people in, but it certainly plays out of the margin line, as we saw margins down across the board for the quarter. So, yeah, I think that this is one of those backwards-looking investments where I just don't see a compelling reason to be a part of it. The biggest hedge fund fight of 2014 ended this week, not with a bang, but a whimper. eBay announced it has reached a settlement with billionaire investor Carl Icahn. Icahn has withdrawn his bid for two seats on the board and ended his demand that eBay spin off PayPal.

Matty, eBay did add David Dorman, former CEO of AT&T, as a director. If the fight's over, I always have one question, who won? That is a great question. I can tell you who lost. Shareholders definitely lost. eBay shareholders lost. And here's why. I mean, this whole thing just doesn't sit right with me.

I mean, you know, you had Carl Icahn for the past few weeks, whether it's on Twitter or in the media, just lambasting John Donahoe, saying, you know, he's either inept or, you know, he's negligent. I mean, it's just, and it was vitriol, really, from the very start. And then all of a sudden, like the snap of a finger, all of a sudden these guys are buddy-buddies. They've had great conversations. Carl Icahn feels like he's involved and he's being listened to. Now he loves the CEO. He loves the CEO, he loves the business. He's so glad that eBay's holding onto PayPal. What bugs me as an investor in eBay is that

I feel like the little shareholder who's not as loud or doesn't have the billions that Icahn has, doesn't really know what's happened here. What were the conversations between Icahn and eBay? What have they decided on? Why is Carl Icahn suddenly happy with the direction of the company? I feel like there's a little bit of a Reg FD problem here, there needs to be better disclosure. And again, Carl Icahn owns less than 1% of eBay, and Yet, he's had an impact, obviously, on the company and the direction that the company is going. I just think that doesn't sit well with me as just a small shareholder. And as we've talked about before, the idea of spinning off PayPal, that's not a particularly new idea.

Not at all. It also seems like it's an idea whose time has not come yet. No, I think eBay and PayPal need to be linked right now. One thing I'm happy about, I'm glad this doesn't play out like the Dell soap opera of last year, because that felt like it just drilled on for months and months. I'm glad this is actually kind of over. Shares of Toyota Motors down this week after the company issued a recall of 6.4 million vehicles worldwide. This is five different models, Jason, five defects across the board here. And it seems like timing is everything,

unfortunately, for Toyota, because this comes just a week after GM is in the spotlight on Capitol Hill for their recall issues. But unlike that, no injuries or fatalities connected to any of these vehicles so far. Yeah, thankfully, no injuries or fatalities. And actually, I think timing-wise, this is pretty good timing for Toyota, because this recall looks exponentially better than what GM's going through right now. And GM is just getting raked over the coals. And I actually admire the way CEO Mary Barra is handling the situation, considering she's kind of thrown into the snake pit here. But with Toyota, I mean, again, we talk about this a lot, it's not the recall. The recall is not news. Recalls

which is part and parcel of the auto business, and just to put some numbers around that, I mean, in 2013, there were 22 million vehicles, domestically speaking, that were recalled. And the year before that, it was 16.4 million. This year, we're on pace to break 30 million. So, it's not the recall. That always happens. But it's how management responds to the recalls. And in Toyota's case, I think they probably, you know, number one, I think they finally put this 2009 accelerator issue recall behind them, and it cost them more than $3 billion to do that. So between that lesson there, seeing what GM is going through right now, this was a bit of a preemptive recall, I think.

And it was a good move by Toyota. But ultimately, we have a situation where cars are more globally produced now. Globalization, I think, is coming into play here. You look at Ford, for example, with that one Ford platform, where more cars are being made from the same platform with the same parts. So if there's even one defective part, it's affecting more vehicles at this point. And that could be something that's coming into play here. But I think this is Toyota management being a little bit more proactive.

Again, though, quality control is always going to be a big issue with cars. You'd rather not see these recalls. I'm sure they'll be addressing that in the future. Coming up, never mind a broken heart, how do you fix a broken restaurant? We'll see what we can do. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill here in studio with Jason Moser, Matt Margesinger, and James Early. The first of the big Wall Street banks reporting first

quarter earnings on Friday, Wells Fargo and JPMorgan Chase. Putting up some big numbers, James, but not really big enough to impress, and one of the common themes, it appears, in the earnings, a drop in mortgage lending. Yeah, true. For both guys here, the economy is still slow, Chris. Interest rates are low, so it's going to be rough for banking. JPMorgan also had a bond trading hit, and their expenses have been high. This is one of the strongest banks. They're near all-time stock price high, except for a little blip like 14 years ago. They've had a financial colonoscopy the past year at the hands of regulators, so they've had a lot of expenses

