Motley Fool Hidden Gems Investing - Rethinking Retail

Episode Date: November 17, 2017

Wal-Mart hits an all-time high on growing e-commerce sales. Gap and Restoration Hardware rise on surprising earnings. And Comcast and Disney pursue a deal with Fox. Plus, Chris talks Southwest Airlines and popsicle hotlines with Dan Heath, author of The Power of Moments: Why Certain Experiences Have Extraordinary Impact. Thanks to Harry’s for supporting The Motley Fool. Get your Free Trial Set – go to Harrys.com/Fool. Learn more about your ad choices. Visit megaphone.fm/adchoices

Thanks to Harry's for supporting this episode of Motley Fool Money. Get your free trial set, including a razor handle, five-blade cartridge, and shave gel. Go to harrys.com slash fool. Support for Motley Fool Money also comes from our identity protection friends at MyIDCare. The massive data breach that occurred this past September puts you at risk, so join the more than 25 million Americans who rely on MyIDCare for identity protection. Get started today by visiting myidcare.com slash fool and save 15%. Everybody needs money. That's why they call it money.

From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money radio show. I'm Chris Hill, and joining me in studio this week from Million Dollar Portfolio, Jason Moser, and Matt Argersinger, and from Total Income, Ron Gross. Good to see you, as always, gentlemen. Ron Gross. We've got the latest headlines from Wall Street. Best-selling author Dan Heath is our guest. And as always, we'll give you an inside look at the stocks on our radar. But we begin with one of the most surprising turnarounds in recent history, and that's Walmart. Shares of Walmart hit an all-time high this week after third quarter sales came

in higher than expected. And for a bricks-and-mortar retailer, Ron, Walmart's online sales really making some headlines. I love a good fight. Come on, Amazon. Bring it. Come on. Yeah, nice results. I mean, 50% e-commerce jump there. Now, that is down from the prior quarter, which was a 60% jump. But let's not haggle over numbers. That's a pretty impressive jump. 13 consecutive quarters, the U.S. locations have had same-store sales increases. So, it was just a few years ago, I remember, where every time we talked about Walmart, we said, the U.S. business is struggling. They cannot grow same-store sales. They've done a great job turning that around. Grocery is a big category for them. It helped them

this quarter as well. It delivered the strongest quarterly comparable sales performance in nearly six years, so they're actually building on their grocery business. And they actually raised expectations, so they not only see this quarter good, but they see it continuing into the future. You look at a few years ago, Jason, that's right about the time that Doug McMillan became CEO of the company, and he and his team have got to get the lion's share of the credit here. Oh, you've got to take your hats off to him, right? But I also feel like, at this point now, I'm still aware of the market share numbers and whatnot, but isn't e-commerce

really just commerce? I mean, that is the state of commerce at this point. It is the one driving the truck. And so, I think the sooner we stop differentiating between the two and then start identifying the companies that are embracing that transition, I think probably have the opportunity to identify some better investing opportunities. Certainly, Walmart has done a good job embracing that opportunity. But let's go back to what Ron was talking about, and let's haggle over numbers a little bit here. Let's do so. Yes, please. Let's throw some context here. I think the grocery point that you made was very

important here, because when you look at Walmart's U.S. business, it brought in about $370 billion in revenue in 2017, the U.S. business. Now, grocery was 56% of that, or around $210 billion. Now, this is all part of that $485 billion that Walmart brings in total. Now, we think about that, $210 billion in groceries, Amazon brought in $161 billion all told last year, or the trailing 12 months. So, I mean, on the one side, you can see how big Walmart is. I mean, there is a lot to how they've built this business over the years. On the other side of the coin, though, I think it really shows the opportunity that's still

out there, it certainly sheds a lot more light on Amazon's Whole Foods acquisition. And now, you really understand why they're cutting prices at Whole Foods so quickly, so they can compete with something like a Walmart, because that grocery opportunity is so big. So, you've got Walmart probably playing a little bit more defense right now. Amazon and Whole Foods playing a little bit more offense. Still a very big opportunity out there for both concepts. And I'll haggle about two more numbers. as impressive as the e-commerce growth is, and it's completely impressive. I, for one, have been way too critical on Walmart on this show. I think with the investments they've

