Billionaire investor Ron Baron has been an active investor for 53 years. In 1982, Baron founded Baron Capital and it has been a successful venture ever since. Its Baron Partners Fund has delivered a 19.3% average annual return over the last 10 years.
Given his decades of investing experience, Baron's advice on the markets tends to carry some weight. Recently, the 80-year-old predicted that the Dow Jones Industrial Average (^DJI 0.40%) will rise from its current level of just below 34,000 all the way to 900,000 over the next 50 years. Here's what's driving Baron's call.
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A huge rise thanks to ... inflation?
This recent bout of outsized inflation was largely detrimental to stocks, since it came on swiftly in late 2021 and early 2022, catching the market and the Federal Reserve by surprise. Inflation makes everything more expensive, which begins to drain consumers' finances. It also forced the Federal Reserve to increase interest rates to get it under control. This generally makes stocks less attractive because it reduces the future cash flows of companies and makes safer assets like bonds yield more and attract more interest.
But Baron recently told CNBC that he believes persistent inflation might actually be the reason for the stock market's impending gains to come. Baron said that, as an investor, he isn't overly concerned about higher-for-longer interest rates, a potential looming recession, and rising geopolitical tensions.
His evidence is that the U.S. has been through these concerns in the past, and the market has always managed to keep rising long-term. He also believes the U.S. economy is poised for incredibly strong growth, potentially more than 7% over the next five decades.
"I expect inflation to be as it always has been, as it always has been in every single democracy that's ever existed, 4% to 5% a year," said Baron. He calculates that such rates would result in having 35 times the current levels of cash and assets over the next 50 years. He added, "That means that the Dow Jones, which is now 34,000, will be 900,000 (if growth hits 7% or higher as he projects)."
But Baron also acknowledged that these market gains will not come without pain. "I think everything is going to be twice as expensive in 14, 15 years," he said in his CNBC interview. "Maybe it (inflation) will go a little bit lower, but it's not going to stay lower."
Headline inflation hit roughly 4% in May on a year-over-year basis, which is all the way down from a peak of 9.1% in mid-2022. Leadership at the Fed certainly still thinks there's more work to do to keep inflation heading south and eventually get back to the 2% preferred target.
Can it happen?
Baron's prediction is certainly possible based on returns the Dow has generated in the past, although predicting anything 50 years out is no easy task. Also, if everything does get twice as expensive, that might not be such a good thing for consumers, and it's hard to know if wage growth could even come close to keeping up.
My main takeaway is that if you look at what's happened historically, stocks have been able to generate inflation-beating returns consistently over time. It also happens to be something The Motley Fool has been saying for decades. It's this truism that will help you beat inflation if you put it to use by investing.
Yes, there could certainly be short-term hiccups, times the market gets too frothy, and down years, but over a long period of time, the Dow Jones Industrial Average (and most of the other market indexes) has consistently generated solid returns. Over the last decade, the Dow index has delivered an average annual return of 8.3%, so if you invest in the market and wait patiently, there's a really high likelihood that you will grow your wealth.
