Motley Fool Hidden Gems Investing - Motley Fool Money: 5.21.2010

Episode Date: May 21, 2010

On this week's Motley Fool Money Radio Show, we discuss financial reform, Google television, and Kevin Costner's slick technology. We talk intuition and investing with Christopher Chabris, co-author of The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us. And we share some stocks on our radar. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. everybody needs money that's why they call it money from fool global headquarters this is motley fool money welcome to the show thanks for being here i'm your host chris helen i'm joined by motley fool senior analyst seth jason james early and Shannon Zerring. Guys, good to see you. Good to see you, Chris. On this week's show, we'll talk investing, intuition, and invisible gorillas. We'll tell you why Kevin Costner may hold the key to the Gulf Coast oil spill, and we'll debate Google's chances as the company attempts to get into the TV business. All that, plus earnings news and a few stocks on our radar.

And hopefully, at some point, my voice will actually improve. Did you set that most cigarettes smoked at one time record, or did you fall short? Tragically, I came in third. I got the bronze. It was a little bit of a Tom Waste quality to your voice, Chris. Oh, thank you. From the music critic, I appreciate that. But we begin with what's being called the most sweeping financial reform since the Great

Depression. The Senate passed legislation this week that would change the way Wall Street does business. Among other things, the bill includes a provision that would essentially end banks from trading on their own accounts. It makes derivatives trading more transparent, creates a new consumer protection agency, and a council of systemic risk. And in extreme cases, the government would be allowed to liquidate failing financial companies. Shannon Zimmerman, the Senate version, tougher than the version that the House passed.

Obviously, the two sides are going to work out their differences in the coming week. What did you make of the Senate bill? Happy days are here again. It's amazing, and I think maybe accidentally amazing for some reasons I'll talk about in just a minute. But lots of things are good coming out of this bill. consumer protections, more scrutiny of the credit ratings agencies. But the piece that focuses on derivatives is unbelievable. Basically, in addition to having greater transparency because this is going to happen on an exchange, derivatives trading will happen on an exchange, the big

investment banking houses, the Goldman Sachs, the Morgan Stanleys, the JP Morgans of the world, are, if this actually gets signed into law, going to have to spin off their derivative units, which basically are little profit centers, big profit centers for these banks. Nobody thought that that was actually going to make it into the final legislation. And the fact that it did, is pretty amazing. Blanche Lincoln is a senator from Arkansas, and she was pushing hard for this, and a lot of people thought that it was because

she needed to shore up her progressive base, such as it is in Arkansas, and that it would get gutted later on. Chris Dodd tried that with an amendment that failed yesterday, and lo and behold, it may be that these banks are going to have to spin off those derivative houses. Shannon, are you so excited that you're quivering? I can't believe it.

It may be an accident, but it's really good news, the incredible shrinking banking industry. To me, the thing I care about is simply the transparency. I mean, let the locker room antics continue with these banks. Just put a camera in there is sort of my logic. And that's been the reason we had this financial crisis. All this derivatives trading was not transparent. We didn't know what was going on, and we will now if this thing goes through.

I like the spinoff idea, and I want to be careful about the blanket trashing of derivatives because there are valid reasons that banks and others would want to take the other side of trades to hedge risks and other things. But a lot of what was going on there was just pure speculation, and there's just absolutely no way that the government should guarantee, as is the case right now pretty much, that banks that speculate poorly will be bailed out by taxpayers. And so if this bill works as intended, which is always a big if,

I think that's a good thing and should hopefully close the book on that. It was a rough week on Wall Street as the Dow, S&P, and Nasdaq are now all down for the year. The euro hit a four-year low. New jobless claims are worse than expected. And we've got the crisis in Greece and political turmoil in Thailand. Greece? I thought Greece was fixed. What was your headline this week? You know, I think it's the deflation.

We talked about gold bugs and inflation last week. And the danger here is still actually deflation. Sorry, gold bugs, and sorry, inflation hawks. I used to worry that all the Fed balance sheet expansion was going to stoke inflation, but that is not the case. The numbers show it. The Fed realizes it. They said they're going to keep rates low pretty much until 2012.

