Motley Fool Hidden Gems Investing - Family Ties & the “Buffett Premium”

Episode Date: November 16, 2022

Fictional character Alex P. Keaton and real-life CEO Warren Buffett have at least one thing in common. (0:21) Ron Gross discusses: - Getting inspiration from a sitcom character - Buying his 1st stock from research in an investing newsletter - His enduring admiration for Costco - The undefinable-but-real value of the “Buffett Premium” when examining Berkshire-Hathaway’s business Stocks mentioned: DIS, NFLX, COST, BRK-B Host: Chris Hill Guest: Ron Gross Engineer: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. We've got a sneak preview of coming attractions. Motley Fool Money starts now. I'm Chris Hill, and let me tell you what we've got coming up. On Friday's show, we're going to have a look at the major retail earnings this week, as well as an interview with Chewy CEO Sumit Singh. On Saturday, we'll bring you the podcast that we recorded in front of a live audience earlier this week at our member meetup, and on Sunday, a conversation with Mark Cuban. So if you're a fan of Shark Tank, you're not going to want to miss it. Now, just like public companies have annual meetings, so do private companies. And for the next couple of days,

my company, The Motley Fool, we're gathering for our annual meeting. So we're going to be taking Thursday off, but today I wanted to share a fun conversation that I had with an investor you've heard from a lot over the past decade, the one and only Ron Gross. We dig into how he first got interested in investing, the influence of growing up near New York City, his biggest holding, how he got his kids interested in investing, and a lot more. I really enjoyed this conversation, and I hope you do too. Do you remember how you learned about investing? How old you were when you started becoming interested in investing. Family Ties, Alex P. Keaton.

Really? Swear to God! I remember that show, but it was ... walk me through it. He was a kid. He would talk about economics and the stock market all the time. Something about him and that show, I was like, that seems really interesting to me. That seems cool! Were you high school age at that point? Yeah, maybe middle school. I can't remember. My dad was in finance. What did he do? He was more a CPA than an investor. In fact, I don't think he's ever owned a stock in his whole life. Really?

Yeah. When I got to college, I was a triple major, finance, investments, and entrepreneurial studies. I didn't know if I wanted to be an investment banker or an investment manager. So, that kind of evolved. And you grew up outside of New York City. Right. So, there's that natural tie to, Well, you grow up in a world where working on Wall Street is very much a thing and very much at least an option for younger people. Yeah, for sure. And I went to a college, Babson, where you can't study anything but business. So there's a bunch of nerds running around with a Wall Street Journal underneath their arms,

all thinking they're hot because they're reading The Journal and just talking about business all day long. I was on the campus recently because my nephew is an assistant coach for the basketball team. You graduated in 1990? Yeah. I was at Boston College while you were at Babson. We may as well have been in two different states. Babson is such a beautiful campus. When I was over there, I just remember thinking, I don't think I ever set foot on this campus. Well, Wellesley's a dry town. You can't even get alcohol except on campus, so you wouldn't even want to go to Wellesley.

So, you're watching Family Ties. How old were you when you bought your first stock, and what was it? It was a simpler time, Chris. It was 1990. It was shortly after I graduated college. I, interestingly enough, subscribed to a newsletter. I don't recall if it was a biotech newsletter or a tech newsletter. But a company caught my eye called Summit Technologies. The ticker at the time was BEAM, B-E-A-M. Don't confuse it with The Current Beam.

It's a totally different company. Isn't The Current Beam Jim Beam? No. There's a company called Beam Therapeutics, which is in the gene therapy space. They were a manufacturer of lasers to correct eye problems. LASIK, I think, is basically what we know it as today. That caught my eye, my very first stock. I don't recall how long I owned it for, but it wasn't more than a year or two. In 2000, Nestle's Alcon Labs bought it for about $900 million in cash, which I think probably made it a loser. But I had sold the stock long before that. Interestingly, before I got bitten by the value investor bug, my first

real investment was at Biotech. That's amazing to me, knowing you for as long as I have, and knowing how value investing runs through your veins. I would not have guessed a biotech stock. It's also interesting to me that this was something that you researched yourself. This was not, my dad helped me pick it out, or it was just something that I was interested in, I saw an ad on TV. You actually did the research. Well, I had the newsletter do the research for me. But I took the time to read and subscribe. Out of however many picks that newsletter put forth in that given month, I chose that one.

