Three years ago, Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), and JPMorgan Chase (NYSE:JPM) announced a partnership that would end up becoming Haven Healthcare. Now, the partnership (and Haven) is dissolving. Qualcomm (NASDAQ:QCOM) CEO Steve Mollenkopf announces he’s leaving after seven years in the corner office. Ron Gross analyzes those stories, and shares thoughts on portfolio allocation as we dip into the Fool mailbag. Plus, we take a moment to reflect on the 10-year anniversary of this podcast.
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This video was recorded on January 5, 2021.
Chris Hill: It’s Tuesday, January 5th. Welcome to MarketFoolery. I’m Chris Hill. With me today, Mr. Ron Gross. Good to see you, my friend.
Ron Gross: Hey, hey, good to see you. Happy New Year.
Hill: Happy New Year. We have a CEO change. We’re going to dip into the Fool mailbag. It’s our 10th anniversary here on MarketFoolery, so we will get to that. We’re actually going to start by dipping into the MarketFoolery archives. Three years ago this month, January 30th, 2018, the episode of MarketFoolery that day was entitled Healthcare’s Latest Game Changer. We talked about the big announcement that Amazon and Berkshire Hathaway and JPMorgan Chase had put out, they were forming a partnership aimed at cutting healthcare costs and improving services for employees. It would go on to be named Haven Healthcare. That was then. [laughs] This is now. Haven Healthcare has started to tell employees it is shutting down by the end of February. It turns out that healthcare is difficult, Ron, although I’m reminded of the fact that at the time, three years ago, this really sent some pretty big shockwaves through the healthcare community and healthcare stocks.
Gross: Yeah. UnitedHealth, Humana, CVS got smacked and not surprisingly, they were up on the news that Haven has decided to call it quits after three years. But yeah, it was relatively exciting. Just getting those three CEOs, Buffett, Dimon, and Bezos together was pretty interesting. Amazon has 1.1 million out of the 1.5 million employees combined. So, this was going to be largely an Amazon led initiative, and we see them getting into healthcare even outside of this deal. But, you know what, you nailed it, healthcare is tough. This was a difficult initiative from the beginning. They wanted to improve access to primary care, simplify insurance coverage, make prescription drugs more affordable, whereby I heard all those things before. Those are all wonderful things. One day let’s hope we all get there in one way or another, but the ambitions were just too difficult to achieve. Each company had different priorities, different locations, different employee bases. The existing healthcare system of each company required different types of fixes, and from what I’ve read, each company was actually executing their own projects separately from each other, and it just never came together as a joint venture. I think the writing was probably on the wall back in May when the CEO of Haven stepped down from day to day, and they had difficulty holding onto other senior executives, including tech executives over the period of time, so time to wrap it up. As I said, shares of the competition rallied on that news and we’ll live to fight this healthcare fight another day.
Hill: This is a very large version of a scenario we’ve seen play out across all manner of industry over the last 10 years, and even earlier than that, obviously, which is to say, a large company, large entity comes into a new space and stocks within that space start to sell off on, in some ways, the hypothetical. The classic example of this over the last five, 10 years has been Apple, in part because of the amount of cash Apple has on the balance sheet. But we’ve seen days where stocks will fall just on the rumor of Apple thinking about getting into original programming. They’re not going to buy Netflix, they’re going to create their own. Just on rumors like that, we’ve seen days where Netflix would drop 5% or more. And I think it’s in some ways a good reminder for investors to really take a moment, because we’re going to see this continue to play out, whether it’s healthcare or other industries. It’s going to continue to play out like, guess what, this company is now thinking about getting into the space, and a stock in your portfolio is going to drop because of it.
Gross: Yeah. I think on a day-to-day basis, the market is reactionary, shortsighted. Shoots from the hip. In the long term, I think it does a nice job of working things out, although [laughs] as we’ve seen or maybe are seeing, sometimes bubbles our eyes and things need to get smacked around a little bit before they get back to normal. But these knee-jerk reactions, when you put together Buffett, Dimon and Bezos, I could see people saying, uh-oh, not only are these balance sheets unbelievable, but the power of these CEO’s, the brilliance of these CEO’s, if they put their heads together, they could maybe disrupt the whole industry. I could see, wondering about that and maybe making an investment or selling an investment to play that potential, but as you said, early stage, hypothetical, didn’t really know what it was going to look like or what shape it would take, and here we are three years later, and it just didn’t work.