made, Jet.com, the management, it's been extraordinary, and the growth is reflecting that. But still, as impressive as that growth is, overall revenue up 4% year over year. It just shows you that, hey, this business, while it's made some impressive investments and made some strides in e-commerce, it's going to take a lot of continued growth in that area to really move the needle. Big for the top line. And then, operating profitably down, which I think is a reflection of how much they have to invest in the business to compete. And so, now I look at a stock with 25, 26 times earnings, with that kind of growth trajectory, it seems expensive to me.

Agreed. And as you said, the top line, we see growth, but it's not going to knock the cover off the ball. And then you see aggressive promotions that are necessary in order to compete with the likes of Amazon, and as you said, we see profit margins dip. So, what are you going to pay for a company with top-line growth, rather anemic, and profit margins that are deteriorating slowly? You've got to be careful. That's just it with Walmart. They're trading one for the other. They're getting more in the way of e-commerce sales, but it's not like it's something that's juicing the top line, really, at all. To your point, that top-line growth really isn't there. Conversely

you look at Amazon, and that top line is still growing at a phenomenal pace, 20%, 30%, 40% quarter in and quarter out. I mean, you understand now why the market's paying so much for Amazon today and so little, really, for Walmart. But for the longest time, we looked at these two companies and these two stocks, and a lot of people would frame the question, is Amazon going to put Walmart out of business? Shares of Walmart are up about 40% this year. So while they may not be hitting the cover off the ball, they are moving in the right direction, which makes me wonder if this is one of those industries, and it seems like it is, where there's going to be more than one winner, if Amazon is a clear winner, if

Walmart is not going to be put out of business by Amazon, someone big out there has got to be not pleased about the fact that Walmart has had this resurgence. And I'm wondering if it's Target, I'm wondering if it's Costco. I was going to say Costco, and even from a stock perspective, you're paying up for Costco maybe 28, 29 times in a time where they probably are a little bit worried here about everything that's going on in grocery in particular, and I'd be careful. And then you get to Target, and Target seems kind of like just an also-ran. Oh, yeah, they do it too. Oh, yeah, I forgot about Target. They're in this business as well. Whereas, a decade

ago, we thought they were something special, and it seems like they've kind of gotten lost. Well, let's go broader on retail. We've talked on this show, and Bloomberg had a huge article recently about the coming retail apocalypse in America. Maybe it's karma, Matty, but retail stocks just had their best week of 2017. Ron mentioned Target. Target dipped because they lowered guidance for the holiday, but they were back up on Friday. And we saw really surprising retail stocks rise on Friday. Abercrombie & Fitch, Foot Locker, you know, a couple of basic niche retailers that were almost at death's door and bouncing back up. And I'm wondering if we need to rethink this at least a little bit.

I think we do. I don't want to use a technical term, but I mean, you could argue that a lot of these companies were just oversold, because the pessimism around anything not Amazon in the brick-and-mortar retail space. It built up so much that everyone really thought these companies were going to be left for dead. And I think the narrative that we've, maybe I in particular, have sort of pushed, and we've been talking about for years now, is that it's Amazon against the world, and everything else is going to lose, and Amazon's going to be the one left standing at the end of the day. And I think that's just not going to be the case. I think if you're a business, especially one that's embraced online channels

and done so successfully, and you have a good customer experience, you're going to succeed over time. It's just a matter of finding that market. And I think we just probably got way too pessimistic on a lot of these companies. I feel like it wasn't that long ago where I said something on the show, I felt like we were at peak Amazon, where it just seemed like every conversation, I was just cleaning the toilet the other day, and, well, Amazon, and whatever it is. Amazon was introduced in the discussion. I don't know what that means. It seems to me that we would talk so much about how well Amazon was doing in taking over the world and left all of these