Consumer prices are falling on a lot of items like motor vehicles, personal care, home improvement, appliances. We're still in danger of deflation, which sounds great if things cost less, except what happens to an economy when everyone believes things will always cost less in the future is they don't go out and spend now, and you enter a vicious cycle. Where have we seen that? Japan. Japan, perhaps?

James Early, what was your headline? Chris, my true headline was that Kentucky Fried Chicken's double-down sandwich is selling so well, but I don't think we're going to come to that in a later segment. Oh, we're going to get to that. So I'll say two things. First, I definitely agree deflation is the big problem. If that's a new term for you, basically, you know, your money is worth or prices are dropping. So if you have 2% deflation and a 3% interest rate, your effective borrowing rate is 5%.

So nobody wants to borrow money in that type of situation, which is Japan's problem. I mean, government can set rates to zero, but typically not below. So it is a tough problem to fix. I think the thing that's going to help us, the U.S., is simply that it's like, you know, Everybody's a little bit drunk, but the U.S. is still the best designated driver, so to speak. We are a little bit of a safe haven, and I think we will, because credibility is the only real currency in a fiat money world, and I think we're finding that out. And we have seen that with money flowing into treasuries again.

For all the talk of the dollar getting destroyed by our policies and by all this borrowing, the evidence from investors is exactly the opposite. Yeah, very traditional sort of predictable behavior, Flight to safety after this prolonged period of people fleeing to risk. That's kind of my headline as well. The junk rally that we've been commenting on for months now has been hit the hardest during the recent days of the market sell-off, which stands to reason. A lot of these stocks went way too far, way too fast in anticipation of an economic recovery. We have some evidence that maybe the economy is somewhat stronger than it was certainly a year ago.

But it's not great. It's not great at all. And I think that, you know, Greece is being held out as a reason for why this is happening. But I think it has a lot to do with investors sort of stepping back and saying, look how far we have come and what's the economy likely to do going forward. The market is a discounting mechanism and it's discounted too far ahead. You're listening to Motley Fool Money. We're talking through some of the big stories this week. Guys don't look now, but when it comes to cleaning up the BP oil spill, Kevin Costner may be the man for the job. A tube has been siphoning off around 5,000 barrels a day, but a lot of oil continues to leak into the Gulf.

Enter Kevin Costner, who has invested 15 years and around $24 million in a device that separates oil from seawater. BP and the Coast Guard plan to test it next week. Seth, what do you think? Well, I've got one of these devices in my kitchen, actually. Really? Yeah, I use it to skim the fat off the top of the soup. You know, we need to see if this works. And good for Kevin Costner if this does work. We've seen demonstrations on TV. Now, that's just mixing diesel and water and then spinning it in a centrifuge, separating it.

That's actually not all that tough to do from the reading I've done on this, which isn't a ton. The difficulty comes when the oil and the water have kind of mixed together more and it's emulsified. at that point, it becomes harder to separate. Now, presumably, the 15 years and $24 million in building these centrifuges is going towards solving that problem. And if this works, great. And if it works, I say, make all the offshore drillers put a little money in a kitty and have some of these things ready to go. You may not need them every year, but at some point, you're going to wish you had them. That's a great idea. And before the show, Seth, you were comparing that to the FDIC. It's the exact same principle. Yeah, we were talking about this a little while

before the show, and I think that's the whole point. We have allowed this drilling, but there's really no insurance policy or not much. You know, it's like having a kitchen with no paper towels to clean up the mess. And so it is time we focus on this. So Kevin Costner is my man of the week. Yeah, but has anyone checked this out on Snopes.com? I have a sneaking suspicion this is guerrilla marketing for Waterworld 2. Well, I mean, let's talk about that. I mean, And this is a guy whose movies include Waterworld, The Postman, Message in a Bottle. If he cleans up the Gulf, does that make up for all of that? No way.

No? That's a big hole to climb out of, Chris. Yeah. Coming up, is Google TV the next big thing, or is it just the next Apple TV? Stick around. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. Chris Haley here in the studio with Seth Jason, James Early, and Shannon Zimmerman as we dig into some of the companies making headlines this week.

