From the midterms to the unfinished business of health care and financial reform, there's a lot of noise in the marketplace right now that have many investors sticking their heads in the sand in fear rather then diving into the equity pool.
Ron Baron, Chairman and CEO of Baron Capital, says that this is a great time to invest. Baron is a quintessential buy and hold investor, holding some stocks for 25 years. When headlines scream panic, Baron sees opportunity.
Ron Barron: News isn't what we trade upon. We are investors over the long-term so we do not listen to that noise. We invest in companies that have really big opportunities to become much larger, are appropriately financed and have a competitive advantage.
We block out the news and for us its relatively simple. If you find really interesting companies and you buy and sell them before these companies grow into a much larger company, you haven't really served your investors well even if you did turn a nice profit.
You need to be in it for the long haul to maximize your return.
An average mutual fund turns over stocks every seven or eight months, hedge funds own stocks for days, weeks, and months sometimes (and that's a long time for them!). We own stocks on average for five years. We have owned Charles Schwab since 1992 and have made at least 50 times our money.
We have also invested in Steve Wynn between 1980 and 1983 and 1987 and 2000. In those periods of time, in 80 and 83 Steve's stock tripled and in 87 and 2000, when he went on to build his property The Mirage in Vegas, it went up 20 times. And then in 2001, we were one of the founding investors in Wynn Resorts. We invested a small amount but in the aggregate we invested 130 million dollars and we got back in the last eight or nine years, 70 or 80 million dollars in dividends. I think we had 60 or 70 million dollars invested and we made 800 million in profits in eight years.
This at a time, when the stock market had not been doing so well. So if we bought and sold our interest, wouldn't have had that kind of profit.
At my investor conference last week, I told a story about how in the seventies we invested in Nike and tripled our profits and sold the stock. I pointed out that was one of the lessons I learned in identifying the difference between being a trader and a long-term investor. Nike has been up 40 times since then. If I stayed with them I would have made 40 times the profits, instead of double or triple. I made a good return but if I stayed with it, my return would have been enormous.
The reasons why stocks are really attractive right now is because there is so much uncertainty and we are coming out of this financial near-death experience. People are now saying we are having a different kind of recovery. It's a balance sheet recession instead of a cyclical recession and its going to take a while to recover.
Right now interest rates are at zero. When I first started Baron in 1982, interest rates were 18 percent. So businesses now have about a trillion eight in cash, government is borrowing from itself and creating a lot more money. Inflation is one percent or one and a half percent and the government says that's not enough, its falling so we have to make inflation. A little bit of inflation does a lot of good. It enables businesses to grow.
LL: There are a lot of headwinds with two of your holdings right now— Strayer Education and DeVry. How do you keep focused with all the news surrounding these two companies right now?
RB: This is a perfect example. In DeVry , we have made from 1990 to before the stock started to go down (because of all the publicity and investigations and discussions on how these businesses should get paid), 40 or 50 times our money and now we have made maybe 20 or 30 times our money and in the case of Strayer, we have maybe quadruple in the last five years and now we've probably doubled.
We've lost a lot of profits but we are not driving ourselves crazy with this volatility because our portfolios are diversified. We'll hurt a little bit but the results will not be devastating.
You have to understand what the stock means from a long-term prospective. If you are willing to own eight or nine percent of a company you can't buy and sell it. You're committed. So what you do is when the stock goes up a lot you sell a little bit of it and when it down a lot, you buy a little bit of it. But that's only on the margin because you have made a long-term commitment.
Despite the headlines on these companies, the way I look at them is very simple. If you go to Illinois you find that 17-19 percent of all the engineers in that state come from DeVry. And if you look at the medical colleges that graduate the largest number of graduates of doctors in the United States, they come from DeVry's Ross School in the Caribbean. They are number one. The majority of their students are immigrant children. For many instances, these children are the first in their families to go to college.
These companies are making education possible for children who might otherwise not have the ability to access it. So you go to Strayer and the average student is 20 thousand dollars in debt and went into school making 30 thousand dollars a year and when he gets out he's making 60 thousand dollars a year. So to me you can have a lot of failures of people who don't go through and re-neg on their debt, but it’s a socially acceptable program.
I think this is more socially acceptable to have a program like DeVry and Strayer than to have high frequency trading which is just a rip off to investors, which costs me money every time I buy and sell stock and for what social purposes? To make companies stock go up and down and make them more volatile and to make them less valuable and more difficult to finance? What's the social purpose in something like that as opposed to 30 or 40 percent of the kids that go through DeVry or Strayer programs are able to earn a living and provide for their families and be productive members of society?
