Ron Baron: 22nd Annual Baron Investment Conference [ TRANSCRIPT]
RON’S SPEECH CONFERENCE SPEECH, “VISION.” Good afternoon. Welcome to the 22nd Annual Baron Investment Conference.
When I was young, Superman was my hero. I even collected Superman comic books. It wasn’t just that he could scale tall buildings in a single bound. Spider-Man could do that. It wasn’t just that he was strong. Captain Marvel was strong. And Batman? He didn’t even have any super powers. He was just a billionaire with lots of cool gadgets. What’s so great about that? No, for me it was all about Superman’s X-ray vision that allowed him to see through any- thing. Now that was amazing. And I’m sure you can understand why that skill would be so appealing to a 13-year-old boy.
SLIDE: Superman using X-ray vision on a date.
SLIDE: Default Plane
Vision is the theme of the 22nd Annual Baron Conference. We chose this theme because we think it’s necessary for CEOs to have vision and execute within its framework for their business- es to grow significantly. I want to thank John Addison, Andrew Florance, Robert Wagman, Peter Carlino and Mitch Rales for sharing their backgrounds and vision with us.
SLIDE: CEO Head Shots
Vision is what allowed them to see opportunities others didn’t. Their businesses are growing strongly because they are investing for the long term to achieve growth. We agree with their strategies. We invest in people. These executives are precisely what we mean by that.
The cost of Baron’s current holdings in CoStar, Colfax, LKQ, Penn National Gaming and Primerica was $619 million. Those investments are now worth $1.6 billion. Based on their businesses’ growth prospects, we think those stocks could appreciate another $1.5 billion in the next five to six years!
SLIDE: Yogi Berra.
Yogi Berra used to say, “That was the best game of my life…I’ve had several of them.” We could say something similar about dozens and dozens of our investments…including these!
I want to thank Linda for a very thoughtful and funny speech. I really enjoyed it.
I also enjoyed watching Kevin Plank, Under Armour’s CEO and Founder, question our guys just like we have questioned him on so many occasions since we began to invest in his business eight years ago…and have since quadrupled our money. I want to congratulate our managers for holding up under Kevin’s intense scrutiny. Today I want to speak about “Vision.”
I. The Environment. “It’s not what you look at that matters. It’s what you see.”
II. Our process. “Seeing with the brain” and “Thinking Differently.”
III. “Vision.” An ability to see what’s not there.
I. THE ENVIRONMENT. First. The environment is confusing. It’s foggy out there.
SLIDE: Foggy beach
My Grammar School guidance counselor in Wanamassa, New Jersey, advised our eighth grade class that we should “believe nothing that you hear and half of what you see.” His advice to eighth graders to be skeptical was unusual…but it was memorable.
“Trust but verify.” That was how President Ronald Reagan put it in 1986.
Individuals remain afraid to invest in stocks. That’s because we narrowly avoided a Second Great Depression five years ago…and conventional thinking is that it can happen again. During the past several months, forecasts that our country’s growth will remain slow for 20 years…or longer…have grown increasingly strident…
despite America’s improving economy and strong stock market.
PIMCO, America’s biggest investor in fixed income securities, expects our nation to experience an extended period of slow growth. They call this the “New Normal.”
SLIDE: New Normal
That would be good for its bond investments. Two weeks ago, Barron’ s magazine cover featured an article suggesting economic growth was “Slowing to a Crawl.” Controversial headlines sell newspapers.
SLIDE: Snail Headline
That Barron’s article was based upon theories of economist Robert Gordon. Gordon thinks the strong growth our nation experienced during its 237 year history is “a blip!” He forecasts an extended period, like the Dark Ages, when growth will be mediocre and standards of living will advance slowly.
SLIDE: Dark Ages
Responding to economic concerns, publicly owned businesses remain cautious about spending money to grow.
SLIDE: Eye Chart Environment
My good friend Arthur sold his business to a larger company several years ago. He recently had dinner with its CEO. “Why aren’t you investing to grow faster?” Arthur asked. He was surprised by the answer.
“Wall Street doesn’t want us to invest. They don’t believe in growth. If we invest to grow, our earnings will decline and our stock price will fall. Wall Street wants share repurchases, increased dividends and cost cuts.”
We think this is short sighted and widespread pessimism is the reason there are so many attractive opportunities and the stock market keeps going up.
SLIDE: Fog Lifts: Here Comes the Sun
We think exponential advances in technology; plummeting communications costs; abundant, low cost domestic energy; and rapid advances in healthcare, will improve our nation’s standard of living and economy. We don’t believe in a “New Normal.”
In the 20th century, America’s standard of living increased seven fold; our economy grew 6.8% per year; and our stock market increased 6.2% per year. Considering innovations since only 2000…iPads, smartphones, gene sequencing, social networking, facial recognition and shale development so far…and self-driving electric cars and Google Glass soon…we think growth will be at least as fast in the 21st century.
CLIP: SNL with Google Glass and porn That’s our future…
SLIDE: Eye Chart Environment
With interest rates at historic lows; our economy deleveraging; and growth accelerating; stocks are currently priced 10% below their median valuation of the past 100 years. This, despite the fact that America’s estimated 2013 GDP is almost 7% higher than last year’s. This is a lot different than the 2% growth you read about. The difference is inflation. Stocks historically have been the best protection against inflation.
SLIDE: Eye Chart Process
II. OUR PROCESS
Most believe we see with our eyes. Science teaches us we see with our brains. Our process teaches analysts to “interpret” what they see. We read the same newspapers, review the same published data and watch the same CNBC programs as everyone else. Why do we reach different conclusions? Why have we earned better returns than most for 31 years? We think it’s because we train our analysts to interpret what they “see with their brains” differently.
In 2012, the Detroit Tigers’ Miguel Cabrera won baseball’s Triple Crown, a feat that had not been accomplished in 45 years. Cabrera’s hitting approach is different than most. He focuses on a pitcher’s grip; the angle of his arm; and the slightest variance in his leg kick…while remembering the sequence, placement and speed of pitches already used.
While other hitters “keep their eye on the ball,” 99% of Cabrera’s “seeing” happens before the baseball even leaves the pitcher’s hand!
SLIDE: Cabrera’s Brain
Cabrera’s intellect allows him to interpret what he “sees” better than others. We train our analysts to “see”….with their intellect. Our process is to ask more questions and understand businesses’ prospects for the next five to ten years better than traders…who don’t really care about what’s going to happen in five to 10 years anyway!
SLIDE: Eye Chart Process
Most analysts and business executives can size a business opportunity. Fewer people understand competitive advantage or consider it important. Fewer still are able