other retailers for dead. As that went on, you've got a lot of money out there looking for relative value out there. I'd say probably a fairly expensive market today. A lot of those retailers that we were giving the thumbs down on look relatively cheap compared to others. I think there's a lot of money flowing into those companies today because of those results that were less bad than expected. Now, I wouldn't be surprised at all if around February of 2018, where we start seeing these holiday quarters and forecasts for the coming year, maybe not quite as healthy as people were hoping. I wouldn't be surprised at all to see a lot of that money start flowing back out. Because I don't think all the money that's

going into these stocks today, Abercrombie & Fitch, Urban Outfitters, Gap, listen, just because their stocks are going up, doesn't mean they're good businesses. It just means that there's probably a lot of short-term money out there on Wall Street that sees a profit opportunity. Yeah, I think that a lot of it was, we assumed that whatever Amazon disrupted, they would take. In other words, that became their market share. And that's not the case. But I think what's happened is, retail has been disrupted. And we've already seen plenty of bankruptcies. And we know we have too much square footage in the United States relative

to other countries in terms of retail. And so I think at the fringes, we're going to see still a lot of bad retail companies go under. But the ones that persevere, again, have the omni-channel presence, have good customer experiences, are going to thrive. And so, it's not a complete washout like we've been talking about. I'll just throw in the two cents that I think, if you're thinking about putting money into retail, make sure you differentiate between investing and playing this for a trade. We obviously advocate investing, finding a company that you think does a great job, that you can own for long periods of time, and that will continue to increase earnings over

time, versus a company that may have been oversold, as Matty said, and you can play it for a pop. That's a hard game to play, especially in specialty retail, where, as Jason said, I think a couple of quarters from now, we might start to see the tide turn and you'll see the stocks go back down again. So, just be careful. Is there one thing in particular that investors should look for when they're looking at a smaller, maybe a niche retailer? Because again, you look at the retail index this week, best week of 2017, and it is fueled not just by Walmart and Home Depot, but also by retailers like Children's Place and even Macy's. I'm wondering if there's a particular metric or

something in particular you want to hear out of management if you're trying to decide if this is a trade or this is a business that actually has value. There's really only two ways retailers can make money, and that's opening additional stores and or increasing same-store sales, sales per each store. So, if you find a company that has a long enough growth runway where you think that they can continue to open stores because there's demand for that particular product, that's great. And if also they're increasing sales per store, then you have that compounding there that can be special. Yeah, I agree. And I think even before that, and I bet you'll agree with this,

Matty, a lot of these retailers are in a lot of trouble because they're over-levered, right? They have a lot of debt on their balance sheets. And when you are a retail concept with a lot of obligations and your business is flatlining, fulfilling those obligations becomes immensely more difficult. And you're seeing businesses like Toys R Us pay the price for that today. Coming up, a couple more headlines and a few stocks on our radar. Stay right here. You're listening to Motley Fool Money. All right. I want to say thanks to Harry's for supporting this week's episode of Motley full money. I'm a Harry's fan. I am a flat-out fan. I've been a customer of theirs for three or

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free trial set that includes a razor handle, five blade cartridge and shave gel, a $13 value for free. Just cover the shipping. Go to harrys.com slash fool. That's harrys.com slash fool. 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 Argesinger, and Ron Gross. Comcast is the parent company of NBC, Telemundo, Universal Pictures, DreamWorks Animation. And apparently, Matty, they're looking for even more content, because Comcast is talking to 21st Century