Guys, a lot of earnings news. Let's start with Walmart, which reported better than expected earnings. Shannon, Walmart also said customers on food stamps increased significantly. What did you make of that? Well, it's sort of a piece with something that we've talked about in the past, Walmart as an indicator, right? If things are going well for Walmart, they're probably not going so great in the rest of the broader economy. and the fact that purchases that are paid for with food stamps is on the uptick, that sort of reinforces that theme. Walmart, its outlook is kind of flattish in terms of same-store sales on the domestic side, but international expansion is where the growth opportunities are for that company.

I've always liked them on just operational acumen, and you can't erode that moat. They have so much pressure that they can bring to bear on suppliers that they're always going to be able to wring out more margin on that route. So, you know, during a bad economy or a weak economy, plus their ability to control costs and inventory, I don't think you'd be Walmart. Target also reported better-than-expected earnings this week, thanks to strong clothing and grocery sales. Shares of Target have outperformed Walmart over the last year, but Walmart has been the better performer over the last five years. James Early, what did you think of Target's quarter? Well, Chris, Walmart did well, and Target has done well because they've been trying to be like Walmart.

They have upped their private label clothing. They have redesigned a lot of their stores. to have more food sales. And it's helped margins. And that's understandable. And also, bad debt expense fell on their credit card portfolio, which is pretty significant these days. But the big thing is, it's very hard to chase the low-price leader as an overall strategy. So, yes, this is good for now. But where does it leave them in five years? I don't know. Abercrombie & Fitch and Aeropostale both reported better-than-expected earnings. For Abercrombie, that means a smaller-than-expected loss. For Aeropostale,

That means a 43% increase in first quarter profits. Seth, you're a retail guru. What did you think? Guru. Yeah, you don't need to be a guru of any kind to take a look at these and say, better than expected for Abercrombie is really just bad. It's really not good at all. It's still a $0.13 per share loss.

Comparable store sales down 1%. Gross margins worse because they're selling stuff for less money. And oh, hey, that beat of earnings estimates, they had a tax benefit of nearly 40%, which I'm sure none of the analysts were looking for. So that's pretty low quality. Aeropostale, on the other hand, net sales up 14%, same store sales up 8%, profit per share up 55% because they've been buying back shares. So as a shareholder, you're making more money.

And also actually important to note that there's some price pressure going on at Aeropostale. so if this continues and we're talking about deflation right going forward Abercrombie has a much tougher row to hoe or is it road to hoe it's row to hoe like a row of potatoes I like to try their Abercrombie is going to be rowing uh hoeing a road however and raking because they still have higher price merchandise Aeropostale sells stuff that looks the same to most of the teens smaller stores cheaper Aeropostale looks pretty good let's just go around the table real real quick, and keeping in mind that Seth is wearing a fabulous t-shirt, what's the worst fashion decision you've ever made?

I've got to go with the red Don Johnson-style blazer that I wore for a graduation picture. James Early? Chris, the year was 1996, and I went down to South Beach in Miami on a business trip, and we stocked up on these. Oh, no, I've heard this story before. We know how James South Beach stories go. Hold on, this is not that story. That was Fort Lauderdale.

And we got these, like, on sale, these $25 pink blazers and these pastel clothes, figuring we are going to be cool, much like Don Johnson, Seth. And we got down there, and apparently, you know, that was Miami, like, 15 years ago, and everyone else was in, like, you know, olive slacks and a tight black T-shirt. So it did not have the desired effect. Shannon? Let's just say, and I won't really divulge my words. Let's just say that my junior high nickname was Platypus.

Wow. Steve Broido? I didn't think about that. There may have been some tight rolling of jeans going on. No, it's shameful. I was not a terrible offender, because I would do the loose tight roll. Because there were some people that did the super tight roll, but it's still terrible. You're listening to Motley Fool Money.

We're going through, really, some of the tragic fashion stories of our lives, as well as some of the big companies making news this week. Google CEO Eric Schmidt says it will change the future of television. He was speaking about the launch of Google TV. which is aimed at organizing television and online content so it's easier for viewers to find stuff on their televisions. Google is teaming up with Sony, Intel, and Logitech, and the technology will be available starting this fall. Guys, what do we think? Google TV. James? Well, Chris, it's not that great right now, despite what you may hear, but I'm kind of a believer long-term.

