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| Official portrait of United States Secretary of the Treasury Timothy Geithner Español: Retrato oficial de Secretario del Tesoro de los Estados Unidos Timothy Geithner (Photo credit: Wikipedia) |
New York, Jul.3, stock advice .- Ron Baron isn't as famous as Warren Buffett or Peter Lynch, but the founder of Baron Capital Group deploys an investment philosophy that's not unlike the better-known investment giants: Start with in-depth research, ignore short-term market volatility and think long term.
It sounds so simple, yet the average individual investor and most professional investment managers are incapable of ignoring short-term market-moving events. The market's overreaction to Ben Bernanke's June Federal Open Market Committee (FOMC) speech is a perfect example.
Baron not only ignores these types of events, but uses the resulting media-driven downdrafts as great opportunities to buy. Meanwhile, the average investor runs for the hills.
Last Friday, in a CNBC interview, Baron made some wise observations - and one stunning prediction.
Trading the News
He mentioned he recently attended a dinner where former Treasury Secretary Timothy Geithner said he believed short-term interest rates would remain low "for years and years to come."
According to Baron, Geithner also said it would take as long as five years to unwind the current quantitative easing that's still going on. It was Baron's view that Geithner was saying this "presumably to calm the markets."
Baron then commented that so many investors like to "trade the news." He continued, "A great example is mutual funds. The average investor makes 3% in mutual funds. The average mutual fund has a 7% return over time. Why the difference? Because investors try to "trade the news' instead of remaining in the fund over a long period of time. As a result they tend to do poorly."
Why Stocks Are a Bargain
Even with the Dow and the S&P near record levels, Baron's next thesis made a lot of sense, too. Here's what he had to say:
"The stock market has just been through a very difficult 14-year period of time, from 1999 until now.
"In fact, from 2000-2006, there was very little change in the markets, while corporate earnings increased 30%. The stock market has changed very little since 1999, and corporate earnings have almost doubled.
"The reason for that is that the stock market in 1999 was overpriced at nearly 30 times earnings. It's now 15.5 [times earnings]. If you go back 100 years, the stock market normally trades between 10-20 times earnings.
"So the stock market is now trading at median valuations. At the same time, interest rates have never been this low in the history of our country. Money has never been cheaper.
"In our opinion, money is a medium of purchasing. You can buy and sell things with money, but you can't store value in money."
Baron summed it all up by saying there is no better place for investors to put money to work than in the stock market.
A Peek Inside Baron's Portfolio
Baron was then asked about the kinds of companies his firm invests in. His answer was very similar to Buffett's: "We invest in companies that have business models that can't be challenged.
"[Take] electrical transmission towers. There's something physical about them, and you need them. So the things we invest in for the most part you need, and they have big growth opportunities."
Baron talked about energy as being "irreplaceable." We have to have it. (It's one of the main themes I focus on in my investing newsletters and here in this column.)
Baron disclosed that his firm invests in about 400 companies. Three that he mentioned were VeriSign, Inc. (NASDAQ:VRSN), Under Armour Inc. (NYSE:UA) and Hyatt Hotels Corporation (NYSE:H).
The top 10 companies in Baron's portfolio represent 20-22% of his fund's assets and the top 20 represent 30% of fund assets. They tend to perform very well over time.
Baron's average holding period? Seven years. The average individual investor is in a mutual fund for seven months. But what Baron had to say next was truly mind-blowing.
Dow 60,000
Baron was asked how the market could continue to move ahead given the slower growth rates we're now experiencing. His response was one more indication of why he and his firm do so well.
"The growth rate for the economy in America has been 6.8% per year since 1960. It's been about that rate since 1900 as well. For the past 14 years, it's been 4.4% per year. Everyone tells you it's 2%, but that's not the number. With inflation, it's 4.4%.
"That growth rate is now accelerating. The reason it's accelerating is money is so cheap. The businesses we talk to are growing. Their growth is accelerating, it's not slowing down. They're also attractively valued.
"So you have the economy growing at 6.8% per year, and stocks (including dividends) growing at 8% per year. Is it going to keep up at that rate? Maybe not. We're using 7% per year, for the next 10 years. So we think that if you just invest in the stock market, you'll double your money in the next 10 years, and double it again in 10 years after that.
"We're thinking about the Dow being at 30,000 in the next 10 years, and 60,000 in 20 years."
The average investor or financial investment manager who sees "Dow 60,000" will probably scoff at the idea. But here's a guy who's laid out a logical scenario as to how it will get there.
The moral of the story?
Invest in companies with solid business models that can't be challenged. Think long term, and ignore most of what you hear on the news. It has little, if any, bearing on the long-term value of your investments.
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