Thriving In The New Economy, Part 3

The following is an excerpt from Lori Ann LaRocco's new book, Thriving in the New Economy: Lessons from Today's Top Business Minds. Benzinga will post the complete eighth chapter of her book over the next week in several installments. This is the third installment. Thriving Strategies Most people run businesses to maximize earnings and profits in the short term. The executives with whom we prefer to invest think about the long term. They put money into their businesses even when it could potentially endanger profitability in the short term. Their objective is to invest in order to create competitive advantage for their business so that it can become much larger in the long term. Our office is very welcoming. Why have we made the effort to make it so? It's because we believe that if you give someone light, pretty space, and a view, they will be happier; they will feel better; they will act positively; and they will become friendly with one another. They will be excited about their jobs and proud to have their children and spouses visit on a weekend to see where they work. Our fellow employees’ families and parents come by all the time. One of the results of having such a pleasant work environment is the tendency to show respect for your fellow workers. They are better employees. They work harder, and they treat our customers, the shareholders of our mutual funds, better. Our reputation in the community is solid. As a result, we are able to hire great employees; they treat our customers well, and the owners of our family business are doing well. If you do not put effort into those other things, you will fail. A good manager is someone who thinks about all of these aspects of business, and that's what we're looking for. That's the sort of personality that you must have; rather than being short-term oriented, you must look at the long term. For years, our country has not had a long-term plan. The chief executive of Singapore is 80 years old. He has a 100-year plan! New York City had never had a plan. Michael Bloomberg was elected Mayor and the city now has a 35-year plan. I read in the newspaper this week that the head of the New York City teachers union had been concerned about Bloomberg's control over education in New York City. But, according to this individual, since Bloomberg wrested control over our city's schools, look what has happened to our city's student population. Student math test scores in New York City schools have skyrocketed. So have other metrics measuring education outcomes. Mayor Bloomberg's long-term plan is to make people in New York healthier, to make it impossible to smoke in restaurants, to tax carbonated soda, to keep you from drinking diet sodas because they are unhealthy. Bloomberg wants to have healthier people, trimmer people, and no diabetes. In addition to benefitting our populace directly, our health care bill will be less. Mayor Bloomberg has a plan. President Obama also has a plan. You might not agree with all parts of it, but he has one; he has a vision for where he wants to take our country. He wants to make our country different than it has been. We have been using too much carbon energy for a long time. It has become too expensive to continue to do so. We have been sending our money overseas to pay for energy, giving foreigners a claim on our assets. This has been hurting our dollar and is allowing foreigners to buy our assets on the cheap. By selling our assets cheaply, we have been damaging our economy; we have been making our country less safe by relying on nations who are not our friends to provide us with what is necessary to operate our economy. Along the way, we have been damaging our environment. President Obama is trying to make America more efficient in its use of energy. He's going to make our economy less leveraged; he's going to make our financial institutions stronger. Right now, we have banks that want to pay back their Troubled Asset Relief Program (TARP) money. But the government has responded, “Not so fast.” They won't permit them to pay it back until they can show the government that they're solvent and can raise equity money from public investors. Why is the President doing this? To make sure that these companies really are solvent and that they are not going to cause a repeat of the financial crisis we are now in the process of resolving. This is great, what our government is doing. Obama Administration Investing There is a terrific opportunity in wind power, which is produced on the great plains of America, in the middle of the country. The users of wind power are the guys who live on the coasts. But how do you get the energy there? You need transmission. We have an investment in ITC Holdings, the largest, and only independent, publicly owned, electricity transmission company. It was a spin out from Detroit Edison. Get Excited When the market falls as much as it has recently, you can throw a dart and virtually anything you hit is going to make you money in the short term. The trick is to find something that is not going to go up just in the short term. In fact, since the U.S. market bottomed in early March 2009, stocks of lower-quality businesses have increased in price more than those of higher-quality businesses. This is because low-quality, highly leveraged businesses were left for dead by investors—and they did not die. But what are the opportunities for those companies for the long term? There is investment opportunity for the long term in education, making sure that people can afford to be educated and make our nation more productive and more competitive in the world. Health care is another big investment opportunity. We recently visited genetic testing company Gen-Probe in California; they told us about their new prostate cancer test called PCA 3 (prostate cancer gene 3). Instead of a prostate-specific antigen (PSA) culture test, which takes two or three weeks to obtain results with only okay accuracy (you get a lot of false-positive and false-negative results), Gen-Probe's genetic test will give you results in two or three hours—and it is 99 percent accurate. I inquired as to why they still do a PSA test if it is inaccurate, is expensive, and takes three weeks versus three hours to get results. I was told the reason is that we have an infrastructure in America that makes a great deal of money from PSA tests—tests that are inaccurate, expensive, and obsolete. This scientist explained to us that many believe almost one-third of the amount of money spent on medical care in our country is wasted. Investing Criteria We at Baron Funds are plain-vanilla investors who employ a very simple strategy: find a business that can double in size in four or five years by providing an important service that others cannot easily provide to a clientele who could not otherwise obtain that service at an attractive price. We are trying to find businesses that are or can become very profitable, operated by individuals we like. It's as simple as that. We tell our clients that we are betting on someone. We are betting on the people who run businesses with big opportunities to work hard to make their businesses become larger. People understand that, and they say okay, I got it. That sounds reasonable to me. This takes me back to high school. When you are young, you know who the smartest kid in your class is; you know whom you like the best. You know who you think is honest. And that's all this is. This business is about betting on people, about betting on people who have the long-term vision and are willing to sacrifice short-term profits to make their business impregnable over the long term. That's what this is all about. Excerpted with permission from the publisher, John Wiley & Sons, from Thriving in the New Economy by Lori Ann LaRocco. Copyright (c) 2010 by Lori Ann LaRocco.