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Q&A: Star investor Ron Baron on Tesla and his top stocks for the long run

Ron BaronRon Baron
Ron Baron in his New York City officePhoto by Patrick James Miller for Fortune

When he’s not meeting CEOs of portfolio companies like Tesla and Ralph Lauren, Ron Baron, the founder and CEO of Baron Capital, rubs shoulders with celebrities from Elton John to Jerry Seinfeld. Besides picking stocks, Baron, 71, selects (and pays for) the entertainment at his gala annual investor conference, which was set to fill multiple halls at New York’s Lincoln Center on Nov. 7. Last year Barbara Streisand performed—and then invested with Baron, who now oversees $25.6 billion in 13 mutual funds and separate accounts. The perks aren’t the only reason investors have flocked. Since the $7.8 billion Baron Growth Fund launched 20 years ago, it has returned 13.5% annually under Ron, compared with 9.7% for the S&P 500. Baron’s secret may be his schmoozing: He seeks to get comfortable with the companies he invests in, as he often hold stocks for a decade or longer. He spoke to Fortune about dealing with market swings and finding growth. Edited excerpts:

What did you do during the recent market volatility?
If markets are volatile, turn off your damn machine, pick up the phone, and talk to companies you’re invested in. Or get on a plane and visit them. So in late September I went to Denver to visit Vail Resorts because we invested in 1999 and have been their largest shareholders since 2004. Then I went to San Francisco to see Charles Schwab (SCHW), which we first bought in 1992—back then we had a very small mutual fund and couldn’t make it grow because nobody could buy it unless they sent a check to North Carolina. But then Schwab revolutionized that with their platform: Once we got onto it, our fund started getting inflows. I also visited Financial Engines, which provides advice about how to allocate money so individuals can retire when it’s their time. The stock had become expensive, but since the market went down, we think it’s attractive again—I bought as much as I could, about 9.9% of their shares.

Next I went to Tesla’s (TSLA) plant in Fremont, then flew to L.A. where I saw True Car and Air Lease Corp. The first thing the CEO of Air Lease says is, “Ron, my stock is down from $42 to $32! What happened?” And later another company we own, the asset-management firm Carlyle Group (CG), said the same thing: “My business is doing great. Why is my stock down 20%?”

DON"T LET GO Investors are holding on to stocks longer than they have in years.DON”T LET GO Investors are holding on to stocks longer than they have in years.Graphic Source: NYSE; 2014 Data as of September

What did you tell them?
When the market was going down, it felt like wave after wave of margin calls taking place. Air Lease acquires airplanes and then rents them to airlines. Investors who were afraid of Ebola saw that they rent planes that fly in Africa and said, “Get me out!” But Air Lease’s business is sold out for two years, and the airlines want to order planes three or four years out. To us, it looks like the stock could triple or quadruple in 10 years. Then the market went down and created a dislocation. How do I take advantage of that? We don’t sell like others are doing—we buy. And if the market goes up a lot in a short period of time, then what you do is nothing. So in this case I bought more of Air Lease and Carlyle.

Carlyle interests me because I know something about fund companies—I own one. When Carlyle was going public, everybody who had ever invested in a private equity firm that had gone public—whether KKR, Blackstone, or Apollo—had all lost money. Everybody was so burned, I knew I wouldn’t have to pay a lot. I thought the revenue and management fees alone were worth $22 a share, and if you add the book value and carried interest, then it was worth $60, and yet it trades at $30 today.

“If markets are volatile, turn off your damn machine, pick up the phone, and talk to companies you’re invested in.”
Ron Baron

What else did you learn by visiting companies whose shares you own?
Tesla is one of our newest big holdings. Once when I went, [CEO] Elon Musk had moved his desk in the middle of the programmers and was programming with them. It’s all about people. Last time I visited, they said, “You have $250 million in our company. How could you not own a car?” So I ordered the new Model S with everything on it. It goes from zero to 60 in 3.2 seconds, which they said is like a spaceship taking off! It also has autopilot, so if it’s raining, you can press a button and it comes to your front door and picks you up.

Where are the opportunities today?
The stock market doubles every 10 years, as it has for the past 100 years. What we’re trying to do is make sure we double our money every five or six years. But you never know—some companies we think are the greatest, and they don’t work out. So all I want to do is invest in a number of businesses that aren’t correlated with each other: Some benefit when the weather is cold, some when the weather is warm. Some benefit from the lower price of gasoline, some from the higher price of gasoline. For example, we own ITC Holdings (ITC), the largest electricity-transmission company in the U.S., which is important when the power goes out. On the other hand, we own an insurance company, Arch Capital (ACGL), that will be hurt if there are a lot of hurricanes and storms, because they’ll have to pay out more claims.

You’re not a biotech guy. Why not?
I’m not interested in investing in a company where you either make 10 times your money or lose 100%. I want to invest in something that just grows. But last year biotech stocks were up 50% and we didn’t own any, so now we’re learning about it. We do invest in Illumina—they basically have a monopoly on genome sequencing, a big opportunity because it allows people to live longer. The average life expectancy is 80 when it used to be 47, and my grandchildren are going to make it to 100.

This story appears in the November 17, 2014 issue of Fortune.

Correction: Baron’s funds own 9.9% of the shares of Financial Engines; an earlier version of this article incorrectly stated that the stake in Financial Engines represents 9.9% of Baron’s assets.