Motley Fool Money - Motley Fool Money: 09.28.2012

Episode Date: September 28, 2012

Apple CEO Tim Cook issues an apology over the iPhone5’s maps.  Research In Motion has a rare earnings win.  And America steels itself for a global bacon shortage.  Plus Nate Silver talks investing, elections and baseball in his new book The Signal and the Noise: Why So Many Predictions Fail - but Some Don’t. Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Colagard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Full Money. Thanks for being here. I'm your host, Chris Hill, and joining me in studio this week from Motley Full Income Investor James Early and for a million-dollar portfolio, Charlie Travers and Ron Gross. Gentlemen, good to see you. Good to see you, too. Always. We have got a great show. We've got earnings from Nike and research in motion.

we have got an inside scoop on the Olive Garden that you will not want to miss. And as always, we've got a few stocks on our radar. But just like last week, we begin again with the biggest public company of them all, and that's Apple. Apple sold more than 5 million new iPhones during the opening weekend. On Monday, however, one of the big news stories was about customer complaints about the new mapping program in the iPhone 5. And, guys, it got so bad that by Friday, CEO Tim Cook issued an apology saying, we are extremely sorry for the frustration this has caused our customers, and we are doing everything we can to make maps better. James, I'll start with you. Were you surprised that he issued this apology? I was surprised by the emotion and the apology, Chris. I think that was interesting. But the bigger story here, I think, is that this is actually not a bad piece of software by general software standards. My wife likes it over the Google, actually. I mean, they're obviously problems, but the Google map version. I mean, but Steve

jobs ran Apple to such a high standard that even, you know, a pretty good piece of software is not good enough. In other words, is Tim Cook thinking more like a businessman here than a perfectionist showman, which, you know, there's Apple as a business, and Apple as an image, and I don't think he's managing the latter very well. Ron, what do you think? I tested out the app, and it worked fine for me, but I'm a bit of a navigation moron, so it's my bar is kind of low. It's on your dating profile.

I, the Mayaculpah was a bit extreme for me, extremely sorry. Come out and say, you know, we made a misstep, we're going to correct it. Like, it's a little bit over the top for me, a little dramatic. Charlie, let's be clear, Steve Jobs years ago, when there was the problems with a new iPhone antenna, he didn't apologize. He just came out and said, no, you're holding it wrong. It's your fault. It's your fault.

I mean, this is. And yet they not just survived that, they thrived. And I think in comparison, that's a great example. example, and I think this maps thing is going to be forgotten in less than a week. Do you think that potentially long-term this could hurt them? Because it seems like the sort of, I agree with you that this helps, you know, the apology helps, they'll get past this. It's certainly not hurting sales of the iPhone 5. But it strikes me as the kind of thing that, Ron, if the next device that comes out, the next new iPad or a new version of whatever, has some

kind of similar problem, then the narrative is going to be formed, well, this is, quality is slipping and this is just like last time. I'd say the danger is, does this signal a kind of a strategic problem, a management problem? Like, how, did they not think this through? Did they not know this would cause problems? I've heard the Apple, the maps, it's called a customer tax or a strategic tax. It's like, sorry consumers, we need to do this because we've got a plan in mind to go after Google, so you're just going to have to deal with it. Did they really vet that enough? And if this continues, if this becomes their Quickster moment in Netflix parlance, that could be a problem. I don't think it is. But we'll watch

it. James, what do you think? On a scale of one to Quixter, where does this rank? Maybe a six. They can recover, but if it happens again, like you said, that's a problem. Just closing out on the stock, shares of Apple down about 2% this week. You guys all have stocks that you are watching, do you root for stuff like this? Do you root for things that are just going to not necessarily have long-term problems, cause long-term problems for a company? But they're just like momentary glitches that knock a stock price down just a little bit so that you can get in at a better price. Is this the kind of thing you look for and hope for, Ron? If I'm still establishing a position, then yes, it's very counterintuitive. But if you're still

buying a stock, you actually want the stock to go down. It's hard to root for that. But it's the truth. In the case of Apple and million-dollar portfolio, we have our position. We're good. We don't like to see the stock go down. We'd prefer to see it go nothing but up. Sticking with smartphone, shares of research in motion up more than 10% on Friday after quarterly revenue came in. Wait for it, Charlie, higher than expected. What'd you say? Yes, not just much higher than expected. It was about half a billion dollars higher than expected. Is this signs of life for RIM? It was taken that way a little bit, Chris. And so revenue was up 2% from the quarter immediately before.