Fox about buying most of Fox's assets, including the movie studio division and National Geographic and FX networks. And Disney was in talks with Fox as well. Where is this going? Well, you know, you used to be able to cleanly categorize the media entertainment industry really into two categories. You had, you know, content and you had distribution. And there was kind of a nice marriage relationship there for decades. But because of the success of Netflix, because of what Amazon, the threat that Amazon represents, I think the older legacy media companies realized, you kind of have to have both. There was always a little bit of overlap, but now we want to actually control both. And so, that's why I think you

saw Comcast buy DreamWorks, NBCUniversal in recent years. You have the AT&T-Time Warner merger that may or may not happen. And then you have Disney now, and Comcast, and apparently Verizon as well, looking at Fox's assets. I think actually, in the mix here, it's mentioned but not really in one of the headlines, is that Hulu is part of this deal, that Fox owns 30% of Hulu. So, if Disney or Comcast get control of Fox, they now have a majority position in Hulu. I think that makes that platform much more competitive against Netflix and Amazon. I think a deal's going to happen here. There's just too much interest in those assets. I expect by the end of the year, there's probably going to be some official acquisition plan

in place. Yeah, I would not undervalue that Hulu asset. We have that skinny bundle that they offer now. They're still working out some kinks, but I tell you, it is a really, really great way to cut the cord, so to speak, and still get a lot of content at a very affordable price. I think they're onto something there. It's interesting, because we hear all the time that content is king, and clearly Fox has looked at their entire portfolio and said, you know what, we just want to do news and sports. Shares of PayPal up this week after the company announced it is selling

its entire consumer loan portfolio to Synchrony Financial. You tell me, Jason, why doesn't PayPal want to loan me money anymore? This is more about just shoring up the balance sheet, I think. I think, honestly, in simplest terms, this is a deal that just lets two companies focus on doing what they do best. So, Synchrony at its core is a bank offering credit products, and PayPal is a financial services company that more or less serves as the medium through which money is exchanged in this mobile age. So, as you said, it takes a credit portfolio that PayPal used to own in the form of a lot of receivables, and basically unloads that onto Synchrony's

balance sheet, which is more in line with what they do. It's about $5.8 billion that represents that receivables portfolio. The general thinking is, this gives PayPal's management, it frees up a lot of cash that they can then invest back into the business in other forms of products and services they want to bring to market that complement their offerings anyway. So, to put it into context, PayPal currently uses about 50% of their free cash flow annually to fund this credit portfolio. So, this is really going to free up a lot of cash for them, which I think is ultimately a good thing, and that's why you saw the market react so positively to the news. Alright, let's get to the stocks on our

radar. Our man behind the glass, Steve Broido, will hit you with a question. Ron Gross, you're up first. What are you looking at this week? Steve, hang on to your hat here. Ready? Sangamo Technologies, S-G-M-O, a biotech focused on gene therapy, which will one day allow doctors to make changes to DNA to cure previously incurable diseases. This last week, they, for the first time ever, tried the technology in a human patient to try to cure Hunter's disease, and we'll have to see if that ends up being successful or not. Obviously, a very risky stock, a lot of companies exploring gene therapies, and there's a lot of different ways to make changes to DNA. So, if you're like me and you want to participate in this kind of an investment,

you might want to take a basket approach and buy more than one. O' Ron is talking biotech! I am a shareholder of this company. O' Someone switched out Ron Gross for David Gardner when we weren't looking! Steve Broido, question about Sanjamo Technologies? When I hear, waiting for FDA approval, I want to run for the door, because it seems like so many businesses are just waiting for that critical FDA approval and everything will go great. Should I think differently, Ron?

No, you are right. That's why biotech is so risky. You've got to make sure they have the cash to succeed and stay around a long time. And that's why I advocate a basket approach by a bunch of these. Jason Moser, what are you looking at? Guys, I love my dogs. That's why I'm going with IDEX Laboratories this week. Ticker is IDXX. Their primary focus is on the U.S. pet diagnostics market. Focus on companion animals primarily, so cats and dogs mostly. We all know sort of the market trends there, but They have a very attractive razor and blade model where they get their equipment in veterinary

offices around the country and then sell the consumables that go with that equipment. They hold about 70% of the market today, and a big investment in growing their direct sales team with a focus on higher levels of service to compete with Mars, which owns VCA Antec and Banfield, among others. According to my vet, those investments are working. He is an IDEXX customer and seems to be very happy with the service. So, we've got it on the watchlist and MDP and just waiting for the right price. Steve, question about Idex Labs? Is there a clear tie-in with an insurance provider? So, you buy insurance before

