Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: their processes, challenges and philosophies and security selection. I'm David Cohne,
Speaker 1: i lead mutual fund and active research at Bloomberg Intelligence.
Speaker 1: Today my co host is Michael Casper, us small cap
Speaker 1: and sector strategists at Bloomberg Intelligence. Mike, thanks for joining
Speaker 1: me today.
Speaker 2: Thank you, David.
Speaker 3: So you wrote an interesting.
Speaker 1: Note recently on earnings fundamentals and current rally. Can you
Speaker 1: provide no review of what earnings fundamentals are telling us
Speaker 1: about the current bullmarket rally.
Speaker 2: Yeah, so, at least for the S and P five
Speaker 2: hundred in the second quarter, it's almost like as if
Speaker 2: Tariff's never happened. So if you went back to the
Speaker 2: January estimate for the second quarter, it was about nine percent.
Speaker 2: They cut that all the way down to two point
Speaker 2: eight percent for two Q and what we ended up
Speaker 2: with was a little over ten percent, So pretty much
Speaker 2: all that tariff draw down inconsensus estimates gone, at least
Speaker 2: for the second quarter. Back half estimates still a little
Speaker 2: bit weaker than they were at the beginning of the year.
Speaker 2: About half. We're looking at about seven percent growth for
Speaker 2: the second half, But again the trend has been towards
Speaker 2: beats for the S and P five hundred, and we
Speaker 2: did a recent note on earning signals for stock prices
Speaker 2: and what that might mean for equities going forward, And
Speaker 2: what we're really seeing is a lot of the early
Speaker 2: year concerns start to clear up. Right, So the bar
Speaker 2: was incredibly high for twenty twenty five going into the year,
Speaker 2: that again has come down considerably, making it a little
Speaker 2: bit easier for the S and P five hundred to
Speaker 2: beat subsequent quarters. The issue, I would say, or at
Speaker 2: least the risk on the horizon, is the twenty twenty
Speaker 2: six bar, which is well over ten percent for each
Speaker 2: of the three quarters that we have clarity on the
Speaker 2: last time that we've had that was twenty twenty one
Speaker 2: and twenty eighteen, so one was post tax reform, the
Speaker 2: other was post COVID recovery. So it's quite unusual to
Speaker 2: have a ten percent growth backdrop without some kind of
Speaker 2: recovery or fiscal policy coming through to help stocks. But
Speaker 2: the other signs that we're watching that that have been
Speaker 2: more constructive for socks. Earnings breadth has improved. Cyclical minus
Speaker 2: defensive sector earnings and revenue better better than cyclicals are
Speaker 2: looking better than defensives on that end. Revision momentum very positive,
Speaker 2: and the margin outlook has been improving despite all the
Speaker 2: terrorfs that have come down the pipe. So things looking
Speaker 2: a lot better on the earnings front than they are
Speaker 2: at the start of twenty five, at least after the
Speaker 2: liberation to announcement.
Speaker 1: Thank you great, well, something we can watch out for.
Speaker 1: But I'd like to seg into our today's guest to
Speaker 1: the podcast. Michael Lippert is the vice president and head
Speaker 1: of Technology Research at Baron Capital and the portfolio manager
Speaker 1: for the Baron Opportunity Fund ticker bioi X and the
Speaker 1: Baron Technology Fund ticker bt e c X. Michael, thank
Speaker 1: you for joining us today.
Speaker 3: Thanks for having me.
Speaker 1: So let's start with the philosophy behind your investment decisions.
Speaker 1: How would you define the Barren philosophy.
Speaker 3: Yeah, we've been in business for over forty years, founded
Speaker 3: by Ron Baron, who's well known, and we are quint
Speaker 3: essential long term investors. I joke with some people and
Speaker 3: I first joined the industry. I switched careers later on
Speaker 3: from being a lawyer to be an investor, and people
Speaker 3: give you books. So I got a book on Warren Buffett,
Speaker 3: and when I read Warren Buffett, who's famously a value manager,
Speaker 3: I said, wow, this person sounds like just like Ron,
Speaker 3: even though we're considered to be a growth manager. Why
Speaker 3: we invest in businesses, not just stocks, and we try
Speaker 3: to find great businesses run by top entrepreneurs that are
Speaker 3: simply going to grow for a very very long time.
Speaker 3: You know, there's the same and the short term, you know,
Speaker 3: the market is a voting machine, and the long term
Speaker 3: it's a weighing machine. We effectively believe in that right
Speaker 3: over the long term, the market will get fat, sorry,
Speaker 3: stocks will get fat on revenues and profits. You put
Speaker 3: them on a scale, you put a reasonable multiple on them,
Speaker 3: because you know, multiple in the short term is sentiment driven.