However, year over year, revenue is down 31%. So I say it's a framing issue going on. That said, research in motion does still have 80 million subscribers. That's a lot for a company that people have written off as debt, and they have $2 billion in cash with no debt. So they do have a little bit of a war chest to try and compete. what investors need to look forward to is the launch of their BlackBerry 10 operating system coming in calendar Q1 of 2013. Supposedly, that's going to be the next big product that's going to turn around the company.

I can't wait. I can't wait. Yeah. Does this get them through the next few months, or is this just sort of a momentary blip and come Monday? It's business as usual. Well, it is a little troubling, but not surprising that management said there's, going to be pressure in the next few quarters until BlackBerry 10 arrives, they are going to see lower unit volumes of the BlackBerry 7 handsets and also a higher marketing expense as they

start to drum up, you know, some interest in the Blackberry 10. So it's going to be some rough going for a little bit here. Nike's first quarter profits came in higher than expected. So, James, I have to ask, why did the stock drop a little bit on that news? Well, Chris, China giveth and China taketh away, and this quarter China took it away. You know, Nike was doing well for the past three, four, five years after the Olympics. It was doing particularly well. But Chinese orders slip to future orders are, I think, showing like 7 or 8 percent growth, which is not bad, but that's sort of like in line with whatever the Chinese officials think their GDP is.

So it's nothing really that bad. It's just not as fast as expected. But still they're doing like 6 percent growth in the future orders worldwide, which to me is pretty good, but obviously not as good as the market expected. When you look at Nike stock over the last five years or so, it's done well. But just year-to-date, it's down about 2%. And that's against the S&P 500, which is up around 15%. Is this just sort of a momentary struggle that they're going through? Or are there material things that Nike really needs to improve to see the shares appreciate? I think it's somewhere in between. They have a lot of inventory. The thing that stood out to me also, I think, was like a 29% boost in marketing spending this quarter of. So, you know, they're really trying hard to maintain these sales, and we're going to find out if it's going to work. Why do some companies tout that?

I remember the CEO of – not the CEO, but one of the executives of Pepsi was on CNBC a month or two ago and was very proudly talking about how much more money Pepsi was going to spend on marketing. And I just thought, okay, if I'm a shareholder, which I'm not, but if I'm a shareholder, I don't know how excited I am about that. It's actually a brilliant question, Chris, you know, because it's only a shareholder. The spending is only half the battle, right? I'm just thinking we're spinning this much more, but we don't know if that's good or not until we see the return. And when it comes back around, it's like I'm throwing the boomerang, but I don't know if we'll catch it. Flattering the host, always a good move.

Shares of Caterpillar down around 6% this week. The company cut its earnings target with the CEO saying Ron Gross, and I quote, we expect fairly anemic and modest growth through 2015. Anemic, you always love to hear that word. I love that. I don't think this should really be that much of a surprise. The mining sector customers are hurting. Colonarian oil prices have fallen sharply, so they're pulling back spending.

In 2011, they made a very large $8 billion acquisition of Bucyrus, which is a mining equipment company. So they've really got to have revenue to support a spend like that. Bucyrus is that what it says? Bucyrus. It's like a medical condition. It sounds like a fungus. It does. Yeah, like a foot fungus.

And then, you know, as James was saying, China is the wild card here. How much they're going to throw towards infrastructure is going to really be a big factor in how Caterpillar does over, let's say, the next several years, three to five to ten years even. I think Caterpillar would be fine over the long run. But when we have global weak, anemic growth, that has to factor in somewhere. We talk about Bellwether stocks from time to time, and Caterpillar certainly fits in that category. It's got a market cap of $56 billion, 132,000 employees. When you think about Bellwethers, does this one carry a little bit bit more weight than others, particularly when you think about housing construction, that sort of thing? It really actually does for me. I don't put too much credence into Bellwethers, but I kind of do think about Caterpillar FedEx is another one that's interesting, which also came out with some lowered guidance and sense of negative things. But again, no surprise. When we look around the globe, nothing is going that well at the moment.

