In his latest Q1 2021 Shareholder Letter, Ron Baron explains how long-term investors can benefit from poor quarterly earnings results to pick up some best-in-class businesses. Here’s an excerpt from the letter:
We view our 5-year baseline holding period as a significant competitive advantage for several reasons. First, we view the long term as a less efficient area of the market. There is a lot of focus on predicting financial results over the next quarter or two, but almost no focus on forecasting over a 5-year period. This gives us a more fertile competitive set and enables us to identify businesses that will compound at faster-than-expected rates for longer-than-expected time periods. Additionally, this investment horizon allows us to be opportunistic.
When companies miss quarterly earnings estimates, or announce investment programs, stocks go down indiscriminately. This is because investors with short-term time horizons view this as uncertainty and expect the stocks to be in the penalty box for several quarters. We can evaluate these situations dispassionately, determine the cause of a miss, or the expected return on an investment program, and make an active investment decision. Ideally this allows us to buy a best-in-class business at a more attractive valuation. Finally, this allows us better access to management teams.
Time for investor relations professionals is a scarce resource, and we find that management teams are far more willing to spend time meeting with us than other investors because they know that we can own their stock for at least 5 years, and often for 10 years or longer.
You can read the entire letter here:
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