Speaker 3: And if you find companies that can really get fat,
Speaker 3: they're going to create great value. And if you look
Speaker 3: over the last you know, let's just call it whatever,
Speaker 3: forty fifty years, the Internet age. You know, the Googles,
Speaker 3: the Microsofts, the Apples of the world. They basically just
Speaker 3: kept going and going and going. And so we invest
Speaker 3: in what we call secular growth trends or themes. These
Speaker 3: are things that are almost undeniable Internet cloud computing. Try
Speaker 3: to find the companies that have competitive advantages so they're
Speaker 3: going to take market share among these trends. And just
Speaker 3: one last point. One of the things we look at
Speaker 3: we call it second or third acts, you know, second
Speaker 3: or third s curves or multiple tams. Companies that can
Speaker 3: do more than one thing, go from a single product
Speaker 3: or service company to multiple product services. All come means
Speaker 3: want to be what's called, you know, a platform company.
Speaker 3: And you know, maybe the most famous one would be Amazon,
Speaker 3: which started life as a you know, online bookseller, and
Speaker 3: we know all the things that Amazon is today including aws,
Speaker 3: probably its most valuable business.
Speaker 1: So when you're looking at these secular trends, how do
Speaker 1: you define and validate you know that an emerging theme
Speaker 1: is truly durable?
Speaker 3: Yeah, I mean it's it's honestly just just research. I
Speaker 3: wish I could say something magic. We have a team
Speaker 3: of over twenty you know, research professionals. Our analysts become
Speaker 3: focused on and you know, seek to become experts in
Speaker 3: different industries. Some industries are so complicated and so diverse
Speaker 3: that we have multiple people on them So for example,
Speaker 3: right now on AI, we have a full what we
Speaker 3: call AI working group, people from all over the firm.
Speaker 3: And when I think about a theme or a trend,
Speaker 3: it's not dissimilar from a company when you learn in
Speaker 3: business school. People can't maybe can't see the podcast, but
Speaker 3: you know, things follow an S curve and you want
Speaker 3: things to inflect, you know, upwards at some point, and
Speaker 3: so we spend a lot of time trying to find,
Speaker 3: you know, that inflection point. And as I was thinking
Speaker 3: about our podcast this morning, like we're not timers, so
Speaker 3: we don't have to exactly get it right. Oftentimes we
Speaker 3: maybe a little bit early before the inflection point. Sometimes
Speaker 3: we're late. However, and if you think about the inflection,
Speaker 3: that's deep part of the growth of a big trend.
Speaker 3: Cloud computing can last seriously twenty years. If you miss
Speaker 3: the beginning, you can still participate in a long time.
Speaker 3: So we really look at, you know, what's the driver
Speaker 3: of that trend, what is the market backdrop, what's the
Speaker 3: traction that it's getting, you know, what's the size of
Speaker 3: that opportunity. You know even what it will take in
Speaker 3: terms of human behavior, whether it's enterprise or consumer behavior
Speaker 3: to get adoption, and we look for what I call
Speaker 3: proof points, actual evidence that something you know, is getting legs.
Speaker 3: And so you know, for example, during COVID, there were
Speaker 3: lots of themes that people got all excited about, you
Speaker 3: know that some of them never really picked up and
Speaker 3: amounted into anything, but we we try to invest in
Speaker 3: the ones that are you know, believe are real. I'm
Speaker 3: sure we'll talk about AI and of course, you know,
Speaker 3: we're now not even three years into it, we're obviously
Speaker 3: convinced that is a real major theme and will impact
Speaker 3: you know, every industry in the world for the next
Speaker 3: at least twenty years will have an AI two dot
Speaker 3: oh at some point of course. So you know, you.
Speaker 1: Mentioned some of the stuff that doesn't stick. So I
Speaker 1: kind of want to follow up with, you know, how
Speaker 1: what is it exactly that you're looking at that lets
Speaker 1: you distinguish between short term bads and you know, something
Speaker 1: that's going to be a lot longer term.
Speaker 3: Yeah, I mean, I would say there was lots of
Speaker 3: talk about, you know, whether blockchain technology would be more
Speaker 3: than just simply you know, supporting crypto, all the different
Speaker 3: uses of it. I would say during COVID it was
Speaker 3: a big move on NFTs and things like that. Even
Speaker 3: when we think about crypto trading, you know, we looked
Speaker 3: at some companies that were going public, and while we
Speaker 3: were definitely believers that crypto trading, for example, you know,
Speaker 3: would expand across the market and you know, lots of
Speaker 3: self directed investors would do crypto, we didn't know that
Speaker 3: any one particular company had a competitive advantage. We looked
Speaker 3: at trading historically and other than like the CME for example,
Speaker 3: that would have a future that was you know, really
Speaker 3: developed proprietary to them. You know, everybody had trading, so
Speaker 3: we looked at things like that. But again there's no
Speaker 3: easy way. It is honestly just doing the work. And
Speaker 3: the work for us are talking to the companies involved
Speaker 3: that we're looking at that are you know, the leader's
Speaker 3: pioneers for example, of a product or service, talking to
Speaker 3: their competitive set, talking to customers. Of course, you can
Speaker 3: do lots of polling and there's lots of data when
Speaker 3: it comes to a consumer. With enterprises, again you can
Speaker 3: go out and talk to them and again it's just
Speaker 3: it's candidly looking for real proof points of adoption people
Speaker 3: actually using a product or service and truly getting value
Speaker 3: out of it, and we try to measure that and
Speaker 3: so again I'm at a high level that but that
Speaker 3: is what we try to do.
