Motley Fool Money - 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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which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. 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 show, we're going to have a look at the major retail earnings this week, as well as an interview with Chewy CEO, Summitt 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? Really? I mean, I remember that show, but it was, walk me through it. He was a kid. No, no. He would talk about economics in 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 just that kind of evolved. And you grew up outside of New York City. 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. Yeah, yeah. And I went to a college, Babson, you can't study anything but business. There's a bunch of nerds running around with a Wall Street Journal underneath their arms, being all like thinking they were hot because they're reading the journal and just talking about business all day long. I was on the campus recently because my nephew was an assistant coach for the basketball

team. And you graduated in 1990? Yeah. So I was at Boston College while you were at Babson. We may as well have been in two different states. And 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. All right, 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, subscribe to a newsletter.

And 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 gym beam? No. I think it's a company called Beam Therapeutics, which is in the gene therapy space.

They were a manufacturer of lasers to correct eye problems. LASIC, I think, is basically what we know it as today. I 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. But interestingly, before I got bitten by the value investor bug, my first real investment was a 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, oh, 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.

read and subscribe. And 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. I mean, we're talking 30 years ago. I'm sure it was only a couple hundred dollars at most, right? And maybe I just wanted to buy something differently. There's also, honestly, a chance I made like two bucks on it. And I, I have a 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. And it's because they both went bankrupt while I still own them.

I didn't bail. I held on. The first one was when I was a hedge fund manager, and I was around 2004, is my guess. And the company was Concord Camera, ticker symbol Lens, L-E-N-S, at the time. They mostly made disposable cameras. You know the kind that when you go to a wedding, they sit at 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.

And in fact, we all carry in our pockets nowadays a pretty, a pretty, you know, a pretty, you know, powerful digital camera. And I didn't really recognize that that was going to be occurring. They had a tremendous balance sheet. It actually fell in love with the balance sheet rather than the income statement, which is a lesson to learn. And I held on to the end, and they went out of business. The second company is more recent, and it's a company I recommended at the Fool, starting around 2008 and then later again. And that was Horsehead Holdings. ticker symbol, Zinc, producer of zinc and zinc-related materials. Basically, what happened is 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? I just very quickly 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 also a cyclical play, for lack of a better word. And just 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 5, 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 thing. investment, but also really, because I thought they would get a kick out of owning a small piece of a company that they understood and really loved in a variety of different ways. So 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. So 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, where it's not just about math or something like that, when you're talking to your kids, and they just sort of, they get it. You see the light bulb go on, and you're like, oh, yeah, no, they got it. There was a time where I was managing a hedge fund out of an office in my home, and my daughter would come home for school, and first thing she would say is, how's Disney Comcast and

Spy, Spy being the S&P 500 Spiders, because she knew that that's what she owned. at the time. And so it was a daily conversation, which is pretty cool. At some point, you had, 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 here. 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 in the mid-40s per share. We're now around 485, so a thousand percent return over the years from 2008 till 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 just sort of the bare case against the market.

Costco, if you go back 15 years, is, look, this is, 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, you know, that you know, you know, He thinks Costco could take on Amazon in a pretty big way if they wanted to do that, which

is interesting. That could be a whole area of the business that they really haven't even delved into. It's not a gimmie. 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 anyone's 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. Okay. Yeah.

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, oh, when they're gone, I'm selling, but what do you think the post-Buffet 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. would think somewhat, being that he's theoretically the best investor of all time, or at least

in the top 10. So there's some concern there, but the group of operating businesses is the group of operating businesses, right? And 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 Jane, 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, Warren Buffett, 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, okay, is that 3 percent? Is that temperate? 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 okay for the stock to be overvalued. If you invest long enough, there's always one that gets away. There's one that you do... 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've 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, and you have to

accept that, or you have to widen out your lens a little bit to not be so staunchly value. And I have actually done that over the last 15 years, really, 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 down, shares are up 2,200 percent over the past 10 years, and I don't own one share. And I wish I did, obviously, in hindsight, but you can't win them all. But 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 went away from him too.

All right. Sounds good. Thanks for being here. Thank you, Chris. Pleasure. Remember, no episode on Thursday, but we are back on Friday with the latest on major retailers like Walmart, Target, Home Depot, Lowe's. And 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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.