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Wall $treet Week with FORTUNE co-anchor Karen Gibbs talked to well-known contrarian investor Bernie Schaeffer this week about the current market and how he's playing it. Portions of their conversation will be shown on the Aug. 20, 2004 program. Meanwhile, here are portions of their talk that didn't make it on the air

GIBBS: You talked about herding and how the investors do have a herd mentality. We heard -- not the herd herd -- but heard that Warren Buffett was buying Pier 1, and news of that filtered through the market. We saw a 9 percent jump in the stock price. Now I'm not one to argue with Warren Buffett's track record, but that herd mentality comes in, and is that a way, a reason for investors to be jumping back into the stock market?

SCHAEFFER: Well, I think investors are kind of desperate for advice, and they're looking more than ever, I think, for the guru to show them the way. I think there was a similar situation with Microsoft about a month or so ago when they declared that big dividend and the stock buyback, etc. It created a huge splash in the media, many, many stories about how Microsoft was a good investment, yet if you look at the price action in Microsoft subsequent to that, it's actually trading a good deal lower than it was before all that hullabaloo was announced.

But I think investors are tending to want to flock into a situation that they deem to be safe, whether it be because a major company is doing a big dividend or because a guru who has a great track record is investing in a particular stock, and they're willing to throw money at these situations because they feel, based upon what they're being told, that the environment is "safe." Now I keep saying "safe."

GIBBS: What are the implications for the stock market and the economy if investors do face another dramatic drop in the stock market?

SCHAEFFER: Well, I think this whole quote-unquote -- using a lot of quote-unquotes here -- this whole "bull market" that we've experienced over the past few years has been built on two pedestals: number one, a lot of debt, and number two, rising asset prices. Well, because real incomes are not growing significantly, we have not created much in the way of jobs, and if in fact one of those pillars were to falter, namely (if) the asset price situation were to take a major hit, I think that would have a tremendous ripple effect on consumer confidence, consumer spending, and would hurt the economy.

GIBBS: And how about gold?

SCHAEFFER: Well, gold is really interesting to me, particularly if you want to be heavily invested in the market, you don't like holding much cash. I would say, okay, look to diversify into gold. This has been the best performing sector over the past three years, and it has a lot of things going forward in terms of addressing the risk potential that I discussed a little bit earlier in the segment. We've got negative real interest rates. In other words, the interest rate is still below the rate of inflation.

Gold has prospered during periods like that. We have kind of a shaky dollar environment with the big twin deficits we have out there. A weak dollar usually means strong gold, and we've also got kind of a disaster insurance aspect of gold. If some of those things we don't like to talk about were to occur, gold might actually be kind of a safe haven investment. So it addresses risks in a different way perhaps than holding a lot of cash, but it's another way to attack the risk factor.

GIBBS: What's the best way for investors to go into gold?

SCHAEFFER: I would say the blue chip company, Newmont Mining, would be the way to go in gold.

GIBBS: You mentioned dividends. Of course the S&P is yielding maybe what, 1.5 percent on a dividend basis? Give me some stock picks that would beat that.

SCHAEFFER: Right. You mentioned that S&P 1.5 percent dividend. People talk about dividends, but they talk about the big S&P type stocks, and I say it's not necessarily compensating you for the risk incurred when you're getting 1.5, 2 percent yield. You go to a stock like Reynolds International, the new post-merger RJ Reynolds, Brown & Williamson Company.

Yes, tobacco litigation risk, there's always risk when you're going to ratchet up for more yield, but you've got a 5.3 percent dividend yield going for you.

General Motors, I'm not tremendously enamored of the upside potential there, because of my general concern about the market, but again, 4.8 percent dividend yield from that. There you're actually being compensated for the risk that you're taking.

GIBBS: There was a lot of skepticism also surrounding Research in Motion. What do you think about that?

SCHAEFFER: Research in Motion was a great play towards the end of last year. It was in the exact same place as PalmOne I feel is now and XM Satellite is right now. A great product, huge earnings growth, the BlackBerry being their product, and yet a tremendous amount of skepticism about their valuations and their ability to continue growing. It has defied the skeptics, but it has picked up a little bit more of a following on Wall Street, the kind of process that I think XM and PalmOne are going to go through. And of course that's helped the stock as the analysts have gone from hold and sell to buy.