Ron Baron‘s letter to Baron Fund shareholders for the second quarter ended June 30, 2015.

“If Rocky Aoki can make 60% profit margins selling dead fish, how is it possible I can’t make as much selling highly engineered, industrial, cutting tools?!!!” Eitan Wertheimer. Former Chairman. ISCAR. Now a Berkshire Hathaway company named IMC. April 30, 2015. New York City.

On Wednesday, April 30, 2015, Eitan Wertheimer, the former Chairman of ISCAR, visited me for lunch in our New York City office. Eitan was traveling from Tel Aviv, Israel to Omaha, Nebraska to attend Berkshire Hathaway’s annual shareholder meeting. In 2006, Eitan sold 80% of ISCAR, his family’s industrial cutting tool business to Warren Buffett’s Berkshire Hathaway for $4 billion. In 2013, after ISCAR had again about doubled in size, Eitan sold Buffett his family’s remaining 20% interest for $2.05 billion! Eitan is now devoted to his favorite Israeli philanthropies that strive to minimize socio-economic inequalities, “not by sharing the cake by cutting it into more pieces, but by making more cakes;” to improve education in engineering to help Israel increase its’ economy’s growth rate; to promote education as vital to integrating Ethiopians into Israeli society; and to create the most advanced hospital in the Middle East. Eitan has also founded a micro banking loan fund for startup industries in the Negev and Galilee, which has created wealth for a growing number of talented and underprivileged Israeli children! Whew!


Eitan and I have a few friends in common. One arranged for Eitan to visit me on his way to what Buffett calls “The Capitalist’s Woodstock” in Omaha. My lunch with Eitan in late April was one of my most enjoyable this year…which is saying quite a lot since I would characterize so many of our lunches as incredibly enjoyable.

But, back to my story. ISCAR is an Israeli business founded in 1952 in a dilapidated shed in Nahariya, Israel by Stef Wertheimer, Eitan’s dad. Stef started his business after emigrating to Israel from Germany in 1937. He began by making precision, metal working tools in Israel’s Western Galilee. ISCAR has since become one of two leading, global, precision, cutting tool businesses. Stef ultimately relocated ISCAR from that shed to become an anchor tenant in several industrial parks in the Galilee. His idea was to provide jobs for Israelis in that region. A condition of Eitan’s sale of ISCAR to Berkshire fulfills his dad’s wish that the business founded by Stef and his wife Miriam remain in Israel. That apparently was fine with Buffett who remarked that he purchased ISCAR with high expectations that ISCAR has exceeded. “Israel isn’t a place you would go to look for oil, but there isn’t a better place to find talent,” according to Buffett.

Eitan took over his dad’s business in 1984. Although Eitan was only 33 years old at the time, he had been working for ISCAR since he was six years old and already had successfully acquired, turned around and sold seven businesses! “Doing less is more…”

The year before he joined ISCAR, Eitan studied at Harvard Business School. The subject of the case he considered most interesting was about Hiroaki “Rocky” Aoki, the founder of Benihana, the Japanese restaurant chain. “Benihana sold dead fish and earned 60% profit margins!” according to Eitan. “How is it possible ISCAR couldn’t earn profit margins as high selling highly engineered, specialty cutting tools?”

Ron Baron – Introduction

Rocky Aoki made Benihana successful by “doing less!” He solved problems before they occurred by eliminating factors that created the problems. The most significant operations problems experienced by restaurants are high labor costs, high food waste, significant food storage costs and limited customer seating capacity. Aoki solved these problems by introducing hibachi tables in his restaurants so customers could sit at tables with cooking surfaces. That eliminated the need for backroom kitchens and provided more seating for customers. It also reduced labor costs to 10-12% of sales, a fraction of conventional restaurants, by providing cooks with direct customer interaction. Increased sales in his stores and a simplified menu virtually eliminated food waste, normally 30% of food costs. There was another benefit to food preparation on hibachi tables by loquacious cooks. Benihana was able to fill its restaurants by making food preparation “theatre.” The takeaway by Eitan? Solve problems before they occur. “Do more by doing less…”

ISCAR cutting tool plants make dirty, greasy objects. Buffett wrote in a letter how impressed he was by ISCAR’s immaculate plants. “They appeared to be pharmaceutical facilities,” according to Buffett. Eitan told me it took less effort to keep his plants well organized than to operate disorganized facilities which by definition are inefficient. How did he accomplish this? Pretty much by explaining to his fellow employees how important it was to be efficient since that would produce greater profitability which would permit ISCAR to grow faster; pay higher wages; and, insure the success of its business which would inure to everyone’s benefit. Eitan was successful convincing all his engineers and factory workers that was the case. With one exception. That individual, however, was one of his most brilliant engineers whose cluttered office was the exact opposite of what you might expect from an individual with such a methodical, systematic, orderly thought process. Although Eitan repeatedly asked that person to clean his office, he had been unsuccessful. Until, one day, he came up with the solution. He visited his engineer the first thing in the morning. “I’ve invited your motherin-law for lunch,” he told the engineer. That individual’s office was never again in disarray! “Doing less is more.” The simplicity of the idea that avoiding problems rather than having to fix them is powerful. Both for ourselves and for the problem solving executives of businesses in which Baron Funds invests. We are pretty sure the problem avoiding and problem solving abilities of the executives who lead the competitively advantaged businesses in which we invest like Tesla, Illumina, Vail, Hyatt, Under Armour, Gartner, Edwards Life Sciences, Manchester United, CoStar and many many others are important reasons those businesses have been so successful.

As for us, we think that following our very simple process of investing in fast growing, competitively advantaged, well managed businesses for the long term; trying not to worry about short term news that we regard as unpredictable “noise;” hiring the nicest, hardest working, smartest individuals who are team oriented; safeguarding our reputation; and, making individuals with whom we work feel “safe” in a wonderful environment keeps our team moving forward toward what I tell our fellow employees is “No Finish Line.” “A billion here, a billion there and pretty soon you’re talking real money.” Senator Everett McKinley Dirksen. Republican Majority Leader. 1962.

When Senate Majority Leader Everett Dirksen reportedly uttered that now famous phrase in 1962, America’s GDP was $600 billion. It is now $18 trillion! That represents compounded, annual, nominal growth for our nation’s economy of 6.7% per year, about 2.6% per year “real,” 4% per year from inflation. Further, it’s not just our economy that has experienced 4% annual inflation. Virtually everything except commodities and technology have experienced nearly the same annual inflation. Whether houses, cars, subway and bridge tolls, buildings, food, art, real estate, air fares, hotel rooms, wages or

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