And you sold it because it just wasn't working out? I honestly can't remember. We're talking 30 years ago. I'm sure it was only a couple hundred dollars at most. Maybe I just wanted to buy something differently. There's also, Honestly, at Chance, I made $2 on it. And I was like, oh, that's pretty good! I'm going to buy something else now! What's the old saw? No one ever went wrong taking a profit. So, yeah, take your $2. What's the worst stock that you ever bought, and what did you learn from that experience? Painful, painful! I'm going to give you two, unfortunately.

Because they both went bankrupt while I still owned them. I didn't bail. I held on. First one was when I was a hedge fund manager. That was around 2004, is my guess. The company was Concord Camera, ticker LENS, L-E-N-S at the time. They mostly made disposable cameras, the kind that when you go to a wedding, they sit on the table, and they encourage you to take pictures of what's going on. Now, Chris, I'm not sure if you're aware, but digital photography has become kind of a big deal. In fact, we all carry in our pockets nowadays a pretty powerful digital camera. I didn't really recognize that that was going to be occurring.

They had a tremendous balance sheet. I actually fell in love with the balance sheet rather than the income statement, which is a lesson to learn. I held on to the end, and they went out of business. The second company is more recent. It's a company I recommended at The Fool, starting around 2008 and then later again. That was Horsehead Holdings, ticker Zinc, producer of zinc and zinc-related materials. Basically, what happened there is, they put a huge capital expender program in place to build out their infrastructure. At the exact same time, the price of zinc plummeted. They couldn't make ends meet. They filed bankruptcy, in my opinion,

too early. In fact, I believe I participated in a class action lawsuit as a result and maybe got a few bucks in the end. They reemerged. They're a private company now known as American Zinc Recycling. But that was painful for members of The Motley Fool that followed my advice on that. It was painful for me personally, because I own the stock as well. But it was a really good lesson in terms of investing in commodity companies. You have to do it right at the right time of the cycle, you have to make sure that everything else is in place, like a capital expenditure program, you have to make sure that they can pay their bills if times get tough, and if the balance sheet isn't strong enough to do that,

you really either have to just take a small position or no position at all. Yeah, someone asked me recently, do you invest in commodities? Very quickly, I was like, oh, God, no. And they're like, why do you say it like that? I said, oh, it just seems tiring. It's exhausting. It's a cyclical play, for lack of a better word, and the word play is almost the opposite of investing. It's not something that you're a proud owner of that you want to hold for five, 10, 15 years. It's more of just an investment. What's the stock that means the most to you? Not necessarily because it's done the best

or it's your biggest holding, but maybe because of memories attached to it. There's a few, but I think it's got to be Disney. I think it was the first stock I bought for each of my kids back in 2002, so 20 years ago. I did it mostly because I thought it would be a good investment, but also really because I thought they would get to kick out of owning a small piece of a company that they understood and really loved in a variety of different ways. Fast forward 20 years later, they both still own the stock today. I had to sell off some of their stocks to pay for college and things, but that was one that, really for nostalgia purposes, plus I still like the company, I had them hold on to.

It's a two-decade investment, and it's near and dear to my heart, for sure. It's so great when you see the light go on. It's not just about math or something like that. When you're talking to your kids, they get it. You see the light bulb go on, and you're like, oh, yeah, they got it. They understand. There was a time where I was managing a hedge fund out of an office in my home. My daughter would come home from school, and the first thing she would say is, How's Disney, Comcast, and Spy? Spy being the S&P 500 spiders. She knew that's what she owned at the time. It was a daily conversation, which is pretty cool.

At some point, probably when she was older, you had to pull her aside and be like, you know, we're not day traders. I'm not raising you to be a day trader. What is the company you own shares of? It's the company you admire the most. For me, I think it has to most consistently, over the years, be Costco. I've talked about it many, many times on the podcast, on the radio show. Big fan. Lots of respect for Jim Senegal, the founder and former CEO. He created a fantastic corporate culture, business model. Current management has continued that legacy today.

I love the value proposition they offer the customers. I love the membership business model, the 90% retention rates they enjoy. I think I bought it in 2008, probably around the mid-40s per share. We're now around 485, so a 1,000% return over the years from 2008 until now. So, not only was it lucrative, but I really think it's one of the best-run companies in the U.S. The retention rate is incredible when you think about the rise of e-commerce and the knock on, maybe not knock, but the bear case against Costco, if you go back 15 years, is, look, they're not going to keep this up. They're not going to retain members in a world where

more and more people are getting stuff shipped right to their home. And yet they have. And they have pricing power to raise the membership fee occasionally when they need to. Interestingly, about the online competition, Charlie Munger from Berkshire Hathaway, who sits on the board of Costco in recent year-ish, has said that he thinks Costco could take on Amazon in a pretty big way if they wanted to do that. That could be a whole area of the business that they really haven't even delved into. It's not a gimme. That's rough. But if Munger thinks it's interesting, I think it's interesting, too. What is your biggest holding?