Speaker 1: So if we even take a set back further, you know,
Speaker 1: we've talked about what you're looking for. What does the
Speaker 1: research process look in practice? You know, where are these
Speaker 1: ideas coming from? Is the analysts? You know, things happening
Speaker 1: in the industry, even your own views of what's going on.
Speaker 3: Yeah, I mean, the true answer, David is all the above.
Speaker 3: You know, people always ask me, you know, how you
Speaker 3: do something. I say, listen, if we're starting the firm today,
Speaker 3: of course my answer would be different. But We've been
Speaker 3: in business for forty something years. I've been with Baron
Speaker 3: for almost twenty five years now. You said, one of
Speaker 3: my titles is head of Tech Research, and I'm always
Speaker 3: asked what that means. It is effectively player coach. Right,
Speaker 3: I'm in the field, on the field with the analysts,
Speaker 3: but I'm a little you know, a little bit coaching
Speaker 3: to make sure we're focused on the right things. Even
Speaker 3: focused on the right things right now. Is not just
Speaker 3: the right answers, of course, you want to get the
Speaker 3: right answers, but the process of making sure you're asking
Speaker 3: the right questions all of the things That means for
Speaker 3: our research. I'm trying to make sure collaboration is not
Speaker 3: just a word that we put on a slide deck,
Speaker 3: but actually happens in practice. Every firm says collaboration, you
Speaker 3: have to actually really really do it. So all of
Speaker 3: these things are just the research. And so when it
Speaker 3: comes to a given sector or industry, for example, it's
Speaker 3: rare that we're surprised because we have it quote unquote
Speaker 3: mapped out. That's my terminology. So we'll know the public companies,
Speaker 3: for example, in software, we'll know the small, medium sized,
Speaker 3: and large cap companies. We don't always think of them
Speaker 3: in terms of market cap, but we think of them
Speaker 3: what I call the development curve of how developed they
Speaker 3: are as a company. Are they emerging company, are they
Speaker 3: approven company? Are they a prospect or they im mature company.
Speaker 3: We'll then divide up a given sector or industry by
Speaker 3: different verticals and we have it mapped out. And we
Speaker 3: also do a lot of work. Even though we don't
Speaker 3: do a lot of private investing, we do a lot
Speaker 3: of work meeting the private companies. Two reasons one to
Speaker 3: get much smarter because those companies tend to be the
Speaker 3: disruptors of the public companies. So to get much smarter
Speaker 3: on that, we just had to trip out to the
Speaker 3: West Coast and we met with lots and lots of
Speaker 3: private companies. I can tell you more about that then,
Speaker 3: of course, to meet these companies before they go public,
Speaker 3: so that we know them really well when they become
Speaker 3: a public company, and hopefully that we will get, you know,
Speaker 3: because of the management direction, not because of a sell
Speaker 3: side firm, a good allocation in the company that we
Speaker 3: really want to invest in, because we've known them for
Speaker 3: years and they see that we at Baron have made
Speaker 3: the investment. And our reputation, of course when it comes
Speaker 3: to private companies and IPOs is that we are long
Speaker 3: term investors. So management teams would like Baron to be
Speaker 3: involved because we're not going to you know, trade their
Speaker 3: stock on a pop for example.
Speaker 1: So one of the things you mentioned earlier is, you know,
Speaker 1: since it's long term, you're not afraid of missing the
Speaker 1: beginning of something. But if you had the I guess
Speaker 1: the choice, would you prefer to enter a theme early
Speaker 1: before the business model has really been proven or kind
Speaker 1: of wait till the company's actually demonstrated viability.
Speaker 3: Yeah, we tend. Of course, we'd like to be early,
Speaker 3: right because you'll get more returns. However, we don't want
Speaker 3: to invest in something you know, is, for example, just
Speaker 3: a fad. It's okay if it's being in a sense
Speaker 3: perceived not necessarily as a fad, but that you know,
Speaker 3: someone is not. You know, there's a lot of debate
Speaker 3: about what the adoption will be. And of course our
Speaker 3: firm is well known for our investment in Tesla. My
Speaker 3: particular portfolio first invested in Tesla in twenty twelve, so
Speaker 3: we were very early on and of course even today
Speaker 3: there's debate about, you know, the adoption and what the
Speaker 3: penetration will be of electric vehicles. Back then, could you
Speaker 3: imagine there was much more debate. So we were able
Speaker 3: to enter at that stage of course, position our investment
Speaker 3: in an appropriate size. But we were early and if
Speaker 3: you really think about and you look at the chart
Speaker 3: of Tesla and Ron Barren, my boss, has talked about
Speaker 3: this a lot on TV. We owned the stock for
Speaker 3: a lot of I owned it from twenty twelve to
Speaker 3: twenty fourteen and got a triple and then the stock
Speaker 3: went flat for a number of years before it inflected
Speaker 3: up again, and so it was long term investors again
Speaker 3: running a portfolio, we can have some stocks that go flat.