from that. You know, there's still a strong bank. Wells Fargo also had, their mortgages was down, mortgage business from $109 billion in originations a year ago to $36 billion, which is a big hit. But they had a lot of one-offs, like a $500 million release in loan loss reserves that boosts earnings, some tax benefits, some equity gains. So, good results in the end for Wells Fargo. But I'm still not seeing kind of the solidity there that would make me want to be a bank investor again. As we talked about, it was a rough week for shares of technology companies, and Intuitive Surgical is certainly on that list. The stock fell more than 10% this week after the company

warned first quarter revenue will be lower than expected. How bad is this, Matty? It's not as bad as it looks. First of all, two weeks ago, they introduced their That's good, because it looks pretty bad. It does look pretty bad. They introduced their new XI Surgical platform, something they've been working on for five years. This is going to really break Intuitive Surgical, or hopefully break them into a lot more complex surgeries, including cardiovascular surgery. So, they're rolling that out. And so, what that's doing a little bit, I think, is it's holding back sales of older models, obviously. So, at least hospitals that have cash are

waiting for the new surgical platform to come out. So, I think this is going to be a 2014-2015 story. 2014 is going to be one where you've got a lot of hospitals who are just happy with the da Vinci systems they bought in the past, holding onto those, not really stretch their budget to buy the new platform. Beyond that, 2015, 2016, if the XI platform gains traction and becomes a really good option, I can see a lot more adoption across hospitals. So, this could be one where 2014 looks bad, 2015 revenue picks up again. O' What is the ballpark price range for these things? Almost $2 million.

O' Okay, not cheap. But interestingly, they're not showing a lot of pricing power here, because it's about $2 million price tag for the new system. That's pretty much what the price tag has been for the previous system. So, you're getting something with a lot more bells and whistles for about the same price. You can always email us, radioatfool.com is our email address. Got an email from Zach Foreman right here in Alexandria, Virginia. He writes, I own a few shares of Discovery Communications, and since their headquarters is 30 miles from my house, I thought about attending this May's shareholder meeting just for educational purposes.

I've never been to one. What are they like? Do you recommend going, or would I be bored to tears? I'm guessing it's the latter, but I've never been to an annual meeting. James, have you? I'm going to say bored to tears. It's not my thing either. Actually, I've never been to an annual meeting. I've been in the investment business for a long time. I've watched some on the internet, and I was bored to tears. Mattie? I've been to several. Bored to tears is mostly what you get. Mostly it's just procedural voting stuff, recounting the shareholder votes and passing certain procedures. But for the companies that give you a good Q&A, allow

shareholders to ask questions. Those can be really informative. Companies like Markel, obviously, Berkshire Hathaway, and the Glory Holdings, a company I like, you go to the annual meeting, and there's four or five hours worth of Q&A. It's a good time. The unusual dissenters sometimes get up and give a talk, similar to what Matt is saying, and that's the only interesting part. There's somebody who's kind of weird. That livens things up. So, you're rooting for the weird, unusual dissenter. You want some weird guy to have some oddball complaint about the company that nobody's

heard of, and then the CEO gets up there and smashes him, but tries to sound sort of polite. It's actually pretty interesting. I would say, I've been to a couple. I've been, obviously, to Berkshire Hathaway's annual meeting and to Markell's. Those are both great experiences. I think, for the most part, they are going to bore you to tears. But even if it's going to be something that bores you to tears, I think it's worth going. It's a worthwhile experience.

I think there's something to learn, even if it's just the fact that you're going to be bored to tears. James brings up a good point. Maybe you see some unusual dissenters. There's always something to gain, even if you just go once. Shares of Panera Bread have trailed the market over the past two years. This week, CEO Ron Shaikh publicly acknowledged that part of his company's challenge is that customers have to wade into what he called a mosh pit to get their food. Shaikh unveiled Panera 2.0, a project to overhaul the way people order at Panera Bread locations. Jason, we were

talking earlier, this is a real problem because the way Shaikh laid it out, you order in one place, you pick up your sandwich in another, your drinks in another, and your condiments in yet another. Well, that is the mosh pit risk, Chris. That's something I think we could lay out in any 10-K. I think we've all been to Panera at least once in this room. It's just not a good in-store experience. I applaud the effort here. It's something they need to do, but leadership is going to be key to this because it sounds like they're going to be introducing a number of moving parts to try to improve this process. And given that Panera has about half of their store footprint is

