Ron Baron’s Baron Funds letter to investors for the first quarter ended March 31, 2015. This is a really good one check it out below.
“Nothing is written.” Peter O’Toole. Lawrence of Arabia. 1962.
Mike Nichols, the brilliant, highly acclaimed film and theatrical director, passed away during November 2014. Soon afterwards, he was memorialized by his friend, Peggy Noonan, in an Op-Ed article in The Wall Street Journal. Ms. Noonan recounted in her tribute, “The Pleasure of His Company,” how Nichols, in 1939, at age 7, traveled to America by boat with only his younger brother. The two boys were fleeing from the Nazis in Germany. Their father had come to America shortly before they arrived. When their dad picked up his two sons on the S.S. Bremen in New York Harbor, Nichols was first startled and then fearful when he glimpsed a delicatessen with neon lit Hebrew letters in its storefront. He asked his father, “Is that allowed? It wouldn’t be in Germany.” “It is here,” answered his dad.
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Long after Nichols achieved extraordinary success and married Diane Sawyer, he kept a large, faded, yellow pillow, a souvenir from the 1962 Oscar award winning movie “Lawrence of Arabia,” on their living room couch. “Nothing is written” was printed on that pillow. Nichols believed that phrase meant “no outcome is dictated; no impediment is insuperable; and, that you can wrest life from its false limits.”
Mike Nichols also believed that to become successful “you need to know things.” Just like Warren Buffett who attributes his remarkable success in part to reading 600 pages per day and Bill Gates who, in his quest to solve the world’s problems, likewise reads a book every day. We agree that reading to learn is a prerequisite to exceptional achievement, whether in the arts, business, science, humanities or politics. This is since accomplishment in all fields is built upon a foundation of what has already taken place. Mike Nichols was one of the best in his chosen field to achieve all that America allows in part because of his great curiosity and “the sheer pleasure he received from learning.”
“You can’t get there from here.”
My family and I have been skiing in Vail, Colorado since 1997. That was the year Baron Funds began to invest in Vail Resorts. In 2004, when my friend Leon Black’s Apollo Global Management distributed shares of Vail Resorts it owned for a partnership that was being liquidated, Baron became the largest shareholder in Vail Resorts. Vail’s share price at the time was $19 per share. Vail Resorts’ current share price is $100 per share. Based on Vail’s growing cash flow and durable competitive advantages, we think Vail’s share price can double again in the next five or six years. Of course, there is obviously no guarantee this will be the case.
I visit Vail two or three times a year and ski for two or three days during each trip. Terry Armistead is my favorite Vail ski instructor. I think all Vail ski instructors are great, but I like Terry the best because she gets me around the mountain safely and sings Beatles songs to me on the ski lifts. She also always makes me laugh with stories about her family and what it was like growing up in Vermont. Terry recently told me an apocryphal story about a tourist who stopped at a Vermont country store for directions to another small town in that state. When the traveler asked an old farmer sitting on the store’s front porch how to get to Fayetteville, the response was, “You can’t get there from here.”
The old farmer’s outlook was certainly a lot different than Mike Nichols’, Warren Buffett’s and Bill Gates’. The mission statement of our business is “we invest in people.” We have often written about the character of individuals in whom we invest. In general, these trustworthy, talented, driven, inspirational leaders who love what they do nearly always figure out how to “get there from here.” Vail’s Rob Katz did. We have invested in a long list of exceptional individuals who also have figured that out. Two, in recent years, come quickly to mind…Under Armour’s Kevin Plank and Tesla’s Elon Musk.
“It’s not what you buy. It’s how much you pay for it.” Carl Icahn. 1985.
Ron Baron’s Baron Funds: International Game Technologies
Chuck Mathewson was the Chairman of International Game Technologies in 1982 when the two of us became friendly. IGT’s market capitalization was then about $100 million. It increased to more than $10 billion under his leadership! We missed most of that increase, one of the most painful missteps of my career. After reviewing our investment in IGT, I found it difficult to understand why we sold after only doubling or tripling our money. Especially since I admired the company’s chief executive and thought the company’s long-term prospects were quite favorable. Soon afterwards, I stopped “trading stocks” and became a long-term investor who “invests in people.” I have come to view my IGT “mistake” as tuition for a very valuable lesson. But, on with my story.