Coming up, the scariest headline of the week will have you running to the nearest grocery store. Stay right here. You're listening to Motley Full 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 ourselves stocks based solely on what you hear. Welcome back to Motley Fool Money. Chris Hill here in studio with James Early, Charlie Travers, and Ron Gross. Guys, not a great week for electric cars. Toyota scrapped plans to mass market a new electric minic car. And shares of Tesla Motors fell 10% on Tuesday after the company cut its sales forecast for the year.

Ron, I'll just be blunt. Is it time to start betting against electric cars? This is a toughie. This is a, we're still in the early stages of this. If I look out 50 years, sure, there's electric cars. But as the CEO of Toyota said, current electric vehicles do not meet society's needs at the moment. That is, of course. So it's tough.

You know, Tesla, I mean, they're betting it, betting the ranch on it. They have their own issues. They're coming up upon their debt is their covenants or they're bumping up against. They're not firing all soldiers. They are not. They just today, or this week, I should say, went back to the capital markets, the equity markets to raise $150 million. Those shares priced at a slight discount, not a lot of demand there.

But at least they were able to raise capital shore up their balance sheet. But this is going to be a long game ahead. But Tesla is at the high end of the market. Toyota was aiming for the low end. And they also said, we misread the market. We misread the ability of battery technology to meet consumer demands. Yeah, then they're scrapping the whole EQ, I think that's the EVE line. Not just that there's lower demand, it sounds like there is virtually zero demand for this.

Well, and I think there's a good reason for this, Chris. So we were car shopping within the last year. When you say we? My wife and I. And we ended up buying a Mazda 3 that gets 40 miles to the gallon. And so when you compare that against hybrid technologies, which do a little bit better, and these are very high mileage vehicles that you don't need an electric car for, and they're much cheaper to buy up front.

I was at the Walgreens of their day, and they had this electric charging station, and there's some homeless guy panhandling, and he'd like set up his shop around that. Genius. Nobody was using it. That's the point. Nobody goes. Yeah, yeah. Guys, here's the scariest headline of the week. Global bacon shortage expected to hit the United States next year.

This week, the U.S. Department of Agriculture issued a warning due to the droughts in the Midwest. The shortage could come as early as next year, and restaurants are already being hit with price increases. Sir Charlie Travers, I turn to you. What is your plan? I just ordered my chest freezer. I got ahead of this. I picture that's seen an airplane where they're running through the aisle screaming. On a more serious note, there are some big companies that spend money on bacon. We've talked about the commodity cost of corn and the rising price of corn and how that hits some of the restaurant stocks. When you look at McDonald's and Burger King and Yum brands, they can't be happy about the fact that

the price of bacon is going up. I mean. Right. And it's not just bacon. It's chicken as well, but to stick with the pigs. The U.S. Department of Agriculture said the hog producers is going to cut production because it's too expensive, given the corn feed costs. I think, you know, the consumers will have the last word. We want our meat. All right. So for any listeners out there who are thinking about sending us a little tang around the holidays, please send bacon. And tank to. Apple smokes, please.

Apple smoked, bacon instead. You can always email us. Radio at Fool.com is our email address. Continuing our conversation from last week when we talked about the Olive Garden, let's bring in our man, Steve, from the other side of the glass, our number one Olive Garden fan. How are you, Steve? I'm doing great. We got an email from Bailey Wood in Washington, D.C., because last week, Steve had mentioned the rolling chairs at Olive Garden. Bailey writes, as part of the Olive Garden server training, I was a server, you are introduced to Larry chairs.

Back when it was at General Mills Company, the restaurants had special chairs that didn't have any arms. Almost all of the chairs do have arms, but not every customer could fit in them. So a customer by the name of Larry complained, so Olive Garden instituted a new policy and armless chairs were purchased. If you had a, quote, substantial customer, a chair without arms, a Larry. It doesn't mean a good tipper. A Larry chair was placed at the table before the host brought the party back to the table. As a server, you were trained to pull this chair out when the party approached, but not say anything for obvious reasons. So the next time you visit the Olive Garden, ask if they still have Larry chairs.

Did you know they had names, Steve? I was always wondering why my chair never had arms, actually. This is the decline of Western civilization. Is it not? I got to say, I love the backstory. I love the little sort of like internal, like, oh, yeah, if you work at Olive Garden, you know. They're called the Larry Chairs. All right, let's get to the stocks that are on our radar.

