In this podcast, Motley Fool senior analyst Ron Gross discusses topics including:
- Getting inspiration from a sitcom character.
- Buying his first 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.
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.
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This video was recorded on Nov. 16, 2022.
Chris Hill: 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. On Sunday, a conversation with Mark Cuban. If you're a fan of Shark Tank, you're not going to want to miss it.
Just like public companies have annual meetings, so do private companies. For the next couple of days, my company, The Motley Fool, we're gathering for our annual meeting. 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 like how you learned about investing? How old you were when you started becoming interested in investing?
Ron Gross:Family Ties, Alex P Keaton.
Chris Hill: Really.
Ron Gross: Swear to God.
Chris Hill: I remember that show. Walk me through it.
Ron Gross: He was a good kid. He would talk about economics and the stock market all the time. Something about him in that show, I was like, "That seems really interesting to me. That seems cool."
Chris Hill: Were you of high school age at that point?
Ron Gross: Yeah. Maybe middle school. I can't remember. My dad was in finance.
Chris Hill: What did he do?
Ron Gross: He is more of a CPA than an investor. In fact, I don't think he's ever owned a stock in his whole life.
Chris Hill: Really.
Ron Gross: Yeah and when I got to college, I was a triple major, finance investments and entrepreneurial studies and I didn't know if I wanted to be an investment banker or an investment manager and so just that evolved.
Chris Hill: You grew up outside of New York City?
Ron Gross: Right.
Chris Hill: There's that natural tie, 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.
Ron Gross: For sure. Yeah, and I went to a college, Babson, you can't study anything but business. It's a bunch of nerds running around with The 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.
Chris Hill: I was on the campus recently because my nephew was an assistant coach for the basketball team and, you graduated in 1990?
Ron Gross: Yeah.
Chris Hill: I was at Boston College while you were at Babson. We may as well have been in two different states because Babson is such a beautiful campus.
Ron Gross: It's really nice.
Chris Hill: When I was over there, I just remember thinking, "I don't think I ever set foot on this campus."
Ron Gross: Wells is a dry town. You can't even get alcohol except on canvas. You wouldn't even want to go to Wells.
Chris Hill: You were watching Family Ties? How old were you when you bought your first stock and what was it?
Ron Gross: 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.
Chris Hill: Isn't the current beam, Jim Beam?
Ron Gross: No, it's a company called Beam Therapeutics, which is in the gene therapy space. They were 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, Nestlé'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.
Chris Hill: That's amazing to me, knowing you for as long as I have and knowing how value investing runs through your veins. But 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.
Ron Gross: I had the newsletter do the research for me, but I took the time to read and subscribe and out of however many picks that newsletter put forth in that given month, I chose that one.
Chris Hill: You sold it because it just wasn't working out?
Ron Gross: I honestly can't remember. We're talking 30 years ago. I'm sure it was only a couple of $100 at most, and maybe I just wanted to buy something different. There's also honestly at chance I made like two bucks on it and I was like, "That's pretty good. I'm going to buy something else now."
Chris Hill: What's the old saw like, no one ever went wrong taking a profit? Take your two dollars. What's the worst stock that you ever bought and what did you learn from that experience?
Ron Gross: Painful. I'm going to give you two, unfortunately, and it's 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 and that was around 2004, is my guess and the company was Concord Camera, ticker symbol LENS, L-E-N-S at the time. They'd mostly made disposable cameras, the kind that when you go to a wedding, they sit it on the table and they encourage you to take pictures of what's going on. Chris, I'm not sure if you're aware, but digital photography has become a big deal. In fact, we all carry in our pockets nowadays a pretty powerful digital camera and 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 and it's a company I've 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 expenditure 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 for 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 owned 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 have to just take a small position or no position at all.
Chris Hill: Someone asked me recently, do you invest in commodities? I just very quickly was like, "Oh, God. No." They were like, "Why do you say it like that?" I said, "It just seems tiring. It just seems exhausting."
Ron Gross: 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 proud owner of that you want to hold for 5, 10, 15 years. It's more of just an investment.
Chris Hill: What's the stock that means the most to not necessarily because it's done the best or it's your biggest holding, but maybe because of memories attached to it?
Ron Gross: There's a few, but I think it's got have to be Disney. I think it was the first stock I bought for each of my kids back in 2002, 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 a kick out of owning a small piece of 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.
Chris Hill: That's great.
Ron Gross: 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, too, so it's a two-decade investment and it's near and dear to my heart for sure.
Chris Hill: It's so great when you see the light bulb go on.
Ron Gross: Yeah.
Chris Hill: It's not just about math or something like that when you're talking to your kids and they just they get it. They just like you see the light bulb go on and you're like, "Yeah, no, they got it."
Ron Gross: There was a time where I was managing a hedge fund out of out of an office in my home and my daughter would have come home from school and first thing she would say is, "How's Disney, Comcast, and SPY?" SPY being the S&P 500 SPDRs because she knew that that's what she owned at the time and so it was a daily conversation, which is pretty cool.
Chris Hill: At some point, probably when she was older, you had to pull her to the side and be like, "We're not day traders. I'm not raising you to be day traders." What is the company you own shares of, it's the company you admire the most?
Ron Gross: For me, I think it has most consistently over the years be Costco. I've talked about it in many times on the podcast, on the radio show. Big fan, lots of respect for Jim Sinegal, 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 loved 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 1,000% return over the years from 2008 till now. Not only was it lucrative, but I really think it's one of the best-run companies in the U.S.
Chris Hill: The retention rate is incredible when you think about the rise of e-commerce, and the knock on, maybe not knocked but just 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.
Ron Gross: 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, which is interesting. 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 that's interesting, I think it's interesting, too.
Chris Hill: What is your biggest holding?
Ron Gross: 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 and 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 overallocate to any one stocks. Seven percent 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, it'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? 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. It's a family affair as well.
Chris Hill: Was he there and when GEICO got acquired by Berkshire Hathaway?
Ron Gross: He was. Yes.
Chris Hill: It was exciting time, I bet.
Ron Gross: Yeah.
Chris Hill: 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?
Ron Gross: 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, 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. 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.
Chris Hill: I love that you mentioned that 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. When he goes away, the Buffett premium goes away. But nobody wants to say 100%. Three percent, is that temporary? What is that impact on the business?
Ron Gross: 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, hasn't 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.
Chris Hill: 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?
Ron Gross: 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 substantially value. 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, 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 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 a cheap in the old definition of Ben Graham or the olden days of value investing.
Chris Hill: You can commiserate with Jason Moser because that was the one that got away from him, too.
Ron Gross: Sounds good.
Chris Hill: Thanks for being here.
Ron Gross: 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, HomeDepot, 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 or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill has positions in Amazon, Chewy, Inc., Costco Wholesale, Home Depot, Lowe's, Target, Visa, and Walt Disney. Ron Gross has positions in Amazon, Berkshire Hathaway (B shares), Costco Wholesale, Target, and Walt Disney. The Motley Fool has positions in and recommends Amazon, Beam Therapeutics, Berkshire Hathaway (B shares), Chewy, Inc., Costco Wholesale, Home Depot, Netflix, Target, Visa, and Walt Disney. The Motley Fool recommends Comcast, Lowe's, and Nestle and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $145 calls on Walt Disney, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.
