Ron Baron Thinks Inflation Is Higher Than You've Been Told -- Barrons.com

Al Root

Growth investor Ron Baron believes inflation runs hotter than most people think. He has an idea about what investors should do with that information.

At Friday's 31st annual Baron Investment Conference at New York City's Lincoln Center, the firm included a handout "Inflation According to Ron Baron."

It listed price changes the Octogenarian founder of Baron Capital has experienced over the past 75-plus years for homes, cars, gasoline, college tuition, steaks, and even golf caddy fees. Inflation has averaged roughly 4.5% to 6.5% a year.

Official government statistics peg the inflation rate at about 3.5% over the same span.

The difference of two percentage points matters a lot. At 3.5% annually, Ron Baron's New Jersey childhood home which cost $5,000 in 1948 should cost about $70,000 today. It costs about $575,000.

Maybe Baron's life or regional inflation accounts for some of the difference. Perhaps, but there aren't a lot of $70,000 starter homes in the U.S.

A bigger reason is how the government calculates its inflation statistics. Government inflation counters adjust for quality. A 2024 house has a lot of advantages over a 1948 house, including energy-efficient windows, central heating and air conditioning, microwave ovens, and a host of other things that weren't around in 1948.

Still, the official inflation feels a little low. Average annual U.S. household income in 1948 was about $3,200. Baron's home was less than two times the average income. Today, an average U.S. home costs more than $400,000, about five times the average household income.

"I don't predict wars, I don't predict Bitcoin, I don't predict currency prices, I don't predict whose going to become president," said Baron on Friday. "The only thing I predict is inflation...everything doubles in price about every 14 or 15 years."

One conclusion from Baron's inflation reality? People must invest to keep their purchasing power from slipping away over time.

It's sound advice. The S&P 500 has gained almost 10% a year on average since 1982, before the impact of dividends.

He prefers investing in growth companies. Baron Capital's top five ideas currently are Tesla, SpaceX, insurer Arch Capital, technology research firm Gartner, and real estate services provider CoStar. Those five account for about 27% of the firms total assets.

SpaceX isn't publicly traded, but Baron has invested in the company since 2017. Tesla remains the first largest position accounting for about 8.6% of total assets.

Tesla stock has been "acting like a yo-yo" in recent years, Baron says. There is a reason, though. "They're reinvesting in their business...penalizing current profitability to become a much bigger business in the future."

Tesla is worth about $1 trillion today. Baron believes it will be worth $3 trillion to $5 trillion in 10 years. He's optimistic about the car business and Tesla's other nascent businesses including the humanlike robots Tesla plans to sell in the coming years.

Tesla stock added 3.1% on Friday while the S&P 500 fell 1.3%. The Baron Conference probably didn't create the outperformance. Tesla shares have been volatile since the Nov. 5 election. Through Friday trading, Tesla stock was up 29% this year and about 28% since the election.

Write to Al Root at allen.root@dowjones.com

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November 17, 2024 12:34 ET (17:34 GMT)

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