Ever since John Bogle, founder of the Vanguard Group of Funds, created the first index fund in 1975, investors have debated whether they should invest in a no-load, low-cost index fund like the S&P 500 or an actively managed mutual fund, questions Mark Skousen, editor of Forecasts & Strategies.
Over the years, supporters of the Efficient Market Hypothesis have argued in favor of index investing. They argue that it’s difficult, if not impossible, to beat the averages over time. Buying low and selling high is easier said than done. Moreover, active traders face commissions, bid-ask spreads and taxes.
Academic studies largely support the indexing approach. Over two-thirds of money managers and mutual funds underperform the markets over any 10-year period. Active fund managers can beat the market once in a while, but over long periods of time, they can’t keep up.
As Jesse Livermore says, “You can win a horse race, but you can’t beat the races.” As a result, index investing has become more and more popular. Today, the Vanguard S&P 500 Index Fund and other index funds have more than $1 trillion invested.
In our portfolio, Ron Baron has come to the rescue. Baron Partners Fund (BPTRX) and the more conventional Baron Growth Fund (BGRFX) is a more conventional fund are both up sharply this year.
Both funds are managed by billionaire Ron Baron, president and founder of the Baron Capital group of no load mutual funds. I attend his annual Baron Investment Conference each year in Lincoln Center, New York (sadly canceled this year due to the lockdown).
Ron Baron isn’t your typical activist fund manager. He doesn’t buy and sell stocks and engage in a lot of turnover, which is costly. He’s actually a buy-and-hold investor, not unlike the S&P 500.
He doesn’t try to time the market, although he will use bear markets to buy well-managed growth companies. His motto is, “I invest in people, not businesses.” The difference is that he is selective in the stocks he buys. In the Baron Partners Fund, he focuses on high growth stocks like Tesla (TSLA).
Baron explained, “The reason the stock-market index goes up 6% or 7% or 8% a year is business grows at that rate. But the reason we have done better than that, historically, is we have bought businesses that grow at closer to 15%.”
As a result, he has consistently beaten the market over the long term. Granted, his funds underperform every once in a while. No one consistently beats the market every year.
One caveat: If you decide to invest in a Baron fund, plan to stay invested, even during bear markets. If you sell, you won’t be welcomed back. You have to be like Ron Baron — a long-term investor.
