“Did you burn down your home?” Jerome Guillen. President, Tesla (TSLA, Financial). November 2018.
That is the question Jerome asks youthful engineers to help him decide whether to hire them. “I want them to have burned down their house, not mine, before I hire them. I want them to have learned what not to do through experimentation.” “Did you ever burn down your home?” I asked him. “Yes. My family lives in a small farmhouse in the South of France. It is where my father was born and still lives and where he will die. Just like my grandfather. When my brother and I were young, we were experimenting with chemical mixtures when one compound exploded and our home burned to the ground.”
Our strategy at Baron is fundamentally similar to Jerome’s. We want our analysts to have learned what not to do before they are given responsibility to invest other people’s money. Mistakes are part of the learning process for our researchers. That is why before we decide to start a new mutual fund, our tenured analysts first manage a “paper” portfolio and then a small portfolio we fund. As analysts, they learn to ask the right questions to see what can go wrong in a business…and, as investors, they learn to judge risk and appropriately size positions. There are no shortcuts to learning these lessons. Further, we incur substantial startup expenses for each new fund. It takes about five years for a fund to reach critical mass. When you review the tenures of our analysts and portfolio managers at www.baronfunds.com you will see that we have been successful at hiring and training talented employees…and, in keeping them.
Jerome focuses on the backgrounds of engineers that suggest whether or not they will be successful. We do the same with our youthful MBAs. We recruit from top business schools. Jerome believes “kids who come from privileged backgrounds may not succeed at Tesla because they don’t realize how hard you have to work when you are trying to do very difficult things…against all the odds.” Most investors thought Tesla would not likely be successful. Elon and Jerome didn’t agree with that assessment. After we met the exceptional people who work at Tesla, we agreed with Elon and Jerome.
While few active mutual fund managers outperform their “benchmark” indexes, as of 9/30/2019, 12 funds, representing 98.3% of Baron Funds’ assets under management (“AUM”) have outperformed their benchmarks from their inceptions; 10 funds, representing 97.8% of Baron Funds’ AUM are in the top 17% of their respective Morningstar categories; and, 6 funds, representing 62.0% of Baron Funds’ AUM are in the top 7% of their respective Morningstar categories. So, our employee selection and training obviously work for us… just like Jerome’s work for Tesla.
“The Fall and Rise of the Town Springsteen made Famous.” The New York Times. September 2019.
I grew up in Wanamassa, N.J., a village of 4,500 people three blocks outside Asbury Park. Asbury is a small beach town of 16,000 on the Jersey Shore. It is about an hour south of New York City. Asbury Park is where I attended high school. Asbury’s gritty and diverse community, comprised of 48% blacks and 32% Hispanics, succumbed to severe economic decline following the riots and burning of its commercial establishments in 1968. That was immediately after the assassinations of Dr. Martin Luther King and Senator Robert F. Kennedy. Asbury Park is the city made famous by Bruce Springsteen’s 1973 debut album, “Greetings from Asbury Park.”
Asbury Park’s economy has since experienced a strong recovery. We think this is in part because Asbury’s beaches are among the best in New Jersey; its boardwalk is iconic; its music scene is legendary…the Stone Pony is where “Bruuuuuce” and bar bands like the E Street Band played all those years ago…and prices for architecturally important Victorian homes by the ocean were depressed following the turmoil of the ‘60s and attracted bargain-seeking buyers. That downtrodden seaside community 50 years ago now receives about one million visitors every summer and USA Today recently called my hometown “the coolest small town in America!!!” Yay!!!
Why am I writing about Asbury Park other than because its return to “Glory Days” is so personal to me? It’s to illustrate what we call “competitive advantage.” My dad was an engineer for the Army. When I was young, my good friend Marc’s dad owned a real estate brokerage business (capital light) and amusement rides on the Asbury Park boardwalk…and a much more expensive, glass walled house than my family’s ($50,000 vs. $20,000) on Deal Lake (not in the middle of a block). One lesson? There is a limited amount of real estate on water. Seaside property retains its value and almost always becomes more valuable over time. This is in comparison to a landlocked residential lot in the middle of a block which we regard as a commodity. We think waterfront land is competitively advantaged… and oceanfront property is really, really competitively advantaged. Competitively advantaged properties…just like competitively advantaged businesses…are limited in quantity, are more desirable, and, although are often premium-priced, grow in value faster!