And we'll have Steve hit you with a question. So I hope you're prepared. Ron, you're up first. So I'm circling back to the baking conversation, and I'm going with Sanderson Farms, S-A-F-M is the ticker. Third largest chicken producer in the U.S. stock is getting smacked, along with our folks in the hog industry, because of rising corn and soybean prices. I've owned this one before based on the same theme. Hopefully, corn will kind of go back to the mean at some point. Chicken prices will rise, and this could be a pretty nice winner. Steve, question for Ron?

when these sort of health scares, E. coli, these things pop up. How does that affect a company like Sanderson Farms? Very poorly. Any kind of the bird flu was a disaster. Salmonella is obviously bad. Stocks get hit. That actually sometimes can be a great entry point unless you think that's going to persist, persist forever. But sometimes when stocks get hit based on like one-time occurrences, that it's actually a good time to buy. James, your stock this week? I'm going with a company called Sassall, SSL is the ticker. This is an income investor recommendation. It's a South African fuel company does coal-to-liquids technology and gas-to-liquish technology. A little bit frisky, kind of like Ron.

And it's staple, basically, is taking coal and turning into fuel, but it's getting better at taking gas, like natural gas and turning it into liquid fuel, which is very useful because we've got this global gas boom tank. So all this horizontal drilling. So all these people have a lot of gas. It's cheap, so it might make economic sense to convert it into fuel using this technology. Before I turn it to Steve, I don't have direct experience, but I think I understand what you mean when you refer to Iran as being frisky. But what do you mean when you refer to the stock as being frisky? It's going to move around a lot with oil prices, basically. All right. Steve?

How does transportation factor into being, though, this company is in South Africa. I'm assuming they're shipping this stuff all over the world, and South Africa seems fairly far. They actually set up technology. So Germany and South Africa got really good at turning coal into fuel, because they had a lot of coal and not all. lot of friends for different periods of their history. They set up the technology, Steve, in different places. So they'll set up a plant, a coal to liquids plant or a gas to liquids plant for you in whatever region you live in. Charlie? I'm going with Accenture, tickers ACN. This is a global consulting firm. They have a giant body of research they've collected over the years, and they

sell it out to companies to tell them how to run their businesses better, such as information technology deployments, you know, manufacturing setups and the like. They just reported earnings were up 13% and they hiked their dividend 20%. Historically, this is a very shareholder-friendly management team. They raised that dividend every single year since they started it in 2005. Is that like number one, is that the number one way to be shareholder friendly just to keep up in the dividend? Doesn't hurt. Yeah.

One of the best, certainly. Steve? What is the average age, do you think, of an Accenture employee? I remember when Arthur Anderson was around. Do you want to ask a different question? Every when it was 22 worked for Arthur Am. You had just millions of people that were aged 22, 23, all working for Arthur Anderson. Yeah, you are right.

They got their army of recent college grads and also the more seasoned executives on top. If I had to peg an average age, I would go with 36. That seemed pretty high. Steve, Accenture, Sassel, Sanderson Farms. Any of those three tickling your fancy? I think the Sassel, the. The South African fuel company sounds pretty interesting. Is it just because James termed it frisky?

Frisky definitely did help. It did win me over. It doesn't hurt. All right, Charlie Travers, James Early, Ron Gross. Guys, thanks for being here. Thank you. Thank you. Coming up next, a conversation with Nate Silver of the New York Times

on why most predictions fail, but some don't. Don't go anywhere. You're listening to Motley Full Money. Welcome back to Motley Fool Money. I'm Chris Hill. Nate Silver is a statistician, writer, and founder of the New York Times political blog, 538.com. His new book is The Signal and the Noise, Why So Many Predictions Fail, but Some Don't. Nate, thanks for being here.

Yeah, thank you, Chris. The rare in-studio guest on Motley Fool Money. I love it. Early in your book, you write, We have a problem. We love to make predictions. and we're not very good at it. Why is that? Why are we bad at making predictions?

