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Investor Ron Baron on investing during periods of entropy


Ron Baron, Founder of Baron Capital

Anjali Sundaram | CNBC

I started my career as a stock analyst in 1970. It was a tumultuous time.

Vietnam War, Watergate, President Richard Nixon’s resignation, Iran hostage crisis, recession, inflation, double-digit interest rates, triple gas prices. The only crisis we didn’t face during that decade was a pandemic. Furthermore, amid the turmoil, the stock market crashed, leading to a global bear market that lasted from 1973 to 1974. It was one of the worst recessions since the Great Depression. The only comparable financial crisis of 2007-2008.

My experience in the 1970s was fundamental. The stocks I have recommended are small-cap companies. They include Disney, McDonald’s, Federal Express, Nikeand Hyatt.

After these stocks double or triple, I recommend selling. That’s because I earn brokerage commissions – not salaries. A few years later, when I look back, almost all of those stocks continue to grow significantly.

I conclude that, instead of trading stocks or try to predict market movementsbetter strategy is to spot and invest in big companies at attractive prices and Long-term investment.

I believed then, and now believe, that you don’t make money trying to forecast short-term market moves.

In my 52 years of investing, I have never seen anyone accurately and consistently predict what the economy or the stock market will do. So whenever unrelated events happen and the stock falls evenly, I believe that represents long term opportunity.

Invest in ‘pro-entropic’ businesses

Example of Tesla

Tesla probably the most famous company we own. But I will point out that it is no exception. In fact, Tesla is the perfect example of How does our long-term investment process work.

We first invested in 2014. I think Elon Musk One of the most visionary people I have ever met. What he is proposing is very revolutionary, very groundbreaking, yet so meaningful.

We owned its stock for many years while Tesla built its business. Sales increased, but its share price, although extremely volatile, remained mostly unchanged. We stayed invested all the time, and when the market started in 2019, Tesla’s stock price was up 20 times. That’s why we try to invest in companies early – because you never know when the market will eventually feel the value we have seenand it drives up the stock price.

We invest in only one asset class – growth stocks. Why? Because we think growth stocks are the best way to make money over time.

While the simple answer to fighting inflation is to invest for the long term, the concept of compound interest tells us why. … Over time, this effect creates snowballs…

Historically, our economy has grown by an average of 6% to 7% in nominal terms per year, or doubled every 10 or 12 years, and the stock market has closely reflected that growth. that chief. America’s GDP in 1967 was $865 billion, 55 years later it was $25.7 trillion – more than 28 times what it was in 1967.

The S&P 500 Index was 91 in 1967. It’s about 3,700 now.

We seek to invest in companies growing at twice that rate at a time when we believe their stock prices do not reflect their favorable outlook.

Stocks are also an excellent hedge against inflation. Inflation is back in the headlines again, but it’s always there. The purchasing power of the dollar has decreased by an average of about 50% every 18 years over the past 50 years.

While inflation causes currencies to depreciate over time, it has a positive effect on tangible assets, businesses, and economic growth. This means that stocks are the best way to hedge against the devaluation of your money.

While the simple answer to fighting inflation is Long-term investment, the concept of compound interest tells us why. As your savings turn a profit, compounding allows those gains to earn even more. Over time, this effect will snowball and incomes increase at an increasingly rapid rate.

So, if you earn 7.2% on an investment, which is the stock market’s historic annual growth rate (excluding dividends) over the past 60 years, then your investment’s growth you will be exponential. You will have almost seven times your original amount in 30 years, 12 times in 40 years, and more than 23 times in 50 years!

I would also like to point out that the stock market is one of the most democratic investment vehicles – available to everyone, unlike real estate, private equity, hedge funds, etc. Baron Capital in 1982 to give middle-class people like my parents an opportunity to increase their savings. Even today, 40 years later, that’s why I do what I do.

Ron Baron is the president and chief executive officer of The capital Barona company he founded in 1982. Baron has 52 years of research experience.

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