2021 Half-Year Check-In | The Motley Fool
The S&P 500‘s been having a good year while meme stocks and inflation have also became headline stories for investors. In this episode of Motley Fool Money, Motley Fool analysts Emily Flippen and Jason Moser look back at the first half of 2021 and share why Procore‘s IPO and opportunities from the pending infrastructure legislation should be getting more attention, and why Forrest Li of Sea Limited (NYSE:SE) and Dan Springer of DocuSign (NASDAQ:DOCU) are early frontrunners for “CEO of the Year.” Plus, Jason and Emily recommend several books for investors’ summer reading lists.
And best-selling author Dan Heath reveals the key to making better business decisions, how creating a powerful experience for customers can deliver economic upside for businesses, and other insights from his book The Power of Moments: Why Certain Experiences Have Extraordinary Impact.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 2, 2021.
Chris Hill: We are halfway through 2021. We’re going to review some of the big stories from the first half of the year, preview what investors should be keeping their eyes on in the second half of the year, and we’ve got some recommendations for your summer reading. Let’s start with the big picture, Jason. For those who own S&P 500 Index funds, the best first step for investors starting out. It was a great first half of the year. The S&P 500 rose 14.5%, the second best performance this century. That’s not a bad headline for the first half of the year, but what’s your business or investing headline for the first half of 2021?
Jason Moser: Those are all great headlines. We talked about all of this stuff for over the first half of the year, but the one thing that really stands out to me, and I hate to give this the attention, but the fact of the matter is it is something that will likely continue. Investors, particularly new investors, need to keep this in mind, it’s this whole idea of meme stocks, or meme stonks, as it were, Chris. Companies like AMC and GameStop, we’ve seen Clean Energy Fuels jumping into the mix here recently. But this idea now that the Internet and social media has really just flipped so many things on its head of the market is no exception there. It’s not to say that AMC or GameStop or Clean Energy Fuels can’t have success in the future; maybe they do, I’m not making that call. What I am saying though, these are abjectly fundamentally challenged businesses today and the valuations that have been ascribed to these companies, the volatility, if you looked at the charts of what these stocks have done over the past year, it’s abnormal; it’s scary from an investor’s perspective. I think for experienced investors, we look at this and we think, to me, the scariest part of this is the new investors that come in on something like this. This does attract a new demographic of investors, younger investors, and that’s great, that’s what we want; younger investors getting started. But you have to remember the rules of the game that you are playing. You have to know the game that you are playing and make sure you understand what the end goal is, because if you’re jumping in here thinking that this is a way to get rich quickly, a lot of people are going to get hurt.
My fear is that people jump into something like this thinking it’s a great opportunity to make some quick money, they lose money then they come up with the, “Oh, yeah, the market is rigged,” like I’ve always said, and they never invest again. So you’ve lost an entire generation, or at least a part of the generation of investors through something like this. It’s something that is going to continue; that’s another debate. But I think it’s just something to keep in mind as the year goes on, as we move into 2022 and beyond. It’s a scary time.
Hill: Emily Flippen, what’s your headline for the first half?
Emily Flippen: Well, it’s really hard to compete with the stonks. I know when something is big because people in my life reach out to me about it, unsolicited, ask my opinion and so many people have been talking to me about inflation in the first half of 2021. I really get the sense it’s on everybody’s mind, rising to three or 4%, as opposed to that 2% that the Federal Reserve has historically targeted. In my case, I think it’s silly for me to speculate on inflation. I’m not an economist, but more importantly, I don’t work at the Federal Reserve; I don’t know how they’re going to respond to potential inflation, or how the public may respond to unexpected inflation. I generally think that investors have little to no control over any of these things. So if you’re already an employed long-term investor with a diversified portfolio, I don’t think inflation should really change the way that you manage your stocks.
Hill: So Jason, if inflation and meme stocks got a lot of attention in the first half, what is something under the radar that you think is important that maybe didn’t get as much attention?
