Last week, Steve Forbes sat down withRon Baron, founder of Baron Capital Group and member of the Forbes 400. They spoke about the economy, small-cap companies in which Baron is investing and Baron’s time-tested investment approach. Video and transcript of their discussion follows.
Below are some brief excerpts from Ron Baron, followed by the full 32-minute video.
How are bonds? Is that a bubble? I mean, how high can the price of treasuries go?
Rob Baron:Well, the reason Treasuries are where they are, the reason gold is where it is – it’s fear. Everyone is afraid. There’s been $800 billion invested in fixed income in the past five years, or four years. And there’s been $400 billion that have come out of equity. So people are terrified of equity. They think there’s going to be another crash.
You’re known as the small-cap maven. Give us your definition, first, of small cap.
Ron Baron:Well, small companies to us are companies that have market capitalizations of less than $2.5 billion. And what’s unusual about our business is that we buy companies when they’re small – when they’re $2.5 billion – and most mutual funds turn over their portfolio every eight months and we turn over every five or six years on average. But we’ve owned companies for ten, 15, 20 years. So we’ve been investor in Charles Schwab since 1992. We’ve been investor in Robert Haft since 1990, DeVry since 1990, Polo since 1999. So we bought them all when they’re small. And when they get to $10 billion, we sell them or reduce.
Now, in terms of choosing your companies you put a lot on management. What are your metrics in evaluating management?
Ron Baron:We say all the time that we invest in people, not just buildings. And the idea behind that is that we’re looking for businesses that have big growth opportunities; other people look for those. We’re looking for businesses that are appropriately financed; other people look for that. We focus on competitive advantage; a few people do that.
That means that something, a barrier to prevent other people from doing what you’re doing. A brand, like Forbes. A brand. And then we’re trying to find someone, a leader who is smart, hardworking, someone we trust and someone who people with follow. You don’t become successful in a business unless you inspire people, unless people want you to be successful.
And so we’re trying to find that kind of a person. An honorable, honest , hardworking, ethical guy or woman who can make their business become much bigger. And people don’t pay for that. They pay for what is, and we’re paying for what is very similar to what other people are paying, but we’re expecting to get much more in the future than we are today.
And businesses that are growing penalize current profitability because they invest in their businesses. And when you invest in your business, you hurt current profits. So therefore you ordinarily are able to buy growth companies for lower prices than you would ordinary companies. Because profits are a little bit less than they should be.
Below are some brief excerpts from Ron Baron, followed by the full 32-minute video.
How are bonds? Is that a bubble? I mean, how high can the price of treasuries go?
Rob Baron:Well, the reason Treasuries are where they are, the reason gold is where it is – it’s fear. Everyone is afraid. There’s been $800 billion invested in fixed income in the past five years, or four years. And there’s been $400 billion that have come out of equity. So people are terrified of equity. They think there’s going to be another crash.
You’re known as the small-cap maven. Give us your definition, first, of small cap.
Ron Baron:Well, small companies to us are companies that have market capitalizations of less than $2.5 billion. And what’s unusual about our business is that we buy companies when they’re small – when they’re $2.5 billion – and most mutual funds turn over their portfolio every eight months and we turn over every five or six years on average. But we’ve owned companies for ten, 15, 20 years. So we’ve been investor in Charles Schwab since 1992. We’ve been investor in Robert Haft since 1990, DeVry since 1990, Polo since 1999. So we bought them all when they’re small. And when they get to $10 billion, we sell them or reduce.
Now, in terms of choosing your companies you put a lot on management. What are your metrics in evaluating management?
Ron Baron:We say all the time that we invest in people, not just buildings. And the idea behind that is that we’re looking for businesses that have big growth opportunities; other people look for those. We’re looking for businesses that are appropriately financed; other people look for that. We focus on competitive advantage; a few people do that.
That means that something, a barrier to prevent other people from doing what you’re doing. A brand, like Forbes. A brand. And then we’re trying to find someone, a leader who is smart, hardworking, someone we trust and someone who people with follow. You don’t become successful in a business unless you inspire people, unless people want you to be successful.
And so we’re trying to find that kind of a person. An honorable, honest , hardworking, ethical guy or woman who can make their business become much bigger. And people don’t pay for that. They pay for what is, and we’re paying for what is very similar to what other people are paying, but we’re expecting to get much more in the future than we are today.
And businesses that are growing penalize current profitability because they invest in their businesses. And when you invest in your business, you hurt current profits. So therefore you ordinarily are able to buy growth companies for lower prices than you would ordinary companies. Because profits are a little bit less than they should be.