any of the testing gets done, so you know you're covered? No. That's really the attractive part about this market, is that the pet care business is really a cash business. There are pet insurance plans, but those revolve around catastrophic-type events. General health and well-being of your animal, it's just a cash business. Matt Argersinger, what are you looking I'm looking at Stagg Industrial. Ticker is S-T-A-G. I'm adding it to our watchlist in Million Dollar Portfolio. Stagg is a real estate investment trust. It owns more than 300 properties, primarily warehouses, distribution centers, light industrial buildings. You can

kind of see where I'm going here. If you're looking to play the e-commerce trend and you're worried about the shifting retail landscape, this is one way to sort of bet on the growth of omnichannel distribution. I think it's a great little business. You've got a 5% dividend yield as well. Steve? That dividend going up or down in the next year? Oh, it's going up. It's going up, Steve. Stagg Industrial, Idex Labs, Sanjamo Technologies, three companies that really aren't household names, Steve. What do you think?

I do like me some dividends. I'm going Stagg. All right, guys. Thanks for being here. Thanks, Chris. So, what's a great experience really worth? We will discuss that and more with bestselling author Dan Heath. That's next. Stay right here. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. Dan Heath and his brother Chip have written several bestsellers,

including Switch and Made to Stick. Last week, I got the chance to interview Dan in front of a live audience and talk about his latest book, The Power of Moments, why certain experiences have extraordinary impact. One of the things early in the book is something you and your brother referred to as the Disney paradox which is both illuminating and in some ways a little I don't want to say disappointing but one of the things that you bring to light is that problem-solving for businesses almost doesn't get the

credit it deserves that that peak moments are outweighed significant get an undue amount of credit for what a business does for any given individual? Yeah, so let's start with the Disney paradox, which anybody who's been to a theme park, I think, can relate to this. And that is, if we were to monitor your moment-by-moment happiness levels via some advanced technology, I think it's pretty safe to say that for the majority of those moments during the day, you would have been far happier sitting on your couch at home right it's less humid there less crowded you can get lunch for less than 18 bucks but looking back on that experience you might consider it one of the highlights of your

year and so that's a kind of paradox how could something that wasn't that fun in the moment or at least in the aggregate of the moments be a highlight and the answer is something that psychology can explain, and that is that even though most of the moments may have been average or even unpleasant, you know, in 96 degree humid Orlando temperatures, there were moments that mattered. There were, you know, the adrenaline high of coming off of the Space Mountain roller coaster, or that moment when Mickey Mouse comes up and delights your child, and the moment when they pick out a souvenir and they're hugging this little, you know, plush stuffed animal of Pluto, and those are the kind of moments that your couch never creates and what's interesting is

psychologists know a lot about how we remember experiences and they say that there's basically two principles here that say a lot about what experiences are made of what great experiences are made of and the first thing is called duration neglect which says that when we remember our experiences the length of those experiences tends to sort of fade out wash away and what we're left with are snippets or scenes or moments from those experiences. It's easy enough to see this for yourself. Just think about a family vacation from a year or two ago and you'll notice there's no sense in which you can kind of load up the whole film of your family vacation and watch it end to end. A lot of it's gone. But what you remember are the special moments. The second

point from psychology is when we talk about these moments that are left, there is a logic to which moments we remember. And there are two particular kinds of moments that we disproportionately recall. One of them is called the peak of the experience, which in a positive experience is the most positive moment. That's the Space Mountain moment. That's the cute Mickey Mouse encounter. And then there's the ending, the peak and the ending. And so this tells us a lot about being in the business of providing experiences to other people, whether that's our customers, the patients that we take care of the students we serve even our own kids and part of what it says is that we may have the wrong mental model about what a great experience is made of