Wanamassa Grammar School Reunion for my 1957 eighth grade graduating class.
One more story. John Cougar Mellencamp sang, “I was born in a small town” at our annual conference several years ago. That song is one of my favorites. Not just because I like how it sounds…but because I was also born in a small town and Mellencamp’s values resonate with me. Another of my favorite songs is Journey’s “Don’t Stop Believing.” I suppose this is because that song also has small town focused lyrics.
I graduated from Wanamassa Grammar School in 1957 and from Asbury Park High School in 1961. Two years ago, I attended my 60th Wanamassa eighth grade class reunion. I arrived early that summer weekend morning and first walked the Asbury Park boardwalk for about an hour, which brought back so many memories. Then to the gym at Wanamassa Grammar School to see my childhood friends. When I arrived at the gym, 57 of my 70 grammar school classmates were already there! I was immediately greeted by Cheryl Gibbons, one of my best friends in 1957. I hadn’t seen her since. Cheryl was captain of both the Wanamassa cheerleaders and the safety patrol and sat next to me in home room for three years. “Ronnie, Ronnie,” she called excitedly, “June, June DiSarno, come over here.” June had also been a cheerleader for our grammar school. “Ronnie, June and I read all about you on the internet…that you took $1,000 you had saved from your summer jobs and Bar Mitzvah, invested it and grew it to $4,000 by the time you graduated Asbury Park High School and needed it for college. June and I came to your Bar Mitzvah. We are your seed money!!!”
Lesson one. Compounding. Capital gains from investing what I had earned summers as a lifeguard, ice cream truck driver, cabana boy, caddy, waiter, water ski instructor, hospital emergency room orderly, umbrella rental boy, and dishwasher initially did not seem like much. However, that wasn’t the case over the long term. So, if the returns you earn on initially small savings seem inconsequential, don’t be tempted to spend those savings. In year one, the amount you earn on your investments will not be a lot. In year 10…or 20…or 30… you will not believe the impact of the “power of compounding”. If you earn 6.5%, the approximate historic annual growth rate of the United States’ economy and stock market for the past 60 years, by investing in a low cost passive index fund, the growth of your savings over a lifetime will be exponential. You will have nearly 7 times your starting amount in 30 years, 12 times in 40 years, and more than 23 times in 50 years! And this doesn’t even factor in dividends! Which approximate over 2.5% per year.
Baron has historically done a lot better than passive benchmark indexes although we cannot assure you that will continue to be the case.
Lesson two. Don’t forget where you came from…and don’t forget who are your real friends.
Thank you for joining us as fellow shareholders in Baron Funds. We will continue to work hard to justify your confidence in us.
Respectfully,
Ronald Baron
CEO and Chief Investment Officer
P.S. While they last…if you’re a shareholder and would like a complimentary Baron Funds’ “What’s Next?” 2019 conference T-shirt, please call us at 1-800-992-2766 ext. 3. Please specify sizes S-2XL. They are great for working out…sleeping…or for a fancy evening out on the town! They look great belted as a dress! It is amazing to me how often I see Baron T-shirts in gyms when I am traveling! Certainly much more often than you’d expect for an investment manager.
We also have been getting lots of compliments about our T-shirt designs. They’re a team effort with lots of input from lots of people. But, the three people most responsible for their creation and design are Jazmin Jourdain, Director of Shareholder Services, Corporate Projects & Events, Matt Weiss, a Baron vice president and research analyst…and me, of course.
P.P.S One more thing. Tesla wants to be sure you know that the Tesla Model 3s were prizes given and paid for by our privately owned investment management company, Baron Capital Group, not by Tesla.
We also want you to know that these gifts, the lunchtime and end of day entertainment, and all other expenses incurred for our annual meeting, were paid for by us, not by you or Baron Funds.
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.
