Image source: CNBC

As value investors, a lot of us talk about investing for the long run.

But what does investing in the long run really mean?

As a value investor, I have had companies that I made over 50% in less than 6 months because that company I owned got acquired. I have also had companies that I sold and it went up another 20-25% after I sold.

But have you held a company for 14 years before? I have not, but the Billionaire long-term/value investor Ron Baron has.

Ron Baron is the founder, CEO, and CIO of Baron Capital which he started in 1982.

The investment firm currently manages around $30 billion of AUM.

From my knowledge, since successfully founding and growing his money management firm since 1982 – Ron’s company had made more than $25 billion in profit for his clients.

So what can we learn from Ron Baron, value investing wise?

Based on a CNBC article dated on August 20, 2019, it says:

“With a net worth of $2.2 billion, according to Forbes, Baron has made a fortune by doing extensive research, buying the stocks of companies he feels are undervalued, and keeping them for an average of about 14 years.”

Based on the quote above, we know that Ron holds companies for an average of 14 years.

What I know as an investor is:

[1] To hold a company for an average of 14 years would require us to also decide for 14 years to not sell the company. That would require us to really understand the company well enough in terms of its business value.

[2] It can be really hard in today’s modern times because patience, to be honest, is generally short in supply. In the older days, it is harder to get information.

Today, we are bombarded by information all in the palm of our hands. We have stock prices, minute by minute, and headlines that could easily influence us emotion wise and might result in us making the wrong decision.

[3] But I know that to really outperform and hold a company for so long, we have to invest in companies that have a long-term bright future that we can hold for the long-run. And in the long-run, it means more than 10 years.

It is important that it is a great company with a strong & durable competitive advantage because if it is not, they will only get worse over time (meaning, the longer we hold the company, the more money we are going to lose).

Consistency is also key. Ron Baron suggests that we should not buy and sell based on headlines.

Many people buy at the wrong time and sell at the wrong time because we are emotional.

For Ron Baron, he buys stocks monthly and buys more when the market is fearful.

In this Outlook Business article, Ron Baron shed a few more investing learning points:

“What’s going to happen if interest rates rise and what happens if oil prices go up? Everyone has a point of view about what they think is going to happen and, for the most part, invest in liquid securities. That’s macro investing. We don’t do that.”

“Baron explains that successful investing is not just about finding the right company but also holding on to it as it grows.”

“Baron believes the biggest mistake investors generally make is to avoid paying a small premium for a strong growing business.”

“We invest for the long term and, over time, become quite knowledgeable about the businesses that we invest in.”

“We focus on companies that are smaller. You need liquidity only if you are buying and selling all the time. For example, in the Baron Growth Fund, the average holding period is 13-14 years, while the average holding period for most mutual funds is nine months to a year. So, if you are buying and selling in a very rapid fashion, you need a lot of liquidity. But if you are making investments over an extended period of time, then you need less liquidity. If the business is going to flourish then you will end up making a lot of money. To give you an example, a chunk of our $25 billion profit has come from relatively small number of companies — 15 companies fetched us $11 billion.”

“We look at whether we’ve made a mistake — and it’s never about the price. If we’ve made a mistake in terms of a business plan not working out as expected, we sell. It’s all about the fundamentals of a business and not about the stock price.”

“And if we are wrong, we just sell as fast as we can. Just get out as fast as you can when you make a mistake and, hopefully, not too often. When you make a mistake, you just move on. “

“In short, we try to discover businesses that, first, can become much larger than they are at present. Second, there is something about the business that gives it a sustainable competitive advantage which others can’t duplicate. Third, it’s all about the management team — exceptional, honest, that work hard and are not going to cheat us; they are going to work for us as opposed to themselves”

“Hence, we are always talking with companies, studying the businesses and making sure that our assessment is going in the right direction. If your thesis is correct, you hold the stock regardless of what the price is doing.”

“When I invested in Vail, for the first 10 years we made just 60-70%. In 2006, the stock was still at $26-27 and now it’s $220-230. In the past 12 years we made 8-9x return. So, you have to be patient. You can’t expect when you buy a stock that it keeps going up 1.5% every single month, at the end of 10 years you would have made 4x. You have to be prepared at any point in time to lose 20% of your money, and make sure that you have enough time to make it back. “

See also: 5 Investing Lessons from The Three Kingdom

Again, we learn some of the investment thought processes that Ron Baron has from the above few quotes, they are:

[1] Ron is a bottom-up investor. That means that he does not think about macro, he does not think about the interest rates. He focuses on analyzing the business and buying a stake of it via the stock market.

[2] He mentions that the key to good investing is not only in finding the right company but holding it as it grows.

[3] Value investors have a common connotation that we only buy cheap undervalued companies. But it is not true, Warren Buffett said something along the line that value and growth are both parts of the value of the business. For Ron, he does not mind paying a small premium for a great business.

[4] When Ron makes a mistake, it is always about the fundamentals of the company and not about the stock price. He admits mistakes fast and moves on. And as we can see, he definitely let his winners make up for his mistakes. He said above that majority of his $25 billion profit comes from a relatively small number of companies – 15 companies fetched them $11 billion.

[5] His example with his Vail investment truly epitome the power of long-term investing. If a company is still good and worth holding, it is obvious that Ron will just hold them. That is how he outperforms.

I hope the above article is value-adding to you 🙂 

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