because in a lot of situations our instinct is to make an experience better you go and survey people about it you look at what they're complaining about and then you fix those problems all right it makes sense that's how you make something better you fix the problems but fixing problems doesn't make people happy. Fixing problems whelms people. Not overwhelms, not underwhelms, just whelms. So think about it. If you're driving down the road, you go three miles of highway without hitting a single pothole. Like you're not giddy about that. You're whelmed. Your cable TV functions exactly as it's supposed to for a full month. you're not going to look back nostalgically on that a year later you know remember that month

you're just whelmed and whelmed is pretty good I don't mean to to to belittle whelmed whelmed means that people basically got what they expected you know the alternative to whelmed is is angry or frustrated or disappointed but if we want a different reaction if we want delight if we want happiness, if we want loyalty, if we want engagement, then we have to ask a different question. Not where are the complaints and how do we fix them, but how do we create moments that are special? And in some ways, that's the starting place for the book. Well, and it sounds like at least one much smaller business than the Walt Disney Corporation that has figured out a way to do that is the Magic Castle Hotel in Los Angeles, which based on the photographs of the

hotel it looks like a perfectly fine hotel it does it it ain't the four seasons but it looks fine yeah but it's the number two rated hotel in all of los angeles yeah so i have to i have to share why this is such a just a crazy fact that this place is the number two hotel in la has anybody stayed at the magic castle nobody okay let me just sort of paint a mental picture whatever is in your head right now when i say the magic castle hotel could not be further from the truth like yeah it's it's not a castle it is neither a castle nor particularly magical looking yeah and even the word hotel is a bit of a stretch uh this place is uh it's actually a 1950s apartment complex two story that was turned into what effectively is a motel painted bright yellow totally unremarkable

it's just it looks like a clean budget motel and so this this this crazy fact that this place that's so modest is outranking the Ritz-Carlton the Four Seasons how could you possibly explain that and what we reveal in the book is that the magic castle has developed this capacity this knack for creating the big moments that matter my favorite example of this is by the pool which is about the size of like your neighbor's backyard pool it's like nothing special about it but mounted next to the pool is a cherry red phone kind of mysterious looking and if you pick it up hold the handset to your ear someone answers popsicle hotline may I help you and they will bring out cherry and grape and orange popsicles delivered to you poolside

on a silver tray by someone wearing white gloves like an English butler all for free There is a snack menu that allows you to order Cracker Jacks and Sour Patch Kids and Reese's and root beer and cream soda all for free, just for asking. In fact, the only thing that you have to pay for, ironically, is bottled water. It's like they're running a reverse nutrition program there. And I saw some kids making use of this, and the smiles on their faces were just priceless. It was like their parents probably spent a couple of grand doing a family vacation, and the thing that they're going to come back and tell their friends about is the free snack menu.

And on and on it goes. There's a board game menu and a movie menu and you can drop off your laundry and they'll wash and fold it for you. There's magicians doing tricks in the lobby. And so all the things that they're paying attention to are the moments that people will cherish, the moments that people will tell other people about. And when you start to hear that focus, you can empathize.

You can understand how people might actually rate this place the number two hotel in L.A. And you know what number three is? The Four Seasons Beverly Hills. You know it must kill those people to lose to the man. They're angry. It's interesting because there are things like that that you write about in the book,

and then there are sort of larger public companies like VF Corp and Southwest Airlines who have figured out ways to create moments either for their employees or for their customers and in both cases they they end up resulting just on the bottom line and in hundreds of millions if not billions of dollars in revenue that they're creating and in a way for me the more surprising one is southwest airlines and just sort of the the charming way that the flight attendants greet you and make their announcements because I as a regular customer of Southwest I always that always

struck me as just a nice little fun thing and it never even occurred to me that there was a significant economic upside for Southwest Airlines that they were doing that yeah it's fascinating so how many of you have flown on Southwest like in the last year how many of you have heard one of their kind of cheeky flight safety announcements so like you I always thought of this as just this is Southwest personality coming out. It turns out there's actually a pretty strong tradition of funny flight safety announcements at Southwest to the point where at headquarters, there's a wall that enshrines some of the best lines they've created. Like one of my favorites is, you know, put the oxygen mask first on yourself and then on your child. If you're