In 1987, when we founded Baron Funds, Chuck became a Trustee of Baron Funds, a role in which he served for 26 years. He was also the Board’s independent Chairman for six of those years. In 2002, on one of his regular visits to me, Chuck mentioned that he frequently played bridge in the evenings by computer with Warren Buffett. He also told me Warren enjoyed reading Baron Funds shareholder letters!
When I asked Chuck if he could arrange for me to speak with Warren, he told me that would be easy. Warren called within a half hour…on our toll free 1-800-99BARON phone line. Warren began the conversation by congratulating me on our good luck for investing in Woodward & Lothrop, a Washington, D.C. department store chain with valuable real estate holdings, in 1982. That business was acquired three years later by mall owner Alfred Taubman. I thanked Warren and responded that a similar investment didn’t work out as well. Warren observed that one of Berkshire’s first acquisitions “didn’t work out either.” He thought he was “buying a second rate department store chain in Baltimore” that owned valuable real estate. “Unfortunately, it was a third rate chain!”
Warren explained that, early in his career, he tried to buy businesses for $.80 that were worth $1.00. That was until “Charlie persuaded me it would be a better idea to buy a great business at an attractive price than a mediocre one at great price.”
Ron Baron’s Baron Funds: Warren Buffett, Charlie Munget vs Carl Icahn
Warren’s and Charlie’s strategy was a lot different than my friend Carl Icahn’s as he described it to me in 1985. “It’s not what you buy. It’s what you pay for it,” Carl believed then…and, still does. I concluded that unless you are really tough like Carl, and want to torture companies into repurchasing their stocks, cutting expenses, increasing their dividends or selling themselves to the highest bidder, Buffett’s strategy was more appealing.
“Movements of the general stock market during abbreviated periods will likely be far more important to determining results than a change in the intrinsic value of…shares.” Warren Buffett. Berkshire Hathaway 2014 Annual Report. March 2015
I began my career as an analyst in 1970. At that time, with legislation to care for the elderly born in Lyndon Johnson’s Great Society, nursing home stocks became top performers. In the early 1970s, “one decision,” large cap, growth stocks referred to as “The Nifty Fifty” became popular. In the late 1970s, gaming was legalized in Atlantic City and boardwalk casinos became trendy. Then steak houses captured investors’ imaginations. Then river boat casinos. Then cable television companies. Then cellular telephone businesses. Then Internet stocks. Now it is biotech stocks, whose share prices had remained virtually unchanged for ten years, which have increased in price fourfold since 2012! Gilda Radner’s Saturday Night Live character Roseanne Roseannadanna had it right when she told her viewers, “It’s always something.”
Our firm continues to invest in people. Both in people who manage competitively advantaged businesses and in people who work at Baron researching those businesses. We are presently investing in health care and biotech research. We believe it likely there will be opportunities to invest in such businesses at attractive prices, although we do not think now is that time. We are preparing for those opportunities if they occur, however. This is analogous to our efforts in the late 1990s when Internet stocks rose to prices we believed were unsustainably high. Although we thought many Internet businesses had promising prospects, we chose to invest instead in Internet analysts and managers for our firm.When Information Technology and Internet related stocks subsequently fell, we invested billions and have since made billions.
In the short-term performance oriented world in which we live, we believe it is unusual for managers like us to penalize their current profits in order to develop expertise that may permit them to substantially outperform over the long term. Especially if that means forgoing what seem to be “easy” profits in stocks that are rising almost every day. The research expenses you undertake are certain. The profits you hope for are not. We think efforts like this provide a privately owned, investment management company like ours with competitive advantages. We think our willingness to accept average performance or underperformance on occasion by not investing in certain stocks which are most popular is an important reason most Baron Funds have outperformed over the long term (see charts on page 9-13). Perspective that comes from long experience, a strong balance sheet and the support of clients who have experienced favorable absolute and relative returns over the long term is the reason why, of course.
Thank you for investing in Baron Funds.
Thank you for joining us as fellow shareholders in Baron Funds. We believe the growth prospects for the well-managed, competitively advantaged and appropriately financed businesses in which Baron Funds has invested are favorable. Volatile markets in recent months and years have created uncertainty among investors that causes many to be fearful. These developments have made stocks, in our judgment, attractively priced, which should offer investment opportunity and limit investment risk.
We are continuing to work hard to justify your confidence and trust in our stewardship of your family’s hard-earned savings. Thank you again for your long-term support. We are especially thankful for the confidence you have expressed in us.
CEO and Chief Investment Officer
April 30, 2015
See full PDF below.