Ron Baron‘s Conference Speech, “Built to Last.” Welcome to the 23rd Annual Baron Investment Conference.
Before I begin I’d like to ask you a few brief questions…
Has anyone here ever met a Babylonian? No? Me either. How about a Phoenician? No? Neither have I. Anyone ever been to a Sumerian restaurant? Raise your hands. No one? Huns? Any Huns in the room?
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NOW… How about the Jews? Is anyone here Jewish? … or do you know someone who is?
SLIDE: Ancient civilizations & Jews
O.K. We’re finally getting somewhere. The real question I want to ask is this… Why are some civilizations doomed to extinction while others endure for thousands of years?
In other words, what does it take to be “Built to Last?” Whether it’s a civilization like the Jews who against the odds have made it for 5,775 years or a business that lasts for decades or a hundred years or more… we think it’s culture… values… and ideas that last….
The Ten Commandments…
The Magna Carta…
The Declaration of Independence…
The Constitution…
The Bill of Rights…
America…
“Things” don’t last. Ideas last.
We chose the image of America to represent our “Built to Last” theme this year.
SLIDE: America Built to Last T-shirt
This is since we think of America as an idea that represents yearning for personal freedoms… self-determination… and hope for a better life for your children…
Bono says it best.
FILM CLIP: “America is one of the greatest ideas in human history. Right up there with the Renaissance, crop rotation and The Beatles White Album.”
Today I want to discuss how Baron investments, portfolios and our company are “Built to Last.”
I. Ron Baron – “Built to Last.” Businesses in which Baron Funds invests
Baron Funds invests in businesses we believe are “Built to Last.” But, here’s the hard part: most businesses that appear “built to last” don’t. In 1958, the lifespan of a Fortune 500 company was 61 years. It is now 15 years.
In the 1950s, Eastman Kodak was one of the most profitable and highly regarded businesses in America. Grandparents often gave their grandchildren Kodak stock to help pay for college. Few doubted Kodak would endure.
Audio Clip: Kodachrome
Competition from digital photography bankrupted Eastman Kodak. Kodak should have been the leader in that technology. Steve Sasson, a Kodak engineer, invented digital imaging in 1975! Kodak’s executives told Sasson “filmless photography” was a “cute” invention. But, since it didn’t use film, “don’t tell anyone!” Kodak fostered a culture that protected its film business and ignored the existential threat of digital imaging. Kodak filed for Chapter 11 bankruptcy in 2012. Not exactly a Kodak Moment!
Similarly, AT&T failed to exploit the cell phone technology its engineers had invented for the Army in 1947. AT&T feared cellular technology could disrupt its tethered land lines business. AT&T thought cellular telephony was a niche market. That niche is now 7.3 billion cell phones.
SLIDE: AT&T buried under cell phones
AT&T and Eastman Kodak had similar cultures. Both suppressed technology that posed threats to their businesses.
Another industry that’s missing the boat? CARS!
SLIDE: Cars falling off boats
We believe automobile manufacturers reliant upon internal combustion engines could meet a similar fate to that of AT&T and Eastman Kodak.
In 1910, at the dawn of the automobile, of 4,000 cars in America, more used electric power than internal combustion engines! Electrics were quieter, had fewer moving parts and required less physical strength to operate. Even Henry Ford’s wife preferred her electric to her husband’s Model T.
SLIDE: Clara Ford in electric car
The internal combustion engine prevailed. The reason? In 1910, gasoline cost seven cents a gallon, half the cost of electricity! Today, things are different. Gasoline is $3 a gallon, four times the cost of electricity!
Even though electrics now cost less to operate and are safer than cars with internal combustion engines, traditional auto manufacturers have little interest and no incentive to adopt new electric technology. Those auto makers are handcuffed by large investments in engine plants, restrictive union contracts, and legacy dealer networks.
Elon Musk’s Tesla, with its culture forged in Silicon Valley, not Detroit, has attracted more than 700 of the most talented engineers from around the world. We expect that number to continue growing rapidly.
SLIDE: Elon in Model S
Tesla is also investing billions in its business, and is on the verge of disrupting existing car manufacturers who have been ‘asleep at the wheel’. While Tesla is creating the future automobile industry… here’s what Detroit’s been working on…
SLIDE: Film Clip: Ron Burgundy Playing Sax
We don’t invest in companies like Kodak, AT&T and traditional car companies, which are trying to protect short-term profitability of legacy businesses by cutting costs rather than investing to grow.