traveling with more than one child, pay attention to who has the greater earning potential. sort of like cynical parenting humor and so Chip and I started working with their insights team at Southwest and like many companies they've got troves of data about their customers and we asked a provocative question what are these funny flight safety announcements worth are they worth anything are they just you know improvisational fun or do they have business value and it turned out they had the data that they needed to answer that question, because they knew, you know, they could pinpoint which customers were highlighting these announcements in surveys about their flights, and they had

purchase histories from these same customers, so you could look at what were they spending on flights before the point when they signaled one of these announcements, and what they spent after. Well, it turns out when people pinpointed an announcement as a positive thing that happened on one of their flights, over the next year, they would fly on average about another half flight. Now, obviously, that's just a statistical average. That's a very difficult thing to pull off in reality, the half-flight routine. So that gives you a sense that this is creating real value. It's creating more loyalty.

People are choosing Southwest over an alternative for a given route. And so then we took a step further and we said we knew from the surveys that about 1.5% of customers were citing these announcements unprompted in surveys. And so just as a hypothetical, we said, what if we were able to double that? from 1.5% of people citing it to 3%, so not some gargantuan leap, but just something that we could realistically implement. What would that be worth? And the number that popped out of the analysis

astonished all of us, $138 million in additional revenue annually, every year, because flight attendants were given the license to do something fun, that entertained them, that entertained the guests. And to me, this is a reminder that moments matter, but not every moment has to be perfect to deliver a great experience. You know, at the Magic Castle, the rooms are average, the lobby is average, the pool is average, but because some moments are magical, people remember it really fondly.

At Southwest, the boarding process is below average. The snacks are below average, right? You're packed in in a way that is below average. And yet, because they focus on these moments, these kind of fun, spontaneous moments, because they're friendly, they create these peaks that make the experience remarkable. And I think that's the lesson for all of us who are in the business of serving people is not everything has to be perfect. You know, whelming is a good baseline, but we've got to invest in a couple of remarkable moments because that's what people are going to cling to. Coming up, Dan talks about the key to making better decisions. Stay right here.

This is Motley Fool Month. Thanks again to our identity protection friends at MyIDCare. Remember that, back in September, that massive data breach that Equifax had? It exposed personal information for more than half of the U.S. adult population, including our own Ron Gross. It's likely some of your most sensitive and valuable personal information was compromised in the breach. Hackers seize names, social security numbers, birthdates, addresses, even some driver's license information. MyIDCare covers all types of identity theft, from medical ID theft to child identity theft. They have got you covered.

Enroll today to get credit and dark web monitoring, $1 million insurance, and a 100% success rate restoring identities. Join the more than 25 million Americans who depend on MyIDCare for protection. Get 15% off by visiting MyIDCare.com slash fool. Welcome back to Mountain Full of Money. I'm Chris Hill. Let's get back to my conversation with bestselling author Dan Heath. You mentioned making better decisions. And in your previous book, one of the things that stuck out to me was sort of a broad analysis

that you and your brother did about how companies make decisions. And unfortunately, the analogy that you guys drew was that essentially most companies make decisions in the same way that teenagers make decisions, which is not necessarily a compliment. No. So this relates to what psychologists call narrow framing. And the research is just very eye-opening on this. And I think we can all relate to this from our own experience in life, that what people tend to do when they make decisions is they tend to put blinders on and obsess about a single option that's on the table. We call this a whether or not decision. So when we're struggling with something, for teenagers, it's deciding whether or not to go to the party tonight, whether or not to smoke this thing or not, whether or not to be friends with this person or not, whether or not to send this image over social media.

And, of course, the flaw with that is obvious, that when we're thinking about one option and the only real decision we're making is yes or no, do it, don't do it, we're leaving off all of the spectrum of possibilities that would be available to us. And organizations make exactly the same mistake again and again and again,

and the research of a guy named Paul Nutt confirms that the percentage of time that organizations make whether or not decisions it's almost indistinguishable from the amount of time teenagers do it. And you can see this most vividly in mergers and acquisitions. So the research has been absolutely clear on this for decades. A good rule of thumb is if you're considering acquiring a company, don't. Because the majority of them create no value and, in fact, roughly half destroy value.