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

And often things go wrong when you have kind of hard facts and kind of our human intuitions collide together. And so the book considers cases where there have been people who have achieved success making prediction, but also cases where you see widespread failures like the failures that led to the financial crisis, for example, the failures of political pundits on TV. If you go back and look at the McLaughlin Group, for example, which they'll have their authors come on at the end of the show. It's the end of every hour. Go around. Give me a prediction. Go around. Give me a prediction. So actually, I went and looked at, I took a while, right, but I went through the transcripts and wrote down all their predictions and then went back and evaluated how they had done.

done, right? And they got exactly half right. So they were as good as flipping a coin and know better. But, you know, part of it is, you know, there's a demand for expertise, I think. There's a man for someone to come on TV or radio and play the role of the expert. But it doesn't have very much to do with the actual accuracy of their information. You say that weather forecasters and gamblers are success stories when it's a lot of comes to predictions. Yes. How so? So, well, the difference with weather forecasters and gamblers is that they're both used to thinking in terms of probabilities. So you see on the weather channel that there's a 20% chance of rain, for example. Some people get very frustrated with that because they're like,

why can't these guys tell me exactly what's going to happen? And the reason is that, well, they can't, but neither can anyone else, and they know they can't, and that helps to make them better. Weather forecasts, they're considered a joke by some people, and that used to be kind of true, that really they would miss the high temperature by an average of seven degrees, right, a couple days in advance. But now that error's been cut in half. And for something like hurricanes, where if you have a hurricane sitting right now in the Gulf of Mexico, three days before landfill, they can pinpoint on average the landfall location, 72 hours in advance by about 100 miles, which means you can evacuate, say, the southern tip of Alabama or, Mississippi or a certain part of Florida, not with guaranteed success, but where it's prudent and saves lives to evacuate. 20 or 25 years ago, you couldn't do that at all, where literally if you had a hurricane

in the Gulf of Mexico, it was equally likely as far as they knew to hit Tallahassee, Florida, and Houston, Texas. So the whole kind of crescent of the Gulf Coast was in play. So that's a case where there have been very tangible, practical improvements, and it's because the weather forecasters knew that if we can think, probabilistically and say, here's what we know and here's what we don't, despite having more and more powerful computers, then you can start to make progress. We're trying to close that gap between what we think we know and what we really know. If you can work on both ends of that,

and the book tries that. It says, well, first of all, let's admit that some things are going to be very hard to predict. Predicting the direction of the American economy more than a couple months advance is intrinsically a very hard problem. On the other hand, we can do some things to be more data-driven and make us better and smarter. And so we up. our skill level at the same time. We're a little bit more humble and modest about what we're lucky to accomplish realistically. You're listening to Motley Full Money talking with Nate Silver. His new book is The Signal and the Noise, why so many predictions fail, but some don't. Let's stick with the economy

because the conventional wisdom is that the stock market is a leading indicator. And right now, we're at about a four-year high for the stock market. Does that, in your mind, predict a faster recovery for the economy overall? So what's interesting is that I think investors and kind of economists have different biases. So I've gone back and looked at cases where you had. So right now, for example, the forecasts of GDP are quite bearish where people still think it's going to chug along at 1.8 percent or 2.2.1%. So it's been rare historically when you had a very bullish market.

market and a bearish GDP forecast. And what happens is actually you do tend to beat the GDP forecast when the market's going up as much as it has. I think one good thing about investors is that they don't have to worry about being politically correct. Whereas if you're making a prediction where you have reputation on the line more than money, your incentives are different. You might not want to stick out too much, right? It might be easier to say, well, the economy's been bad for a long time so I can stay more in consensus by saying it's going to continue to be bad, right? And of course, investors have their own issues with kind of believing maybe too much in the sentiment sometimes. But, you know, there is a lot of power and having a lot of

independent information coming together. The kind of 90% of time I say that markets are functioning well, they can be a beautiful thing. And of course, there are, there's either 10% of time where you have bubbles and you have, and you have, and you have, and you have kind of collectively very irrational behavior. But taking on the whole, there is macroeconomic information, as far as I've found in the S&P 500 in the Dow. Why do you think more people didn't predict the financial crisis that we saw in 2008? Why didn't more people see that coming?

Well, part of it is you had a number of dominoes unfolding, and I think this is almost kind of more of the kind of Teleb Black Swan type argument, right? But where I think people don't realize how the risks in different parts of the economy are correlated with one another. So you think, okay, so this is the whole problem behind, for example, the rating agencies thought, well, we're going to take all these different mortgages and bundle them together and repackage them. And by the miracle diversification, we'll take a bunch of kind of B-plus, you know, B-rated crap. And they'll be AAA. Yeah, yeah, yeah, right? Because they assume that what happens to, like, a carpenter in Cleveland and a dentist in Denver are independent.

from one other, right? But of course, if you have a housing bubble that bursts and everyone is facing the same conditions, then the risks are hugely correlated. And so the whole structure blows up, and they defaulted at rates that were literally hundreds of times what was expected. And then you further leverage that with the fact that, in addition to just having, you know, the actual effects of people having mortgages underwater itself, I mean, just the sheer volume of betting, side-bending on the housing market was astounding. For every actual dollar that exchanged hands with someone buying or selling a home, there were about $50 worth of side bets. And so instead of being a severe but localized problem that became a global problem.