Speaker 3: Another company that we were early on in frankly Envidio,
Speaker 3: we invested in my portfolio believe it was twenty seventeen
Speaker 3: or twenty eighteen. In Nvidia, we did not invest because
Speaker 3: it was a you know, a gaming chip company. We
Speaker 3: were investing against the AI m L back then machine
Speaker 3: learning opportunity. I laughed because we were wrong. If you
Speaker 3: look at our initial model and we thought the you know,
Speaker 3: AI penetration would be for Nvidia. I mean, we were
Speaker 3: ordered of magnitudes too low, and Nvidia just went like
Speaker 3: this for a long long time before the jet cheap
Speaker 3: PT inflection of course made it a great stock, and
Speaker 3: I think it's the best performing investment in my portfolios history.
Speaker 3: We had a full day where a team of Baron
Speaker 3: met with Jensen in twenty eighteen. We talked about AIML
Speaker 3: the entire time, and to show our investors that we
Speaker 3: were early in the kind of work that we did.
Speaker 3: I put literally put quotes from my notes into one
Speaker 3: of my quarter letters to show that what we were
Speaker 3: talking when Jensen Wang in twenty eighteen. Let's be real,
Speaker 3: four plus years. I think I can't remember a spring
Speaker 3: or fall, you know, before the chet cheap pt moment
Speaker 3: of you know, November twenty two.
Speaker 1: So you know, you just talked about Tesla. If we
Speaker 1: go back before the Navidia part, but you're talking about
Speaker 1: Tesla being flat for a few years. What happens if
Speaker 1: you know one of the companies you're invested in actually
Speaker 1: underperforms for a while. How do you keep conviction in
Speaker 1: that company when you you know, just knowing that it's
Speaker 1: something in the long term.
Speaker 3: Listen, no portfolio. It's unrealistic to almost think that every
Speaker 3: stock in your portfolio is going to perform at the
Speaker 3: same time. That's why I write a portfolio. You want
Speaker 3: to have diverse exposures for your investors. Some stocks will work,
Speaker 3: some stocks won't work. We're not timers at Baron. We're
Speaker 3: not market timers. We're not individual stock timers. Like colleagues
Speaker 3: will joke at me sometime I'll read the night before
Speaker 3: news and I'll tell people what I think the market
Speaker 3: is going to do that couldn't be completely wrong. So
Speaker 3: I'm definitely not a timer. When a stock is not working,
Speaker 3: of course, the market is telling you something. We try
Speaker 3: to understand what the market is telling us, and we
Speaker 3: try to test that through our research. If the market
Speaker 3: is you know, simply myopic or short term, that is
Speaker 3: one thing, and we could wait. If the market, you know,
Speaker 3: is telling us. And by telling us, I mean doing
Speaker 3: that research right, understanding why a stock is underperforming in
Speaker 3: the market, obviously, talking to the company, all the other
Speaker 3: things that we do. If it's just adoption is taken
Speaker 3: a little bit longer, there's been a change in the
Speaker 3: competitive environment and industry. Some of these things are real,
Speaker 3: which may cause us to have a different view of
Speaker 3: the investment. Less in the investment, sell the investment. And
Speaker 3: of course if a stock hasn't performed and other stocks
Speaker 3: have performed well and the long term return opportunity is
Speaker 3: more attractive, and we can confirm all the things that
Speaker 3: we have in our investment fieces that will let you
Speaker 3: know this company again be a company that's going to
Speaker 3: get fat ultimately on profits, will increase that investment. And
Speaker 3: so I won't say that both things have happened in
Speaker 3: my career, hopefully, you know, I believe we've been more
Speaker 3: on the right side where stocks haven't worked, and we've
Speaker 3: been right and they eventually work, but there's no doubt
Speaker 3: that there have been times that stocks haven't worked. We
Speaker 3: drilled down and we ultimately decided to exit that company
Speaker 3: because you know, when we exit, if you want to ask,
Speaker 3: it is honestly not because stocks are going against us
Speaker 3: in the market, because we conclude, based on our own
Speaker 3: research analysis, that we've made a mistake or there's just
Speaker 3: literally something better for us to invest in, even though
Speaker 3: it may not be a mistake, there's just something better,
Speaker 3: but it's never because of the trading activity.
Speaker 1: Okay, makes sense. I've actually just got one more question.