And the reason is this, that right now it just accesses currently playing TV shows, sort of a TiVo queue stuff that you've got, as well as the Internet. So that's not that cool. But I think a lot of the studios are going to try to move, you know, like old ATM episodes onto some sort of a Netflix-like platform that you can then access. So I think it will ultimately mean a lot more programming for people. The thing I worry about is, you know, how are they going to price that and make a lot of money? The Internet brings so much competition that people, instead of pursuing exactly what they want, will take a cheaper substitute much more readily. And I think that's what could happen here. And studios and others are probably not champing at the bit to hand Google yet another slice of their revenue potential.

I do think that, you know, as with the Google phone, this is the beginning of a conversation. It's going to develop over time. And to me, we were talking about this before the show as well. Now, given how fragmented the television audience has become, there are 300 channels, 400 channels. Well, this is sort of the next step, and it's a magnitude of difference. Anything that you want to see, well, you type in the specific query, as you do on the Google search engine, and if it's available, there you have it on your television. Not now, and the technology is not impressive yet, but I think four or five, six iterations on down the line, it could be quite impressive.

See, I don't think that's what's going to happen because that would mean that the studios have to somehow get a bunch of high bandwidth, high quality programming onto the Internet and make it available. Now, streaming programming at high definition over the Internet is actually really, really expensive. And they're certainly not going to want Google to take any of their possible revenue stream from it. So for right now, what you're getting with Google TV is the ability to watch really crummy video that looks bad on your laptop. on your 40-inch TV, and I think that is why it is not going to be very successful. Maybe for, you know, crusty, cranky old men like us, high-definition fidelity kind of matters, but kids of today, kids of today, you know, they've grown up listening not to records, not to 8-tracks,

certainly not to cassettes, but to MP3s, highly compressed sound. I think that that sort of fidelity matters less to them than does access to TV. It's not bad. It's like saying that I'm going to listen to, you know, Men Without Hats, but through a cell phone. I mean, that's the quality difference we're talking about. That's my ringtone, dude. It sounds like Seth's still warming up to his remote control. I mean, I think this is the future of technology.

And I'm not a huge technology guy. Seth's a guy who doesn't watch TV. I know, I know, I know. I used to watch 90210, but after that, you know, I just had better things to do. Really, though, if you are a studio and you have, you know, ALF episodes or Will & Grace episodes from a while back, what do you do with them? You can sell them to some network that's going to run them, you know, at 2 in the morning a little. I think you could – it might not be much money, but you could probably make more money with this than just letting them sit idle. If you had to buy one and you can't get your money back, are you buying Google TV or are you buying one of Kevin Costner's oil separator devices?

I'm going to go with Google TV. The oil separator cleaned the heck out of a kiddie pool, but I don't know how it's going to work in the Gulf, so I'm going with Google TV as well. I'm going to have to go with the oil separator as long as I'm getting to sell those things, even if they just sit on a dock and don't do anything. If I'm hiring it out, then I'm going to go bankrupt. And finally, if you bet on the Double Down, you are a winner. KFC is reporting strong demand for its Double Down sandwich, which is bacon and cheese sandwiched between two chicken fillets. Good eating.

Demand is so strong that KFC will extend the Double Down's run and offer it for as long as demand is high. This is the thing where the chicken was the bread. Yes. The chicken is the bread, yes. Here are some numbers to chew on. Later this month, KFC expects to sell its 10 millionth Double Down. It has 540 calories, 32 grams of fat, and over 1,300 milligrams of salt.

Which is about half your RDA of salt. It's very nutritious. How can anyone possibly be optimistic about the state of our country when you read statistics like that? You don't think that's awesome? I think it's amazing. They grow up so fast, don't they, Chris? We were only talking about this sandwich four weeks ago, five weeks ago,

and it's already sold 10 million? Jeez! Email us at motleyfoolmoneyatfool.com. Tell us what you think about the Double Down, Google TV, and Kevin Costner's possible redemption. That's MotleyFoolMoney at Fool.com. The guys will be back later to talk about the stocks that are on their radar, But coming up next, what do invisible gorillas have to do with investing? Our next guest explains it all.