franchised, I think that puts the onus on leadership even more so to really get out there and communicate this. We kind of saw the same thing go, Buffalo Wild Wings went through this with their new pricing strategy. So it's something that I hope they succeed with it, but it's going to require a lot of work to do so. The bottom line is they have 16 million MyPanera loyalty card holders, and that is a tremendous asset that this business is just not exploiting today. They really need to focus on doing that, and I think this is one way to do it. Isn't this actually really, though, Panera 3.0? I mean, because this shake came

from Au Bon Pain, right? And so, it's Au Bon Pain, and I thought Panera was sort of his Au Bon Pain 2.0. Now, he's sort of reinventing the way he's ... I just feel like, I don't know. There are a lot of companies that get it wrong over time, but a lot of companies like Chipotle, they just have gotten it right from the beginning, and I just wonder if there's something fundamentally wrong with Panera. But they get everything else right. This is a problem with their own design, right? They try to make this little French bakery-type experience where it's semi-organized. But the place is a feedlot.

But that's a good thing, right? I mean, you can't just – I mean, it's a victim of their own success. But arguably, they've gotten the most important part right, which is the food. The food is very good. The soup is good. The service is – people are friends. When you can find the food, it's good. Drop us an email, radioatfool.com, if you have questions.

But also, if you have suggestions for the good people at Panera Bread, we'll pass them along. All right, guys, we'll see you a little bit later in the show. up next, a conversation with senior columnist Morgan Housel. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Morgan Housel is a senior columnist here at The Motley Fool. He joins me in the studio now. Good to see you, my friend. Good to be here. A few things I want to talk about, but let's start with the market, because on Wednesday, it seemed like a nice, basic day on Wall Street. The markets were just sort of humming along. And then, two o'clock in the afternoon, the minutes come out from the Federal Reserve

meeting in March. And while we didn't get a lot of insight into what might prompt a raise in interest rates, what we did get was that the policymakers at the Fed were unanimous at this meeting in wanting to ditch the thresholds that they had been using and basically saying, let's throw out the playbook we had been adhering to. Let's make sure we are absolutely certain. And the market shot up from there. We know what's really interesting is that the Fed, some while back, set some parameters for when they would raise interest rates and stop buying bonds. And it was really based on the unemployment rate. Once unemployment fell below 6.5%, that's when the Fed could

start pulling back from the gas pedal that it's been on for the last five years. But there's a funny thing about the unemployment rate that we spend so much time focusing on. We don't really know if the unemployment rate going up or down is good news or bad news. It is a very uncertain statistic. And it's really ironic that we spend so much time looking at it. Because the unemployment rate is affected by how many people are looking for a job. And if a lot of people stop looking for a job. And the unemployment rate can go down, but it's not necessarily a sign of health in the labor market. And vice versa, the unemployment rate can go up. And it might actually be a good sign because the unemployment going up could signify more people coming back into work as

they become more confident about the economy. So the changes in the unemployment rate can not really be indicative of what's happening in the economy. And I think that's what the Fed is grappling with right now. The unemployment rate has come down pretty substantially over the past two years. But I think Fed policymakers look at it and say, look, is this a sign that the economy is really getting stronger as quickly as the unemployment rate says it is? And I think they're probably answering no. So they're ditching these thresholds, because I think they're probably pretty confident that the unemployment rate is going to be below 6.5% before long. But they don't want to use that as a trigger to start pulling back prematurely and maybe send the

economy back into a recession. So that's good news. I guess if you're a short-term investor and you follow these things on a short-term basis, because it means the Fed's probably going to keep its foot on the gas for a while. And if you're a trader, that's good for the stock market. If you're an investor, you probably shouldn't care. But if you're a trader, it's good. I know she's only been chair of the Federal Reserve for a few months, but what is your impression of Janet Yellen so far? What, if anything, have you seen from her and the way she has handled the job so far that gives you insight into how we may one day look back on Janet Yellen's tenure? I think you don't really know the character of a Fed chairperson

until there's a crisis. That was true of Paul Volcker with the inflation in the early 80s. It was true with Alan Greenspan in 1987 with the stock market crash. And right after 9-11, it was true for Ben Bernanke in the financial crisis. That's really when they earned their pay, so to speak. So with Yellen, not only has she been chairwoman for two, three months now, but in an environment like this where it's as kind of steady as she goes, nothing really crazy happening out there, it's hard to judge Fed performance. One thing that's interesting that kind of sets her out so far is that in one of her first press conferences two or three weeks ago, she gave a humanistic touch to the speech by profiling, calling out by name three Americans who have