We make long-term investments in what we believe are well managed, competitively advantaged, growing businesses that are “Built to Last.” Like the companies you heard from this morning:
SLIDE: Company Logos
Brookdale…the only branded housing provider with a national footprint catering to seniors, America’s fastest growing demographic. ANSYS… a software company with 45 years of simulation expertise that improves product performance for 40,000 customers.
Middleby… with its culture of continuous innovation producing better functionality and performance for kitchen equipment.
CaesarStone… the innovative producer and distributor of countertops and tiles with superior characteristics to granite and marble…
…and Manchester United with its storied 136-year history and 600 million soccer fans worldwide, making it an unparalleled media property…
Executives of these businesses have established cultures to encourage growth investments even if they hurt earnings in the near term. We invest in leaders who are neither risk averse nor complacent, and who are keenly aware of competitive threats. We train our analysts to recognize addressable market opportunity and competitive advantage. And should that advantage diminish, whether management will be resistant to change… or embrace it.
II. Ron Baron – “Built to Last.” Baron Portfolios
1. It’s not hard to imagine why people are afraid to invest in stocks.
With streaming television news about Ebola… ISIS… commercial airplanes disappearing or being shot out of the sky… political unrest in China… economic uncertainty in Europe … and market volatility… we are often asked, “how is it possible to invest in stocks for the long term?”
Especially since traders sell stocks whenever there is news of dire events on distant shores or missteps by the White House, including the Secret Service.
SLIDE: Headlines
But, wait a second. Headlines have always been scary. I began my career as an analyst in 1970. In the following decade, inflation soared into double digits; short-term interest rates reached 18%; the economy was in recession; the price of oil tripled; gas lines were interminable; and, we had a hostage crisis in the Middle East.
SLIDE: Gas lines
Now that was bad news!
Today, about the only thing we have in common with the 1970’s is a President who is as unpopular as Jimmy Carter. The economic news is actually pretty good. Interest rates have never been lower; unemployment is falling; the growth of our economy is accelerating; auto sales are strong; housing is improving; and, the price of energy has just fallen by more than $20 a barrel in just four weeks. That’s a savings of $400 million a day for Americans!
The point is, in bad times, people are afraid to invest… and now, in times that are good and getting better, people are still afraid to invest! Isn’t that amazing?
SLIDE: Louis C.K. “Everything is amazing right now and nobody is happy”
2. The only thing investors should fear, we think, is not investing.
Investments in stocks, real estate and businesses protect you against inflation. Our government tells us that inflation is presently less than 2% a year. But, our government is incentivized to underreport inflation since many of its costs are tied to price levels. We do not accept its inflation estimate at face value. Prices for goods and services have increased by 4% a year since 1960.
SLIDE: Inflation chart
Until seven years ago, governments worldwide had been trying to fight inflation. Gerald Ford even tried using a lapel pin.
SLIDE: WIN button. Whip Inflation Now
That didn’t work.
Now, governments here, there and everywhere are explicitly trying to increase the rate of inflation to help their economies. ECB’s Mario Draghi has vowed “to do whatever it takes” to accomplish that. Japan’s Prime Minister Shinz¯o Abe, U.S. Federal Reserve Chairman Janet Yellen and Vice Chairman Stanley Fischer share the same goal.
SLIDE: “Do whatever it takes”
We think airfares, tuition, clothes, cars, rent, bridge and tunnel tolls, groceries and just about everything else that already seem to be increasing faster than 2% a year, could soon increase even faster.
Postage stamps are a good example.When I was young… my mom would purchase rolls of 3 cent stamps to mail her letters.When the Post Office raised the price of a first class letter to 4 cents, she needed a roll of 1 cent stamps. First class stamps now cost 49¢!
SLIDE: Vintage stamps
Seven years ago the Post Office began to sell “Forever” stamps with no price printed on them. Not because the post office intended to stop raising prices, but rather to save on printing costs… And to be able to raise prices without people noticing!
Video Clip: Colbert on Stamps
Colbert’s wrong! Stamps are not a good investment. They barely keep up with inflation. Stocks are a good investment. U.S. stock prices and our economy are inextricably linked. U.S. GDP for the past 54 years has grown 6.7% a year. Stock prices over that time have grown 6.4% a year.
