Review and Outlook
Review.
“The glass is half empty.”
On Friday morning, January 15, 2016, the day preceding MLK weekend, Tom Pritzker, Hyatt Hotels’ Chairman and principal owner, returned my call from the prior afternoon. He was about to board a plane so our conversation was necessarily brief. Following two weeks of dramatic price declines, U.S. and global stock markets were again falling sharply. Hyatt’s share price was again declining even more. “What the heck is going on?” Tom asked. “Why has Hyatt’s stock fallen from $50 to $36 in three weeks? Nothing in our business warrants this. I know many analysts are predicting a recession. Maybe. But, there isn’t anything in our numbers that indicates recession.” He noted that 51% of Hyatt’s occupancy relates to business meetings booked significantly in advance. Hyatt’s 2016 commercial bookings are stronger than for 2015; those for 2017 are stronger than for 2016.
To give you a sense for how disconnected Hyatt’s value had become from its stock price, we estimate Hyatt’s “asset light” management business for 137,000 hotel rooms could be worth more than $5 billion. Hyatt’s 20,000 owned hotel rooms would be worth an additional $5-6 billion. Hyatt’s dramatic share price decline over the past six months despite its continued growth is the result of analysts’ recession fears. Hyatt’s stock is now valued for just $5 billion! Similar to a 50% off store sale, we suppose. Further, over the next five or six years additional Hyatt management contracts will be converted from backlog to revenue producing assets. If Hyatt’s revenue per available room (“RevPAR”) on its owned properties increases at its historic 3-4% annual growth rate, the value of this cyclical growth company could reach $18-20 billion…four times its present stock market price!
My conversation with Tom reminded me of a group meeting arranged by J.P. Morgan for about 20 portfolio managers with Marriott (MAR, Financial)’s senior executives on November 17, 2015. That was the day after Marriott announced it would acquire Starwood Hotels & Resorts. At that meeting, Marriott’s Chairman, Arnie Sorenson, explained the rationale for the acquisition. Most of the portfolio managers were skeptical. Arnie was questioned thoroughly about the transaction and the outlook for Marriott’s RevPAR growth which had recently slowed. Arnie said there was nothing in his numbers that suggested Marriott would anytime soon experience declining RevPAR, a measure of hotel businesses’ profits outlook. Arnie observed that Wall Street analysts might be able to predict such events. He could not. He believes his responsibility is to consistently grow Marriott’s businesses and to take advantage of opportunities when they are presented. He explained that Marriott’s acquisition, financed principally with equity, would help achieve that goal. Regardless of how attractive Arnie and his team believed the Starwood acquisition, due to analysts’ concerns, Marriott’s share price has fallen about 25% since November.
“The stock market has predicted 9 of the last 5 recessions.” Nobel Prize laureate, MIT Professor Paul A. Samuelson. 1966.
The decline in Hyatt (H, Financial)’s share price relative to its value as well as that of Marriott’s following its acquision have been among many “glass is half empty” paradigms during the past six months. This has happened to several attractively valued, generally small and mid-sized cyclical growth companies in our portfolios. This has also happened frequently to the rapidly growing businesses that have been so rewarding for us to study and in which we principally invest …because they have been such profitable investments over the long term.
Stock market prices changed little on average during 2015 despite the unusually strong price appreciation of a small number of technology and health care stocks.This is because more than half of U.S. stock prices fell with a median decline of 22.5%. In fact, 50% of the S&P 500 stocks fell with a median decline in value of 15.93%. 60% of the small cap stocks in the Russell 2000 Growth Index also fell, with a median decline of 23.64%! After about tripling their values per share since March 2009, most Baron mutual funds declined modestly during 2015. This is as you can see from our performance charts and portfolio managers’ letters that follow.
