There Are Opportunities Everywhere - Barron's Interview 37 comments
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Ron Baron, 
CEO of Baron Capital which manages nearly $13B, strikes an optimistic note, telling Barron's magazine this is the most attractive time to be an investor in his lifetime:
Stocks are cheap. They are down more than 40% from their peak in October of 2007, and that is in line with their profit decline. But stocks are now selling for less than their replacement cost -- that is, what it costs to build the businesses or build the buildings. That's very important because until profits go up and prices go up for the services of existing businesses, you aren't going to get more competition.
The stocks he likes best are those that are capitalizing on their competitors' problems. To wit:
- People's Bank (PBCT) used to be a small regional bank, but through its risk aversion and access to low-cost deposits, it's now the country's 11th-largest bank, with a market cap of $5.6B and $2.5B in cash which could open up acquisition opportunities.
Other stocks he holds:
- ITC Holdings (ITC) - sometime soon the government will mandate that utilities take a certain percentage of their power from nuclear and wind, which will benefit this electricity-transmission company.
- Wynn Resorts (WYNN) - after a recent share offering, its debt load seems manageable. Trades for a low multiple on trough earnings. Well managed.
- Blue Nile (NILE) - their competitors, mall jewelry retailers, are going out of business.
- DeVry (DV) and Strayer Education (STRA) - state colleges are cutting back on their programs due to budget restraints. Enrollments in private educators are up strongly.
Baron makes an interesting point about active management vs. buying index funds:
With index funds, you are going to be investing in the most successful businesses at that point in time, and at the top of the market you will be massively overweighted in those companies. That was oil and gas in the 1970s and 1980s. In the 1990s, it was technology. Earlier this decade, it would have been financial companies, which you would have invested in at exactly the wrong time. When you invest in our funds or other mutual funds that are actively managed, the idea is that you are going to be investing in businesses that a team of analysts and portfolio managers has carefully chosen.
Keep you eyes on the balance sheet, Baron says, and you'll be okay in the long-run. He 'hopes' stocks will strike new all-time highs within 4-5 years, "and maybe even sooner if we get lucky."
::::::::::::::::::::::::::::::::::::::::::::
A number of bloggers seem to be encouraged by the ISM's latest manufacturing survey, which surged to its best reading in seven months last week. Both Mark Perry and The Good News Economist believe growth will return to the GDP by Q2 or just after. And Edward Harrison thinks we've hit a manufacturing bottom.
But David Templeton thinks the excitement over the recent upturn is misplaced, and notes that a disproportionate level of cash remains sidelined.
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This article has 37 comments:
On May 03 05:43 PM dcb wrote:
> The question I always need to ask is what was he saying before this
> time. without some idea of his history one doesn't know does one.
> The rally must stall if the public doesn't buy into it. so wait and
> buy cheaper. why do these people always come out of the woodwork
> when it is time for a rally to stall.
In all fairness, some of this other buys would've been good a few months ago. I'm not quite as sure if they are good buys now. Blue Nile (NILE) appears to be selling at a P/B over 30 and a P/E over 50. Even if you go by their record earnings in 2007, it's still at a P/E of over 33. That's an awful lot of growth already priced into the stock.
I haven't seen anything in this article to support his statement, one that I hear all of the time, that "stocks are cheap". No one knows that. Did those who own Microsoft and 60 think it was cheap at 50, 40, etc. until they ran out of money? As anyone with a brain knows, we are in uncharted water and P/Es could be 5 or 15 depending upon how and when we, if we do, recover and how the country's debt will affect our growth potential. In other words, where will our tax rates be, how much of our productivity will be absorbed by debt service, how much of our economy will depend upon political favorites, and what are those unknown risks?
seekingalpha.com/artic...
From the linked article:
"More than 70% of all actively managed U.S. equity mutual funds trailed their benchmarks for the five years ending 2008, according to the new Standard & Poor's Index Versus Active Fund Scorecard (SPIVA).
"The new report shows that 71.9% of actively managed large-cap funds trailed the S&P 500; 75.9% of actively managed mid-cap funds trailed the S&P MidCap 400; and a stunning 85.5% of actively managed small-cap funds trailed the S&P SmallCap 600.
S&P says the results were consistent with the previous five-year cycle, from 1999 to 2003.
The belief that bear markets strongly favor active management is a myth," said Srikant Dash, global head of Research & Design at Standard & Poor's, in a statement. "A majority of active funds in each of the nine domestic equity style boxes were outperformed by indices during the down markets of 2008. The bear market of 2000 to 2002 showed similar outcomes."
It should also be pointed out that Ron Baron did not 'Preach' his portfolio here in this forum, he did an interview with Baron's, and Eli Hoffman chose to post it here.
