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Any patient investor can turn $5,000 a year into nearly $1 million, says billionaire investor Ron Baron

Key Points
  • "You have to have a small amount of money and invest it regularly for a long time," Baron says.
  • "It's all about compounding," the Baron Capital founder says, referring to the power of making regular investments and reinvesting the returns.
Ron Baron: Anybody can turn $5,000 a year into nearly $1 million

It's wrong for people to think that they have to be wealthy to get rich investing in the stock market, famed buy-and-hold investor Ron Baron told CNBC in a Friday interview.

"You have to have a small amount of money and invest it regularly for a long time, and live to get to be old. That's how you get rich," said the billionaire founder of Baron Capital, which has nearly $26 billion in assets under management. He appeared on "Squawk Box" from the sidelines of his annual investor conference in New York City.

"It's all about compounding," he said, referring to the power of making regular investments and reinvesting the returns over decades.

Baron has made billions of dollars by doing extensive research, buying the stocks of what he feels are undervalued companies, and keeping them for an average of about 14 years. But individual investors don't need to pick stocks, he said. "The simplest thing for people to do is buy an index fund."

"If you invest $5,000 a year for 30 years ... it's worth $890,000" based on historical stock market returns, he calculated.

Billionaire investor Ron Baron on how disruptions fuel economic growth

On a shorter time horizon, he said that a decade using that strategy would yield $110,000. "If you do it for 20 years, it's worth $250,000."

Baron bases his belief in the power of long-term investing on the historical correlation between the economy and the stock market.

"The economy grows with the market," he said, though admitting that at any given time one may be ahead of the other or visa versa. "We're thinking the economy growth is going to accelerate, pointing to low interest rates, cheaper oil prices, and disruptive technologies. "That means that the stock market growth should accelerate," he reasoned.

Over the summer, Baron said he could see the Dow Jones industrial average at 40,000 by the year 2030. On Friday, he told CNBC, "That may be a little low." The Dow closed Thursday at 23,461, less than 1 percent off the recent all-time highs.

To make his case, Baron pointed to a recent prediction from fellow value investor and billionaire Warren Buffett. Last month, Buffett said the Dow should be over 1,000,000 in 100 years. "But that's just compounding 4 or 5 percent a year," Baron said, which is a rate on par with his estimates.

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