Moser: Well, it’s a developing story, so maybe we’ll hear more about it as the year progresses; I think we will. But it’s the infrastructure bill and the opportunities that should come from it. We’re seeing this Invest in America Act making its way through the system and we will see something at the end of it all. Right now, in its current form, I think it’s somewhere in the neighborhood of $700 billion or so. But this is, as it sounds, it’s investing in our infrastructure. It’s something that’s sorely needed. The American Society of Civil Engineers gives our overall infrastructure a C- today, and that’s nothing new; that’s something that’s been going on for a while. We really do need to invest in our infrastructure, water, transportation, and technology. This whole move into 5G, these investments need to be made. It sounds like we’re starting to get some bipartisan agreement there in some shape. But we are seeing a lot of companies out there that are viewing this as a generational opportunity playing offense. I’m looking at a company, Rob Painter, CEO of Trimble; a stock I recommended to members a year ago, that was exactly the language he used. This is a generational opportunity, they’re playing offense. I think we’ll see a lot of companies taking this perspective here over the course of the remainder of the year into the following years. This is a big opportunity a lot of companies will benefit from.
Hill: Emily, what about you?
Flippen: Mine is actually really similar to Jason’s, although it’s a specific company. It’s Procore (NYSE:PCOR), the ticker is P-C-O-R. They actually IPOed this year after delaying their IPO from last year. I feel like nobody was really talking about it despite a lot of excitement headed into their potential IPO in 2020. They’re a construction management and workflow platform, so very much building off of some of that infrastructure that Jason was talking about. It’s important because so much of the construction process right now is so manual. There are so many different parties, they don’t communicate well, it’s still very paper-based. So Procore is coming into the game to change that. They do go up against some big competitors, Autodesk being one, and they’re not profitable, but they are operating in free cash flow positive. So, definitely worth a look.
Hill: Jason, let’s start to look ahead to the second half of the year. Obviously, from a broad standpoint, a really strong first half of the year. But it wasn’t strong for every company and it wasn’t strong for every industry. When you think about the second half of 2021, who needs a strong second-half?
Moser: I’m going to go company-specific here and call out Peloton (NASDAQ:PTON). I think it’s a business with tremendous potential. It had a tremendous year over the last 12 months. The stock is better than doubled, but on the other side of the coin there, it’s down 20% year-to-date. There have been a lot of headlines out there lately that have really put this company in the crosshairs. A lot of questions in regard to the treadmill. Obviously, there are some safety concerns there that they need to figure out. Bad press is always something that I think is surmountable, but they need to actually prove that they can get past it. We’re seeing it making investments in wearables; I think that’s interesting. I like the idea that they’re bringing out virtual exercise programs that don’t even require their equipment. I think they’re doing a lot of really cool things, apparel. They have a tremendous brand, I think, in that fitness space. The other thing they keep in mind though, lockdowns are over, people are going back out. Just anecdotally speaking, every time I drive by the gym on the way to the burger joint, Chris, trust me, I’m not going to the gym, I’m going to the burger joint, but I have to drive past the gym to get there. I am seeing more and more people in that gym. So it’s just interesting to see that those walls are starting to come down, people are feeling a little bit more comfortable. I just wonder what that bodes for Peloton going forward because as we know, investing is a forward-looking exercise.
Flippen: The business I’m looking at is Quidel (NASDAQ:QDEL), actually. I think they need a strong second half to 2021. The ticker is Q-D-E-L. Quidel is an immunoassay and molecular diagnostics business, which is really just a fancy way of saying they make diagnostic healthcare products. Pre-COVID, a large part of its business was actually just seasonal flu testing. As you can imagine, they had a great 2020 because they are actually one of the first FDA approved antigen tests for COVID. So as we head into 2021, the business has really struggled as COVID testing has really wound down. But I don’t think that’s the reason why they need a strong half of their 2021. I actually think the real reason is the anticipated launch of their Savannah molecular analyzer in the back half of 2021. It’s a big launch that has been expected for a decade now, Chris, so a long time. They’re saying the fourth-quarter of 2021 is when they will get it into the physician’s office. They need to do that because investors are getting impatient.
Hill: Just to be clear, they’ve been saying this is coming for a decade, but now, it’s really coming in the fourth quarter.
Flippen: I am skeptical. I’m hopeful, but skeptical.
Hill: Up next, a couple of things investors need to watch in the second-half of 2021, along with a few titles to put on your summer reading list.
Hope everyone has a safe and fun Independence Day weekend. Remember, the stock market is closed on Monday, July 5th, and you know what else July 5th is, guys? It’s the 40th birthday of […], one of the dozens of listeners in Cupertino, California. Happy birthday.
Moser: Wow. Happy birthday, D.
