Billionaire investor Ron Baron is betting on a big spending mistake by the market, and it's not related to AI

On Dec. 9, JPMorgan warned it would spend more next year than it had previously forecast. Shares tanked. Within days, the bank's stock had recovered. That trading dynamic is a rapid-fire microcosm of an approach that billionaire fund manager Ron Baron says underlies a key part of his investment philosophy: making bets on the companies that the market is punishing in the short-term for spending on the priorities they need for their long-term growth.Baron, the founder and CEO of Baron Capital, in recent years has become known for some big bets on high-growth, high-risk companies, including Elon Musk's SpaceX, Tesla and xAI. But in a recent interview on CNBC's "ETF Edge" to discuss his company's new exchange-traded funds, Baron said roughly 10% to 15% of the companies he wants to own are those being penalized by the market for doing the exact kind of spending they should be doing. Any short-term market reaction to spending plans, and any selling that is predicated on a current quarter earnings shortfall or market fears that the next quarter's earnings will be dented, are reasons for a long-term investor to buy. Baron broke down his portfolio approach by three distinct buckets, where the exact percentages may shift over time, but the overall philosophy that guides the stock picking remains the same:"We have this portfolio of very exciting, super-fast growing companies, they are risky," Baron said, and which he said represents anywhere from 30-40% of Baron fund holdings overall.Then, Baron has anywhere from a 50-55% allocation to "solid double-digit growth companies," he said.The third component, Baron said, is the 10-15% of companies that are penalized by investors with a short-term focus on current earnings, companies that he believes are poised "to become much larger in the future.""Those are the ones, companies in the last 10-15%, where no one wants to invest, but to us it is obvious what the companies are going to produce. We invest in those companies, and it's one of the reasons we have performed so well for so long," he said. "Those are companies you want to invest in," he added.Since founding Baron Capital in 1982, the firm has generated $57 billion in profits for its fund shareholders. Baron projects the firm will generate $250 billion in profits over the next 10 years."So many companies are interesting right now that have been let behind, with everyone focusing on technology," Baron said during the CNBC appearance in which he also discussed two beaten-up financial stocks that he expects to continue growing over time. "Across the board, whether hotels, real estate, financial companies, consumer products companies, you can find them everywhere," he said. His son Michael Baron, co-president and portfolio manager at the firm, who joined his father on "ETF Edge," said while it is AI that has worked well over the past few years, "so much of the market has been left behind."Small-cap and mid-cap stocks, in particular, he said, should begin to benefit as interest rates come down, and many of these companies have been "investing in themselves" and "have been extremely penalized.""Investors don't like to invest in those companies," Michael Baron said. "They take a hit as earnings come in, and also the multiple comes in, and it's a double whammy. We love that," he said. "We are able to find those companies and understand what they are able to achieve and invest in those companies at a great valuation and see them through those lifecycles," he added.He provided two recent examples, cloud technology firm Guidwire Software and pet health firm Idexx, as companies that "invested in themselves" in recent years, took the market pain, and are now seeing the rewards in rising stock prices.Guidewire was a case of a company betting on the long-term shift from "on-prem" corporate enterprise IT to cloud-based IT, which Baron said has now "come to fruition." Idexx spent years investing in new pet diagnostic testing and now usage is increasing, as is its valuation and earnings. "But lots of companies still in our portfolio are being penalized for investing in themselves," Michael Baron said. "It's great to be invested in them."Got a confidential news tip? We want to hear from you.Sign up for free newsletters and get more CNBC delivered to your inboxGet this delivered to your inbox, and more info about our products and services.© 2025 Versant Media, LLC.

All Rights Reserved. A Versant Media Company. Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis. Data also provided by