Having said all of that, I do agree with the comment that the stocks selected would not be my choice at this point in time, and for the same reasons that the poster gave, but then all that does is reveal my biases.
On May 03 06:34 PM Prudent Man CFA wrote:
> Preaching your portfolio is not journalism's function. Why ask a
> money manager's opinion when you can ascertain his or her's opinion
> by their positions.
>
> I haven't seen anything in this article to support his statement,
> one that I hear all of the time, that "stocks are cheap". No one
> knows that. Did those who own Microsoft and 60 think it was cheap
> at 50, 40, etc. until they ran out of money? As anyone with a brain
> knows, we are in uncharted water and P/Es could be 5 or 15 depending
> upon how and when we, if we do, recover and how the country's debt
> will affect our growth potential. In other words, where will our
> tax rates be, how much of our productivity will be absorbed by debt
> service, how much of our economy will depend upon political favorites,
> and what are those unknown risks?
The statistics are, over 50% of funds don't perform as well as the Index.
How much money did he charge for the -32% performance?
I am not dcb, but here are the facts,
www.gurufocus.com/List...
Look at the December 5, 2008 record, please.
This is the opportunity of a lifetime for investing. Whether stocks, bonds, or real estate. Its not the time to be temid.
Interesting wording there --- "through September 2007".
From 1990 to September 2007, the S&P 500 increased by about 12.1% annually and that would not include dividend payments. So it would appear that he basically performed in line with the market and that an index fund would probably generate returns similiar to him.
That said --- I'm not a believer in the "you can't outperform the market" argument. There are lots of people who consistently outperform the market by analyzing the financial thoroughly or having a very keen understanding of the businesses one is investing in. It's just that most fund managers don't actually achieve this. And I'm not convinced that this guy's track record really suggests that he is one of the outperformers.
In late October Mr. Baron said that he would not suggest that people sell stocks unless they had to.
On July 18, 2008 he gave an interview that shows a complete lack of simple investing acumen. Take a look at www.casttv.com/ext/mlbm2p
It's pretty obvious that this is a man who got rich by getting other people to give him their money to invest and once things got tough, he failed miserably. That may not be nice to hear but it's the truth.
> Blowout earnings from RIMM, Mastercard, visa, google, Apple are all
> fake, huh?
Cetin,
You would be shilling the market in 1931. You need to get at least a tiny level of objectivity to be taken seriously.
Take a look at this data direct from Standard and Poors and let's see what you think:
www2.standardandpoors....
"341 issues (76.15% mkt val) rptd: initial good reports fading, actuals are 2% behind of estimates, and -36.1% behind last year...169 issues beat est, but only 69 beat last years earnings; 159 missed with 29 beating last years EPS...Sales down 12.8 with 89 beating last year and 246 falling short..."
Outperforming in this economy IS great but even those companies are going to be revalued as we enter a new era to correct for the over valuations of the past 2 1/2 decades.
You need to learn history and quite ignoring it. Haven't you been beaten around enough in the past 1 1/2 years?
Having said that, I agree with the rest of your post.
On May 04 12:02 AM H.J. Huneycutt wrote:
> "Since inception in 1987, his Baron Asset Fund has returned 13.16%
> annualized returns through September 2007."
>
> Interesting wording there --- "through September 2007".
>
> From 1990 to September 2007, the S&P 500 increased by about 12.1%
> annually and that would not include dividend payments. So it would
> appear that he basically performed in line with the market and that
> an index fund would probably generate returns similiar to him.<br/>
>
> That said --- I'm not a believer in the "you can't outperform the
> market" argument. There are lots of people who consistently outperform
> the market by analyzing the financial thoroughly or having a very
> keen understanding of the businesses one is investing in. It's just
> that most fund managers don't actually achieve this. And I'm not
> convinced that this guy's track record really suggests that he is
> one of the outperformers.
Two periods before this had better valuations and less baggage of an enormous debt lead carried today at 350% debt to gdp. 1982 and 1987 post crash. In the case of 1982 p/e's were single digits and dividend yields were higher than today. Of course interest rates were double digit and no where to go but down. 1987 post crash priced securities at real low double digit valuations. All of this in both periods mainly without the gross rewarding of stock options to company execs which dilute shareholders like today.
We have a federal reserve monetizing debt and lending money to various deadbeat constituents in TARP and TALF. We have a corrupt runaway political process and lack of social constraints to prevent such malinvestment. So yes there are some good values today, but is it the best I have ever seen?NO.
One last measurment. Look at the Q-Ratio stock market value to asset replacement costs and the market is trading something like 80% of this value. back in 1982 this value was near 40%.
So the markets can overshoot in times of major distress.
Never seen so many predictions calling for a bottom in the economy, kind of like all the calls from the NAR that housing has bottomed all the way back to the peak.
So the next time you hear something is down 50% look closer to make sure it is really cheap.
