Feb. 15 (Bloomberg) -- Ron Baron still kicks himself for missing the chance to make billions of dollars for his investors with the founders of Home Depot Inc.
Baron, chief executive officer of Baron Capital Management Inc., sold his shares in the owner of Handy Dan hardware stores in the mid-1970s. The company was run by Arthur Blank and Bernard Marcus, who went on to start Home Depot, the world's largest home-improvement retailer, with a market value of $85 billion.
``Because I sold early, I didn't get to invest in Home Depot and make untold billions,'' Baron, 63, said in an interview from his office overlooking New York's Central Park.
Baron learned from that mistake and now sticks with stocks six times longer than other fund managers. His favorites include Wynn Resorts Ltd., the casino operator created by billionaire Steve Wynn, and Whole Foods Market Inc., the largest U.S. natural-foods grocer.
The approach has paid off. The $2.7 billion Baron Partners Fund has returned 6.4 percent in 2007, almost double that of the Standard & Poor's 500 Index, and beat the U.S. stock-market benchmark three years in a row. His biggest fund, the $6.2 billion Baron Growth Fund, has doubled the S&P 500's gains in the past five years.
The Partners Fund ranks first in the past three years among 15 market-neutral funds, which aim to profit whether stocks rise or fall, according to data tracked by Bloomberg. The Growth Fund is 10th of 53 with at least $500 million in assets that buy shares of small companies.
Keeping Turnover Low
``Most people are investing to make short-term profits,'' said Baron, whose 25-year-old firm manages $18.5 billion. ``We imagine what it will become, not what it is today.''
The Baron Growth Fund's turnover rate, the portion of its holdings that changes in a calendar year, is 15 percent, compared with 86 percent for the average fund, according to research firm Morningstar Inc. in Chicago. The Baron Partners Fund's turnover is 38 percent.
Baron, who worked at the U.S. Patent Office early in his career, has owned shares of Charles Schwab Corp., the biggest U.S. discount brokerage, since 1992 and Robert Half International Inc., a staffing company, since 1991. Schwab's stock has gained an average of about 22 percent annually in the past 15 years, twice that of the S&P 500. Robert Half has increased 28 percent yearly over the same span.
Handy Dan
Three decades ago, Baron invested in Daylin Inc., owner of California-based home-improvement chain Handy Dan, together with Kenneth Langone. He sold Daylin shares after his money doubled. Langone kept his stake.
Blank, now 64, and Marcus, 77, ran Handy Dan. After they were fired in 1978, they approached Langone, who helped them found Home Depot in Atlanta. The company went public in 1981, and its shares have surged more than 1,000-fold, according to data compiled by Bloomberg. Langone, 71, owns shares valued at almost $690 million.
``You don't benefit if you've identified a big opportunity and it starts to grow and you sell,'' said Baron, whose office is filled with valuables such as a rocking chair once owned by former President John F. Kennedy and a copy of the 1920 contract that brought Babe Ruth to the New York Yankees.
Baron gets better returns than peers with the risks he takes. The Partners Fund's Sharpe ratio is 1.55 and the Growth Fund's is 0.99, compared with 0.78 for the average U.S. diversified fund, according to Morningstar. A higher Sharpe ratio means better risk-adjusted returns. Morningstar gives the Partners Fund four stars and the Growth Fund five stars, its highest rating.
Early Wynn Investor
Baron was the third investor in Wynn Resorts, which runs casinos in Las Vegas and Macau, China. He made a private-equity investment in the company in April 2001 and bought more 18 months later when it went public at $13 a share. Wynn Resorts has soared to $103.36 through yesterday, giving the company a market value of $10.5 billion.
``There's $10 billion in profits more to be made in that property in the next 10 years,'' he said, referring to Wynn Las Vegas. ``The Macau development gets you to something like $200'' a share, he said, ``and if you're successful developing the property in Las Vegas, that gets you to $300.''
Baron is willing to stay put when a company runs into trouble. Shares of Whole Foods tumbled 23 percent, the most ever, to $46.26 on Nov. 3 after the company reduced its sales forecast for this year and said new-store openings will ``significantly'' reduce profit this year and next. The Austin, Texas-based chain opened its first store in 1980 and now operates 191. Its shares closed yesterday at $45.88.
Baron, who's roughly doubled his money since becoming a shareholder in June 2003, welcomes the expansion.
``Where they're opening up, people can't get into the stores fast enough,'' he said.
To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net .
Last Updated: February 15, 2007 12:16 EST
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