Hill: Thank you for listening, we love it. Emily, you know, every year in December on Motley Fool Money, we do our review show for the entire year and we hand out CEO of the year. Who is your early front runner for that award?
Flippen: I’m going to call out somebody who I think doesn’t get enough attention despite running an amazing business. That’s Forrest Xiaodong Li. He’s the CEO and Founder of Sea Limited (NYSE:SE). Sea Limited is an amazing Southeast Asian business that is rapidly making headwinds into new markets. I believe it is the largest company in Southeast Asia right now. Li has really led this company to a certain level of success that we haven’t seen before in that region. They are the Founder and owner of Garena, which has Free Fire, and Li took this gaming company, this ton of cash generated by this free-to-play mobile game, Free Fire, and turned it into an e-commerce powerhouse. It is truly becoming, some call it the Amazon of Southeast Asia, but I really think they’re spreading way beyond just their locality based in Singapore, heading into markets like Brazil to compete with even the MercadoLibres (NASDAQ: MELI) of the world. I think an underrated CEO, again, the largest company coming out of Southeast Asia. If they keep that up into the second half of 2021, then I could see them being a winner at the end of the year.
Hill: Jason, who’s on your list?
Moser: I had to noodle this one for a little while because there are a lot of CEOs out there that have done a really strong job over the past year and year-to-date. I’m going to go with Dan Springer, the CEO of DocuSign, a company we talk about frequently on the shows, stock that I own. I really enjoyed being a shareholder of this business. It’s very difficult. Let me use a golf analogy here for you real quick, Chris. It’s very difficult in golf. If you’re playing in a golf tournament, it’s difficult to follow up a really good round in golf with another good round. It’s just you’ve set the bar so high, it’s just difficult to do. With DocuSign, in 2020, the stock was up 200%. This was for obvious reasons. The business performed very well and then there was also just the narrative throughout 2020 why DocuSign was a compelling value. But he’s really following that year up with another encouraging performance here with the stock. I’ll tell you, I can understand why the quarter that they just turned in, I mean, top-line growth of 58%, they raised guidance again. By the end of this year, this is going to be a two billion dollar revenue company with 80% gross margins, a massive suite of offerings, a lot of shares still to capture.
When you look at the competitive landscape there, I think the name that always gets thrown out there is Adobe. I think that’s valid, Adobe is a very strong business with this document Cloud offering. DocuSign is growing faster, it’s picking up share. I think that’s something to keep in mind. I think this is just going to be a new way of doing business. People are buying into the idea here. I think that Dan Springer is absolutely in the mix there. I will offer just an honorable mention. I need to offer an initial impression of Jonathan Webb with AppHarvest. I just think I love what he’s doing with this company, I think he’s tackling a really important issue in global food supply, and pre-revenue business coming into the SPAC, you’ve got a lot of hurdles to clear it. It seems like he’s doing a pretty good job clearing them.
Hill: Emily, it can be a stock, an industry, a trend. What is one thing you’re going to be watching in the second half of the year?
Flippen: Well, Chris, I’d be remiss if I didn’t talk about the cannabis industry, and the potential developments that we could see in the second half of 2021. Recently, Senate Majority Leader Chuck Schumer has said he doesn’t want to pass banking reform despite it being set from the house to the Senate. Instead, Schumer is prioritizing full legalization bills, which he hopes to bring to the Senate sometime this year. That’s a lofty goal that may or may not go anywhere, but I do think it says something about the need for some federal reform in the way that we handle cannabis and marijuana in this country. The Supreme Court has even said that unfair tax laws harm state legal cannabis businesses. So we’re getting some momentum on the federal front for change here. It’s definitely something that I will be watching as a cannabis investor myself, but I think everybody should be watching in the second half of 2021.
Hill: Jason, what are you going to be watching?
Moser: It’s not news. We’re in a little bit of a semiconductor supply chain crunch. The semiconductor show that we’ve been talking about for most of the year. I think the real question is, how long is it going to last? We’ve seen language from a lot of the bigger names in this space, from Qualcomm to Qorvo to Intel initially talking about things picking back up in the back half of 2021. It’s starting to look like this may last a little bit longer than even they assumed initially. Ford just recently came out with headlines here that Ford is going to reduce production at eight plants. Six of them in the U.S. starting in August due to semiconductor shortages. This is something that’s going to impact this business material. They say they’re going to lose around 50% of vehicle production just in the second quarter alone due to this. It should impact earnings by around $2.5 billion, 1.1 million units of production. That’s just an automaker, you’re seeing the same type of language from companies like John Deere. Then you look at the companies in this space, Intel, AMD. I mean, they are all starting to see signs that this is going to drag on a little bit longer than initially anticipated. It’ll be very interesting, I think in the back half of this year, just to pay attention to the language on these earnings calls because I think it will be very enlightening.
