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Sydnee Gatewood
Sydnee Gatewood
Articles (1154) 

Baron Perspective: Idea Generation

By Linda Martinson, president and COO

November 07, 2019

The New England Patriots had a perfect 2007 season, winning every game they played. They went into the Super Bowl as 12-point favorites, and everyone expected they would win. Instead, what followed was one of the most memorable Super Bowl games in history, as the New York Giants, a wild card team, put on an exceptional performance in the fourth quarter to win the game 17-14 thanks, in large part, to a now-classic helmet catch by receiver David Tyree.

Similar to the extraordinary performance of the Giants at that Super Bowl, the recent economic/business/political environment has been anything but ordinary. The U.S. yield curve remains inverted, the odds of recession in the U.S. keep rising, Germany is on the brink of recession, the U.S.-China trade war continues, consumer confidence and manufacturing data around the world are downbeat, and global profits are contracting. And then there is Brexit, Trump’s impeachment inquiry, Argentine debt default fears, Ford’s debt downgrade to junk, and a disappointing IPO market, among others. At the same time, the U.S. stock market remains near all-time highs.

All of these issues may be overwhelming to some investors, leaving them wondering what the best investment strategy is. Not us. While we recognize the temporary weakness in certain areas, we are optimistic about the future and continue to believe that investing in growth businesses with strong competitive advantages and exceptional managements is the best choice for the long term. Our caution may be raised, particularly with respect to valuations, but we are not short of investment ideas.

Since the beginning of 2019, we have invested in and continue to hold 83 new stocks. 25 of these investments were made in the last quarter. This year’s new investments (so far) have been across almost every sector and various geographies, as the charts below show. They represent about one-sixth of all companies Baron was invested in as of 9/30/2019. (Note: sector and country allocations are subject to change.)

IDEA SOURCES

We are often asked about our idea generation process and where our ideas come from. Our investment ideas come from many sources. Before discussing the sources we do use, it is important to point out two popular industry sources that we do not use: indexes and quantitative screens.

1. In-house research The single most important source of ideas for us is our in-house research staff. At Baron, we currently have 36 analysts in our research department, some of whom are also portfolio managers. Analyst coverage is divided up by industry, with most analysts covering several industries, and the largest industries have multiple analysts covering different sub-industries. Over years of research, they develop industry expertise, and they become deeply knowledgeable about the companies in their industries, including many of the competitor companies in which we do not invest. Our veteran analysts have a level of expertise and track record that we think is unparalleled in the industry. The ideas arise because of the deep knowledge of industries that our research team has developed.

Potential ideas are fed by portfolio managers to analysts, and analysts feed ideas to portfolio managers. There is a constant give and take between portfolio managers and analysts, and our more junior analysts learn and develop from that process.

Our research team holds regular discussions where ideas are tested and vetted collaboratively. Ideas are also communicated via our in-house proprietary research database, BRAInS, where ideas, research, and analysis are posted, stored, and updated regularly.

2. Existing investments We often find new ideas from existing investments. If we find a business model that we particularly like, we will look for other investment opportunities with comparable business models, although the end markets may be different. For example, our investment in FactSet Research Systems, Inc., which provides subscription-based financial information to the global investment community, led us to other information services businesses including Gartner, Inc., the leading independent provider of research and analysis on the information technology industry; and Verisk Analytics, Inc., which provides information that enables risk-bearing businesses in the health care, insurance, and mortgage industries to better understand and manage their risks.

Read more here.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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Comments

david-root
David-root - 4 days ago    Report SPAM

While we perceive the impermanent shortcoming in specific territories, we are idealistic about the future and keep on accepting that putting resources into development organizations with solid upper hands and uncommon administrations is the best decision as long as possible! For some more details visit Adweb Studio for more interesting services!

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