Speaker 1: I know before Mike's got a few market more related questions.
Speaker 1: But you know one other thing you like, I want
Speaker 1: to go back to Tesla for just a second. So
Speaker 1: if we talk about Elon, you know, you also mentioned SpaceX.
Speaker 1: So one of the things I've always trying to figure
Speaker 1: out is when you have exposure to a private company
Speaker 1: or you know, a structured entity, how do you evaluate
Speaker 1: those and kind of integrate those into your valuation and
Speaker 1: risk frameworks when information is obviously not as readily available
Speaker 1: as a public company.
Speaker 3: At Baron, we have an investment in SpaceX and the
Speaker 3: Baron Opportunity Fund. SpaceX is a approximately a four and
Speaker 3: a half percent position in the portfolio. Depending on what
Speaker 3: happens in the market, it could go down or up.
Speaker 3: We value it. We have a valuation committee, for example,
Speaker 3: that does the work in terms of how we value
Speaker 3: it in our mutual funds. There's a fairly active secondary
Speaker 3: market that certainly influences our valuation for the committee. However,
Speaker 3: as investors, we research and value SpaceX exactly the same
Speaker 3: way that we research and value a public company. And frankly,
Speaker 3: private companies often give you more information than you are
Speaker 3: able to get more exposure to management because you don't
Speaker 3: have some of the same reg fd issues. So we've
Speaker 3: been investors in SpaceX for many, many years. I wish
Speaker 3: I could recall the exact time period. I believe we
Speaker 3: know the company very very well, just like we might
Speaker 3: have a model on Tesla or Microsoft or Broadcom or Shopify.
Speaker 3: Of course, we have a model on SpaceX. It's not
Speaker 3: marked to market every single day in the market, but
Speaker 3: we as investors of valuate it, you know, honestly, exactly
Speaker 3: the same way. Some of the different risks, of course,
Speaker 3: are liquidity risks. There's no doubt about that, and that
Speaker 3: will inform maybe the position size we have of the company.
Speaker 3: One of the things with a company like SpaceX, we
Speaker 3: have no intent at Baron to use these secondary markets.
Speaker 3: But there's you know, there is liquidity in SpaceX today
Speaker 3: that is a little and that's evolved in the private markets.
Speaker 3: That's a little bit different than you know, what a
Speaker 3: private company might have been ten years ago. But again
Speaker 3: for all listeners there right now, the way we see
Speaker 3: the opportunities for SpaceX and certainly their differentiation whether it's
Speaker 3: in satellite broadband or in the launch business, we intend
Speaker 3: to be very long term holders of SpaceX.
Speaker 2: So cloud computing and software as a service adoption are maturing,
Speaker 2: Where do you see the next wave of growth coming
Speaker 2: from within enterprise tech?
Speaker 3: Yeah, you know, I saw that question in there. Mike.
Speaker 3: If I call you Mike, I'm Mike too. I think
Speaker 3: that the current phase that we are in is maturing,
Speaker 3: but I think the most important thing is the next phase,
Speaker 3: right and the next phase is artificial intelligence phase of
Speaker 3: cloud computing. You know, we used to think we had
Speaker 3: three what are called hyperscalers of everyone at home or
Speaker 3: listening doesn't know what a hyperscaler is the three used
Speaker 3: to be Microsoft Age or Amazon Aws and Google Cloud compute.
Speaker 3: It's very clear from the announcements of last week we
Speaker 3: have a number four that's Oracle, and certainly we have
Speaker 3: what are called neo clouds companies like core Weave, and
Speaker 3: there's just insatiable demand for power cooling and of course
Speaker 3: compute to train and run running is what's called inference
Speaker 3: AI workload. So I think cloud computing has not matured
Speaker 3: at all, just maybe what you know CPU, you know,
Speaker 3: central processing unit dominated by the Intel five percent market
Speaker 3: share of AMD. That world has changed and we're now
Speaker 3: in the you know, AI compute, GPU compute. People call
Speaker 3: them accelerator world. So I think we're in the very
Speaker 3: early stages of that and demand is literally insatiable. I'll
Speaker 3: touch on software for a second that you can come
Speaker 3: back with a follow up. There's been an enormous debate
Speaker 3: in the market this year, you know, quote unquote is
Speaker 3: software dead. We did our own piece on that and
Speaker 3: all quarterly letters. We wrote a barren insight piece which
Speaker 3: people can take a look at, and our answer was,
Speaker 3: first of all, that's not the right question for us,
Speaker 3: at least because we don't invest in software. We try
Speaker 3: to invest in, you know, the software winners. Software is
Speaker 3: obviously facing a major challenge, a major disruption. The future
Speaker 3: of software is not simply a human being, you know,
Speaker 3: dropping down, you know, like I'm in my Excel right now,
Speaker 3: windows and things and doing something with it. Software is
Speaker 3: shifting and it was interesting. We met with a CEO
Speaker 3: last weekend and the way she put it is software
Speaker 3: is sipping from like humans doing things to just work happening.