Don't go away. You're listening to Motley Fool Money. The best things in life are free. But you can give them to the birds and bees. I want money. Welcome back to Motley Fool Money. I'm Chris Hill. So what do smart chess players and stupid criminals have in common?

Should you be more like a weather forecaster or a hedge fund manager? Is it always better for investors to have more information? Chris Chabris is a professor of psychology and neurology. He's a chess master, and he's the author of the just-released book, The Invisible Gorilla and Other Ways Our Intuitions Deceive Us. Chris, welcome to Motley Fool Money. Thanks for having me. Let's start by talking about invisible gorillas.

For those who aren't familiar with the famed experiment, can you give us a quick overview and what is the main takeaway? way? Sure. The title of our book refers to an experiment that Dan Simons and I did at Harvard University about 12 years ago. It was a very simple experiment. We created a video which showed two groups of three people passing basketballs back and forth. One of the groups was wearing white shirts and the other was wearing black shirts. And the white-shirted people passed the ball among themselves and the black-shirted people passed the ball among themselves. About halfway through this 60-second long video, a person in a gorilla suit saunters into the game, turns to face the

camera, thumps its chest, and walks off at a leisurely pace, remaining on the screen for about nine seconds. We showed this videotape to people, and we asked them to count the number of passes that the white players were making. And then at the end, we asked them how many passes they had counted, and we said, did you see the gorilla? And the surprising result was that about half the people who saw this video did not see the gorilla at all. And they accused us of switching the tape and of making it up and all kinds of things. But in reality, there was a gorilla there and about half the people didn't notice the gorilla. So it shows really two things. One, we're missing a lot of stuff in our world around us. If we can be missing a gorilla walking through a basketball

game, what else are we missing? But two, we're not really aware of how much we're missing. We're surprised to find out that we don't pay attention to as much as we think we do and we don't notice as much as we think we do. And it seems that we have a lot of other ideas about how our own minds work, which are similar to this one. They're sort of predictably wrong in surprising ways. Now, I want to dig into some of the questions you get at in the book. But first, I got to ask, how do you even come up with an experiment like that? Who was the one who said, oh, I know, we'll have people passing basketballs and we'll get a gorilla? Like, how do you even come up with something like that? Well, in this case, we were inspired by a fairly similar experiment that had

been done about 20 years earlier in the 1970s by Dick Neisser, who's a famous cognitive psychologist, really one of the pioneers of the field of cognitive psychology. I don't know how he got the idea, but he didn't have a gorilla in his video. He had a woman carrying an umbrella who walked through the game. And we were doing a class project at Harvard, actually, and we wanted to recreate an experiment that the whole class could participate in. And it was Dan Simon's idea to do this one, because he knew Dick Neisser. And one other professor in the department happened to have a gorilla suit lying around

in his lab. That's a whole other story why people are keeping gorilla suits lying around in their labs. But somehow it popped into our heads that it would be nice to try the gorilla also and to have the gorilla just walk right through the game. And it was almost a humorous afterthought, but that turned out to be the really powerful demonstration that sort of took on a life of its own after we did that experiment and published it. You just had the gorilla suit lying around,

and people wonder why Harvard has the reputation that it does. All right, let's get into some of the questions in the book. Should you be more like a weather forecaster or a hedge fund manager? Which is it? Well, it really depends, of course. If you're trying to forecast the weather, you probably want to be more like a weather forecaster. The question is really meant to get at the idea that there are some areas of knowledge where it is really possible to know how much you know and how much you don't know.

