Letter from Ron | Q1 2025

Letter from Ron

May 2, 2025 | Download PDF

"Over more than four decades managing money, Ron Baron has heard all the advice. Diversify. Cut Losers. Let valuation guide you. He’s taken virtually none of it and has achieved a record of investment success that’s the envy of Wall Street. His one rule: Buy a handful of stocks and hold them- almost no matter what.” Bloomberg. Vildana Hajric and Denitsa Tsekova. November 15, 2024.

Also, according to Bloomberg, Baron Partners Fund is the only U.S. equity mutual fund to outperform the QQQ ETF for the past 5-, 10-, and 15-year periods. Today, Baron Partners Fund remains the only fund…of about 2,600 such funds...to beat the QQQ ETF over the past 15 years.

Ron's always been more of a bold, colorful optimist than a soup can kind of a guy!

Mission: Changing Lives

Baron’s Mission is to change the lives of its middle-class clients and our employees...and to help our institutional clients exceed their hurdle rates of return.

Ron Algorithm.

1. Invest in People

Baron invests in Awesome People...like Elon Musk...well, not exactly like Elon Musk...but you get the idea.

It is not difficult to build a great prototype. It is very difficult to innovate and manufacture exceptional product at scale. In the current unsettled tariff and trade environment that is disrupting supply chains, with manufacturing increasingly autonomous and digitized, it has become even harder. We met Elon in 2010...began to study his businesses then... and have been investing in him…and the extraordinary people with whom he works…and the first principles business culture he has created…since 2014. “What took you so long?” he once asked me on stage at The Met at an annual Baron Conference. During the entire 15-year period we have known Elon, he has been focused on vertical integration and localization of supply chain. This for greater efficiency...to speed production...and because controlling as much of your supply chain as possible reduces risk. Talk about vision! 84% of Elon’s supply chain is “localized.” Toyota’s much admired supply chain is only 27% localized!

In the April 22, 2025 Tesla quarterly earnings call for analysts, Elon described his current electric vehicle automobile production line as the fastest in the world. Tesla now has the capacity to produce a car every 35 seconds! According to Musk’s xAi’s Grok 3 large language model in which Baron is a significant investor, specific cycle times to produce one vehicle for the automobile industry were typically in the range of 60-90 seconds in the most advanced factories. pre Tesla’s innovations! Those included GM, Toyota, and VW factories. Elon noted that with his new “boxed” production facilities for lower cost autonomous robotaxis, Tesla will produce a car every 5 seconds! During the next two years, Elon expects to have produced and sold more than 10 million vehicles with autonomous capabilities...achieving unusually safe and convenient transportation service. and, we think, enormous recurring profits.

Scott Pelley: “When SpaceX had that third Falcon rocket flight failure in a row, did you think, ‘I need to pack this in?’” Elon Musk: “Never.” Scott Pelley: “Why not?” Elon Musk. “I don’t ever give up. I mean I’d have to be dead or incapacitated.” CBS. Sixty Minutes. 2012.

Baron invests in exceptional executives...I believe no one more brilliant than the physicist/ engineer/businessman Elon whose manufacturing skills and vision are distinguishing. I have lots of great stories about so many...but clearly none as colorful as Elon...whom I think of not as a Rockefeller or Ford but as the Leonardo DaVinci of executives.

2. Question Everything

Baron accepts nothing at face value.

I graduated in 1957 from Wanamassa Grammar School’s eighth grade. Wanamassa is now and was then a small village adjacent to the 25,000 population Asbury Park, New Jersey beach town. In 1957, Wanamassa had about 60 students per grade. We were divided into three classrooms. The student population in Wanamassa was all white with a significant percentage of its students children of doctors, lawyers, small business owners, and Jewish engineers who worked for the Army at Ft. Monmouth. On graduation day, our guidance counselor, Mr. Robert McKee, spoke with my class.

“You are about to go into the real world,” he told us. “Asbury Park High School is a lot different than Wanamassa. There are 600 students per grade, 2,400 students, overall. Its student body is diverse. “My advice is to be skeptical about everything. Believe nothing that you hear! Half of what you see!” I was then only 14! But his words were so jarring and memorable that they ultimately became a core foundational principle of the Baron investment business I founded in 1982.

“Question Everything.” To me, the words mean, take nothing for granted. Make decisions based on your personal experience and knowledge. What you have learned from your research. Not on advice someone gives you. The only way you will make great investment returns is if your decisions are based on your understanding of business opportunity…competitive advantage… and what a business can become. There are no shortcuts. You cannot rely on others.

3. OWN IT!

Baron invests in businesses that grow faster than inflation...a lot faster...that’s the key....We are NOT a “macro” hedge fund trader...

A 4% to 5% annual inflation rate in America is not just a recent phenomenon… Further, we believe you should continue to expect prices of nearly everything you purchase to double about every 14-15 years! As they have during my entire 81-year lifetime. This is regardless of what government officials tell us about their 2% annual inflation objectives. Further, a 4% to 5% annual inflation American economic model works. The U.S., with just 4% of Planet Earth’s population, produces approximately 30% of its GDP!