One last point, take a look at crisco stock option reward plan. The buybacks barely make a dent in lowering share count after stock options rewards. Buybacks in this case should be looked at as ongoing capital expenditures to maintain shareholder value.
On May 03 10:36 PM alexdv38 wrote:
> TeeBone,
> I am not dcb, but here are the facts,
> www.gurufocus.com/List...
>
> Look at the December 5, 2008 record, please.
On May 04 09:02 AM The Hammer wrote:
> I have to disagree that this is the best buying opportunity in 30
> years.
>
> Two periods before this had better valuations and less baggage of
> an enormous debt lead carried today at 350% debt to gdp. 1982 and
> 1987 post crash. In the case of 1982 p/e's were single digits and
> dividend yields were higher than today. Of course interest rates
> were double digit and no where to go but down. 1987 post crash priced
> securities at real low double digit valuations. All of this in both
> periods mainly without the gross rewarding of stock options to company
> execs which dilute shareholders like today.
> We have a federal reserve monetizing debt and lending money to various
> deadbeat constituents in TARP and TALF. We have a corrupt runaway
> political process and lack of social constraints to prevent such
> malinvestment. So yes there are some good values today, but is it
> the best I have ever seen?NO.
> One last measurment. Look at the Q-Ratio stock market value to asset
> replacement costs and the market is trading something like 80% of
> this value. back in 1982 this value was near 40%.
> So the markets can overshoot in times of major distress.
>
> Never seen so many predictions calling for a bottom in the economy,
> kind of like all the calls from the NAR that housing has bottomed
> all the way back to the peak.
You're advocating basically eliminating all the bad performers from the sample!
And the point is how to you determine ex ante who are the 'good managers'?
Research has shown past performance is not highly correlated with future performance.
In other words, somone who outperforms the market this year is not likely to outperform next year.
On May 03 11:52 PM Stone Fox Capital wrote:
> Find it interesting that anytime people compare index results versus
> active managed funds they throw in the whole universe of funds. How
> about qualifying if by funds open at least 10 years to show they
> aren't just fly by the night funds. Also, wouldn't you want to invest
> in those funds that consistently beat the indexes? The good managers
> will beat the indexes. Why compare it to the bad managers?
>
> This is the opportunity of a lifetime for investing. Whether stocks,
> bonds, or real estate. Its not the time to be temid.
Unless Ron Baron shorted last 2 years, he didn't know when stocks were expensive, so how would he know when stocks are cheap? Talk is cheap.
and yes, that quoted 'hope' of new allb time highs for stock indexes is just hillarious. It disqualifies him outright as a prudent money manager
If you're smart enough to type morningstar.com into your browser, you should have the mental capacity to find a few of the 30% of manangers who always beat the indexes.
Diversification is a hedge against ignorance, which makes index investing the height of stupidity.
Regards
On May 03 07:04 PM berated wrote:
> Interesting. I'd like to hear the author's perspective on the following
> recent research showing active managers did much worse than index
> funds:
>
> seekingalpha.com/artic...
>
>
> From the linked article:
>
> "More than 70% of all actively managed U.S. equity mutual funds trailed
> their benchmarks for the five years ending 2008, according to the
> new Standard & Poor's Index Versus Active Fund Scorecard (seekingalpha.com/symbo...).
>
>
> "The new report shows that 71.9% of actively managed large-cap funds
> trailed the S&P 500; 75.9% of actively managed mid-cap funds
> trailed the S&P MidCap 400; and a stunning 85.5% of actively
> managed small-cap funds trailed the S&P SmallCap 600.
>
> S&P says the results were consistent with the previous five-year
> cycle, from 1999 to 2003.
>
> The belief that bear markets strongly favor active management is
> a myth," said Srikant Dash, global head of Research & Design
> at Standard & Poor's, in a statement. "A majority of active funds
> in each of the nine domestic equity style boxes were outperformed
> by indices during the down markets of 2008. The bear market of 2000
> to 2002 showed similar outcomes."
1) This guy is talking his book.
2) With index funds, you achieve ultimate diversification - the success or failure of any single company or even industry will only show as a slight blip regarding overall performance. Also, as one industry fails (tech) another one usually succeeds (energy). As for the argument that no amount of diversification hedged your bets this past year, you still would have done better than the vast majority of mutual/hedge funds out there.
And his picks?
People's Bank (PBCT) ... a company with a PE over 35.
Wynn Resorts (WYNN) ... a casino with $5.1 billion in liabilities and a PE over 27.
Blue Nile (NILE) ... A profitable company but with $70 million of liabilities compared to $89 million of assets, and a whopping PE of 58.
With so much undervalued in the market, why on earth would you buy incredibly risky stocks like these? There are actual bargains out there, and these are not them.