When such events take place, there is never a shortage of explanations or commentators to tell us “why?” Low oil prices have potential to bankrupt many energy businesses; resultant distress in “high yield” financial markets of which energy businesses are important participants; concern about China’s slowing growth, unpredictable economic policies and focus on elimination of corrupt practices; concern that debt-driven economic expansions from 1982 through 2007 have left world economies too indebted; the strong dollar creates deflation; an unusual Presidential election campaign; a significantly changed stock market structure with greater volatility caused by ETFs and high frequency trading that has left us vulnerable to potential “flash crashes;” and slower-than-desired inflation are just a few reasons markets have fallen. Were investors of a different mindset, you might be surprised to learn that it would be as easy to make strong arguments that “the glass is half full” in virtually all these instances.
Outlook.
“The glass is half full.”
For example, oil companies’ profits have fallen 75% in the past two years negatively impacting short term S&P 500 profits. Oil company profits have declined because the price of oil has fallen from $100 per barrel two years ago to $30. Oil prices have declined because fracking technology developed in the United States has allowed the exploitation of America’s enormous shale energy reserves that could otherwise not have been economically developed.
While low oil prices mean bankruptcies and defaults for many oil companies, what’s bad for them is good for the rest of us! There are 97 million barrels of oil produced in the world every day. The United States uses about 20 million barrels per day. Since we now pay about $80 less per barrel, our nation and its citizens are saving $1.57 billion per day. Payments to energy producers for oil are the equivalent to a “tax” on our citizens and economy. Just like the taxes we pay on 1099 income to our government. Savings from lower oil prices are the equivalent of a $570billion annual tax cut that should soon help make our economy grow faster! Our nation’s government about which politicians often express concern has a projected annual budget deficit of $544 billion!
In contrast to 2007 when banks were highly leveraged, they have since been recapitalized, new regulations prohibit them from engaging in risky principal transactions; counterparty rules have been strengthened; and, banks’ exposure to energy loans is modest. Banks will lose money on energy loans for sure, but it is unlikely such writeoffs will cause cataclysmic bank failures that resemble what occurred during 2008-09.
An OpEd by economist Donald Luskin in the January 8, 2016, The Wall Street Journal, “The Recession Caused by Low Oil Prices,” posits that due to the “technology breakthrough of horizontal drilling and hydraulic fracturing [developed in the United States], consumers worldwide have received a tax cut of $7.8 billion per day”…that should eventually cause an economic boom rather than a bust. It is only because of the speed of this energy price decline that a recession in the short term is a threat. Luskin concludes that low oil prices provide cause for optimism. “The best news is that, thanks to fracking, recessions caused by high oil prices are a thing of the past.”
We believe opportunities for growth businesses in our nation have never been stronger...perhaps not in mature cyclical businesses like steel, cement, oil, commodities and retail. But in health care, technology, electric cars and autonomous driving vehicles, for example, more jobs are being created than there are individuals trained to fill them! Medicine a century ago was rudimentary compared to today. That is why life expectancies of Americans in 1900 was 47 years while today it is nearly 80. Within the next century it could reach 125 years! Antibiotics were invented during World War II. Vaccinations for the dreaded scourge of polio in the 1950s. As a result of recently developed, inexpensive and rapid gene sequencing, in the next decade most cancers could become chronic disease states, not death sentences. Alzheimer’s is probably within 15 to 20 years of successful treatment. Access to “big data” by health care providers on their iPads will soon allow all of us to obtain the “right” care, higher quality, lower cost with better outcomes, regardless of where we present for treatment! Autonomous driving will save lives and trillions of dollars per year. Electric cars are not only safer than cars powered by internal combustion engines…they are better for the environment.
We think inexpensive energy and inexpensive money may persist much longer than most expect. In the short run, oil is cheap because markets are oversupplied. In the long run, if transportation shifts to electric power from internal combustion engines, there will be less demand for oil than most anticipate. Energy is an important cost for our economy. As described by economist Donald Luskin, low cost energy will ultimately help cause an economic boom. Further, as we have been discussing for a long time, our nation and other developed economies are presently heavily indebted. America’s debt-to-GDP percentage currently approximates 345%. This is following a 25-year debt-driven economic expansion from 1982 to 2007. Debt increased during this period from about 160% of GDP, near where it had remained since the 1930s. We are now in a secular deleveraging cycle because significantly higher interest rates are unaffordable. It could take 20 years to return to acceptable debt-to-GDP ratios. We think our dollars will then be worth much less…and, our stocks, real estate, art and businesses will be worth much more.