Hill: Our email address is [email protected], got an email from Eric Wallace, who writes, “How about a summer reading list? I need some good finance and market books.” Emily, you’ve got a recommendation?
Flippen: Well, I have a bit of a cop out recommendation, because I actually haven’t read this book yet, but it was recommended to me by one of my friends. It’s on my reading list for what I should read next. When I looked at it, I thought to myself, how have I not read this book yet? It sounds really interesting. It’s called Financial Shenanigans by Howard Schilit. Its case studies for fraud and reporting offenses by largely U.S. based businesses. So if you’re interested in accounting scandals like I am, it’s definitely a book you should checkout.
Moser: I’m reading more for entertainment now than ever before. I’ve read a lot of investing books for my life and I think there are plenty of good ones out there that are also entertaining. Bad Blood by John Carreyrou, really good, The Space Barons by Christian Davenport. We just had Christian on Motley Fool Money last week. Those are some interesting investing related books that also tell really good stories. Another one that I think just makes you smarter, The Magic of Reality by Richard Dawkins. It’s not investing related, but trust me, it’s very entertaining. Then ultimately, there’s no substitute for just reading 10-Ks in the earnings transcripts, so much free information in those documents. I would encourage you to check those documents out in regard to your favorite companies.
Hill: It occurred to me the other day that we are just a few years away from 2025, which means there’s going to be a quarter century list to come out. I think when that happens, The Big Short by Michael Lewis is going to be on a bunch of lists of the best investing books of the century so far. I love that movie, but the book is so much richer as books tend to be when it comes to movie adaptations. I just think there are so many great takeaway lessons about hive mentality and thinking for yourself. It’s one of those books that I’ve read a couple of times. I don’t think I can say that about any other investing or stock market book. Jason Moser, Emily Flippen, thanks so much for being here.
Flippen: Thanks, Chris.
Hill: Up next, one of my favorite interviews in the past few years, best-selling author Dan Heath on how creating a powerful experience for customers can deliver economic upside for businesses.
Dan Heath and his brother Chip have written several best sellers. A couple of years back, I got the chance to interview Dan in front of a live audience about one of their most popular books, The Power of Moments: Why Certain Experiences Have Extraordinary Impact. One of the things early in the book is something you and your brother refer 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 peak moments get an undue amount of credit for what a business does for any given individual.
Dan Heath: Yeah. Let’s start with the Disney paradox, which anybody who’s been to a theme park I think can relate to this. 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’ve been far happier sitting on your couch at home. It’s less humid there, less crowded, you can get lunch for less than $18. But looking back on that experience, you might consider it one of the highlights of your year. 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. 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, in 96 degrees humid Orlando temperatures, there were moments that mattered. There was an adrenalin 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 plush stuffed animal of Pluto. Those are the moments that your couch never creates.
What’s interesting is psychologists know a lot about how we remember experiences. They say that there’s basically two principles here that say a lot about what great experiences are made of. The first thing is called duration neglect, which says that when we remember our experiences, the length of those experiences tends to 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 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. 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. 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. 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. Think about it. If you’re driving down the road, you go three miles of highway without hitting a single pothole, 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, “Remember that month when,” you’re just whelmed, and whelmed is pretty good. I don’t mean to belittle whelmed. Whelmed means that people basically got what they expected. The alternative to whelmed 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? In some ways, that’s the starting place for the book.
Hill: 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, looks like a perfectly fine hotel. It is not the Four Seasons, but it looks fine, but it’s the number two rated hotel in all of Los Angeles.
Heath: Yes. I have to share why this is just a crazy fact that this place is the number two hotel in LA. Is it misstated, the Magic Castle? Let me just 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.
Hill: It’s not a castle.
