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That Baron Conference

November 02, 2008
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Warren Boroson

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The Baron Funds’ yearly extravaganza on Oct. 24 had almost been cancelled this year--because the markets are so far down, because the Baron funds are so far down.

As if that weren’t bad enough, the scheduled mystery entertainer was sick—the Baron people were notified the Wednesday before the Friday bash—and a last-minute replacement had to be obtained. (Jerry Seinfeld was the replacement—his mother is friendly with Ron Baron’s mother in Florida. Who the scheduled entertainer who finked out was remains a mystery.)

A good time was had by all. Free breakfast, free lunch, free entertainment. Did I mention that Patti LuPone serenaded us at lunchtime? Did you know that she’s distantly related to the old opera singer, Adelina Patti?

Various representatives of various companies that the Baron Funds invest in spoke in the morning: Helmerich & Payne, ITC Holdings, MSCI, Under Armour, Fastenal.

How did America’s economy get into this muddle? We focused too much on performance and too little on risk. That was the diagnosis of Henry Fernandez, chairman and CEO of MSCI, the leader in tracking international market indexes.

A refugee from Nicaragua, Fernandez said that clues that something was awfully wrong were: 1. the high level of volatility, 2. the huge amount of leverage, and 3. “exuberance”—a “lethal” combination, he called it.

The lesson we should learn, he went on, is that there are two sides to the coin: return and risk.

“We should pay attention to both.”

The market will probably go down further, “But don’t sell,” he advised. “Buy. In my 40 years of tracking the market, I have found that periods like this are when the biggest opportunities exist.”

Fernandez spoke before 4,000 shareholders at the Metropolitan Opera House. The funds, which are no-loads, now manage $18 billion. Ron Baron himself was 355 th on Forbes magazine’s list of richest American’s this year.

When Fernandez said that America will emerge from this mess stronger, thanks to its flexibility and its entrepreneurship, the audience applauded loudly. No one has to lose sleep, he went on. “The biggest risk is not to take advantage of this opportunity.”

Linda Martinson, president and COO of the Baron Capital Group, granted that there has been panic selling among some Baron shareholders. But “If you’re waiting for the bottom to buy back in, you may miss it.” Markets tend to shoot up quickly after reverses.

Too many investors buy high and sell low, she continued, citing a famous study that found that the market rose 8.85% a year during the 10 years ending in 2005; investors made only 2.4%. They lost 6.45 percentage points because they didn’t hold on—they darted in and out.

In previous bear markets, she went on, there has been a 20% advance three months after the lows, and a 23% advance six months after the lows.

One portfolio manager, Cliff Greenberg, reported that the Baron funds now have higher levels of cash, they have beefed up their exposure to “more established, seasoned businesses,” with no leverage and little debt, and lightened up on holdings that they had less confidence in.

Some stocks that Baron fund managers recommended: SunPower, Thomas & Betts, JPMorgan Chase, Immucor, Flir Systems, JCrew, WellsFargo. At the time, Microsoft and HomeDepot, one manager said, were selling at prices lower than at any time since they went public.

Ron Baron told of the time back in 1987 when the market crashed. He promptly told his wife, we’ve got to stop spending. Her reply: Not pay the rent? The electric bill? For food?

He lived in Westport, Conn., at the time, and he bopped over to the middle of town. “It was as crowded as ever. There was no sign of trouble.” His conclusion: “We must be the only people in America who own stocks.”

Questions the audience asked:

Why don’t the Baron funds buy Warren Buffett’s Berkshire Hathaway stock?

Ron Baron’s answer: Why doesn’t HE buy US? (Actually, one Baron fund does own shares of Berkshire.)

Why don’t Baron funds sell stocks short—bet on their going down--so they might have been somewhat protected in this downdraft? Baron’s answer: “We wouldn’t invest that way.”

Besides the free entertainment, there was a free breakfast, free lunch, and a free T-shirt. That’s a good reason why I wouldn’t dream of selling my shares in the one Baron fund I own.

About the author:

Warren Boroson
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.4/5 (27 votes)

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