Ronald Baron
January 25, 2016
“Question Everything.”
On November 6, 2015, more than 5,000 Baron Funds’ shareholders and institutional clients of Baron attended the 24th Annual Baron Investment Conference. Our annual meetings for many years have been themed. Our 2015 theme, “Question Everything,” was intended to convey the principle underlying the research that Baron conducts before investing. It is also the principle that we believe you should consider before you invest in Baron Funds or any other active mutual fund, ETF, passive index fund, debt instrument, real estate asset…or anything else. Just like we do. You can either watch Linda’s and my presentations on our website, www.BaronFunds.com, or read them in the “Letter from Ron” and “Letter from Linda” that follow. We hope you will find them entertaining and informative. We are pretty certain you will not find them conventional or boring.
The 2015 Annual Baron Investment Conference was again held in New York City’s Lincoln Center for the Performing Arts. Executives of four businesses in which Baron Funds has invested spoke and answered questions from our shareholders that morning at The Metropolitan Opera House. The Met is located at the center of the Lincoln Center campus. Following entertaining lunches elsewhere on the Lincoln Center campus, attendees returned to the Met for presentations by Linda, the President of our business, and me; a moderated Baron portfolio managers’ panel; a no-holds-barred question-and-answer session with all of us; and finally, to close the afternoon, surprise Super Bowl/Madison Square Garden-quality concert entertainment. This to thank you for spending the day with us…which, by the way, is at our expense, not yours, and not that of Baron Funds.
During the last several years, interest in attending the Annual Baron Investment Conference has grown substantially. To accommodate Baron Funds’ shareholders and Baron Capital’s institutional clients, we have expanded the program and added venues on the Lincoln Center campus.
In addition to morning company presentations at the Met, lunches on the Lincoln Center campus, and afternoon presentations at the Met by Linda and me, we have expanded our morning and lunchtime programs to David Koch Theatre, David Geffen Hall and Alice Tully Hall. Those facilities provide venues for morning meetings with our portfolio managers… and for a special lunch intermission with highly anticipated surprise entertainment.
Steve Martin and Martin Short, Michael Bublé, and Tony Bennett and Lady Gaga entertained during lunches at Alice Tully Hall, David Koch Theatre and David Geffen Hall, respectively. Alicia Keys ended the day with a spectacular performance on the Met stage. Her rendition of “NewYork,” without Jay-Z of course, was the finale. But, as exciting as our entertainment was this year, I think the real hits of the conference this year were our speakers and, most specifically, Elon Musk, Tesla’s Chairman. Since we began to invest in Tesla nearly three years ago, I had been asking Elon to speak to our shareholders. For just as long, he had rejected that request telling me he was inordinately busy. I persisted and finally, last summer, caught him in a weak moment. He gave me a conditional acceptance provided that, if, instead of him making remarks and then answering questions from our shareholders, I interviewed him. I quickly agreed. He also requested that we not use his name on our invitation to promote our meeting. He asked that he be identified as “Surprise Speaker.” When I proposed a compromise that he also be identified as an “electrifying speaker,” he accepted.
Saturday morning, November 7, the day after our annual meeting, Michael Bublé called me at my home to thank us for inviting him to entertain! He told me how much fun he had, which showed in his exceptional performance and in our shareholders’ reaction to him. He said he was not aware there were such meetings for investors in mutual funds. He then told me he had looked us up on YouTube before he called and 10,800 individuals had already mentioned our conference the day before! I thanked him for calling and invited him to visit when he was in New York…which he promised to do.
Later that month, at Thanksgiving dinner with my wife’s family in Florida, one of Judy’s cousin’s children told me he had just finished watching me interview Elon Musk on YouTube at our November 6 meeting. He told me it was called “Elon Musk and Ron Baron (Trades, Portfolio).” In addition to the 5,000 Baron conference attendees who watched it live at the Met, the audience who had watched it on YouTube had by then reached more than 110,000 people! It certainly gave me a new appreciation of the impact of “Social Media.” As of the writing of this letter, more than 140,000 individuals have watched Elon and Ron on YouTube!
