By Michael Brush
Institutional investors have been clearing out of stocks. They sold $42 billion worth in the five weeks ending Sept. 21.
That followed $51 billion in sales during the five weeks ending Sept. 7 — the biggest selling wave this year, says S&P Global Market Intelligence. Bank of America clients favored defensive names over cyclicals last week, another good contrarian signal telling us it is time be bullish and buy.
“This is a pretty good buying opportunity,” says David Baron of Baron Focused Growth Fund /zigman2/quotes/209657860/realtime BFGFX +0.37% . “Even if there is a slowdown next year, a lot of stocks are pricing in pretty draconian earnings.”
No one knows for sure what the future will bring. But Baron is worth listening to, judging by his record. His fund beats its mid-cap growth category and Morningstar U.S. mid-cap broad growth index by 14 percentage points annualized over the past five years, according to Morningstar Direct. That’s big outperformance.
The catch is that it may be a stock pickers’ market.
“Not everything is going to work together,” says Baron.
Here are three ways to deal with this.
1. You can solve this problem by leaving the driving to someone else, such as Baron. His fund gets five stars from Morningstar, the highest, and it charges 1.3% in expenses.
2. You can take a peek inside his portfolio for stock ideas. “A slowdown does not change our thesis on our stocks. Our companies continue to innovate and continue to grow,” says Baron.
3. Better yet, take the “meal for a lifetime” approach and consider what you can learn from him about investing.
I tackled the last two approaches in a recent chat with Baron about his investment approach and his biggest — and most recently purchased — positions.
Here are five key lessons that might help you improve your returns, with stock examples for each.
1. Hold concentrated positions
This one is not for everyone. A lot of investing is about managing risk, and big positions increase your risk considerably because if they go bad, you lose a lot of money. But time and again, I notice that investors who outperform often do so via large position size. (Read this other column I wrote.) Talk to a financial adviser to see if this is right for you. But Baron has little doubt when it comes to his own fund. In a world where many managers cap their portfolio exposure to single names at 2% to 3%, at Baron’s fund, over 56% of the portfolio is in eight stocks. Each of those is a 4.5%-or-more position.
The biggest concentrated position, by far, is Tesla /zigman2/quotes/203558040/composite TSLA +0.08% , at 20.4%. Baron Funds famously took a large position in Tesla before it went parabolic, and then stuck with it despite the vitriolic skepticism toward Tesla CEO Elon Musk.
Following the stock’s big move in 2020, the fund trimmed it a bit, but Baron is keeping a huge position.
“We see so much potential, we don’t want to sell,” says Baron. “Of all the companies I cover and [those] analysts come pitch to me, the company I feel the most confidence in is Tesla.”
Baron thinks the stock could still triple in less than a decade. What will get it there?
Tesla has created a strong brand with no marketing, and it has a 25% market share in electric cars, which are still in the very early stages of adoption. Only around 4% of vehicles are electric.
“People think we are going into a slowdown but demand for their cars has never been better,” he says.
Tesla delivered a million cars last year. It will deliver two million next year, and that’ll hit 20 million a year by the end of the decade, Baron predicts. Tesla produces high gross margins in the upper 20% range because cars that sell for around $50,000 cost around $36,000 to make. Baron thinks Tesla’s battery business could ultimately be as big as the car business.