Why Ron Baron Is Sweet on Stocks

Where the billionaire mutual fund manager is placing his bets for the years ahead.

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Ron Baron is a passionate bull. The billionaire mutual fund manager—tied at No. 311 on the Forbes 400 list of the richest people in the United States, with an estimated $1.5 billion—made his name as a stock picker at the helm of New York-based Baron Capital, which he founded in 1982. When Baron finds a company and a management team he likes, he sticks with it, a philosophy that has guided his team to invest early in a number of successful businesses such as Wynn Resorts, Ralph Lauren, and Under Armour, and has contributed to the long-term track record of his family of mutual funds.

While performance at several of them has slipped the past few years, Baron Growth Fund, which he has managed since 1994, has returned 8.7 percent annually for investors over the past 15 years. Baron, 69, earned a bachelor's degree in chemistry in 1965, attended law school at George Washington University, and worked for several years as a patent examiner before turning to investing full-time. He recently spoke with U.S. News about why he's so bullish on stocks when many are skittish, and where he's placing bets for the years ahead. Edited excerpts:

[Read: The 10 Most Popular Mutual Funds of 2012.]

You've said stocks are undervalued. What's your assessment of the markets?

Are stocks undervalued? Yes. Are stocks a good place for investors to be? Yes. One important reason is that they're so cheap and you've just gone through the worst 13 years in the United States' history. Of course, the reason the stock market has been so bad for the past 13 years is that it had been so good in the 1990s.

Normally the stock market trades between 10 and 20 times earnings, and the median is 15½. Since 1999, what's happened is that the multiple has fallen from 30-some-odd times earnings—which is the highest it's ever been—to 13½ or 13.75, below the median. Now what's going to happen is that if businesses can continue to grow, you should be able to make a return commensurate with that growth going forward.

How might broader economic concerns, like the debt problems in Europe and the fiscal cliff in the United States, have an impact?

Governments not just here but all around the world have been in a concerted effort to say that they're going to make sure that the economies don't crash, don't collapse, don't have a depression. [But] what they're doing is they're devaluing your money. Inflation is what is taking away the value of your currency. What people have to realize is that stocks are a way that you can protect yourself against inflation. Everyone's afraid to invest. They're afraid of everything they read in the newspaper about what it's going to cost to expand their business and healthcare costs and taxes. There's tremendous uncertainty. I think that stocks are a way you can protect yourself. It's foolish to try to trade news and expect to be successful. Read the newspaper all the time, and you'll never want to buy stocks.

So investors should be optimistic?

Yes. They should be incredibly optimistic right now. When I was in law school … my uncle gave me a book to read with the premise that if news was really bad, you're supposed to be buying, and if news was really good, you're supposed to be selling, because the news gets reflected in stock prices.

That's the way you're trained to think on Wall Street. When something really bad happens, you're trained to look for opportunity. When something really good happens, you're trained to think, well, gee, maybe it's reflected in stock prices. And if in 1999 you were watching what was going on with the Internet bubble, if you had some basis for examining businesses and studying them and valuing them, you wouldn't have wanted to invest in those businesses even if you thought they were changing the world, because the prices weren't reflecting a value.

And right now, think about businesses and the opportunities they have, and the balance sheets they have, and how sooner or later there's going to be a change in policy where they're going to give people who have all this cash incentives to invest and create jobs. I'm optimistic. I think that as soon as the dialogue becomes more positive, that's going to be positive for the economy. So I'm bullish.