The title of your book is The Signal and the Noise. When it comes to the stock market, what do you think is the noise that the average investor would be wise to just tune out? Well, I think a lot of the day-to-day fluctuations, right, where if you look at the stock market over intervals of 10 years or 15 or 20 years, it does display certain types of predictable behavior, right, where if the PE ratios get too high, it's been a pretty reliable predictor of a market that will achieve below-average growth or even maybe a favorite to decline over the long term. But over the short run, it's a bit different where I think, you know, when Allen Greenspe, and describe the market as being irrationally exuberant, right? If you had invested your money

at that time and had the hindsight or the foresight to sell right at the peak of the NASDAQ bubble, you would still have made three or four times your money back. In the book, I quote from the economist Fisher Black, and that's kind of where my 90%, 10% conception comes in. Because normally it's a healthy strategy in life to pay some attention to what your neighbors are doing and to say, well, you know, it's probably not the case that if everyone else thinks this is a good idea, that my theory is better than theirs, right? And if everyone else thinks these CDOs are safe, then, you know, who am I to say differently? But there is that 10% of the time where that herd mentality kind of leads us off a cliff. And I think it's just kind of the price that we pay for having markets where people are reacting to one another, right? You know, the benefits to aggray information are sometimes compromised to people lose their independence.

And one thing you worry about a little bit now, right, is kind of is that people become so efficient some of the banks at kind of developing their algorithms and so forth that there's kind of no more almost species diversity. as much, right? And so everyone's kind of doing the same thing. And if one fund goes down, then a whole bunch might as well. So it's a little bit frightening. It's also a little bit frightening, by the way, just how many trades are being made, right? There's some notion that, well, the market's becoming more efficient. Well, if a market's efficient, then you wouldn't have very much reason to trade. But the volume, just the volume of shares that change hands is increasing very, very quickly. So now the average share of common stock is traded once every six months, and it was once every six years back in the 50s and 60s. So it really has become an investment now where you buy stocks to trade

them and not to hold them, and that changes the climate, I think, quite a bit. I was going to say, it seems like with so much more information available to so many more investors, individual investors, and, of course, institutional investors, fund managers, etc., It would seem like in some ways it's harder than ever for an investor to have any kind of edge in terms of predicting where a stock price is going to go. Well, maybe that's true, but it makes it easier for people to think they have an edge, right? So in the book, and this is going to come from a different kind of historical era, but I talk about what happened when you had the printing press invented, and all of a sudden there were books when there weren't really any books before. and people had a lot more information exponentially more than they had a generation earlier. And the first thing that people did is kind of read books that proselytize different religious ideas.

And so you had, you know, hundreds of years of holy war in Europe, right? Where it's like, well, now there's way more information than I can get a handle on myself. So I have to pick and choose what I read. And people, I think, forget that, you know, the subset of information that you come across is not the only information in the world, but you become devoted into it and believe deeply into it. And that's kind of why you have people willing to make so many bets, I think, in the market, and the volumes are increasing so much, is that is people kind of cherry-pick, whether consciously or not what information they look at,

and they assume that because they're in possession of it, because they read that this information is especially worthwhile, and often it's not. So you're saying the specious and incorrect information that's available, widely available on the Internet today, that was going on in Gutenberg's time as well, just in... Yeah, you see this precedent where, look, you know, you get, people eventually get better at processing information, right? But the volume of information we have in the world today is astounding, right? Where we're generating, I don't know the figure offhand, but it's quintillions of bytes of data each day, right? Where it would take, you know, all of humanity, all seven billion people, hundreds of lifetimes to go through it, right? And so there's kind of this, the signal to noise ratio is waning because you have more information than you have useful information. A lot of it's just kind of crap and kind of should go in your spam folder, so to speak.