Some people have the opinion that you should not be able to make money in education. There are some who think you should not make money in health care. I happen to think this is a good thing.
Everyone is entitled to agree or disagree. I'm interested in investing in areas that will improve our society. Education is a part of that. I'm interested in investing in companies that are in alternative energy.
I'm lucky where I get to work in such an exciting business where I meet individuals who are creating jobs and developing careers. What a neat opportunity as an investor as opposed to just try and make as much money as you can. Of course, everyone tries to make as much money as they can so they can provide for their families, but you don't have to make the most amount of money all the time to feel very satisfied in your life.
LL: Let's switch gears. The balance of power is up for grabs this midterm election. Do you think Congress has the political will to do what's needed to right this economy?
RB: There are a lot of attack ads out there right now. No one is talking about the issues. We hear "we" are going to cut spending and taxes but nobody tells us how. I assume we're going to get of some sort of leader to be honest and do the unpopular things that will right our country. I was hoping Obama would be the guy.
We need to sacrifice to get things back on track. We have to pay higher taxes to use carbon energy. We need to invest in education. If the members in Congress and the President don't tackle any of this, we need to fire them.
LL: You said you were hoping Obama would be the leader to turn this economy around. Do you think he can?
RB: I think he can if he wants to. He's a very smart man, but he has an agenda and his agenda is to redistribute the wealth. He does not believe there should be very wealthy people. He believes the wealth belongs to the country and if you are earning a lot you are earning it because of the country. Not because you have worked hard, or because you are skilled.
The wealthy should give their income to other people. And so, if this is going to happen, people will not work as hard or find a way to make money and have assets grow and not take income until the income tax changes. He is a brilliant man and has got a great heart, but his politics are not my politics.
I voted for him and I'm glad I did because I could not imagine where the United States would be if we had the alternative—a hands off to the economy and to the financial system leader. He did save the financial system but I'm really upset because his social priority has been health care since he has gotten into office and he has pursued it at all costs.
Now, I happen to believe that everyone should have health care but he did not address cost. Most people think the health care system is so bloated in the United States because of those costs.
Obama had the ability to change that but he didn't. He just wanted to get everyone covered as opposed to figuring out how to do it at a lower cost.
Can he really turn this economy around? I don't know. Maybe if he is handed some sort of defeat at the midterms he will do what Clinton did and try to move to the middle of the road.
I don't know if I'm encouraged if he will do that or not but I remain hopeful. Obama wanted to become President to change things and while I don't like all the change he wants to accomplish, I think fundamentally Obama is a good guy. I thought he was an open book and everyone thought he would run to the left and go to the center but he has never gone to the center.
LL: In addition to health care, we are also looking at the beginning stages of financial regulation. We have many more bills that need to be passed. What do you hope to see passed in the future rules?
RB: We'll have years of regulation rules being made. There has to be changes to the financial structures. With financial regulation, what needs to be done is you need to regulate computerized trading. You have to regulate the way the markets soar up and down. You need to get all of these derivatives on exchanges.
There has to be changes to high frequency trading, which people have run away from even though I believe it had a very important role in the Flash Crash. You don't want to have that again. Its terrifying people. That's why stocks are cheap. Bonds are 38 times earnings. Everyone wants to invest in them and they want to ignore stocks that are 12 times after tax and eight times pre tax. It’s insane!
And stocks are a protection against inflation. Not bonds. With bonds you are going to lose money. Bonds for the past 50 years have gone up four point three percent a year to inflation, stocks made six point four percent a year.
So stocks in the past 50 years are up 25 times, and in bonds you've lost 90 percent of your buying power. And if you think Bernanke who wants to create inflation is going to keep your money more stable than before, I don't think that's the case. There are brilliant people who understand and know what exactly needs to be done but politically they've just been overwhelmed by the regulated. The regulated have been captured by the regulator.
LL: What do you think of the populist anger toward the banks? Is it right?
RB: Obama's social agenda isn't the only thing I didn't care for. I also didn't care for the populist rhetoric he used where he was always putting the blame on someone else.With the issue of populism and blaming someone, I think once people get over the initial idea, they just want to make it better instead of just blaming someone, in this case the banks for being "bad.”
There were some excesses, of course there were. There were huge excesses. But they have been corrected. The balance sheets of banks are much better. The regulations as I understand it so far, have been directed to making more capital required than ever before. So capital is better, they've raised a great deal of equity, they've written down bad loans, they're flush with cash, even though there are a lot of mortgages that are not going to get paid, they'll be foreclosed, but if housing does turn around that will help.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."