Introduction “Question Everything”
Every day, I “interview” executives of businesses in which we invest. These conversations take place either in our offices or in theirs, and on the phone. The analysts and managers with whom I work do the same. It was gratifying for me to have others see a typical conversation with me and an executive like Elon who runs a business in which we have invested…and to gain an appreciation of what we think makes such a business an attractive investment.Also, for you to see why we think it so necessary to know the executives in whom we have invested well…and how enjoyable it must be for us to meet daily with people like this who are changing our lives…and, in the case of Elon, who is making an effort to make our planet continue to be habitable by humankind. Elon, by the way, thought our meeting was “really cool,” even more so when he learned that Lady Gaga was a lunchtime performer. I think he may have appreciated it even more that more than 300 people sat in two Teslas parked in front of the Met and, more importantly signed up for test drives! A pretty good percentage of those who try one, buy one, which is a good thing for all of us.
Ron’ s Conference Speech, “Question
Everything.”
When I was seventeen, before beginning my summer job as an ice cream truck driver, I applied to be a waiter on weekends at Asbury Park boardwalk restaurants. But, at every inter-view, they asked, “Do you have any experience?” “No,” I answered… “but I’m a really hard worker.” “Come back when you have experience,” I was told. “But how can I get experience if every waiter job needs experience?” I asked, confused by the conundrum.
I decided to try another tactic. When the maitre’d at The Berkeley Carteret, the nicest hotel in my home town, asked if I had ever worked as a waiter, I replied, “Of course. Last summer at The Concord in the Catskills...and I didn’t drop a single plate.” “Come back Saturday,” she said. “You can serve lunch. Wear black pants, a white shirt, a bow tie and a cummerbund.”
The first hotel guest I waited on ordered a shrimp cocktail. I had never heard of such a thing! I walked into the kitchen and asked a waitress for help. She showed me how to place cocktail sauce in the center of a small bowl and surround it with ice and shrimp. A chef was standing behind a wooden island watching. When he saw what I was doing, he pulled a long knife from his table, waved it over his head like a Samurai war-rior and yelled at me in deeply accented English, “Get out. If you ever come in my kitchen again, I kill you!” He didn’t have to ask me twice. I ran out of that kitchen, told the maitre’d what had happened and collected my day’s pay…
The moral of the story? The maitre’d didn’t ask me enough questions. If she had just taken a moment to ask a few basic waiter questions she would have known. Like...Which side do you serve from? Which side do you clear from? What’s bigger? A salad fork or a dessert fork? O.K. There are three soups…gazpacho, bouilla-baisse and consommé… Which one is cold?
To us, the interview never ends. We accept noth-ing at face value. We question everything.
So here’s a question for you…
Why is this annual Baron conference different than all other conferences? Sound familiar?
SLIDE: Question Everything.
At the Jewish Passover dinner which celebrates my tribe’s Exodus from slavery in Egypt, the youngest child present recites “The Four Questions.” Today we are going to discuss Baron’s Four Questions…
- Who?
- What?
- Why?
- Where?
The Passover seder, by the way, was Christ’s “Last Supper.” He was also a Jewish guy. We have unearthed some archival footage of that historic event…
CLIP: Mel Brooks. Waiter at Last Supper.
Wow. That guy was a worse waiter than I was!
SLIDE: The Four Questions. Who? What? Why?
Where?
1. Who?
We invest in people like Under Armour (UA, Financial)’s Kevin Plank who has reinvented athletic wear and is revitalizing Baltimore;
SLIDE: CEO’s
Tesla’s Elon Musk who has reimagined both cars and space travel…at the same time!; Inovalon’s Dr. Keith Dunleavy who is using massive clinical data to reduce health care costs and improve outcomes; Hyatt’s Tom Pritzker who empowers his employees to provide exceptional service to guests; and Charles Schwab whose mission for his business is to be the most ethical financial services provider on the planet.
