Ron Baron, founder of Baron Capital.
Anjali Sundaram | CNBC
We are increasingly becoming a transactional, impulse-driven society.
As we spend most of our lives with our smartphones and computers, providing endless means of distraction, people’s attention spans have shrunk considerably.
Plus, businesses have made it much easier to act on our impulses.
Purchases — from as small as a cup of coffee or a movie ticket to as big as a car or even millions of dollars in bitcoins — are just a swipe or click away.
But what is lost in a world ruled by impulses? We think a lot.
Take markets for example.
This year’s dramatic failure of regional bank Silicon Valley Bank and several others happened in large part because investors could withdraw money in seconds with just a tap on their smartphones.
Would these banks have failed regardless? It is impossible to say.
But surely the run on these banks was driven not by a rational, well-thought-out analysis of the situation, but by panicked investors who feared being left with a bag of worthless assets.
We came very close to a full-blown banking crisis because we made decisions based on impulse.
In this brave new world of instant gratification and transactional relationships, what we do at Baron Capital may seem old-fashioned, but we make no excuses. We take ownership of what we do. We look for high-confidence growth opportunities that we can invest in for the long term.
To build this high level of trust, we focus on the basics: competitive advantages and exceptional managers of high character, which we believe are the keys to the company’s long-term success.
Our deep research bench is at the core of our investment process: what we like to call “virtual intelligence”, not “artificial intelligence”.
Algorithms cannot imagine the future, or assess character, talent, or vision.
Also, the algorithm cannot analyze the qualitative characteristics of the company and its leaders to decide whether it is a good investment or not.
We use our own personal research to create a portfolio designed to outperform its benchmark over the long term (although of course there are no guarantees). And while we can hold a position for many years, we are hardly passive buy-and-hold investors.
I personally “interview” the CEOs of the companies we invest in at least once a day, and often more. In addition to regular meetings with management, we visit factories and headquarters, talk to competitors, customers, suppliers and industry experts, and read everything we can get our hands on.
Most importantly, we never base our investment decisions on the opinions of others. And our investment horizon is long…ideally, forever.
As growth managers, we believe that a long-term investment horizon is the key to achieving above-average performance. Sometimes we follow a company for years before deciding to take on a position.
Once we invest, we will stay invested as long as our thesis remains intact.
We’ve held Charles Schwab stock—currently our longest tenure—for more than three decades. We originally bought shares for less than a dollar each, so our current share is almost 100% profit.
The hardest part of what we do is knowing when not to sell.
It might sound easy – it’s nothing you have to do – but it’s not. Emotions get in the way. You naturally ask yourself. Staying on track through bad times – whether it’s a missed quarterly earnings report or a full-fledged bear market – and not panicking or letting emotions take over takes incredible faith.
Because of our possessive mentality, we can exclude emotions from our account.
Just like a CEO doesn’t walk away because of a disappointing quarter, we don’t walk away from our investments. This strategy is the key to successful investing.
Emotions are the reason many non-professional (and sometimes professional) investors buy high and sell low.
Because big down days are often followed closely by big up days, those who panic and sell on the down days are likely to miss the following days.
We also own our mistakes.
Although it may take years before we make an investment decision, we will sell immediately when we determine that our investment fundamentals are wrong or that growth prospects are no longer favorable. And mistakes, even if we don’t like to make them, are inevitable in this business.
If investors are generally afraid of making any mistakes, it ultimately limits their chances of success. The key is to learn from our mistakes, so we always do a postmortem to see what we missed or did wrong.
So while there’s nothing wrong with making a mistake once in a while, when we do, we always want to make a new one.
We look for the same ownership mentality in the leaders of our investments.
We prefer executives who are as personally invested in their company’s success as we are.
Elon Musk, the CEO and founder of Tesla and Space Exploration Technologies, or SpaceX, is famous for sleeping on the factory floor under his desk many nights.
Bernard Arnault, CEO and founder of French luxury goods conglomerate LVMH Moet Hennessy Louis Vuitton, had his five children — and now his grandchildren — accompany him on store checks when they were in elementary school. All four of his children currently work for the company.
Amazon.com CEO and founder Jeff Bezos lost nearly a decade before the company turned a $5 million profit in 2001.
These are just three examples of the many executives we invest in who share our ownership mindset.
Finally, I would like to mention that I approach my business in the same way.
I have spent my entire career reading, researching, investing and “not selling” great businesses.
Baron Capital was shaped by what I learned.
Like businesses we find attractive, whether times are good or uncertain, we consistently invest in our 45-person research team and more than 200 employees across the firm. We have never had layoffs and many of our employees have spent most of their careers at Baron Capital.
The vast majority of our employees, including all of our portfolio managers, have investments in our funds, many of which are significant.
We believe in our investment process and our firm. It belongs to us.
—Ron Baron is CEO of Baron Capital.