Speaker 3: And often the work will be done by artificial intelligence,
Speaker 3: will be done by agents in conjunction with human beings.
Speaker 3: And I think more and more over time, more and
Speaker 3: more of the work we'll be done by agents by AI,
Speaker 3: and it will make you know, people that much more productive.
Speaker 3: And software has always been a productivity tool. I don't
Speaker 3: think that will change. But again, we are going through
Speaker 3: a major inflection. We are going through a major change.
Speaker 3: Some software companies will quote unquote across the chasm from
Speaker 3: the SaaS age to the AI age. If you do
Speaker 3: not do that, you will be disrupted. If you want
Speaker 3: to follow up, there's lots of things that we could
Speaker 3: talk about. What the characteristics might be of a software
Speaker 3: company that can be successful in the AI age, and
Speaker 3: I think just to put a touch on it, data
Speaker 3: is incredibly important, proprietary data or customer data that they
Speaker 3: could access and understanding basically what's called the context around
Speaker 3: users and workflows. You know a term that Volunteer has
Speaker 3: popularized called ontology. I would say they have ontology, but
Speaker 3: when we talk to lots of other companies they talk
Speaker 3: about what they're doing with the data, they talk often
Speaker 3: about context and that is basically the same thing that
Speaker 3: they're referring to with intology. I'm not putting down what
Speaker 3: volunteers doing. They're doing some really interesting stuff, but that
Speaker 3: is what people are talking about, and software companies have
Speaker 3: that they have to capitalize on that. If they do not,
Speaker 3: they will be disrupted.
Speaker 2: I'm a macro strategist at heart, so I kind of
Speaker 2: have to ask you. I know you don't do a
Speaker 2: lot of market timing stuff, but a lot of tech
Speaker 2: growth is tied to the consumer, and we might be
Speaker 2: hitting a period of economic weakness. How do you evaluate
Speaker 2: the durability of consumer driven tech themes?
Speaker 3: Yeah, we look at it honestly, you know, very carefully.
Speaker 3: We're certainly where that what we don't call the macro.
Speaker 3: You can't work in the stock market without being you know,
Speaker 3: cognizant of what's going on the macro. And this has
Speaker 3: maybe been the craziest mac rea that have experienced in
Speaker 3: my career. Like, you know, the word of the day
Speaker 3: all year long has been uncertainty. You know, you touched
Speaker 3: on the tariffs and the tariff's impact and what will
Speaker 3: happen later in the year and did this you know,
Speaker 3: was there a pull forward in consumer demand in the
Speaker 3: middle of the year before taris. We've asked lots and
Speaker 3: lots of questions on that. You know, we think about
Speaker 3: all the time. What I call secular tocyclical, you can
Speaker 3: call it a ratio. You can't calculate it, but qualitatively
Speaker 3: you could understand which businesses are more secular and therefore
Speaker 3: you know their business will be less disrupted by a
Speaker 3: weak macro. And certainly some great businesses any advertising business
Speaker 3: you know, Google or meta e commerce businesses Amazon or Shopify,
Speaker 3: and they're all macro sensitive of course, right consumers have
Speaker 3: to buy on their platforms, or consumers have to be
Speaker 3: buying so that advertisers want to want to reach consumers.
Speaker 3: So we're well aware of that. We have a lot
Speaker 3: of data on of course the macro. We know what
Speaker 3: you know comps are, you know what treat expectations are,
Speaker 3: and of course we know what valuations are, what in
Speaker 3: a sense being priced in for these companies. So we
Speaker 3: are making judgments about in a sense what exposures we
Speaker 3: want to have, and at our firm, there's no doubt
Speaker 3: we want to have exposures to get what I call
Speaker 3: secular themes. So if you think of a ratio, if
Speaker 3: we could calculate that ratio, we want to, you know,
Speaker 3: have as high as secular as cyclical ratios as we
Speaker 3: possibly can. And when it comes to cyclical companies like
Speaker 3: some of the ones I named, we're absolutely investing in
Speaker 3: the ones that we believe are are clear leaders, you know,
Speaker 3: with real strong and durable competitive advantages, so that you know,
Speaker 3: even if there is some macro weakness, usually the strong
Speaker 3: end up becoming stronger during a macro week week period.
Speaker 2: And I saw you can allocate up to thirty five
Speaker 2: percent of the assets and bt c X to non
Speaker 2: US securities. How do you evaluate global versus US tech opportunities?
Speaker 2: Are there any regional themes you're particularly interested in right now?
Speaker 3: Yeah, so that question also, and that ticker is the
Speaker 3: Barn Technology Fund, of which I'm co manager of. My
Speaker 3: colleague is named Ashra Mehra. I'm gonna put that out there.
