In this prerecorded episode of Market Foolery, Mac Greer talks with Ron Gross from Motley Fool Total Income about how this year's market has been for value investors, and a few of the biggest trends he's watching for in 2018.
Tune in to learn:
- Why gene-therapy biotechs are so exciting and have such huge growth potential for the long term.
- A few solid gene-therapy companies at which you might want to take a closer look.
- What value investors have to keep in mind with a market as bullish as the one we're in today.
- How the potential new tax plan could affect workers and investors.
- And more.
A full transcript follows the video.
This video was recorded on Dec. 28, 2017.
Mac Greer: Welcome to Market Foolery for December 28th. I'm Mac Greer and I'm joined by Ron Gross from Motley Fool Total Income. Ron, how are you doing?
Ron Gross: Good, how are you?
Greer: I'm good. Happy holidays. We're taping this show a few days in advance here.
Gross: We're not even here right now, really. It's magic.
Greer: Yes. Through the magic of modern technology. And we want to step back a little bit from the day's news and instead talk about the year that was and the year that will be. I want to begin by asking you, when you look back at 2017 as an investor, how about one takeaway?
Gross: The resilience of the stock market was a bit of a surprise for me. I thought we would probably have a year -- and again, predicting the market is fraught with issues -- but I thought we would probably have a year that somehow reverts to the mean, would be a typical year. For the S&P 500 to be up 20%, the Dow, even more than that, let's say 25%, it's not something I would have guessed. But then you think to yourself, you know what? If you have low interest rates and low unemployment and positive GDP and tame inflation, maybe that's a recipe for a pretty good stock market. So that's all in hindsight. Once you get valuations that take all of that into account, then things, by definition, have to slow down eventually. But I'm certainly happy to see it. Nothing wrong with opening up your brokerage statement or your 401(k) statement each month and seeing a higher value than the month before. Really exciting. It'll set us up at some point for a correction. But the higher level we can start from before that correction begins, that's fine with me.
Greer: Is this a tough market for a value investor?
Gross: Oh, yeah, it's a really tough market for a value investor. You have to exercise patience. It's really where patience comes in. If you start to chase things, you might do OK, because like we said, the market keeps going higher. But if you're strictly going to be just about value, you're probably going to be few and far between in things that you find. And then, what you really have to be careful about is, you think you found something that looks like a good value, but you're really stretching, and it's more of a value trap then a value investment. In that case, I'm fine either just sticking to my cash and dry powder, or even just staying in an index fund and letting my money ride with the market, in good times and bad over years, if not decades.
Greer: And Ron, you do tend to be more of the value investor, fair?
Greer: So what's the biggest thing you've learned this past year as an investor?
Gross: I think that's where the patience thing comes in. As Warren Buffett says, you don't have to swing at every pitch. If you can just find that, right down the middle pitch every now and again, and you take your big swing, that's really all you need to do. So if I can't find an investment that I feel comfortable with, I don't need to invest in it. If I don't find a company that I'm not a big fan of both the business model and the management team and the long-term nature of the business and their ability to generate high rates of return for years to come, I don't need to chase that investment. As I said, I can either stay in cash, or index my money and participate in the market, as a whole, which I'm a big fan of doing, anyway. I'm by no means 100% invested in stocks in my own personal portfolio. I have a lot of index products, mostly through ETFs, even some mutual funds from back in the day. Certainly, a lot of my 401(k) is indexed. And that's money that I don't need to worry about. I just participate in whatever happens in the market gladly because I'm a believer in the stock market over long periods of time.
Greer: Ron, as we look ahead, how about one industry, one area that you're feeling bullish about?
Gross: We just spent a little time talking about me as a value investor, so I'm going to go completely the other way for fun and talk about an industry that I've recently invested in, which is the gene-therapy segments of the biotech industry. I believe it's the future of medicine, where the new sciences will be able to come to alter our DNA and cure diseases. Now, we're in the infancy here. There's some really exciting technologies that some folks might have heard of, such as CRISPR technologies, or TALEN, or zinc finger -- different companies are trying to attack changing DNA in different ways. But I do believe it's the future of medicine. And since I believe that, I wanted to have some allocation to that sector. So what I did was, I did some research and I picked eight stocks that are specifically attacking gene therapy, and I bought them as a basket, because the odds are that some of them are certainly going to go out of business, maybe one, or two, or three -- hopefully more will be successful and ride the wave into the future. But I wanted exposure to that industry. So companies like Editas -- EDIT, is the symbol -- Sangamo, SGMO, bluebird is one that's been really on fire lately -- ticker symbol BLUE. These are all gene-therapy companies that have their own take on the technology, but the goal is the same -- to remove bad pieces of our DNA and replace it with non-mutated versions of DNA. It's awfully exciting.
Greer: And by buying that basket of stocks, you're not at the mercy of the volatility of any one stock, right?
Gross: Correct. And it is volatile. Within a week of buying this basket, the basket was down 15%. As of today, I think I'm even, or even up. This is a 10-20 year investment for me. I don't even care if it's volatile like that. Twenty years from now, I'm going to look back and see how I did.
Greer: And as we look ahead to 2018, what is your biggest question as an investor?
Gross: I have to go with the tax plan that looks like it's going to pass. This is not a political comment, it's more of a business-finance comment. I tend to think that the benefits of this plan will not accrue to the worker in the sense of wages and increased employment. I think most of the benefit will accrue to people who are in a position to own stocks -- like most of our audience listening. I think companies are going to take the windfall of extra cash and they're going to either pay it out in dividends, or buy back stock with the vast majority of the money that they're saving on taxes, and that will be good for the stock market and those who are fortunate enough to own stocks, which I hope are more and more people each year. Unfortunately, as we know, so, so many people do not have the ability to own stocks and have an investment portfolio. I hope that changes over time. And as I said, I do believe most of this tax plan will accrue to stockholders, so I'm going to keep a keen eye on it to see if it's good enough to support this market and maybe even drive it higher.
Greer: Well, we will end it there. Ron, Happy New Year!
Gross: You too, Mac!
Greer: As always, people on the show may have interests 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. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, we'll see you tomorrow!
Mac Greer has no position in any of the stocks mentioned. Ron Gross owns shares of Bluebird Bio, Editas Medicine, and Sangamo Therapeutics. The Motley Fool owns shares of and recommends Bluebird Bio. The Motley Fool recommends Editas Medicine. The Motley Fool has a disclosure policy.