In his recent interview on The Masters in Business Podcast, Ron Baron discusses his neversell strategy that has seen him hold successful companies for more than 30 years. Here’s an excerpt from the interview:
RITHOLTZ: Let’s talk a little bit about how you put the long in long-term investing, a couple of names. You’ve owned Charles Schwab since 1992, Choice Hotels since ’96, Vail Resorts since ’97. Where do you get the conviction to be so long-term in your core holdings?
BARON: There’s something about every business, the most important element of the — you know, of course, they got to grow and you really got to like and trust the people. And — but what is important is about because of advantage, what is it about these businesses and what you’ve invested — which we’ve invested. It gives them a chance to last for a long time and get some pricing power.
And the case at Charles Schwab, that was the — we had a mutual fund business. And 1992 we had $100 million in management, $50 million was the mutual fund, $50 million was separate accounts. We could not make that business grow. ’86 is $50 million on mutual fund. 1992, we had $50 million in mutual fund. We couldn’t make it grow.
And all of a sudden we get into Charles Schwab on the platform side. We’ve learned about financial advisors to learn about — I had no idea who they were like you, (inaudible).
BARON: And we learned about them and we learned that they’re clearing through Schwab and — and — and they have — Schwab has a platform, the Mutual Fund Marketplace and then they have one source. And we got on — so we got people who are advisors to recommend to Charles Schwab, which was for $20,000 we would — we would have to do the work and they weren’t sure they were going to have a worthwhile spin on us and where with the demands. So we got a whole bunch of people to call.
They said, “Okay, we’ll put you on.” And when they put us on and we started, they said, “A lot of people know who you are, but — and they had to buy what was going.” And we got on the platform funded well. We got recommended. We got one of the top fund choices, all of a sudden where we couldn’t get any money coming in starting at $10,000 a day, $50,000 a day, $100,000 a day.
And then we started growing. And so when I saw that happening and it all came from Schwab, they said, “Wow, I better really study Charles Schwab.” And I studied Charles Schwab, and I saw that people were leaving brokerage firms to go on their own and then use Charles Schwab to clear. And they didn’t want to sell the product of the brokerage firms that they were working for with asking them to sell and — or they didn’t want to just raise money, they wanted to — to have their own business.
And — and so it made sense to me. And — and I really like Chuck. The fact he was just being honored barely, I guess, the last few years at some restaurant downtown and — and — and he invited me to be one of the people at — you know, at his lunch — at this dinner.
And — and then I — I don’t know maybe 100 people were there, 150 people and he — I was up there. And — and he said — and he calls me out from the — from — from the podium about how, you know, people like Ron Baron were able to be offered to his clients, which was a really good deal.
So, to Charles Schwab, they’re responsible. It would be crazy for me to have a business like ours, they couldn’t grow. And all of a sudden (inaudible) platform and growth and for me not to realize that was a really big opportunity to have investing in.
BARON: So we invested in. We made …
BARON: … 50 times our money, 60 times our money so far.
RITHOLTZ: So far, are you — are you still long Charles Schwab all this time?
RITHOLTZ: That’s 30 years ago.
BARON: That’s been a dollar a share. Now …
RITHOLTZ: Wow, amazing. I know you turnover rate is about five to seven percent. And the Baron Growth Fund, the average turnover is under three percent. That very much stands out compared to your peers who often have turnover rates of 50 or 100 percent or even more than 100 percent. They’ll turn over a whole portfolio, you know, twice a year. What are the advantages of the buy-and-sell approach that — that you’ve embraced?
BARON: Oh, and I described onto you before about Disney, and McDonald’s, and Federal Express, and Nike in the 1970’s, I have been — remained an investor in all those companies, they rose 50-60 and we’re investing in Disney in the 1970s when they were building Disneyworld in Florida.
And they had Disneyland in California which was 5,000 acres and everyone around them built their properties and made all that extra money in the orange groves in California. And in Florida, they said, Okay, we’re doing this differently this time. Instead of having 5,000 acres where we just have a park, we’re going to buy 100,000 acres and we’re going to have the hotels, we’re going to have all the other services. We’re going to get the money from that. So, I was investing in Disney in the 1970s when they were building Disneyland — Disneyworld.
I was investing in McDonald’s at a time when I would go — my girlfriend at the time was in Washington and when I would go down to Washington, I would go — every weekend, she will come to New York, I would be in Washington.
And Big Macs, I couldn’t wait to go and have Big Macs and they were like the best spent a dollar — 75 or 80 cents, I don’t know. And it felt that with the McDonald’s the big opportunity was if they were — they owned the land that was underneath of the franchisee’s property.
And the Coca-Colas were then 10 cents for a Coke, maybe fries were 10 cents. Maybe the hamburgers were 20 or 25 cents. And I said, my God, the profit margin that they’re on the verge of making, they could raise a price from 10-15 cents. And then all of a sudden, extra 5 cents is all profit or like they raise extra fries from 10 cents to 12 cents or apple pie, they had them from 15 cents to 20 cents.
So, I thought there was a tremendous amount of leverage in that pricing that they had and plus they had this land underneath of the mall or the hotels.
You can listen to the entire interview here:
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