In 1966, I worked as a Chemical Coatings Patent Examiner during the days at the U.S. Patent Office, while attending George Washington University Law School at night for seven semesters on partial scholarship. I resigned my PO position in 1969 two days after my 26th birthday since I was then no longer subject to the Vietnam War draft. So, one semester short of law school graduation, and $15,000 in debt, in the Summer of ‘69, I headed to New York to apply for an analyst position on Wall Street...and to live in a high school friend’s basement unemployed for three months.

My annual P.O. salary in 1966 had been $7,729. ($138,000 in 2025 Inflation adjusted dollars, 5.2% CAGR). After living in the basement of a home in Rock Creek Park, D.C. for a year…something about me and basements I suppose…I moved to a “luxurious” $110 rent per month garden apartment in Arlington, VA. My new apartment overlooked the Iwo Jima Memorial and across the Potomac, the Kennedy Center, Washington Monument, and Jefferson Memorial. Since I rarely paid my rent on time, almost every month there was an eviction notice pasted on my door...which I ripped up since I believed they were bluffing and, living paycheck to paycheck, I was only a few days late anyway.

At the time, I wanted to purchase a beautiful Eames lounge chair and ottoman at The Door Store in Georgetown. The Eames chair’s highly engineered, polished rosewood frame and black leather cushions made it comfortable and classic luxury....but its $600 price tag meant it was nearly unattainable by me. Miraculously, somehow I managed to save the $600 needed and purchased the chair and ottoman. The current cost of that Eames chair? $6,925!!! In 2025 inflation adjusted dollars. 59 years. Nearly 3 1/2 doubles. 4.7% CAGR. You gotta OWN things. A home...stocks...art...a business... land...an Eames lounge chair... Dollars are not a “store of value.” That’s the lesson.

4. Exceptional Takes Time

Baron invests in the careers and character of our awesome employees...and in exceptional business executives...in the 43 years since our Founding...Baron has never had a layoff. NOT ONE!

We try to invest in talented executives whose character I admire. There are so many. Among the most prominent was Jay Pritzker, Hyatt Hotel’s Chairman in 1979. He was among the most important business people who helped me in the 1970s at the start of my career. Jay told me lots of stories and had innumerable maxims. “If you need a contract to enforce an agreement, you are doing business with the wrong person. ” and “What goes around, comes around”...are two that immediately come to mind.

“I shook your hand.” That was what Donald Zucker told me in 2020 five years after he offered to sell me a seven-acre cornfield adjoining our weekend home. When I asked him in 2020 if he was still willing to sell me that property, he replied “You missed the market, Ron. It’s now worth 50% more than it was five years ago. But I know it’s more important to you than to me and I have other investments I can make. I will sell you the land at the 2015 price!”

No agreements to represent Baron in expensive multi-year commercial real estate transactions were in writing. We agreed that the broker would describe the work he had done and the results achieved after the transaction closed and that I would then decide what was “fair and appropriate broker compensation.” There were three such instances. All three were resolved quickly and to both parties’ satisfaction.

5. Building Legacy

Legacy is about what we are building for you and your families. not about what we’ve built.

Baron Capital Perspective 
April 9, 2025 

“In the end everything will be okay. and if it’s not...it’s not the end.” John Lennon, 1980.

Baron is one of the very few mutual fund companies or any other investment firms for that matter that has outperformed its passive benchmarks. Since their respective inceptions, 16 of 19 Baron mutual funds, representing 96.6% of Baron Funds’ AUM, have outperformed their primary benchmarks and 12 Funds representing 94.3% of Baron Funds’ AUM, rank in the top 10% of their respective Morningstar categories. Eight Funds, representing 60.5% of Baron Funds’ AUM, rank in the top 5% of their categories. Baron Partners Fund is the number one performing equity mutual fund in the U.S. since its inception as a mutual fund in 2003.*

“Stocks are terrific, Ronnie. You pay 10X earnings...businesses grow....their stocks increase in value....they pay dividends ...and you don’t even have to manage the businesses.” Leon Massar. My friend Marc’s dad. Owner Massar Realty. Asbury Park. 1957.

At the Baron 2024 “Building Legacy” Investment Conference last November, I spoke about growing up in a small town near Asbury Park, New Jersey...and about the lives of my grandparents who emigrated from Europe pre-Holocaust to America... penniless and not speaking English...to escape religious persecution.. seek better lives for their families. and to own a home. As a child I often asked my dad, a U.S. Army engineer at Ft. Monmouth, “are we middle class yet?”. and when I was Bar Mitzvah in 1956 how proud he was when he answered “yes.” My dad’s salary had just reached $10,000 per year (about $160,000 in inflation adjusted 2025 dollars, 4.6% CAGR for 69 years).

