Fund Manager Ron Baron Consistently Showing How It’s Done
It shouldn’t be that hard for an active fund manager to beat the market, and do it consistently, if we focus on what matters. Baron Capital is one of the few funds that do.
Fund manager Ron Baron of Baron Capital is getting some publicity these days for his extremely bullish take on Tesla, especially with his belief that Tesla stock could be worth $1.5 trillion in 10 years. They currently sit around $131 billion, and people have already pulled quite a bit of their hair out over this stock being valued that high, but for this to explode to 12 times higher would probably have their heads exploding if this did happen.
The first question that should come to mind is how a car company could ever get this big considering that the entire market isn’t big enough to make sense of this, even if they sold every car in the world, and a whole lot of batteries on top of that. Still though, a belief like that really shows how much of a maverick that Baron is compared to most of his peers, and that can be a great quality for an active fund manager, provided that they have the insight to back it up.
While many may not believe Baron when he speaks about Tesla, his results speak for themselves. 98% of Baron Capital’s funds beat the market last year, and this is an even more ridiculous number than it appears. Other companies are lucky to have a splattering of winners among a wall of underperformers, and most of them aren’t even designed to succeed as the strategies that they use don’t really work.
Since the plan here is supposed to shoot for the potential for either a company’s stock to grow or the company itself to grow, we would think that one of these would be at the forefront of a fund’s strategy. Instead, they happily dilute whatever good stocks they may hold with a bunch of lesser ones, some based on hope that they will turn around, and some just added for variety’s sake.
Baron, on the other hand, confines himself to companies that have good growth potential, and looks to reap the rewards by this eventually translating to their stock prices. This is how legendary fund manager Peter Lynch did it, and Lynch did some amazing things with this strategy.
It is not that Ron Baron is alone in trying to do this, but fund managers can have varying degrees of commitment to this goal and will often take their eye of the ball. Baron stands out in his commitment, not just to get in the right stocks but to see his plan through.
Baron Capital just wasn’t hot last year, they have beaten the market throughout this entire 10-year bull market. The fact that they have done this with focusing mostly on mid-cap stocks makes this even more impressive, especially when they haven’t just beaten the mid-cap market, they beat the big one, the S&P 500, with these smaller stocks.
We rarely are impressed with mid-cap funds since this in itself excludes a lot of big stocks that we should want to be in, but it’s only because it’s so unusual for a mid-cap fund to compete with large cap funds. This has not been a problem for Baron though, as he doesn’t worry about giving up a little now to look to score bigger in the future. His results tell us that he is succeeding very well now without having to wait, from getting in the right mid-cap stocks.
Baron Capital’s Partners Fund was actually in positive territory for 2020 last Friday, when just about everything was underwater. It wasn’t just up, it was still up by 7% after the fastest correction in history. It’s not that this fund didn’t get hit as well, but being up 29% before last week does give you a lot more room. Being up that much at any point this year is simply crazy and has this fund stepping to the front of the stage and taking a bow. We are bowing back.
This fund added another 5.5% on Monday, adding further to their 2020 gains when other funds have quite a way to do in order to just get out of the big hole they just got put in. The S&P 500 also had a big day, but this fund beat the market by a full percentage point, and this is just one day.
The S&P 500 is only up 11% over the last 12 months after being up 29% year over year at the end of last one. Baron’s Partners Fund is up 41% from a year ago. This is much more than just beating the market, it is simply embarrassing it. It’s not all that hard to do such a thing playing price momentum, but the fact that Baron’s results are all due to his just picking better companies makes this all the more impressive.
Baron Capital Has Stomped the Market for Decades
Baron Capital has been beating the market for a long time. Baron’s Growth Fund has bettered the S&P 500 by 3% a year since its inception in 1994. Baron hit the ground running with his strategy, and is still running strong today.
Baron’s is more than just two great funds, as when you have 98% of your funds beat the market, you know that these funds are truly based upon performance. This shows, better than anything, that they do know what they are doing at Baron Capital, and they do it very well indeed.
The way Tesla has performed will really test the mettle of fund managers. Many would never touch it, and the conundrum surrounding its valuation puts the scare into a great many of them. Once Ron Baron made up his mind that this was a company worth investing in, he put his plan into place and did not waiver.
Once Tesla started making money and things started to really look up, this stock should have been a natural for growth funds, although false beliefs about the gods stepping in and putting the brakes on it because they believed it was overpriced surely was an impediment. Tesla may not grow to anywhere near a $1.5 trillion company, but their business will grow, and by a lot more than the great majority of other companies, and this is why Baron likes it so much.
Baron got in on Tesla well before it started to take off, and acquired their 1.62 million shares between 2014-16, at an average price of $219.14. Baron is not your Johnny-Come-Lately to this stock, and it was far easier to ride the rollercoaster up than to see this coming 4 years ago and sticking with your idea through some pretty tough times.
Baron has also shown great vision with Vale Resorts, when he picked up 11% of the company back in 1997 at an average of $32 per share. Baron Capital still owns their 11%, now worth $209 at the close of trading on Monday. Vail Resorts traded as high as $274 in the summer of 2018, and has fallen upon harder times since, but Baron still believes in them and is looking well past 2020.
This shows the commitment Baron Capital has to their positions. While this is a two-sided sword, as it’s easy to be committed to bad ideas or bad stocks, when you find a winning strategy such as they have, that’s the sort of thing we want to see funds be committed to.