Speaker 3: You and I co manage Baron Tech Fund. I'm the
Speaker 3: solo manager of the Baron Opportunity Fund. It is not
Speaker 3: very different, Mike. You know, we most AI e commerce
Speaker 3: for example, are certainly global, even you know, you know,
Speaker 3: great Chinese companies try to reach the US markets. So
Speaker 3: when it comes to a technology trend, we evalue it
Speaker 3: the same. There are certainly, you know, some trends go
Speaker 3: to market. You know, product or service adoption will happen
Speaker 3: in a more localized or regional manner, So we will
Speaker 3: look at that go to market, that penetration, that competitive
Speaker 3: environment in that way. Right, there are global companies, North
Speaker 3: America based companies. Obviously it could be Latin America or
Speaker 3: Asian based companies. So that part of the analysis it
Speaker 3: is certainly, you know, quite similar. You know, we may
Speaker 3: look at particular trends that you know, relate to you know,
Speaker 3: Latin American for example, to pick up an e commerce,
Speaker 3: to pick up of you know, I think neobanks are
Speaker 3: doing better in markets outside of the United States. Why,
Speaker 3: because our banking system is quite mature. We have investments
Speaker 3: in some India businesses. And you know, local commerce, for example,
Speaker 3: is a very big thing, which today in the US
Speaker 3: we might experience with door dash. There are Indian players
Speaker 3: that are doing that, and so these are there's no
Speaker 3: doubt that there are some localized themes that we look at.
Speaker 3: You know that one, for example, you know, what i'll
Speaker 3: call local commerces is one that we're looking at in India.
Speaker 2: And tech valuations are obviously pretty high in aggregate and
Speaker 2: they've dominated index returns for years. Are you worried about
Speaker 2: a possible mean reversion where other sectors start to outperform
Speaker 2: and how would that impact your strategy?
Speaker 3: Yeah, worried is a word. I'm certainly aware of it.
Speaker 3: I think about it all the time. I've done this
Speaker 3: now for twenty something years. I benefited from the period
Speaker 3: of time where tech was out of favor, like coming
Speaker 3: out of the pandemic at the end of twenty two.
Speaker 3: You could read my quarterly letters. I don't ordinarily say, wow,
Speaker 3: this is a massive buying opportunity, but I do price
Speaker 3: targets in a way where I color code them and good.
Speaker 3: The best color is green. The next best color is blue,
Speaker 3: and I put in my core letters. Things are flashing
Speaker 3: green and blue right now. Very aware of where evaluations are.
Speaker 3: Not only do we do particular company valuations, we call
Speaker 3: them peer group because that's what we started on, but
Speaker 3: they're industry based and I know exactly where, and everybody
Speaker 3: in my seat should know that. You know, because the
Speaker 3: data is available. You know where software companies have traded
Speaker 3: at over time versus growth rate, versus margins, where cloud
Speaker 3: computing companies have traded over time internet companies. So we're
Speaker 3: quite aware of that. You know, we you can graph
Speaker 3: all these things, you can look at you know, you
Speaker 3: know where you are within the range. There's no doubt
Speaker 3: that there are some, you know, certainly companies that are
Speaker 3: that are quite expensive. Honestly, we do take that into account.
Speaker 3: I'm not allowed to name particular trades, but you know,
Speaker 3: earlier this year we made a cybersecurity trade. We had
Speaker 3: a company that was a fantastic winner, but we were
Speaker 3: able to shift it into you know, that's a little
Speaker 3: bit less developed, lower market cap company that we also
Speaker 3: perceived as a winner. And basically, you know, we were
Speaker 3: trading about ten multiple points for that the company we
Speaker 3: ended up getting into ended up being acquired, so that
Speaker 3: was a nice risus. But we're not always making those trades.
Speaker 3: And when I think about it, I really don't look
Speaker 3: at I'm well aware of the one year or two
Speaker 3: year forward multiple. The question is how much money can
Speaker 3: we make over the long term? And at Baron we
Speaker 3: look in four or five year time periods and then
Speaker 3: we stack them continuously on top of each other. So
Speaker 3: how much money can I make in a four or
Speaker 3: five year time period? Basically our goal is to look
Speaker 3: for a fifteen percent annualized return. I want a little
Speaker 3: bit better than that. We know, sometimes I'm going to
Speaker 3: use my hand that stocks or sometimes you know, if
Speaker 3: you plot that line, sometimes they're above, sometimes they're below.
Speaker 3: We also look at downside risk, and downside risk is
Speaker 3: also often multiple contraction, you know, from something going on,
Speaker 3: you know with the market. Of course we had that around,
Speaker 3: you know that, you know, the tax or sorry, tariff
Speaker 3: for you know what people call liberation. To hate that
Speaker 3: term because it didn't feel so liberating to me, but
Speaker 3: you know, the tariff period, and so all of these
Speaker 3: things are taken into account in our portfolio management in
Speaker 3: terms of position sizing, what exposures you want to have
Speaker 3: in our portfolio. So it's absolutely not ignored. But to
Speaker 3: be clear to anyone at Barn Capital, you know, we're
Speaker 3: mostly focused on the long term. We want to invest
Speaker 3: in companies that we believe with the long term winners
Speaker 3: because they have durable competitive advantages. And we will not
Speaker 3: over emphasize, like you know, a meaningful short term move
Speaker 3: in the stock price if we think the long term
Speaker 3: opportunity is still very, very attractive.