Hill: Qualcomm is getting a new CEO. Steve Mollenkopf has been in the corner office since March of 2014. Qualcomm announced he is retiring in June when company President Cristiano Amon takes over. Mollenkopf is only 52. I say only 52 because that’s younger than me. This is a young man, and I don’t own shares of Qualcomm, but when I think about the past few years and the number of knock down drag out fights that Qualcomm has been in with regulators, with Apple, it reminds me of the great line that Indiana Jones has in the first Raiders of the Lost Ark movie when Marion says to him, “You’re not the man I knew 10 years ago,” and he says, “It’s not the years. It’s the mileage.” [laughs] Mollenkopf is 52 years old, he’s been CEO for basically seven years, but in terms of mileage, it’s been more than seven years.
Gross: Yeah that’s 49 in dog years and I bet that’s how he feels, because as you mentioned, if you think, it’s been a really rough six years. During his tenure he had to deal with an antitrust case from the FTC over anti-competitive practices, you mentioned the legal fight with Apple over patent licensing, that resulted in Qualcomm paying $4.5 billion, and Apple’s iPhone 12 now uses Qualcomm’s chips, there was a hostile takeover attempt by Broadcom, the data partners, if you recall, the activist investors tried to go after them to get them to split the company up, and last but not least, we should not forget, the $44 billion acquisition of NXP Semiconductors that got scraped as a result of the U.S. and China political tensions and the trade war at the time. So, they are in a good place now, the shares have crushed the market over the last five years, they’re really capitalizing on the demand for 5G phones. Just a good time to maybe say, “Okay, I’ve been through the wringer, I’ve done a nice job here, I’m going to move on and it’s time for someone else to take the reins, because it’s been a rough six years for sure.”
Hill: Not to say that Mollenkopf is retiring, it sounds like he wants a break, but it’s not going to surprise me if a year from now or two years from now, we see that he’s emerged in the corner office of another company. Stepping away from Qualcomm for a second, when you see that a CEO is leaving a company that you own shares of, do you have a default reaction as an investor, or does it depend on the company?
Gross: Yeah. I’ll answer that question, I just want to say I just misspoke. The $4.5 billion that Qualcomm received, they didn’t pay when they had the fight with Apple, so I just wanted to make sure I clear that up. CEOs, especially iconic CEOs, or CEOs that have really been important to a business, if they leave, it has me scratching my head a bit, gets me a little bit nervous. An example would be a founder, someone like Jim Sinegal at Costco. If he is going to decide to leave, I really want to make sure that the next CEO is going to either follow in the footsteps from a culture perspective at Costco or business perspective, and really it’s a great succession plan and it’s really solid. On the other hand, if it’s a CEO that reinvented a company like Satya Nadella comes to mind over at Microsoft and he’s still there, but one day when he leaves, that would be another nervous moment for me, because he’s done such a wonderful job of reinventing Microsoft. Leaders always matter, just sometimes they matter more than others.
Hill: Yeah, we talk from time-to-time about the concept of leash. Like, how long is the leash that you’ve got this stock on? In my own experience, when there have been times, Disney being the most recent example where Bob Iger is leaving and the leash gets a little bit shorter on my shares of Disney. [laughs] Just like, “Okay, tell me about this Bob Chapek.” [laughs]
Gross: That’s a perfect example. An iconic CEO who’s done a wonderful job, and you just want that to go on forever. Why wouldn’t you, as long as that person is still up for the job, and when they go away, there’s nothing wrong with rethinking your investments, in fact, you should be rethinking your investments fairly consistently with an eye, as we always say, toward being a long-term owner.
Hill: Our email address is email@example.com. We had an email from Mike in New York City, he writes, “I have been buying shares of Amazon and MercadoLibre over the last five to 10 years, and now they each make up about 20%-25% of my stock-based portfolio, but only 10% of my total portfolio, if I include stocks, my low-cost index fund, focused 401(k), an IRA, and cash positions, and it drops even lower if I consider my equity in my home and other less liquid investments. Although this is a delightful problem I’m facing [laughs] with two consistent winners, the general rule that I hear is you shouldn’t have more than 10% invested in a single-stock. But what is the suggested denominator? Is it individual stock portfolio, total exposure to the market, total assets? I understand you can’t provide individual advice, but what are your thoughts?” I really like this question, because he’s thinking about this in several layered ways, and I also like that he recognizes this is the proverbial good problem to have.
