Investing With The Masters: Ron Baron

by: Integrator

Originally published on July 6, 2016

I love studying the techniques and strategies of successful investors. Ron Baron was one that recently caught my attention.

I try to regularly read up on the techniques and strategies of successful investors. While I've probably spent the most time becoming familiar with Warren Buffett's approach, there are other investors on whom I've tried to gather insights and learnings to mold my own investment strategy.

Peter Lynch and Philip Fisher are just two of these investors. I also happened to recently come across another investor who I hadn't heard a whole lot of previously.

Ron Baron is a hedge fund manager whose investment strategy is focused on identifying promising companies that have the potential to double every five years by just buying and holding onto these companies for the long term. Employing this approach has made him a billionaire and several of his funds have achieved double-digit returns on investment over long periods of time.

What struck me the most about Ron Baron as an investment manager is that his investment philosophy is very similar to what I am deploying for my own growth portfolio. That is to identify businesses with solid competitive advantages that look to have long runways of growth in front of them and then just hold those businesses for a long term.

This is exactly what Project $1 million is based upon. Baron also looks specifically for businesses that have the potential to double in five years and possibly quadruple in 10. He only makes the decision to sell if the business no longer has the potential to double within the next five-year period of time (i.e. its growth opportunities have diminished).

While Ron Baron's record hasn't been as good in recent years, between 1988 and 1998, his Asset Management fund had four years where returns exceeded 34%. A $10,000 investment in Baron's growth 15 years ago has doubled the performance of the S&P.

When I combed through Baron's portfolio, there are a couple of businesses in that portfolio that served as ideas for my own Project $1M. The companies that I identified for investment in project $1M included Under Armour (NYSE:UA) and Ulta (NASDAQ:ULTA).

Baron is of the belief that Under Armor has the potential to quadruple in value within the next 10 years. He believes, like I do, that sales growth should average approximately 20% for the next decade. With some modest margin improvement, the business should be able to at least triple quadruple its value within that time.

Not only is strong domestic growth likely to continue for Under Armor, but international opportunities appear promising as well. As disposable incomes rise in emerging markets, consumers will increasingly spend on leisure activities, which should drive good apparel and footwear growth. Also Under Armour has acquired several connected platforms, a perfect vehicle to upsell additional merchandise!

While Ulta is no longer in Baron's portfolio, I still like this business as a play on the decline of large department stores. Ulta has been posting 20% sales increases through providing a one-stop shop for beauty products. As department stores continue to decline, women will look to specialty stores to fill this gap, and Ulta will be a beneficiary.

Finally, the one additional position that Baron had which sparked my interest was Tesla (NASDAQ:TSLA). It's Baron's largest position, and one that he thinks could still increase 5x from here.

Unfortunately, there is just too much execution risk inherent in the Tesla model for me. Scaling up to the volumes necessary to carry such a large valuation step up carries significant funding risk, and execution risk.

Tesla hasn't had the smoothest of rides in producing the limited volume of vehicles that it currently produces, let alone attempting to scale up to multiples of what it produces currently

I do see the potential reward, and it could be a game changer, but at a $30B valuation, it seems already priced for significant success. I'll revisit this one in due course.

Baron's model and approach was very interesting to me. While there are other investors with better long-term records, buying and sitting on earlier stage businesses with good track records, solid competitive advantages, and promising growth opportunities ahead of them is an approach that I too believe in to fast track my own independence.