You know, you look at CNBC or Bloomberg or you see all this data and you think, oh, there must be some real insight there. And, you know, maybe there is a little bit, but you have to sort through an awful lot of hay to find that needle that might give you some extra advantage. Coming up, more with Nate Silver, including a look ahead to the presidential election. Stay right here. You're listening to Motley Full Money. I had everything going my way. Welcome back to Motley Full Money. Chris Hill here in studio with Nate Silver of the New York Times, author of the new book, The Signal and the Noise. You are perhaps best known for your political forecasts and your blog, 538.com.

What is the toughest part of political forecasting? Well, it's tough with presidential elections because you don't have very much of the case history, really, where we've had. I think this is the 17th election since World War II. And, you know, if you have a complex phenomenon where a lot of things factor into how people vote, the economy and wartime, peacetime, and incumbency, and so forth, What you ideally want for Cisco model is to have hundreds of cases to test it upon, right? Then you can say with some subtlety, for example, which economic variables matter more to people. Is it the trajectory at the end of the fourth year of a president's term or over the whole four-year term, right?

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

But in presidential elections, if you're not careful, you can get yourself in a lot of trouble. Right now, as of this interview, the model that you have on the 538.com blog for the presidential election, I believe you have 82% chance that President Obama wins re-election. Yeah. So my question is, what goes into that 18% for Governor Romney winning? What is the biggest unknown that makes you, in your model, say, well, that's what's going into the 18%. 15% chance. Well, the economy is still a part of it.

So the way the model works is it kind of combines polling data with economic data. And as we get closer to the election, the polling data gets more and more weight. And the rationale behind that is that at some point, if there are economic things that are going to change voters' minds, they should be priced into the polls, right? So it kind of abandons the idea that, oh, things are going to change radically if it turns out that people haven't changed their minds yet. But, you know, but we still have enough time for a crisis in Europe to worsen for a couple of bad sets of employment numbers. We're going to have a GDP number out for the third quarter before the election, which people are pretty pessimistic about. So there

will be a couple of hooks for Romney to put his hat on and say, okay, here's some bad economic news. Although now it looks like he might need to have some sort of an acute crisis. where, you know, if we have a jobs number come in at 55,000 when the forecast is 110, that's probably not going to do it. A negative jobs number, I think, might. A 1,000 point drop in the Dow over the course of a week because Europe looks like it's blowing up, that could definitely matter. But I think Obama now is close enough to 50% of the vote, where in these polls,

it's not just that he's ahead of Romney by five or six or seven points, He's often at 50% or 51% in some of the swing states, which means that Romney would now have to unpersuade people who right now say they're going to vote for Obama, and that could require something to knock people out of their sense of complacency about kind of where the election is headed. We will wrap up with a round of buy-seller hold. In 2007, you created an online competition to determine the best one in Chicago's Wicker Park neighborhood, buy-seller-hold burritos. Oh, buy, yeah. Although, you know, in New York, we have fairly weak burrito options, I think, right? Get to work, New York City. They've won the fall classic twice in your lifetime, and they're headed to the playoffs again. Buy Seller Hold, the Detroit Tigers winning the World Series this year.

I have to buy it because my parents might be listening to this. You gave this drink partial credit for helping you finish writing your new book. Buy Seller Hold, Red Bull. As a stock, I guess I'd buy it. It seems like we're getting more and more busy now, right? And people need more and more kind of stimulation. It's pathetic, by the way, when you're like, I don't have time to go get coffee. I'm going to have to go to the write aid and get a Red Bull.

And finally, I'm assuming that your publisher did not predict this, but your new book debuts the same week as her new book. Buy seller hold the chances of your book selling more copies than J.K. Rowlings. Oh, I'll buy that. Yeah, we'd like to, you know, I don't mind if I'm losing to the Navy Seals book or Bob Woodward. But, you know, I know we've no chance in hella beating her. But it would be, you know, we'd be nice. Yeah, yeah, yeah.

In 2009, Time magazine named Nate Silver, one of the world's 100 most influential people. His new book is The Signal and the Noise, why so many predictions fail, but some don't. Nate, thank you so much for being here. Yeah, thank you. That's going to do it for this week. You can always drop us an email. Radio at fool.com is the way to get a hold of us. You can also follow us on Twitter at Motley Fool Money. The conversation continues 24-7 online at our flagship website, Fool.com.

That's it for this edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Matt Greer. I'm Chris Hill. Thanks for listening. We will see you next week.