Gross: [laughs] For sure. Not only can I not give individual investment advice, but I’m not a financial planner, so there might be others who have different opinions, but I’m happy to give my opinion here. When thinking about allocation, I think you need to look at it as a percent of your overall invested assets. That would include stocks, funds, bonds, if you have them, all invested assets. I would include retirement assets in there, and also cash actually, if that cash is earmarked toward one day being invested and it just happens to be on the sidelines for now. I would not include equity in your home, if that’s the home you live in, but if you have other real estate investments, then I would count them as invested assets and put them into the denominator. Once I have done the math there and once I see my overall exposure to any given stock investment, I’d like to see that exposure also as a percent of just my stock investments.
Again, stock investments should include ETFs and funds, if those ETFs and funds are stock focused. I think that’s another nice metric to just know. The rule of 10% that he mentioned, not having more than that in any one company, I think that’s really based on your own individual situation and your own risk tolerance, so while I personally agree with the 10% rule, give or take, a percent or two, there are others, plenty of my colleagues who would disagree and would be happy to let a great company run to somewhere higher than 10%, 2% perhaps even. I do think that’s more of an individual circumstance and you just got to make sure you can sleep at night and you can withstand any large negative hit to any one company if it happens to be this oversized position in your portfolio.
Hill: Yeah, the only thing I’ll add to that is I have a couple of stocks in my portfolio that make up more than 10% of my stock portfolio, and I’m fine with that. That being said, there are a couple of companies that I own shares of, if for some reason they ballooned [laughs] to become 10% or more, I would think about trimming those back.
Gross: Yeah. Sometimes you just feel lucky and fortunate and you’re like, “Okay, I’m moving on, that’s a little bit too much for me.” That speaks to the risk profile of the company, that strength of leadership, the balance sheet, how great their earnings quality happen to be, so many different factors of why or why not, you would feel comfortable with an outsized position.
Hill: Before we wrap up, I just wanted to say a couple of more quick things about the fact that we’re now at the 10-year mark for MarketFoolery. I did talk about a lot of this last week on the New Year’s Eve episode, so I’m not going to repeat everything I said. But Ron, I think it’s appropriate that you are on the show today, because last week I talked about how the analysts who come on the show, there’s no financial incentive for you guys to be here, and I appreciate you doing it, and the reason I think it’s appropriate that you’re here is because there’s no one I felt guiltier about [laughs] browbeating to come to the studio than you.
Back when we were in the office and I would literally stand by your desk and be like, “Come on, man, I need you to come to the studio today.” Anyway, I just wanted to thank you for that. Here is a stat I came across this morning. In the last two years, for anyone who is wondering, it seems like there are a lot of podcasts, you’re not wrong. In the last two years, more than 1.3 million new podcasts have been started. In the business category, over 110,000 have been started. So, that MarketFoolery continues to be one of the most popular business news podcasts is a testament to a lot of things. It is a testament to the dozens of listeners, the work that the analysts put in, Dan Boyd producing the show for so many years, and it reminds me of the old saying that there’s no substitute for showing up, and showing up day-after-day for 10 years, MarketFoolery, to me, is an offshoot of The Motley Fool as a company. A lot of people don’t know, there are 500 people around the world who work at The Motley Fool and the dedication to helping people invest better to making the world smarter, happier, and richer, which is our company’s mission, it all flows from Tom and David Gardner and the company they are leading in 2021 and beyond.
Gross: I couldn’t agree more, and I will just say, thank you for your kind words, but it has been my pleasure to be part of this show, as well as Motley Fool Money, over the last decade, and you make it easy, you make it fun, and as far as I’m concerned, there’s nobody better in the business than you. So when they write the history of business podcasts one day, I hope you’re right up at the top.
Hill: You are too kind, I appreciate that. Thanks for being here.
Gross: My pleasure.
Hill: 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 yourself stocks based solely on what you hear.
That’s going to do it for this edition of MarketFoolery, the show is mixed by Dan Boyd. I’m Chris Hill, thanks for listening, we’ll see you tomorrow.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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