When you add in dividends, stocks have doubled every 10 years. Stocks now trade for 15x earnings, at the midpoint of their 100-year range.
3. Baron portfolios are “Built to Last” and we believe they will continue to significantly outperform “passive” stock market indexes over the long term.
Why? Because we think each company in which we invest has the potential to double in size over five years and double again in the following five years. That’s a lot faster than the growth of our economy and stocks in general, which double approximately every ten years.
Our diversified portfolios are invested in companies across multiple industries. The risks inherent in those industries are uncorrelated. For example, some of our businesses will benefit when the weather is stormy, like Vail, Generac and ITC, others when the weather is warm, like Hyatt Hotels and Choice Hotels. When the price of oil is high, our energy investments like Concho do well. When energy prices are low, consumer stocks like Under Armour and CarMax benefit. When interest rates are high, our financial investments like Charles Schwab and Carlyle benefit; when they are low, real estate related companies like Brookdale, CaesarStone and Masonite do well.
SLIDE: Diversification
Baron Funds’ diversification reduces risk. Several Baron Funds portfolios are 20-30% less volatile than the market. Index funds often have a large percentage of their portfolios invested in mature, slowly growing businesses like Kodak, AT&T, auto makers, newspapers and IBM… before they go bankrupt. Since these companies haven’t invested for their future, they are not “Built to Last.”When those falter, they can have an unusually large negative impact on the performance of passive indexes.
That’s what helps “active” managers like us beat passive indexes.
Baron’s process has been successfully applied in different markets, across asset classes and market caps, and has proven sustainable and repeatable.
III. Ron Baron – Baron Capital Group is “Built to Last”
1. “We Invest in People.” That is our firm’s mission statement.
People like Under Armour’s Kevin Plank; Tesla’s Elon Musk; Hyatt’s Tom Pritzker; Carlyle Group’s David Rubenstein; Chuck Schwab; Zillow’s Rich Barton; Edwards Lifesciences Mike Mussallem; Illumina’s Jay Flatley; and dozens and dozens of entrepreneurs like these individuals and those who spoke with us this morning…
We also invest in people who work at Baron Capital. As a growth company, our job is to hire, train and retain talented individuals. We continuously hire, promote, expand and invest through all market cycles.
We’ve never had a layoff. That is one reason we have been able to attract great employees. They can rely on us… just like we rely on them.
Another reason we get great employees is that they get to work with other great employees in a terrific environment.
2. We intend to become a hundred-year-old business.
68 years to go. That’s what we mean by being “Built to Last.” How? By providing investors with returns significantly better than the market over the long term.
It’s just as important to us how we achieve these returns. We would never use what some traders call “black edge” insider information. We impress upon individuals with whom we work the importance of reputation.
Many ballplayers have used illegal, performance enhancing steroids to break records. That is baseball’s equivalent of “black edge.” Derek Jeter and Cal Ripken Jr. played baseball cleanly, with integrity, honesty and hard work.
SLIDE: Jeter & Cal last game
Henry Grantland Rice, an early 20th century sportscaster said it well. “For when the One Great Scorer comes to mark against your name, He writes-not that you won or lost, but how you played the game.”
We want to be like Derek and Cal… But personally, if I had my choice, I’d rather be Derek.
SLIDE: Jeter & Girls
Baron Capital is a privately owned “family business.” Let’s lose that slide, I’m trying to run a family business.
Our business is managed differently than most publicly owned businesses or businesses owned by private equity. We are focused on long term and are managed for future generations of owners not for quarterly earnings and not to be “dressed up” to sell. My family has no intention to sell the business we are building.
We invest our profits in our business to grow to provide investors, their families and their advisors with services and products we think will benefit them. If it’s good for our clients and if it’s good for our employees, we think it’s good for our firm. That is embedded in our culture and helps make us, without question, “Built to Last.”
Baron Capital Group has grown significantly since I asked Linda to become Chairman of Baron Funds and President and COO of Baron Capital Group eight years ago, so that I could spend more time doing what I love… investing. We have recently extended our lease to 2045. 31 years to go. I’m 71. So, either I expect our business to last much longer than I will… or I expect to live forever.
SLIDE: Woody Allen/FAME
I have great confidence in our 131 person staff, that continues to grow and that includes my sons David and Michael. I am excited that we have assembled such a wonderful group of people to make this business last for generations.
SLIDE: America Built to Last
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