> Another thing, back in 2000-2002 period. All I heard is tech tech
> tech. Tech started going down and many said crisco was down 50% it
> was a bargain. Just because something is down x% does not make it
> a bargain. You need to look deeply at the business and asset values
> to really see if it is priced at a bargain price. Crisco went from
> $30 to near $15 today or 75% cheaper.
> So the next time you hear something is down 50% look closer to make
> sure it is really cheap.
> One last point, take a look at crisco stock option reward plan.
It's Cisco ... not Crisco.
> No offense but I researched Ron Barron and he seems like a very typical
> analyst/advisor who could easily be outperformed by a chimp trained
> to follow a few simple rules.
>
> In late October Mr. Baron said that he would not suggest that people
> sell stocks unless they had to.
>
> On July 18, 2008 he gave an interview that shows a complete lack
> of simple investing acumen. Take a look at www.casttv.com/ext/mlbm2p
>
>
> It's pretty obvious that this is a man who got rich by getting other
> people to give him their money to invest and once things got tough,
> he failed miserably. That may not be nice to hear but it's the truth.
WOW. Great find!
After watching the interview I consider Mr. Hoffmann thoroughly debunked.
Anyone know where I can find a trained chimp (other than my Merrill Lynch financial advisors, of course)?
That should be what people focus on right now - what is selling at great prices, not what the general trend of the market is going to do to stocks.
On May 04 09:09 AM The Hammer wrote:
> Another thing, back in 2000-2002 period. All I heard is tech tech
> tech. Tech started going down and many said crisco was down 50% it
> was a bargain. Just because something is down x% does not make it
> a bargain. You need to look deeply at the business and asset values
> to really see if it is priced at a bargain price. Crisco went from
> $30 to near $15 today or 75% cheaper.
> So the next time you hear something is down 50% look closer to make
> sure it is really cheap.
> One last point, take a look at crisco stock option reward plan. The
> buybacks barely make a dent in lowering share count after stock options
> rewards. Buybacks in this case should be looked at as ongoing capital
> expenditures to maintain shareholder value.
It's named "I'm Smarter than My Broker"
seekingalpha.com/insta...
Enjoy! It was fun to write too.
Past performance is in no way an accurate predictor of future results.
Regards, and please read my instablog, which happens to be about exactly this type of arrogance from fund managers and the financial industry in general:
seekingalpha.com/insta...
Now, if you know someone closely, and are comfortable and confident in their abilities, then maybe, just maybe, it's worth a risk. But not for the majority of your retirement planning.
On May 05 02:13 PM Focus Advisory wrote:
> As an active manager, I love to hear the story of how 70% (or greater)
> of mutual funds underperform their respective indexes... It means
> 30% outperformed!
> If you're smart enough to type morningstar.com into your browser,
> you should have the mental capacity to find a few of the 30% of manangers
> who always beat the indexes.
> Diversification is a hedge against ignorance, which makes index investing
> the height of stupidity.
>
> Regards
Bill Miller, and Bernie Madoff.
Bill Miller was not a crook, had a flawless track record for twenty years, and lost every shred of his reputation last year.
Bernie Madoff was a crook, and had a flawless track record for much longer than twenty years, and lost every shred of his reputation last year.
On May 05 02:13 PM Focus Advisory wrote:
On May 04 02:47 AM Fred Voetsch wrote:
> In late October Mr. Baron said that he would not suggest that people
> sell stocks unless they had to.
>
> It's pretty obvious that this is a man who got rich by getting other
> people to give him their money to invest and once things got tough,
> he failed miserably. That may not be nice to hear but it's the truth.
awesome post.
On May 04 09:02 AM The Hammer wrote:
> I have to disagree that this is the best buying opportunity in 30
> years.
>
> Two periods before this had better valuations and less baggage of
> an enormous debt lead carried today at 350% debt to gdp. 1982 and
> 1987 post crash. In the case of 1982 p/e's were single digits and
> dividend yields were higher than today. Of course interest rates
> were double digit and no where to go but down. 1987 post crash priced
> securities at real low double digit valuations. All of this in both
> periods mainly without the gross rewarding of stock options to company
> execs which dilute shareholders like today.
> We have a federal reserve monetizing debt and lending money to various
> deadbeat constituents in TARP and TALF. We have a corrupt runaway
> political process and lack of social constraints to prevent such
> malinvestment. So yes there are some good values today, but is it
> the best I have ever seen?NO.
> One last measurment. Look at the Q-Ratio stock market value to asset
> replacement costs and the market is trading something like 80% of
> this value. back in 1982 this value was near 40%.
> So the markets can overshoot in times of major distress.
>
> Never seen so many predictions calling for a bottom in the economy,
> kind of like all the calls from the NAR that housing has bottomed
> all the way back to the peak.