And this hasn't changed very much, but it still happens. There are still companies being acquired, still mergers happening. And you can understand from the perspective of narrow framing why this happens. You know, a CEO kind of takes a shine to some other organization. You know, maybe it solves a strategic problem. Maybe it opens up a new opportunity. There go the blinders, right? There's one option on the table.

The question is, do we buy this thing or not? And then with every week that passes, notice how the dynamics of that decision change. You know, you're lobbying the board to get behind it. You're starting to socialize the idea with your company. You're starting to figure out how are we going to pay for this. You're starting to make connections at the target. And as time goes by, it's really not even a yes or no decision anymore. Because with one option on the table, no really feels like a failure, doesn't it?

Six months go by. You've been researching this merger nonstop. You've been selling it to your team as the next great thing. You've got your board on, you know, behind you on the bandwagon. And then you're going to back away because it's something you learned. Like, isn't that going to put egg on your face? Are you going to feel kind of sheepish about that? And so you can see these forces kind of conspire to turn what is originally a yes or no decision,

which is bad enough, into a yes or yes decision. And so that's why you see this phenomenon of just gross overpayments for acquisitions that everybody outside the fray can see is crazy. And yet CEOs push forward. Is that why creating distance is so important when it comes to making decisions? I'm just thinking about Andy Grove at Intel and sort of thinking about the memory chip business and how he and his team wrestled with that until it seemed like finally they were able to almost remove themselves from the situation. Yeah, so what was so heartening to Chip and me about this decision-making research is how often the simplest tricks were the most effective.

So I think there are two really easy ways to break out of narrow-framing predicaments. One is to force yourself to develop one other legitimate option. That's it. You don't need eight options. You don't need 12 options. You just need more than one where you have a legitimate disagreement, especially within organizations. if someone isn't lobbying for option two you don't have a second good option yet so just one is enough to kind of pierce that bubble of narrow framing and to your point I

think the second approach is find a way to distance yourself from the immediate emotions and politics and stresses and anxieties of the situation and Andy Grove in his memoir talks about a situation where he did that it was in the 80s Intel had been founded some people don't remember this as a producer of memory chips in fact for a while they were the world's monopoly provider of memory chips and then competition increasingly came in the market especially japanese firms by the mid 80s intel was really languishing in memories it wasn't that profitable anymore share was shrinking but meanwhile they created the second line of microprocessors and ibm selected intel's microprocessor to be the brains of the first pc and so they had this kind

of small but exciting product in the microprocessor in this legacy big business that was that was sliding in the memory chips and the question was what do we do about memory do we try to leapfrog the Japanese competition do we seed the mainstream of the market to them and pick off specialty markets that are higher margin do we get out of the market altogether and he said that at a certain point he walked over to the window and he saw in the distance this ferris wheel rotating and it just struck a chord in him you know it felt symbolic of this kind of non-stop debate that had been going on and he turned to Gordon Moore Gordon Moore Moore's law fame and he said Gordon if we were replaced and our successors came in here to take our jobs what do you think they would

do about the memory business and he said that Gordon Moore replied without hesitation oh they would get us out of memory business for sure and so Andy Grove said well Gordon shouldn't we just go down to the lobby, walk out the front door, turn around, come back in, and just do it ourselves. And that was the moment that broke the logjam. And what's amazing to me about that is just think of the ROI for this question that he asked. I mean, this was one of the most important strategic decisions that Intel made in that entire decade. The book is The Power of Moments, Why Certain Experiences Have Extraordinary Impact. It is available everywhere. That's going to do it for this edition of Motley Fool Money. Our engineer is Steve Broido.

Our producer is Mac Greer. I'm Chris Hill. Thanks for listening. We'll see you next week.