Well, perhaps not surprising for people who have heard me talk over the years about being a value investor and building on what I said about Mr. Munger, Berkshire Hathaway's B shares are definitely my largest holding. I own it, my wife owns it, my kids own it. It makes up about 7% of my overall family's portfolio. Now, 7% might not sound like a lot to some listeners as my largest position, but I've never been a person to over-allocate to any one stock. 7% is a big number in my mind. I know some people do 15%, 20%, 25%, let their winners run, and they grow that big. That's never how I've personally managed my portfolio.

I'm a little more conservative than that. But I've owned it for at least 20 years. There's a chance I've owned some of it for 30. Because I'm a value investor, it certainly makes sense for me to own Warren Buffett's company. Why wouldn't I? And the fact that my father-in-law was the head actuary at Geico back in the day has made it really a family favorite of ours. So, it's kind of a family affair as well. Was he there when Geico got acquired by Berkshire Hathaway? He was, yes. It was an exciting time. I bet. When you think about Berkshire Hathaway as a business, it's impossible for me to

think about it without thinking about Buffett, and to a lesser degree, Charlie Munger. At some point, they're not going to be there. Do you ever think about, not like, when they're gone, I'm selling, but what do you think the post-Buffett and Munger Berkshire Hathaway looks like? Or do you think it's like Costco and it looks a lot like the business it is right now? It makes me a little nervous. I would imagine the stock gets hit, I hope only in the short term. I don't know how much of a premium, a Buffett premium, is actually in the stock. You would think somewhat, being that he's theoretically the best investor of all time, or at least in the top 10.

There's some concern there, but the group of operating businesses is the group of operating businesses, right? He's got two great investors taking care of the investing. He's got Greg Abel, who will step in as CEO. He's got Ajit Jain, who will be a big part of this business on the insurance side. Whether there will be as sophisticated of a repurchase program, or not even sophisticated, but a methodic repurchase program in place, it's hard to say. Will future acquisitions be as well thought out or lucrative? That's hard to say. But the operating businesses are the businesses, and they remain. I love that you mentioned the Buffett premium, because it reminds me that there

are those things in the investing world that exist. Everyone agrees that they exist, but no one can specifically quantify them. Just the idea that, yes, because he's Warren Buffett, there is a premium on the stock because of his experience, because of his ability to get deals throughout his career. And when he goes away, the Buffett premium goes away. But nobody knows. It's like, is that 3%? Is that 10%? What is that impact on the business? I will tell you, what gives me comfort is that we're not saying, Berkshire is overvalued, but that's because of the Buffett premium. The stock, in my opinion, is not overvalued. It has been overvalued for quite some time. That does make me feel a little bit better,

that we're not using Buffett as an excuse for why it's OK for the stock to be overvalued. If you invest long enough, there's always one that gets away. There are stocks, Visa, for me, is one that I've still never pulled the trigger on, for reasons passing understanding. What is that stock for you? What's the one that either you sold it too soon or you never bought it, or something else? As a value investor, you're going to miss a lot of great investments. You have to accept that, or you have to widen out your lens a little bit to not be so staunchly value. I have actually done that over the last 15 years since I've become a Fool, I've expanded my horizons and not been so much in that everything

has to be this deep value, which has served me quite well, to really expand a bit. But one that I just could never buy and never get my arms around was Netflix. I just couldn't get comfortable with it. I was very wary about the cost of content, especially the difficulty and the cost of creating new content. The valuation always assumed they were going to be the big winner in streaming, despite what I saw as tons of competition and potential competition. But despite the ups and downs, shares are up 2,200% over the past 10 years, and I don't own one share. I wish I did, obviously, in hindsight, but you can't win them all. There are things to learn.

and one of them is perhaps to expand your horizons a little bit, and not everything has to be cheap in the old definition of Ben Graham or the olden days of value investing. You can commiserate with Jason Moser, because that was the one that got away from him, too. Sounds good! Thanks for being here! Thank you, Chris! Pleasure! Chris Hill. Remember, no episode on Thursday, but we are back on Friday with the latest on major retailers like Walmart, Target, Home Depot, Lowe's. Coming this Sunday, Mark Cuban. 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thanks for watching!