In an interview on CNBC’s Squawk Box on February 15, 2017, billionaire investor Ron Baron spoke about his investment approach and favorite holdings. Baron, the founder and CEO of Baron Capital, emphasized the importance of a long-term view of investments.
Baron believes that the economy and the market tend to double in the span of ten to 12 years, and one must invest and hold for the long term to get a higher-than-expected return. In this series, we’ll take a look at Baron’s 2017 investment picks and his investment strategy.
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In 2016, the US market (SPY) (QQQ) began on a rough note, and it slowly picked up its performance by the end of the year. Increased volatility affected the market’s performance, and the Dow Jones Industrial Average Index (DJIA) (DJIA-INDEX) posted the worst start to the year, falling ~5% in January alone. Markets across the world fell in the short term for a number of reasons, including the following:
However, in the long term, global markets recovered their losses, in some ways even outperforming expectations. According to Baron, investors who hold their investments for the long term need not worry about short-term events, as markets eventually recover. Let’s look at the Dow Jones Industrial Average Index’s performance on a long-term investment horizon.
We can see in the above chart that the market has seen highs and lows during the last 20 years, eventually recovering in the timeframe of ten to 11 years. According to Baron, the market tends to provide double the return every ten years. Losses in every recession have been recuperated, and prices have reached higher levels in the period of a few years.
As we can see in the above chart, the Dow Jones Industrial Average fell ~27% to 8,341 in 2002, compared to its previous high of 11,497 in 1999. It took about a year’s time to recover its losses and posted a compound annual growth rate of ~8% to reach its next high of 13,264 in 2007.
Again, the market fell 34% following the mortgage crisis in 2008, to 8,776. The 2008 fall of ~60% was recovered by 2013, when the market fully recovered its losses and was trading at its 2007 high. The rally continued until 2015, but due to cyclical factors, it again experienced a fall due to weak global economic activity in 2015.
The trend continued until the beginning of 2016 as the energy sector saw falls in some its stocks. By the end of 2016, however, as oil prices surged, the energy sector regained its losses and turned out to be the top performer. In 2016, the DJIA had an average return of ~9% for the last nine years.
Let’s look at the reasons long-term investments tend to beat out inflation in our next article.