Ron Baron Q2 shareholder letter, always a gem…
A few months ago, Ivor Braka called me to ask if he could visit my office. Ivor is the older brother of a high school friend I haven’t seen or heard from for many years. Ivor’s family for many generations had been unusually successful in a variety of businesses. As a result, his family has become among the most prominent in the small, middle class, Jersey Shore, beach town where I grew up. Although I could not recall having spoken to Ivor since 1961, when I graduated from Asbury Park High School, I invited him to lunch.
When Ivor visited, we spoke principally about his family’s business interests. Under his entrepreneurial leadership, the value of his family’s assets had grown materially. The assets for which he is now responsible comprise interests in real estate in New York and other gateway cities around the world; international banking; and, most recently, shipping. I asked him about his staff of advisors and how he achieved the expertise I believed was necessary to invest in such a diversified group of businesses. “Like you, I invest in people,” he began. “I invest with people in whose skills I am confident and whom I know well. In most cases, we also knew their grandparents well. If I am uncomfortable with a potential partner’s grandparents’ ethics, integrity and character, we don’t invest,” this successful entrepreneur told me.
Ivor’s family is a close knit one. Many of his forebears had been associated with the forebears of the families of his present business partners for more than 500 years!!! This is because around 1492, during the Spanish Inquisition, the Sephardic Jewish ancestors of these individuals were forced to flee their homes in Spain. If they had not left their homeland and had attempted instead to continue to live in Spain without converting to Christianity, they would have been tortured or killed! After leaving Spain, many of this clannish community remained closely associated with each other for the following five centuries! While we pride ourselves in knowing managements well, we clearly can’t compare our associations to Ivor’s 500 year relationships. But, we nevertheless do share with him the same ideas about investments in people and “trust.”
“We invest in people, not just buildings”… just like Ivor.
A friend who provides venture financing to startup businesses recently told me that “no business plan we have reviewed has ever worked as it was supposed to.” Advisers to my friend had recommended numerous times that several businesses, each now worth billions, should be closed… while they were still “early stage” before they became successful. This was because the problems those businesses faced seemed insurmountable.
It’s all about the people who found a way to overcome those obstacles and made those businesses successful against the odds, he thinks.
In the world of publicly-owned businesses, we try to invest with the same sort of individuals. In our opinion, Michael O’Leary, Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) (LON:RYA)’s Chairman and CEO, is one such example of a talented, driven executive. Michael was born on a farm in Ireland, the second oldest of six siblings. Although his beginnings were not remarkable, Michael figured out how to get the best education he could by attending the best schools he could. After attending a Jesuit boarding school as a young boy, he graduated from Trinity College with an accounting degree; began his career working for KPMG, a large public accounting firm; and, soon afterwards, became a financial advisor to Tony Ryan, Ryanair’s founder. In 1986, Michael was hired to work for Ryan and initially advised him to close the airline immediately since it was losing so much money! In 1989, when Ryanair was on the brink of insolvency, Ryan offered Michael the job of Deputy CEO of the airline and in 1994 as its CEO. Michael accepted, on the condition that if he couldn’t make it profitable, he would be allowed to shut it down! He also chose to work for a percentage of profits rather than for a salary from the money losing business.
Michael then began to study Southwest Airlines Co. (NYSE:LUV), the most profitable airline in its industry. When Michael recently visited us and, when we asked, he described the epiphany he had at Love Field in Dallas more than twenty years ago when a Southwest Air plane landed. The Southwest Air plane was immediately surrounded by its ground crew that Michael thought looked like swarming locusts! The Southwest Air plane was quickly prepared for its next flight; its new passengers boarded; and the plane took off for its next destination in about half the time other airlines needed to prepare their planes for flight. Michael immediately grasped the reason Southwest Air planes produced more revenues and profits than others’ planes. It was because they flew on average two more short haul flights every day than others! Michael put that lesson into practice at Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) (LON:RYA). In the hub airports where his airline had previously operated, the inefficiencies of those welllocated facilities made it impossible to turn around a plane for takeoff in less than an hour. Ryanair then began to operate from less convenient and less crowded but more efficient regional airports. His goal was to turn around Ryan’s planes in less than 25 minutes! Further, while flag carriers which land in hub airports pay an ever increasing amount per passenger, each year to use those facilities, Ryanair is paid to land at regional airports that are seeking jobs and tourists! Ryanair passes those savings on to its passengers, with significantly lower fares and better service. Of course, its customers need to be willing to travel using airports that are a little less convenient.While competitive flagship airlines are losing money or are marginally profitable, Ryanair is profitable and growing quickly.
We think our portfolios of about 400 investments in competitively advantaged companies with big growth opportunities are operated by hundreds of entrepreneurial executives who will somehow find a way to make those businesses successful. None of these executives are exactly like Michael, which I am certain you could tell in an instant after meeting him. But, they are, nevertheless, terrific executives whom we have confidence will be able to overcome whatever “insurmountable” issues they encounter…and, in most instances, the businesses they operate will become much larger than at present. Of course, there can obviously be no assurance this will be the case.
“There is no such thing as a dumb question.” Jay Pritzker. Chairman and Founder. Hyatt Hotels Corporation (NYSE:H). 1993.
After graduating from Harvard University, Mark Hoplamazian earned his MBA in 1989 from the University of Chicago’s Booth School of Business. At Booth, Mark became friendly with Tom Pritzker, who then recruited Mark as a young executive for The Pritzker Organization. When no one in the Pritzkers’ heavily Jewish family office could pronounce or spell Mark’s Armenian Christian last name, Tom nicknamed him “Steinberg.” The Pritzker Organization’s flagship investment then, as now, was Hyatt Hotels Corporation (NYSE:H).
Early in Mark’s career, Jay Pritzker, Tom’s dad and the founder of that organization, asked Mark to take part in a meeting between Sam