We interview these individuals to assess their character. We ask about their values and back-ground. Are they smart? Driven? Trustworthy? Passionate? Are they good leaders? We then ask the unexpected. “What did your parents do? What’s made you who you are?”
AUDIO CLIP: “Who are you?” The Who.
We believe business culture comes from the values of its leader. We invest in leaders who want to “do what is right.” Our analysts under-stand personalities and culture. This is what computers cannot do. It is what few other investors care about.
Investors couldn’t have known about Volkswagen’s illegal “emissions cheating” software.
SLIDE: VW ad Nobody’s Perfect, 1963.
But hundreds of Volkswagen’s employees had to know. Where were the whistleblowers? In the car industry over the past fifty years, Volkswagen’s behavior was not unusual. Others covered up when they found brakes that didn’t work; faulty ignition switches; cars that accelerated uncontrollably; gas tanks that could rupture; transmission defects; faulty tires; and airbags that sprayed shrapnel. Executives of businesses like Volkswagen didn’t tell their employees if you “see something, say something.”
CLIP: Hogan’s Heroes Sergeant Schultz
Even more outrageous, when defects were dis-covered, some car executives ordered “cost ben-efit” analyses to see if it would be cheaper to repair defects or settle wrongful death claims!
SLIDE: Ford 1973 Memo
While analysts couldn’t have known about illegal software and defective parts, they should have known about Volkswagen’s corporate culture. All they had to do was ask.
SLIDE: Yogi. “You can see a lot just by looking.”
We ask lots of questions because we don’t want to invest with people who run businesses like Volkswagen.
Tesla’s Elon Musk, like Warren Buffett (Trades, Portfolio) and others, requires employees to “go around their supervisors” to report anything they believe is wrong. Tesla is the only car company in which I have invested during my entire career.
This morning you heard from Tesla’s CEO. I am certain you can see why we are so enthusiastic about Elon’s business and why Google’s Chairman, Eric Schmidt, his friend, refers to Elon as a combination of Thomas Edison and Walter Chrysler. Hollywood, on the other hand, por-trays Elon as a cross between Bruce Wayne and a stinger missile.
SLIDE: Ironman
OK…now comes the part of our Seder when we welcome the prophet Elijah. Let’s open the door and let him in…
CLIP: Seinfeld as Elijah
I know what you’re probably thinking…WHAT was that? Which brings us to our second ques-tion, What?
2. What?
What is a good investment? Stocks!
SLIDE:
- Stocks protect against inflation
- Stocks have grown with the economy
- The prospects for our economy are bright.
Including dividends, stock prices have grown at more than twice the rate of inflation since 1960.
The United States’ GDP has almost doubled on average every ten years since then. So have stocks.
SLIDE: Stocks and Economy are linked
We think technology…low cost energy…and low cost money will allow America’s economy to soon begin to grow at least as fast as it has since 1960, 6.6% per year in nominal terms..
“What” is our outlook for America’s economy?
First, we think growth opportunities are abun-dant.
SLIDE: i. Growth opportunities are abundant.
At a small lunch I attended last summer, the host posed a question. “During the past fifteen years, there have been so many remarkable advances like smart phones…tablets… gene sequencing…electric cars…semi-autonomous driving…streaming video…how is it possible technology can drive additional growth? What’s left to invent?”
SLIDE: What’s left to invent?
Google’s Eric Schmidt was also a guest at that lunch. He countered, “Silicon Valley’s research and development is growing exponentially! So will innovations.” Technology’s impact on health care is a good example. Computers will soon do more examinations than doctors…and help doc-tors become more effective. Computers can process enormous data sets and identify anom-alies from patterns…whether in your eye or on your skin. I am certain the day is coming when Siri will ask me to turn my head and cough.
AUDIO CLIP: Siri: “Sorry Ron, I can’t do that for you right now.”
Thanks Siri!
AUDIO CLIP: Siri: “Just doing my job.”
But, in the meantime, we will soon have blood tests for cancer and genetic abnormalities courtesy of Illumina…fully autonomous driving that will save tens of thousands of lives every year courtesy of Mobileye and Tesla….artificial intelligence and robots...uses for big data we haven’t dreamed of …and space travel… Do you still think “what’s left to invent?” is a good question?
