Buy Businesses, Not Stocks

Holding Forever

Perpetual Inflation

Better than the Market

A Room Full of All-Stars and COVID Depression

I write this letter on my way home from Steamboat Springs, Colorado, where I spoke to the fascinating “GoBundance” group of mostly young, successful, enthusiastic entrepreneurs. Before that I was in Grand Lake Stream, Maine, for the Camp Kotok economics/fishing retreat. I’ll have some details for you later. Today we will look back a few months to a Strategic Investment Conference presentation that truly affirms my optimistic outlook for both business and humanity.

You’ve probably heard of Ron Baron, founder of Baron Funds which has grown to a stable of not just mutual funds but a variety of private investments and Ron’s own capital—something like $50 billion in total. Ron is a legendary investment genius and we were thrilled to have him on the SIC virtual stage, where my good friend David Bahnsen ably interviewed him.

Below I’ll give you some extensive quotes from that session’s transcript, interspersed with comments from me. The GoBundance event reminded me of Ron’s enthusiasm for fast-growing businesses. While there may only be a few Ron Baron’s, the US has hundreds of thousands if not millions of entrepreneurs trying to build such businesses. The common thread is they all take risks.

Comments in brackets […] are mine. Let’s jump in…

Holding Forever

David began by asking Ron what differentiates his philosophy from other managers.

Well, what we try to do is find businesses that we think have a chance to grow a lot. There's something about the businesses that gives them a competitive advantage, that makes it very difficult for other people to do the same thing. We try to invest in exceptional people and then we differentiate ourselves by investing in those businesses for the long term. So, everyone could look at a growth opportunity, but very few people are able to understand or care about a business culture or what its competitive advantages are, and very few, even fewer can invest for the long term. And the reason for that is that it's not so easy to find a Charles Schwab and to invest in it in 1992 and have a cost of 60 or 70 cents a share, and it's now $70… and we still think it's going to 100.

Or to find a Robert Half that we invested in 1990 at less than a dollar a share, and it's $60 or $70 right now. Or find an Elon Musk in Tesla and invest in it for four or five years, when the stock went up and down dramatically. We invested $380 million. Market cap then was 35 billion. So we invested $385 million, which at the time we had $21 billion of assets under management, so it was 1.5% of our assets. And people would say, "Why are you investing in that crazy man? Why are you investing in that company, it's so volatile?" And what happened is that business over the next... we invested between 2014 and 2016, we bought and since it’s split five for one.

So our cost for eight million shares was about $43, $44 a share, and the stock would go up and down like a yo-yo. But the business grew 10 times from 2014 when we bought it, 2014–2016 over those two years and grew 10 times as of last year in business and in revenues. But the stock price almost was unchanged, then all of a sudden it went up 20 times. Now it's up 15 times. Now it's about 650, 620, 630. I think it's going… but it's down from 900, but we never... the only stock we've sold is for our clients. We've sold 20% of our shares at an average price of 650. But the reason we sold was not because we were pessimistic about the prospects for the business, it had just become too large of a position of the portfolio for the clients who were holding it in our funds. You can see how that can happen [when a stock more than doubles]. But for myself, I own a million shares, 1,150,000 actually, that I bought after all of our clients bought. I have not sold a share personally, and I don't expect to for 10 more years. So how can someone be willing to hold a stock that he thinks in the short term or she thinks in the short term could go from 900 to 600 and not worry about getting fired? And I don't worry about getting fired because I'm not going to fire myself until clients do.

So, we think that in the case of Tesla, we're going to make another triple in the next 10 years, not 20 times, a triple, maybe four times. SpaceX is the one I'm really excited about now that we invested in, started about two or three years ago, started with a market cap of about $35 billion. It's now $75 billion. I think that we're going to make 30 times in the next 10 years. So that's a $70 billion market cap presently, and I think has a chance to be $2 trillion. It's certainly going to be $1 trillion. So, 15 to 30 times to 40 times, I don't think I'm going to ever sell that stock in my lifetime.

This is so important. Ron doesn’t look for stocks to sell higher. He looks for solid businesses that will grow. The stock price will take care of itself if they do.

You may notice he talks about owning SpaceX, which hasn’t even gone public. The owners are Elon Musk and an assortment of wealthy individuals and institutions. Having access to those kinds of opportunities is a big advantage now, one (sadly) not available to small investors.

JM: Certain kinds of funds, which you might think hold only publicly traded stocks, also allocate small slices to private companies they think will grow exponentially and eventually go public. Curiously, I find myself investing alongside them sometimes. You really do want to find visionary managers…