Speaker 2: And what's one theme you think is really underappreciated by
Speaker 2: the market today.
Speaker 3: Wow, that's a that's an excellent question. One theme that
Speaker 3: is under appreciated, I will probably say it's talked about,
Speaker 3: but I'm not sure how appreciated is what I'll call
Speaker 3: physical AI. Physical AI can be lots and lots of forms,
Speaker 3: the ones that are you know, and lots of people's faces.
Speaker 3: Of course, are you know what Tesla calls full self driving,
Speaker 3: others called autonomous driving. I just came from San Francisco
Speaker 3: and we drove around Weymos right, and Testa is now
Speaker 3: rolling at robotaxi. I couldn't get a robotaxi because they
Speaker 3: they wouldn't let me take when I didn't sign up
Speaker 3: early enough. Of course, robotics right what Tessa's doing again
Speaker 3: with Optimists and others are but there's other things. We
Speaker 3: have a company called Somsara that we have invested in.
Speaker 3: Their ticker is IoT Internet of Things because they are
Speaker 3: trying to bring artificial intelligence to the physical world. So
Speaker 3: they you know, they're doing with vehicles, vehicle safety, vehicle telematics,
Speaker 3: but they also have a really strong growth business in
Speaker 3: all other types of physical assets that they can monitor
Speaker 3: for location. They're doing tanks for fill rates and all
Speaker 3: these other things. And they sat on their last conference
Speaker 3: call and it was in their corely letter like you
Speaker 3: can't train your models on stuff for the Internet for
Speaker 3: what we do, so it's very distinct. So I would
Speaker 3: say physical AI in all forms, not only autonomous driving
Speaker 3: and robotics for people are things that people should watch
Speaker 3: out for. I can name a lot of others. I
Speaker 3: think AI and healthcare will also be a massive theme
Speaker 3: as well. I want to put that in there.
Speaker 2: And is there an under the radar secular theme you
Speaker 2: believe can emerge as a core opportunity over the next
Speaker 2: decade or so?
Speaker 3: Hard to say, the markets. The market's you know, obviously
Speaker 3: pretty smart. The question, you know, at any point is valuation.
Speaker 3: I think a lot of the AI themes the market
Speaker 3: was uncertain. Certainly there was a scare around Deep Seek.
Speaker 3: Most of those themes are being played today. I thought
Speaker 3: you guys would ask me about Sam Altman's comment about
Speaker 3: the bubble. I think, you know, if you honestly listen
Speaker 3: to what Sam was really saying, he was saying, not
Speaker 3: all of AI is a bubble. You know, if you've
Speaker 3: seen the you know, information reports, they're going to have
Speaker 3: to raise one hundred and fifteen billion over the next
Speaker 3: I can't remember four or five years. So certainly they're
Speaker 3: not making the argument that, you know, chat ept is
Speaker 3: a bubble, but that there are probably other companies that
Speaker 3: have bubble. I don't dispute that there was some bubble somewhere.
Speaker 3: I don't know that much is missed today when we
Speaker 3: think about artificial intelligence. To be candid, it's gonna affect
Speaker 3: every area you know, of the economy, and so you know,
Speaker 3: it's going to be software, it's going to be consumer application,
Speaker 3: it's going to be the infrastructure, it's going to be
Speaker 3: the energy, infrastructure, I'm trying to think of one that
Speaker 3: I think has completely missed today. I think, honestly slower
Speaker 3: right now is probably the impact that artificial intelligence will
Speaker 3: have in healthcare. We have a few small investments are
Speaker 3: certainly very interesting private companies. It takes a little bit
Speaker 3: longer in that space because of course, you know, AI
Speaker 3: is not always you know, perfectly correct right. It's probabilistic
Speaker 3: versus what's called deterministic. In healthcare, you need to be right.
Speaker 3: So I think it'll take a little bit longer for adoption,
Speaker 3: but I think it will. It will really impact healthcare.
Speaker 3: We have some small investments there in that space, and
Speaker 3: we're watching it really really carefully.
Speaker 1: Well be something I'll watch out clar But we have
Speaker 1: to end here, unfortunately, but this was a great conversation, Michael,
Speaker 1: Thank you so much for joining.
Speaker 3: Us, both of you, David and Michael, thanks for having me.
Speaker 3: I appreciate it.
Speaker 1: Thank you both, and thanks Mike for being my cost Yeah,
Speaker 1: thank you both, and I want to thank you for listening.
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Speaker 1: This is David Phone with inside out