SLIDE: ii. Low cost energy is positive for America.
The price of oil has fallen almost 50% during the last 13 months. High oil prices hurt our econo-my. Low oil prices create an immense wealth transfer from energy producing nations to ener-gy consumers. Because OPEC kept oil prices far above the cost to produce it for 35 years, a lot more energy reserves than we need have been created. Low cost energy will benefit our economy for a long time. Global economies have slowed recently partly due to reduced energy capital spending. We expect our econo-my’s slowdown to be short lived and a material increase in growth to soon follow.
SLIDE: iii. Low cost money is positive for America’s economy.
America is heavily indebted. Deleveraging will take decades. As a result, coming Federal Reserve credit tightenings will likely be more modest than at any time since 1936! Our nation cannot afford expensive debt. We believe below normal interest rates and above normal inflation could prevail for twenty years...or longer. This is good for our economy. It couldn’t be worse for creditors!
Which brings us to our third question…Why?
3. “Why?”
Curiosity, intellect and judgment are analysts’ most important traits. “Why?” is the question we ask most. “Why did you start this business?” “Why can’t others do what you do?” “Why can’t someone do it better?” We accept nothing at face value. We are unrelenting as we question everything to learn how a business functions. To us, no question is off limits. Of course, when you ‘Question Everything,’ you never know what answers you’re going to get…
CLIP: Jeopardy Threesome
Why do we think Tesla, the innovative car com-pany growing 50% per year, will become the leading manufacturer of safe, electric cars?
SLIDE: Tesla
It’s because Tesla (TSLA, Financial) is the only car company focused solely on electric cars. No engine needed. We believe traditional car companies only pretend to be interested in electrification. Those companies have invested billions in plants that build internal combustion engines. Electrification will make those engines and those plants obsolete.
The pattern of struggle between innovator and incumbent is always the same. It’s human nature. The managers of incumbent businesses have had successful careers. During their five to ten year tenures, they have no mandate to invest in promising ideas that could make their businesses obsolete.
In general, companies in which we invest have significant “moats” that protect their businesses from disruption. Brands. Technology. High switching costs. Proprietary knowledge. Strong cultures. You get the idea.
Illumina is the leading gene sequencing business with technology that is the fastest, most accu-rate and least expensive in its industry. Illumina spends $300-400 million a year to make its products even better.
Manchester United is not only the most popular sports team in the world, it’s also one of the most valuable media properties. Vail is the best ski mountain in America. Morningstar has unique financial data bases. Costar has unique real estate data bases. Inovalon has unique clin-ical databases. Alexandria’s highly specialized science and technology campuses allow pharma company tenants to collaborate, making Alexandria the landlord of choice in the health-care industry.
Finally, our fourth question, Where?
4. Where?
Baron Funds and Baron Capital.
SLIDE: Baron Funds
We’ve just described how we question the “who,” “what” and “why” of publicly owned companies in which we invest. Baron Funds is “where” we think you should invest. All our senior employees have substantial investments in Baron Funds. My family is the largest investor in Baron Funds.
SLIDE: Baron Capital
Now we’d like to tell you a little about our privately owned management company, how we are “building our business to last” and why we are different than other management firms.
SLIDE:Why are we different than other manage-ment firms?
Baron Capital is a “family business” with an unusually long time-horizon. My two sons, David and Michael, have growing roles in our business. They, along with my wife and I, are the principal shareholders of this business.
We do not try to maximize Baron Capital’s cur-rent profits. We are optimistic which is why we are “building our business to last” by “investing in people.” Baron is well capitalized and absorbs costs caused by short term market fluctuations. We consistently invest in our business...during good times and bad. Since 2006, we have grown from 60 individuals to 146. We have never had a layoff. Turnover among our employees is unusually low. We believe the longer our invest-ment professionals work together as a team, the better the results we will likely achieve. We question every aspect of our business in order to continuously improve it.
What is our competitive advantage?