People complain about weather forecasters all the time because sometimes they get it wrong. But when you actually look at their track record, when they say there's a 75% chance of rain, if you look at all those days when they said 75% chance of rain, it actually rains 75% of those days. So they're not perfect. They don't say 100% all the time and 0% all the time, but they're actually very well aware of how much they know. And if they say 75%, that's pretty much correct. On the other hand, there are many famous cases of hedge fund managers who made tremendously large bets on particular ideas about the direction of markets. We tell the story in the book of Brian Hunter, who was a trader in energy futures, and he bet

billions of dollars on directional movements in natural gas prices, did well for quite a while, and then blew up his fund completely. And that's the kind of thing that someone with an awareness of how little they really know about the system they're trying to model would probably not do. You're listening to Motley Fool Money. We're talking with Chris Sherbree. He's the author of The Invisible Gorilla. One of the other questions in the book that you got at that mentioned right at the top, what do smart chess players and stupid criminals have in common? Well, that's another funny one, I think. Chess players and criminals usually don't seem that much alike,

but there's one way in which they're quite alike and in which they're, in fact, like all of us. They are overconfident in their own abilities. So let's take the criminals first because they're a bit funnier. There are many examples of stupid crimes. For example, a guy named MacArthur Wheeler tried to rob some banks in Pittsburgh without a disguise in broad daylight. And the reason why he thought he could get away with this was that he rubbed lemon juice on his face, thinking that that would render him invisible to security cameras, much like, I guess, children writing in lemon juice think they're writing in invisible ink and invisible messages and so on.

Of course, they broadcast the security footage of him, and he was caught an hour later. and he seemed incredulous when he told the police that his method didn't work. He was very incompetent as a bank robber, but at the same time woefully overconfident of his abilities as a bank robber. And what research has actually showed with cleverly designed experiments is that the people who are the least able at something are often the most overconfident or the most confident in their abilities. Chess players have a rating system that tells them exactly how good they are.

You know, if you're a bank robber, you don't really have, like, a numerical rating system that tells you how good a bank robber you are. Right. I think Morningstar is working on something like that, like a five-star rating for bank robbers. Right. Well, if they could get it right for mutual funds, that would be a start. The fact is that in almost all fields, we don't have perfect feedback about how good we are. In chess, we do. There is a rating system in chess which is very well calibrated, and it tells you exactly how likely you are to beat somebody else based on your two ratings. We surveyed chess players at large chess tournaments and found out that despite having this really high-quality information available to them, and they all know it, they still thought they were much better than they actually were. So there's this sort of innate tendency to think that our skills, our knowledge, our abilities are better than they actually are, and that can obviously get us into trouble when we're making investing decisions or managing other people's money.

One of the things you write about is an experiment involving two mutual funds, and the subject has a choice. They can receive feedback and be able to change their allocation every month, every year, or every five years. As investors, how often should we want that information? Well, we posed this sort of as a thought experiment. If you were an investor, how often would you want to get the information about how your funds were performing and the chance to change the allocation? And I think the answer that most people would give is as often as possible. And in fact, we can do that every day. Right now is generally the way things are set up.

But in this experiment, which was done by behavioral economist Richard Thaler and some of his colleagues, it turned out that subjects who are randomly assigned to get feedback only once every five years had the best track record over about a 30-year period of performance than people who got feedback every month. Of course, this was not a 30-year-long experiment. This was simulated time and simulated time periods. But the result was the same, actually having less information about your performance and about how the market was doing resulted in better performance. The reason for that is that the two mutual funds in this experiment, simulated mutual funds, one was a bond fund,

so it had a very low return but also very low volatility, and one was meant to be like a stock fund, so it had high return but also high volatility. So people who allocated money to the stock fund found that sometimes they suffered large losses month to month, as the stock market is wont to do, and that made them move out of the stock fund into the bond fund. But over the 30-year period, it was a bad idea to have all your money in bonds, so those people didn't wind up making that much money. They got a lot of sort of short-term information about volatility,

and that obscured them from understanding the long-running trend in the market. More in a minute. This is Motley Fool Money. Intuition takes me everywhere You're listening to Motley Fool Money. We're talking with Chris Chabris about his new book, The Invisible Gorilla and Other Ways Our Intuitions Deceive Us. Now, in addition to writing the book and all of your work, you're also a chess master.

