Ron Baron: Stock Market Undervalued

through there through all that music. ron baron has said in the past this is one of the best opportunities he’s ever seen in his lifetime when it comes to buying stock. right now the sheer numbers of opportunities out there has him a little over the moon. ron baron is the chairman and ceo of baron capital. he joins us right now, from the hamptons, i believe. right, ron? from easthampton. a smart guy in the summer. chairs in easthampton. mario and i have been friends for over 40 years, since i started in business. that speaks well of you, ron. that speaks very well of you to stay friends with mario for 40 years. that means we can’t be working anywhere else. we have to keep a job somewhere. but we have the passion of investing. that’s absolutely right. mario is one of the most brilliant investors there is who i know. i followed you, ron. without him there would be no ebidta. he invented the term. also, he started off in busy guess two or three years ahead of me. when he did, he was trying to get a 10% return over inflation after taxes. i was trying to build on my money every couple years because i had to catch up to him. i was two or three years behind. he’s a spectacular investor. so nice to see him. keep it up, ron. both of you are very optimistic when you look around at the stock market and look at the number of opportunities that are out there. but, ron, you say when it comes to investing generally when you look around, you have more money than you have ideas but that’s not the case right now. this time around there are so many ideas out there you can’t even fund them all? that’s right. the issue i think is that everyone is worried about the european fiscal crisis, they’re worried about iran, they’re worried about the fiscal cliff and they’re not working on companies, they’re not looking for investment opportunitie so the stock market is below the norm of how it’s been valued for 200 years. 200 years is 15 1/2 times on average, 10 to 20 times normally and now it’s a little bit less than 14 times. so people are so concerned that they give stocks a much lower valuation than they normally do. and the way we’re going to come out of all this is by the governments, what they always do, they print money. and so they create inflation. and if you go back in your life and think about what things have cost you over the years, whether it’s tuition or whether it’s your cars or even your house or your clothes or your meals or your gasoline, everything, and so everything goes up a lot in price overtime because there’s a lot more money to buy the same amount of goods. if you go back and think about when i was in college my tuition was $3,500 in my last year. i think nursery school in new york in private school is almost $40,000 a year. not everyone pays that but if you can afford it, you pay it. a large percentage get tuition aid scholarships but things go up and up and up all the time. that’s because there’s more money and it doesn’t grow quite as fast. two years ago you told us this was going to be one of the best investment opportunities of your career. that was about two years back? i’m fairly consistent for a long time. i think that two or three years ago that’s what i said, but i’m normally bullish but i was exceptionally bullish then. i think that what you have right now is that, you know, you just had an article, you’ve had articles being printed of late called the death of equity, you should never invest in equities again, the economy is going to grow 2% of year. when i started baron capital in 198 2, the stock market is now 13 times higher than it’s been. that’s 7.9% a year. if you go back 50 years, the stock market is 31 times higher, 31 times higher. the value of your money is down 90% since 1958 and it’s down 95% since the 1940s. but if you think about the economy growing only 2%, the kennedy budget in 1960 was $92 billion. that’s the whole budget. the economy was $500 billion or $520 billion. you have the economy growing 30 some-odd times since 1960 and the stock market growing 31 times. the reason people say 2%, that’s the real growth bu the nominal growth is what you’re trying to keep up to and that’s 6 or 7% a year. the way i see it, good analysts, people like mario, you should be able to find companies to do much better than the stock market. that’s what we’re all about. i want to ask you about one out there idea i just seem to be hearing more and more of. is it time to start thinking about a flyer on the european equities? we’re aware of what’s going on in the world, but we try to focus on areas that we have expertise on. so we try to look for opportunities that we know something about. everyone’s trying to guess the time and market and trade news and i think that’s a foolish game. the stock market in the past 20 years is up 7.5% a year for 20 years and it’s individual investors who invested make 3.5% a year. so they’re 400 basis points less in the market. the reason is they’re trying to trade news and they always get it right. not just individuals, nobody can get it right. that’s a great point. they’re packaging ideas, trying to trade the market, same as soy beans or corn. what’s your best idea? come on, tee it up and i’ll tee it up for you and, you know, give as you couple areas that you’re actively investing in. so, for example, opportunities, one of the reasons we’re looking — so we find companies that are trying to solve problems, that are solve be problems. that’s where often opportunities grow and become much larger are, if you have well-managed business, competitively advantaged. we’re trying to create portfolios of fundamentals that are not correlated with each other. for example, we’re trying to find businesses that use less energy. electricity transmission is an idea to invest in. there is only one company. it’s called itc holdings. it’s a spin out from detroit edison. the concept is that the government found that they were underinvesting, electric utilities. it only represents 7% of revenues, they have 65% from generation. if they have inefficient generation, they need more transmission. the government gave them a special capital structure to encourage them to spin it out. this company is growing 17%, 18% a year because they invest more money in transmission so it’s worked. they expect to double in size over the next year when they merge with entergy but then grow 17%, 18% a year for ten years. so we’ve tripled our money in i guess the past five years and i think we’re going to make eight times, four times at least, over the next ten. if they turn into an mlp over the next ten years, we’ll make more money. real estate — go ahead. real estate. when i have talked protecting against inflation, we’re interested in real estate. a new idea for us is campus housing. competitively advantaged businesses, that’s what we’re looking for. vail, you have a mountain, only god can create mountains. american campus communities, what they do is they build college housing. so if you’re a middle-class person like all of us and i guess i’m a little bit better than that, but if you’re a regular person sending your son or daughter to college and you see a ratty dorm and they live in a beautiful house all their lives, all of a sudden you look at the dorm and say i have to send my son or daughter there? no. there’s going to be all this rebuilding. there’s 5 million beds that have to be rebuilt. there’s only one company with 60,000 beds and another one with 20,000 and our guy’s able to finance because he’s only in the stock market 4%, 5% yield, he develops to an 8% yield. when you deal with princeton, they’re building for princeton’s balance sheet and using it as a reference account but if you’re building for state colleges and universities and you’re getting an 80-year deal, an 80-year lease on land, nobody can build land exclusively, nobody can build on your campus except for you. therefore you’re going to get these very high returns and share it with the university on which they’re building. and the universities have to do it. it’s a great bunch of ideas you’re finding and it’s an exciting time. you see the people prices pay when they take over a company. we need more deals, more financial engineering. we have an investment — we had an investment in merit group. we’ve had two deals this past month, merit group and pete’s. that’s managed care for medicaid. the stock was trading at $60 a share two weeks ago. our cost is probably 16. i know it’s 16. and they were acquired at 92. 50% up from where it was last. pete’s was trading and it was up 20% from where it was. so you’re right, mario, there are deals that are taking place and they’re big premiums. if you’re a long-term investor like we are and find businesses that are aattractively priced, that’s the opportunity in which we find attractive to invest in. if you two would bear with us