Baron Capital still owns Tesla as well and has no intention of selling anytime soon, regardless of where the stock goes along the way. Their belief resides in the company, and if you really are out to hold something long term, this is far more meaningful than the ups and downs of the stock market.
The company’s turnover rate is a very low 7%, really demonstrating their commitment to sticking with their long-term analysis. This does show that they do some shifting, and you always want to be doing some, but not so much to take them away from their mission of pursuing long-term company growth potential.
As far as market risk goes, Baron isn’t even concerned about the election. Whether or not this is all that wise, this does show how committed he is, and he’s certainly not a fair-weather investor.
We do need to be aware that there is a big difference between concerns such as the trade war or the coronavirus and the risks that someone else other than Trump taking up residence in the White House next year. Riding out the coronavirus scare is one thing, and this is one situation where those holding tight and taking the blows have the odds on their side due to this being such a ridiculous exaggeration of the threats involved.
We don’t have to exaggerate when it comes to a Democratic president, and although a moderate would do less damage, what people tend to not appreciate is just how precarious our economic situation is and how dangerous their ideas are to it. It can handle anything that this virus can throw at it and laugh it off, with or without the Fed’s help, but the Fed won’t be able to help us from the blows that Democratic candidates have their fists cocked to deliver if given the chance.
It therefore worries us when fund managers say they are ready to weather any storm, but given that those who invest in Baron’s funds can step away on their own, this criticism might be more like blaming a stock for its price going down when we were the ones that chose to bear the loss.
If You Are In it For the Long Run, It Pays to Look At the Long Run
Over the long run though, these things all pass, and even presidents come and go, provided that things do recover to get back to normal someday. That day will likely be well before we should care if we are focused on the future as well, so it’s not hard to see why sticking to companies that are solid over the long term isn’t necessarily that terrible of an idea.
We think far more like traders than Baron or just about anyone else, and get excited about bad news like we’re facing right now, as these things provide an opportunity to get out and then back in at a significantly lower price. Those who sat out last week or even most of it but returned on Monday after we opened up and things started to look good again were very well rewarded, for instance.
We also have the advantage of realizing that you can make even more money from stocks when they go down, but this is very distant from the approaches that regular funds take, and it’s not fair to look to someone like Ron Baron for help with this since his funds aren’t allowed to speculate on the downside like hedge funds can.
While speaking of the much higher turnover rate of his competitors, Baron wryly mentioned how much money hedge funds put in his pocket in commissions back when he was a broker in the 1970’s, but that was a time where commissions were extremely expensive, as opposed to either dirt cheap for the funds or free if you’re an individual investor now.
It does cost money to trade though, and you want to make sure that the trading costs, including slippage, are worth it, but it doesn’t take much of a move at all to justify them now, where back in the 1970’s you’d need a good sized move to justify them, such as the one we just saw. If you have to pay 4% for a round turn, you need at least the potential for 10% or more to make sense of the trade, to account for all the misses. Now, a single percentage is enough because it costs next to nothing to trade these days.
You don’t need your fund heading for the exits though and it’s actually better for us when they don’t, as this allows us to tailor what we do to our own needs and strategies, including huddling together with the fund and weathering the storm if that’s what we want to do. If our fund bails, we are bailing right along with them whether we want to or not.
Baron Capital doesn’t pay attention to either the news or the market, and instead relies on their proprietary fundamental research to guide them. Where this all goes wrong is when these supposedly fundamental traders sprinkle in what amounts to technical analysis into their decision making, which wouldn’t be such a bad idea if their understanding of technical analysis, the study of how stock prices move, weren’t so inverted.
Baron wisely steers clear of this and therefore doesn’t bear the burden that brings down so many funds. Pure fundamental analysis just looks at the fundamentals, how a business is doing and how they are projected to do in the future, and does not pay attention to price, as opposed to thinking that poor price performance is somehow a virtue, or that good performance is to be steered away from. This is the surest way to end up with bad picks, because with this strategy, you get them by design.
Ron Baron shows us that fundamental analysis alone can be quite beneficial indeed if we actually focus on that and not how beat up a stock may be and have that aspect make us want to own it. If they just concentrated on the fundamentals, which is what they are supposed to be doing, at least they would be seeking to have their dog stocks measure up in some meaningful way other than they are just doing terribly in the market, which is not a good reason to pick a stock.
Baron’s position in Tesla shows us clearly that he is not put off by present valuations, like so many funds are, and is instead focusing on the time frame that matters, the future.
Baron sums up his investment philosophy as follows: “We invest in businesses, not stocks. I hate commodities. I don’t like materials. I just want to invest in growth companies—businesses that can grow at a much more rapid rate than the economy, where we like the people, we don’t think they’ll cheat us, and there’s a competitive advantage that prevents others from doing the same thing. Then we hang on for the long term.”
If you are investing for the long term, this all makes perfect sense. As critical as we are about so many funds, it warms our hearts to see someone who gets what it actually takes to find long-term winners. This also brings to light why he prefers the mid-caps, as the bigger you are, the less growth potential you have on a percentage basis. While bigger stocks do outperform smaller stocks in the short run due to the added interest they attract from investors, if we want to look 10 or 20 years ahead, it is these smaller stocks that have more potential to grow over time.
Tesla will get a lot more competition in the electric vehicle market in the coming years, and therefore may not grow into the behemoth that Baron believes they will, but they will grow, and will grow a lot. He’s sticking to his guns with this one, as he usually does, but being one of the better gunslingers around does make this a lot easier, and Ron Baron is among the very best.
Editor, MarketReview.com
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