really been hit hard by the recession, and talking about how these three individuals in particular have suffered in their story, what they're going through, how hard it is for them to find a job. That's a big departure from Bernanke or Alan Greenspan, who are just data nerds. I was just going to say, the three men that you just mentioned. Right, who are just data nerds, really. And, you know, not to say that these were soulless Fed chairmen in the past, but they were really just looking at the numbers and making their decisions from there. Whereas I think Janet Yellen brings a more humanistic touch to it.

So what does that mean going forward? Well, I think that's yet to be determined. But, you know, the Fed has two mandates. One is to keep price inflation in control, in check. The other is to maximize employment at a reasonable level. It seems like Janet Yellen is, at least right now, far more concerned about the latter, about keeping employment in a healthier balance than it is right now. Again, we're only a few months into the year, but the NASDAQ already in the negative column.

There's no way we're going to equal or better the returns that we had in 2013. And yet, you can't help but feel that there are investors who are anxious out there. What do you say to them? I think if you're anxious out there, I think that's a bad sign for you as an investor. I think if you are a stock investor, then you should be an investor for years in the future, five, 10, maybe more years than that. And during that time, you can be absolutely guaranteed with 100% certainty that there's going to be a lot of volatility in the market from time to time, is going to lose a lot of money. It's in your certainty. I've brought it before. It's like

If you're living in Florida and you're asking yourself if there's going to be another hurricane, the answer is yes, of course there's going to be. There's no question whatsoever. If you live in Florida and you think there's not going to be a hurricane, that's a terrible position to be in. And rather than asking if there's going to be another hurricane, you should ask yourself, how do I prepare for it when one hits? There's a great quote from Ben Graham, Warren Buffett's early mentor, from I think 1949. He said, he's talking about the margin of safety. margin of safety just being the safety zone in your investments, sort of your safety buffer, your airbags in your investments. He said the purpose of the margin of safety is to render

the forecast unnecessary. What he meant by that is when people are trying to forecast when's the next bear market, if you have a margin of safety in your investments, meaning you have a good cash cushion, you've got some good reserves, you've got proper insurance, you've got the safety buffer in your personal finances, then you can render the forecast unnecessary. It doesn't matter when there's going to be a next bear market, because when it happens, and it will happen, you're just ready to deal with it when it comes, rather than asking if it is going to come. You're listening to Motley Fool Money, talking with Morgan Housel, senior columnist here at The Motley Fool. You wrote something recently, a charming headline, entitled, Why Markets Will Always Crash. So,

thanks for that. But here's the thing. I looked at that headline, and what I focused on was the word crash? Because I know markets are always going to go down at some point, but why are they always going to crash? Well, there's a really interesting theory from an old economist named Hyman Minsky. He had this theory that stability is destabilizing. And what he meant by that is that when something is stable for a long period of time, like the stock market, if we go a long period of time in the stock market when things are stable and things are going great, like the 1990s, that builds confidence among investors because they feel safe. There hasn't been a crash in a long time. They feel safe. When they feel safe, they're going to bid prices up so that

stocks become more expensive because they say, hey, stocks are safe. I'm going to put more of my money into them. That bids prices up. When prices go up and valuations get higher, that just makes any bit of bad news that arises, is going to affect stocks that much more if they're expensive. Expensive stocks is just an indication of people pricing in. They're assuming that bad news is going to happen. When bad news comes, it's even worse. It's this paradox. This sounds like a DirecTV commercial. When your cable goes out, you get depressed. When you get depressed, you quit your job. That's basically how the stock market works, right?

And so it's this paradox that if stocks were stable all the time, prices would get so high that that would plant the seeds for a new crash. Stocks would get so expensive that in the slightest bit of bad news, they'd come crashing down. So when you think about that paradox, it means that markets will always crash because a lack of crashes is literally the fuel for the next crash. And it sounds crazy and paradoxical, and it is, but it's back to this theory that stability is destabilizing.

And it goes back to what I was saying before. If you're an investor for five or ten years in the future, it's a certainty that bad things are going to happen. And rather than asking if they're going to happen, I think what investors should do is prepare for them to happen and be ready for them to happen. You just got back from Texas. You were down there for the Final Four.