What game do you think investing most approximates? uh well i think the the obvious answer is something that has a little bit more a little bit more gambling in it um if if i had to choose though i think the right and the right game i would pick is something more like poker and a lot of people sort of analogize investing to a casino and so on and and um to the extent that it has those characteristics that that's probably bad but a game like poker involves both skill and chance you know you can have the edge if you study and if you practice, and especially if you know yourself. And one of the big ways to have an edge in poker is to get control over your own emotions

and to understand when you're acting impulsively and when you're not thinking things through and you're not thinking long-term. And, of course, those are the same characteristics that I would think investors would want to have also. You don't want to be making decisions based on intuition, gut instinct, and so on. You want to be making them on a long-term plan that you can stick with and sort of use to ride out emotional swings. All right. Before we let you get away, we've got to end with a quick round of buy, sell, or hold.

Let's start with, well, you know, Malcolm Gladwell wrote a bestseller entitled Blink based on this concept. Buy, sell, or hold snap judgments. I'm going to say sell snap judgments. I wouldn't hold on to them right now. I think they're quite overrated, and it's not necessarily Malcolm Gladwell's fault. I actually enjoy his book very much, but I think people have somehow taken the lesson from his book and from a few things that he says in that book, kind of isolated sentences, that the world would be a better place if we all trusted our guts more.

And, you know, one, I was reading a fascinating book that I'm sure a lot of others have read, Too Big to Fail, and it talked about what happened with Lehman Brothers. And it turned out the president of Lehman Brothers, as they were sort of circling the drain, 2007, 2008, was a big devotee and, you know, had exhorted all of his, you know, all of his friends to go with their guts and so on. And I think there are some situations where it is good to trust your intuition, your gut instincts, you know, deciding what kind of ice cream you like and what you want to eat and so on. But investment decisions and really weighty matters might be a good time to step back and go for a little more rational analysis. So I'm going to sell those

right now? One of the big topics in your book is confidence. This guy epitomizes confidence. Buy, sell, or hold Donald Trump. That's a good one. I don't know. You have to admire his confidence, and Donald Trump really does. I don't know the man. I do like some of his appearances on TV, but he really does illustrate one thing we call the illusion of confidence, which is that if you act confidently, other people are going to believe what you're saying and believe that you have the skills and the knowledge and the ability, and that can actually carry you a long way. And I think, you know, you're right that that's one of his attributes. I think I'd put a hold on him right now, though, because I think, you know, there could be too much of a good thing there.

This is a film about confidence, man, by Seller Hold, The Sting. Oh, I would definitely buy that one. Now that you've mentioned it, I haven't seen it in years, but now that you mention it, I think I'm going to check it out again. I mean, Confidence Man, a lot of people don't know that the phrase con man is short for confidence man, and that was the original phrase a long time ago, and it's a great example of that phenomenon. If you just look at the Madoff case from last year, he was a guy who was supremely confident. People went and interviewed him, and he betrayed no signs of unease or that anything was going wrong with his business when he talked to outsiders

and future investors and so on up until close to the very end. And finally, your book is on sale everywhere, including Amazon.com. Another book that I found on Amazon.com is entitled Practical Intuition in Love. Let Your Intuition Guide You to the Love of Your Life. Now, you and your co-author are both married, so buy, sell, or hold the role of intuition when dealing with one's spouse. well i thought you were going to say when when finding a spouse and in that case i was going to put a buy on that one because i i think uh attraction is one of those areas where a lot

of rational analysis is not going to tell you who you'd be attracted to and who you shouldn't be attracted to uh so i would go with intuition there now as far as dealing yeah i'm talking about the day-to-day stuff different that's a different question so now i'm going to actually answer the question you posed um and i would on that one i'd i'd put i'd put a hold because here you've got two sides of intuition involved. One is you want to be sensitive to how someone's feeling. You want to be sensitive to your own emotions and all that kind of stuff. And I'm not really that kind of psychologist, but I can appreciate that. But two, you want to be aware of when you're making assumptions about things like who remembers what and who said what when

and what people know and what they don't know. And a lot of arguments I've noticed after I wrote this book, the more I started to look at my own behavior and my own life, a lot of the things we argue about are based on people thinking they have perfect memory of what happened in the past. You said that two weeks ago. That's exactly what you said. I remember exactly what you said. And you can get into too many ridiculous arguments with your spouse, other people in your life, and so on, if you really believe that you are perfectly aware of what's going on and you have perfect memory and your knowledge is better than everyone else and so on. So I would really watch out for those kinds of intuitions, the kinds of intuitions about how your mind works and how good

you are, which are the ones we're really sort of warning about in this book. So on balance, I'd have to give it a hold because it's a half a buy and half a sell. The book is The Invisible Gorilla and Other Ways Our Intuitions Deceive Us. It is available everywhere. Chris Chabris, thanks so much for being here on Motley Fool Money. Thank you. As always, people on the program may have interest in the stocks they talk about. Don't buy or sell stocks.