Heath: It is neither a castle nor particularly magical looking, and even the word “Hotel” is a bit of a stretch. This place is actually a 1950’s apartment complex two-story that was turned into what effectively is a motel, painted bright yellow, totally unremarkable. It looks like a clean budget motel, and so this crazy fact that this place that’s so modest is outranking the Ritz-Carlton, the Four Seasons, how could you possibly explain that? 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 your neighbors backyard pool, nothing special about it. But mounted next to the pool is a cherry red phone, mysterious looking. If you pick it up, hold the handset to your ear, someone answers, “Popsicle hotline, may I help you?” 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. [laughs] 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. 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 No. 2 hotel in LA. You know what No. 3 is? The Four Seasons Beverly Hills. You know, it must kill those people to lose to the —
Hill: They’re angry. It’s interesting because there are things like that that you write about in the book, and then there are 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. In both cases, they end up resulting just on the bottom line, and in hundreds of millions, if not billions of dollars in revenue that they are creating. In a way, for me, the more surprising one is Southwest Airlines and just the charming way that the flight attendants greet you and make their announcements, because as a regular customer of Southwest, that always struck me as just a nice little fun thing. It never even occurred to me that there was a significant economic upside for Southwest Airlines but they were doing that.
Heath: Yeah, it’s fascinating. How many of you have flown on Southwest like in the last year? How many of you’ve heard one of their cheeky flight safety announcements? Like you, I always thought that this is just Southwest personality coming out. It turns out, there is actually a pretty strong tradition of funny flight safety announcements in 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, “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.” Like, cynical parenting humor. Chip and I started working with their insights team in 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 improvisational funds or do they have business value? It turned out, they had the data that they needed to answer that question because 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 they were 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 [laughs] but 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. We said, “We knew from the surveys that about 1.5% of customers were citing these announcements unprompted in surveys.” So just as a hypothetical, we said, “What if we were able to double that from 1.5% of people citing it to 3%? Not some gargantuanly but just something that we could realistically implement. What would that be worth?” 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 entertain them, that entertain the guests. To me, this is a reminder that moments matter, but not every moment has to be perfect to deliver a great experience. 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. You’re packed in, in a way that is below average, and yet because they focus on these fun spontaneous moments because they’re friendly, they create these peaks that make the experience remarkable. 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. 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.
Hill: You mentioned making better decisions and in your previous book, one of the things that stuck out to me was a broad analysis that you and your brother did about how companies make decisions. Unfortunately, the analogy that you guys threw was that essentially, most companies make decisions in the same way that teenagers make decisions, which is not necessarily a compliment.
Heath: No. This relates to what psychologists called narrow framing. 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. Of course, it 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. 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 are almost indistinguishable from the amount of time teenagers do it. You can see this most vividly in mergers and acquisitions. 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. This hasn’t changed very much, but it still happens. There are still companies being acquired, still mergers happening. You can understand from the perspective of narrow framing why this happens. A CEO takes a shine to some other organization. Maybe it solves a strategic problem. Maybe it opens up a new opportunity. There go the blinders. There’s one option on the table. The question is, do we buy this thing or not? Then with every week that passes, notice how the dynamics of that decision change. 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 we are going to pay for this. You’re starting to make connections at the target. 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 behind you on the bandwagon and then you’re going to back away because of something you learned? Isn’t that going to put egg on your face? Are you going to feel sheepish about that? You can see these forces conspire to turn what is originally a yes or no decision, which is bad enough into a yes or yes decision. That’s why you see this phenomenon of just gross over payments for acquisitions that everybody outside the fray can see is crazy, and yet CEOs push forward.
Hill: Is that why creating distance is so important when it comes to making decisions? I’m just thinking about Andy Grove at Intel and thinking about the memory chip business and how he and his team wrestled with that until it seemed finally they were able to almost remove themselves from the situation.
Heath: Yeah. What was so hardening to Chip and me about this decision-making research is how often the simplest tricks were the most effective. 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. Just one is enough to pierce that bubble of narrow framing. To your point, I think the second approach is to find a way to distance yourself from the immediate emotions and politics and stresses and anxieties of the situation. 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 had created the second-line microprocessors and IBM selected Intel’s microprocessors to be the brains of the first PC. They had this small but exciting product in the microprocessor in this legacy big business 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? 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, it felt symbolic of this non-stop debate that had been going on. He turned to Gordon 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?” He said that Gordon Moore replied without hesitation, they would get us out of the memory business for sure. 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?” That was the moment that broke the long jam. What’s amazing to me about that is just thinking of the ROI for this question that he asked. This was one of the most important strategic decisions that Intel made in that entire decade.
Hill: 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.
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