NEW YORK (CNN/Money) -
Back in the age of disco balls and polyester leisure suits, fund manager Ron Baron was looking to make a name for himself on Wall Street. Stocks were in a two-year bear market, down an average of 60 percent, against a backdrop of rampant inflation. An oil crisis gripped the nation, and interest rates spiked to 18 percent.
The good old days, Baron recalls.
That might sound odd to fund investors these days, who fled the market in record numbers in July. But Baron, a Wall Street veteran who rose from a junior stock analyst to manage $6 billion in assets, said the 1970s bear market -- and the one we're caught in now -- are perfect opportunities to make a lot of money.
"I tell people this is the most incredible time to be on Wall Street," Baron said recently in an interview at his office on the Upper East Side of Manhattan. "Every day, we find things to buy."
The firm's flagship Baron Asset Fund, a small growth fund with $3.1 billion in assets, has earned an annualized return of 11.8 percent in the past 15 years, putting it in the top 6 percent of its category. Baron's sideburns may be shorter now, but his investing style hasn't changed.
From bear market to bull market - and back again
Baron, 59, is a numbers wonk who is part Woody Allen, part Peter Sellers. He rattles off a company's financials as if he's describing the most engrossing novel he's ever read. On this particular afternoon, the Dow had just finished July with its worst monthly point and percentage loss in history, down 507 points, or 5.4 percent. But Baron seemed unconcerned, even absentmindedly swinging a baseball bat signed by Pete Rose as he talked. Around him, there are vestiges of his success -- blond wood, overstuffed chairs in buttery leather, an 11-ton tank full of exotic fighting fish from Fiji and the Philippines. From his office overlooking Central Park, he can see Yankee Stadium way up in the Bronx.
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| Ron Baron, founder of Baron Capital Management |
Baron graduated with a degree in chemistry from Bucknell, and his parents were crushed when he decided against medical school. But his passion was stocks, and he spent 12 years as an institutional securities analyst at various firms. Some of his clients were the other rising stars of Wall Street: Peter Lynch of Fidelity, former Tiger Management hedge fund manager Julian Robertson, billionaire investor George Soros.
He founded Baron Capital Management in 1982, focusing on small and mid-sized companies. Besides Baron Asset, he also manages the $940 million Baron Growth, which has a five-year annualized return of 9.2 percent, putting it in the top 10 percent of its category. Two other funds, Baron Small Cap and Baron iOpportunity, an Internet fund, complete the lineup.
About 300,000 people subscribe to his quarterly reports, which include anecdotes about his favorite CEOs (David Pottruck of Schwab and Polo's Ralph Lauren are two of them), as well as homey asides about his life. You may not know that he used to catch Bruce Springsteen shows at the Stone Pony in Asbury Park. An estimated 2,000 shareholders will attend his 11th annual investing conference in the fall, which features sessions with some of the chief executives of the companies he invests in. (Last year, Jerry Seinfeld performed.)
Still the same after all these years
All along the way, Baron's approach to stocks has been pretty simple. He looks for companies dominating their markets, with products that are household names. He buys stocks he thinks can double in price in three to five years -- and then double again. Two of his first stock picks were Walt Disney and McDonald's, names he says have withstood the test of time. He owns stocks an average of eight years - an eternity in the fund business.
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Baron Asset Fund - top 5 holdings and their weightings:
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Among his favorite stocks these days is ChoicePoint, which provides background information on people to insurers, businesses and government agencies. The company has a projected five-year growth rate of 20 percent and its stock is up 9 percent this year. If the 1990s were about technology, this decade will be about security, he said.
Another favorite is Apollo Group, a provider of adult education programs in classrooms and online. Enrollment is growing in the double digits and its five-year expected growth rate is 25 percent. The stock is up nearly 28 percent this year.
In management, he wants a CEO with integrity and vision, a perfectionist. Casino developer Steve Wynn, for example, is taking Valvino Lamore public this fall (the company will be called Wynn Resorts), and Baron couldn't be more excited. Wynn recently won a bid to operate one of three new casinos slated for construction in China.
Part of Baron's analysis seems to be home-spun common sense. People will need more financial help, so a company such as fund firm Waddell & Reed will do well. People love doughnuts, so he owns Krispy Kreme. Then they'll need to go on a diet, so he owns Weight Watchers. All are experiencing double-digit growth. His firm has always relied on its own research.
To be sure, a lot of his holdings, such as Schwab, are suffering these days. The stock is trading near its 52-week low. (Baron Asset is down 14 percent year-to-date as of Aug. 1.) But Baron doesn't seem to get rattled. Sure, he's sold more than half of his Schwab shares. Baron owned the stock when it went from $1 to $50, and he sold his stake at an average price per share of $32. He thinks Schwab could still perform well long-term.
Of course, Baron steered clear of technology stocks in the late 1990s when other small-growth managers were loading their portfolios with them. (Ironically, he didn't see big outflows in July, as some other funds have. But he did back in 1999, when investors were annoyed that he was in the bottom percentile).
Why he sees reason for hope
Baron understands why people are so fed up with Wall Street. There are accounting blowups and CEOs who are getting rich off their stock options. Meanwhile, the little guy is in serious pain -- retirement plans in tatters, portfolios off 50 or 60 percent. But this bear market is different from the one in the 1970s -- the economy is much stronger. Interest rates are at 35-year lows. Inflation is in hiding.
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That's why he's upbeat these days. Stocks are so cheap now; they've been falling for months. Down the road -- three to five years -- it will be an entirely different picture. "You've got to have a different point of view than most to be a successful investor," he wrote in his March 31 report. "You've got to want to buy when most others want to sell."
Not that Baron is ready to ditch the decade of the Bee Gees and Saturday Night Fever.
In fact, he keeps a picture in his office of himself dating back to that era. He's bare-chested, wearing a pair of gym shorts favored by NBA players at the time (think Dr. J, circa 1970s.) Baron said he likes to remind himself of where he came from. He's still the same guy who used to jog in Central Park to pick up girls.
And he's still the same guy who thought Mattel was a great investment because of a little product known as Barbie.
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