You got a chance to meet with some of our members. You also got a chance to meet with not just one of the titans of the energy industry, but I would say one of the foremost business leaders, thought leaders anyway, in the country, and that's T. Boone Pickens. What was that like? It was great, yeah. So we met in his office in Dallas at his hedge fund, BP Capital. T. Boone Pickens has an absolutely fascinating story. For the first part of his life, he was an oil CEO for an oil company that was out there drilling for oil and actually going out and finding oil the hard way.

And then so he sold his company in 1996, started a hedge fund in 1997, and he's made the bulk of his fortune since then. So he's made far more money trading and investing indirectly in oil than he has going out and drilling for it himself. So he's had this multi-pronged career and just gives him so much experience, and he's got so many war stories to share with everyone. And I was telling you earlier, Chris, when you're old and rich, you have a license to say pretty much whatever you want and speak your mind freely. So we got some great stories from Boone just about life and how he thinks about business. You know, he's 85 going to 86 years old, and he's perfectly sharp and active. He's a really big health fanatic. He's got these really intense workout routines.

So, again, he's 85 years old. He exercises at 630 every morning. And when he says that, I'm thinking, okay, how's an 85-year-old exercise? He's doing some really light aerobics or something. Ten minutes on the exercise bicycle. So that's what I assume. But Mr. Pickens starts rattling off how he exercises. And he says, you know, yesterday I did 300 yards of lunges.

And everyone in the room is thinking, God, you know, if you're 25 years old, that would destroy you. How does he do that? And he said, and then tomorrow I'm doing 100 squats with a 75-pound vest on. I'm thinking, there's no way I could do that. That would destroy me, doing that. So he's physically and mentally active and still sharp. And he's just told some great stories about, you know, he's been in the oil business for 60-some-odd years now. One of the points that he really drove home is that the United States is by far and away the best, if not the only place right now for investors to look for and invest in oil.

Because in other places in the world where there is oil, it's completely taken over by the governments of that country, Saudi Arabia and whatnot. But even in places where they are accepting private capital, it becomes so corrupt in so many of these places that it's not worth it. he just said, these places won't let you make a lot of money. They advertise like they're going to let private investors in, but they just won't let you. So he's telling a story about 20 years ago or so, he found a large oil field off the coast of Africa. And he's getting ready to drill and he sends his lawyers over to finish up the contract. And the oil minister says, you know, to make this possible, you're going to need to bring me a briefcase with $400,000 in cash in it. That's just how business was done over there.

So Boone, as he put it, he said, well, you know, I told the guy he can kiss my fat old white rear end. And that's how he does business. So I think he put up with so much of that investing overseas that now he's really focused on America. And he's a huge bull on America's energy situation. You know, I've talked a lot about, you know, really the past five years, U.S. oil production, natural gas production has just exploded. Not just grown. It has sheerly exploded. and people like Boone, who are the world's foremost experts on this,

are so incredibly bullish about what's going on. One of his analysts said something I thought was interesting. He said, you know, for all intents and purposes, there is an unlimited amount of natural gas in the United States. And people kind of, you know, shot their eyebrows up and he repeated, he said, there is an unlimited amount of gas in the United States. It's just a question of at what price is it economical for companies to pull it out of the ground.

But technology is increasing so quickly that we're finding new ways to pull it out of the ground. We're finding so many new ways, and we have so much of it here in the United States. It's just a massive abundance of gas. And where that leads to in terms of trains and semi-trucks switching over to natural gas, they just see massive opportunity. And I think Boone in his 60 years in the business is about as bullish today as he's ever been. I know you've got a lot going on. And before I let you go, you are working on something right now on diversification. What's something investors should know when it comes to diversifying their portfolios?

And let's be clear, that's almost the first thing you hear as an investor when you are starting, whether you're working with a financial advisor or you're just talking with a parent, a mentor, something like that. Almost everybody, one of the first things they hear is, you've got to diversify. You've got to diversify. But what does that mean? as an investor? Does that mean five stocks, 20 stocks, 8,000 stocks? The Vanguard Total Stock Market Index, which is a popular ETF, 7,000 stocks. Is that necessary? If you're

an individual stock picker, should you do that? People laugh, but I have met individual investors that own 200 individual stocks. They probably think that's great, I'm being nice and diverse. But if you own so many stocks, you're eventually just owning an index fund with a lot of transaction fees. On the other hand, there are a lot of investors, famous investors, who have done very well by being heavily concentrated in just a few positions. I remember at a conference three or four years ago, Charlie Munger at Berkshire Hathaway said, if you look at Berkshire's track record, if you take out the top five best investments, it's a very mediocre track record at that. And Buffett said the same thing at last year's