SLIDE: Competitive Advantage
“What is the role for an “active” investor like Baron…in an investment world being disrupted by passive index funds; ETFs; robots; smart “beta;” factor portfolios; and artificial intelligence models that seek average performance…high frequency trading that creates “flash crashes” ... and “activists” and private equity which try to fix “cheap,” slow growing businesses to generate short term profits for themselves?
We believe our role as an active investor is to outperform over the long term with less risk. Of course, we cannot guarantee this will be the case, but it is our goal.
Baron’s smart, hungry and hard working analysts can do what computers can’t…understand busi-nesses’ competitive advantages… that’s the ‘Why’ … and their cultures… that’s the ‘Who.’ Baron’s people and process are our competitive advantages.
Our office is a special place. Nearly everyone who visits remarks that our glass walls, views, light, art and aquariums provide an inspiring work environment.
SLIDE: Photos of Baron’s office
While we are proud of our office, we are even prouder of our employees.
SLIDE: Baron Employees
We are also proud of our reputation for “doing the right thing” and guard that reputation zeal-ously.
And now, the question we get all the time…
SLIDE: Why is Baron like the Vikings?
If this were a Linda speech you might expect to hear about these Vikings.
SLIDE: Minnesota Vikings.
But, this is my speech and I am going to talk about The REAL Vikings.
SLIDE: Pillaging Vikings
A thousand years ago, Viking warriors burned their boats when they landed on enemy shores. This was to show their commitment to victory since they couldn’t return home unless they were successful in battle and could rebuild their boats. Like the Vikings, we are committed to being successful.
SLIDE: Baron People
During the past two years, our firm has contin-ued to add staff and resources while investing significantly to renovate and expand our offices. We also signed a 30-year lease with options for additional space. Now that’s commitment!
And, when we commit, we commit!
SLIDE: Company logos
We began to invest in Vail Resorts in 1997. Though our initial returns were modest, since 2006 we have about quadrupled our money and expect to double it again in the next five years. We acquired our investment in the Manchester United soccer team over the last three years. We expect this investment to more than double in value in the next five years. We purchased Tesla shares over the last two and a half years. We expect to earn four to five times our money in the next five years…and to potentially earn an additional four to five times our money in the fol-lowing five to six years! We have been an investor in Under Armour for ten years. We have earned more than 10 times our investment so far. We have lots more examples like these. Mutual funds on average hold investments for less than one year. We are different. We do not blink.
SLIDE: Why Baron?
We presently manage more than $25 billion. Since 1992, investors have entrusted us with almost $7 billion net. Those investments have increased in value by more than $18 billion! That represents almost four doubles over 23 years, about 12.0% per year compounded. This com-pares to about 9% per year for the S&P 500. Our goal is to double your money again in the next five or six years, to have our investments increase in value an additional $25 billion!
Our “question everything” strategy has allowed us to be right a lot more than we are wrong. 10 out of our 13 funds, which represent 98.5% of Baron mutual fund assets, have outperformed their benchmarks since inception. This is why we believe Baron Funds is a compelling investment.
Adam Aron, Chairman of Starwood Resorts and the prior Chairman of Vail Resorts, recently remarked to me that he “had not answered more questions in his lifetime than he had in our offices.” Remarks like that from many executives served as the inspiration for this year’s “Question Everything” theme.
One last story.
Isadore Rabi was one of the most accomplished physicists of the late 20th century.
SLIDE: Isadore I. Rabi. Nobel Laureate nuclear physicist.
Rabi was born in Galicia, Poland, near where my grandfather was born. Rabi’s family came to America in 1903. When Rabi was awarded the Nobel Prize for Physics in 1944, he dedicated it to his mother. “My mother made me a scientist without ever intending it,” he said. “Every other Jewish mother in Brooklyn would ask her child upon returning home from school, ‘So, did you learn anything today?’ Not my mother. She asked me a different question. ‘Izzy. Did you ask a good question today?’ That difference, “…ask-ing good questions, made me who I am.”
It is also what makes Baron who we are.
The discussion of market trends and companies are not intended as advice to any person regarding the advisability of investing in any particular security. Some of our comments are based on current management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change any time based on market and other conditions, and we have no obligation to update them.