My family then lived in a modest 2,000 square foot, $20,000 house ($1.5 million in present day dollars, 75X its 1955 cost, 6.3% CAGR) in West Allenhurst, New Jersey. My friend Marc’s home, designed by a Japanese architect, was a larger, really cool, modern, glass walled structure on Deal Lake. Marc’s dad owned a real estate brokerage business...amusement rides on the Asbury Park boardwalk...a motel...earned an unimaginable $100,000 per year. and purchased a new Cadillac...every year. An early lesson to me of the benefits of entrepreneurial business’ ownership...

It was from Marc’s dad, Leon, that at age 14, I first learned about the stock market. After hanging out as a freshman in a brokerage office near APHS after classes, I was able to persuade my dad, who had never invested, to open a brokerage account for me. with the $1,000 I had saved for college tuition from bar mitzvah presents...shoveling snow....caddying...cutting lawns..and other odd jobs. That was after I convinced him I could research a business. I did my homework and he let me purchase 100 shares of Monmouth County National Bank...where I had a passbook savings account...at $10 per share. I was all in with all my savings.

The Asbury Park Press printed the daily share prices of local securities in its Business Section. Every afternoon when I got home from school, after quickly scanning local high school sports scores...I turned to financial news where 15-20 local publicly traded securities were listed. Virtually every day for the next seven or eight or nine months the price of Monmouth County National Bank either was unchanged or increased a sixteenth…an eighth...or a quarter. Every day. Until it was acquired for $17 per share!!!! And my $1,000 became $1,700...enough to cover about two-thirds of my first year’s $2,500 tuition at Bucknell. “Wow. That was easy. I want to do that,” I thought. (Tuition at Bucknell is now about $67,000 per year, 27X its 1961 fee in 2025 inflation adjusted dollars, 5.1% CAGR).

Baron Capital invests for the long term principally in stocks of publicly owned growth companies...

Baron is fulfilling its MISSION to Change Lives of its individual client/investors...as well as Baron employees...while helping our institutional clients exceed their required hurdle rates of returns on capital....

Baron’s $4.5 billion investment in privately owned, but actively traded SpaceX, is an exception to our ownership of public growth companies. BOTTOM LINE...We OWN shares of growing businesses...we do NOT buy and sell stocks attempting to predict the impact on share prices of “macro” economic factors.

While tariff news and the possibility of recession dominate today’s headlines...creating market volatility...we have not changed our strategy and continue to invest in people and unique growth businesses for the long term based upon our proprietary research and process. We don’t rely on others’ opinions and advice or base decisions on current news cycles. We need to see what isn’t there. Yet. The future. And be right!! This is as we have since the founding of Baron Capital in 1982....and, we believe, the reason we’ve outperformed.

Thanks for getting me started all those years ago, Leon Massar!!!

Respectfully,

P.S. Memo to Baron portfolio managers and analysts. From Ron. March 31, 2025.

Two requests for your Baron mutual funds’ shareholder letters.

1. Please limit references to “unpredictable macro.” No one knows what will happen in the short term...and if we did there is no way to tell the impact or if it had already been anticipated. We are not traders who make macro bets. Just invest for the long term in competitively advantaged business...and outperform markets and inflation.
2. Please also avoid using terms “quality” and “high conviction” in your letters. Regard those phrases as common with little real meaning. I want you to describe why businesses in which we invest are different from competitors ...and are unique with more favorable prospects than average businesses. They grow faster. And, as much as you can please describe how our efforts to “invest in people” due to our proprietary research that “question everything” permit us to achieve “exceptional long-term returns.” That’s how we are “building legacy” and “changing lives” for our clients and employees.

Be optimistic.

“Don’t Stop Believin.” Journey.

P.P.S. Elon’s First Principles Manufacturing Algorithm.

1. Question everything.
2. Eliminate processes and parts that are “dumb.”
3. Simplify… produce faster… and lower cost.
4. Eliminate the part. The best part is no part.

Additional Must-See Resources (As of 3/31/2025)

• Baron Capital's Top 25 Holdings

• Baron Funds Performance

• Baron Funds (Institutional Shares and Benchmark Performance)

* This is a hypothetical ranking created by Baron Capital using Morningstar extended performance data and is as of 3/31/2025. As of 3/31/2025, Baron Partners Fund remains the number one performing equity mutual in the United States since its inception. There were 1,989 share classes in these nine Morningstar Categories for the period from 4/30/2003 to 3/31/2025. As of 3/31/2025, the annualized returns of the Invesco QQQ Trust were 25.61%, 19.93%, and 18.29% for the 1-, 5-, and 10-year periods, respectively. As of 3/31/2025, the annualized returns of the Invesco QQQ Trust were 6.21%, 20.51% and 16.99% for the 1-, 5-, and 10-year periods, respectively. Note, the peer group used for this analysis includes all U.S. equity share classes in Morningstar Direct domiciled in the U.S., including obsolete funds, index funds, and ETFs. The individual Morningstar Categories used for this analysis are the Morningstar Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Small Blend, Small Growth, and Small Value Categories.