Be solely on what you hear. Chris Hill and back in the studio with me, our trio of senior analysts, Seth Jason, James early Shannon Zimmerman. Guys, time to talk about the stocks that are on our radar. Shannon, we'll start with you. Well, I have interest in this stock, but I don't own it. So it's Berkshire Hathaway. And of course, it's endlessly fascinating because it's Warren Buffett, the most obsessively studied money manager there is. And his company has filed its latest 13F, where you can learn what he has bought and what he has sold in the equity portfolio. Cut substantially is Kraft Foods, which is not that big a surprise since he was pretty miffed at what they did with the Cadbury

acquisition. What he has purchased, though, Becton Dickinson, Iron Mountain, and Republic Services, which I know is a company that's near and dear to James's heart, people follow Buffett. And the fact that he likes these sort of boring businesses and mundane industries is telling. Right now, I think that that is where the action is after the crazy junk rally that we've seen over the course of the last 18 months or so. That's an interesting area to go fishing, and Buffett is fishing there. James Hurley? Chris, first off, before I get to my stock, I'll just say, despite all this banking stuff that might seem to be good for small banks, and maybe it is, relatively speaking, I'm still staying away from them for the most part because small banks are the most highly exposed banks to commercial real estate. Real estate is mainly a local game, and these small banks are sitting on a lot of that, and I think it's still going to be a big shoe to drop.

My stock is Deere & Company, D-E. This is John Deere. Most of us know it as. And it had a great quarter, a better quarter than many of its peers. And this is a company that's really tied to the rebound thesis. So if you're a believer in that, I would be a buyer in John Deere. If you're not, and I think a lot of us aren't, maybe short it. Or a competitor, maybe a Kubota or Caterpillar might be a better bet.

But the point being, it's a strong way to express your beliefs, positive or negatively, about the economy. And you better believe in agricultural commodities because that's when they sell tractors, is when the prices of all those agricultural goods go up. Seth Jason? Well, we'll go from Deere to Dell, which announced earnings just recently, and people were sort of disappointed. And I thought, ooh, hey, maybe Dell looks cheap, trailing 12 months free cash flow yield, 13%. That sounds great. Except that then I look at, I have a lot of nerdy graphs on my computer, and I look at these margin lines that are sort of this slope, constant slope downward.

And Dell is indeed racing to the bottom. And I think Dell's a value trap. And I think sooner or later Dell looks like GM. The problem being just about anybody can make a sort of half-lousy computer like the kind that Dell makes. And the high-end, Apple or others, that is a niche that's occupied by others. People don't even put Dell in that group. And so Dell is really left selling lots and lots of low-priced scraps. I don't need to look at any graphs.

I just look at my Dell laptop and come to the same conclusion. I can't stand Dell computers. They did have a pretty significant uptick in revenue, but thanks largely to the servers part of the business and the services part of the business as well. But that's a relatively small slice of the revenue pie. It's all about commodity PC sales, and they're losing that race to the bottom. And sort of adding insult to injury on Dell is the fact that over the prior quarter, they spent about $200 million repurchasing shares. You know, we've talked a little bit about share repurchase programs, and a lot of times that's a smart way to allocate capital. A lot of times it's just theater for gullible investors.

Hey, look, the company's buying back these shares. That's got to be a good time to get in, right? It's always not the worst possible time. Exactly, exactly. So I think that was a dumb move, to borrow Buffett's word. Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. Thank you, Chris.

Thanks also to our special guest this week, Christopher Shabris. His new book is The Invisible Gorilla. If you missed any part of the show, you can get it at our website, motleyfullmoney.com. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.

We'll be right back.