Berkshire Hathaway Annual Shareholder Meeting. He said, throughout the course of his life, he's invested in about 400 stocks, and he's made 90% of his money in 10 of them. So the concept of being diverse, you know, it gets very interesting at this point where too much, you know, you're just owning an index fund. But these investors that have done so well have done it through concentration, which leads to a whole new level of risk, too. I mean, obviously, if you have a huge portion of your risk in one company or one sector, that leads to all kind of problems as well. So how does an investor look at this in terms of finding the right balance between you don't want to be so diversified that it's going against you, but so concentrated that you're just exposing yourself to too much risk? And I think it's a very complicated topic that a lot of investors don't think enough about. I've met some of our own members from the Motley Fool services who say they have 80% of their net worth in one stock.

And I think maybe that works for the risk tolerance, but I think for most people that would be a very dangerous situation. One thing I think is really interesting, if you look at the S&P 500, so it's 500 stocks, if you just take the top 10 of them, just 10 out of 500 stocks has a 98% correlation to the entire index. So it's really true that owning just a handful of stocks puts you pretty close to just an index fund. And that can be hard if you're an individual stock picker trying to beat the market. So it's a topic I'm digging into.

Hopefully it'll provide some answers for investors. One of the best reasons to be on Twitter, as far as I'm concerned, so you can follow Morgan Housel and read his stuff. Thanks for being here. Thanks for having me. Coming up, we'll give you an inside look at the stocks on our radar. 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 Jason Moser, Matt Argersinger, and James Early. Guys, time to wrap up with the stocks on our radar this week. James Early, what do you got? I'm going quickly to Petrobras. PBR, Chris is the ticker, excuse me. This is a Brazilian oil company, state-owned. This was, at one point, the best-performing stock and income investor by far. Now, it is one of the very worst. The past five years, we've just been kicked in the teeth and kicked in the teeth again. The Brazilian government has just gotten grabbier and grabbier and more difficult to deal with. However, in the fall, it looks we're going to have a new government in Brazil, so the shares are starting to climb back up

finally. So, I'm liking this again. I was going to say, one of the things Morgan touched on when we were talking was the fact that T. Boone Pickens, with all of his experience, he prefers the U.S. energy companies for that very reason, that they don't have the government. That would have been great information for me to know five years ago, Chris, but right now I'm already suffering this pain. Matt Argersinger, what are you looking at? It's interesting that you brought up T. Boone Pickens, because my pick is a U.S. energy

company. I'm looking at Devon Energy, ticker DVN. If you look at the market the last few weeks, it's really interesting. There's definitely some kind of rotation going on. Money coming out of tech, some money going into energy, utility companies, materials companies. And I just think energy could be one of those areas that's just been beaten down, underperformed the market the last few years, and it's set for some nice returns, I think. Devon Energy is just one of those companies in the gas business, in the oil business, mostly in North America, actually all in North America at this point. Just kind of high-quality assets, really cheap stock, one company I like.

How big are they? Because I'm wondering if they're small enough that part of the thesis is they're a potential takeout. No. Well, they could be, but it'd have to be big. I mean, this is a $25 billion company, so they're certainly on the larger end. Jason Moser, what are you watching this week? Yeah, so tech is taking a big swift kick in the teeth, and the company I'm looking at, Viva Systems, ticker is V-E-E-V. This is a relatively new company to the public market, so just a little bit less than a year old. But Viva provides cloud-based software for the global life sciences industry. So they're serving big customers, you know, customers like big pharma, sales reps, biotechs, medical products, stuff like that. They have an interesting relationship with Salesforce.com, which I think a lot of fools are probably familiar with, that company.

And that worked to their advantage today. It's also something that could potentially be a competitive risk down the road. But they just recently extended a relationship through 2025, so that's encouraging. Four co-founders that are still involved with the business today, which I think is neat. CEO Peter Gassner is leading the way there. And to me, the biggest question for the company is understanding the actual market opportunity, really what kind of growth can we really look for from this company. Well, you know, they're in the cloud, so it's got to be good.

Yeah. You can't go wrong. All right. Jason Moser, Matt Argesinger, James Ehrlich. Guys, thanks for being here. Thank you. Thank you. 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.