Value Investing

T. Rowe Price – A Rare Breed: Father of Growth Investing

T. Rowe Price
T. Rowe Price

The man, the myth, the legend.

Successful long-term growth managers are part of a rare breed, but Thomas Rowe Price, Jr.  – also known as the “Father of Growth Investing” – certainly qualifies. Too often, value legends like Warren Buffett and Benjamin Graham are highlighted in media circles. Using a baseball analogy, growth heroes like Mr. Price are more akin to atypical knuckleball pitchers, like Hall of Famer Phil Neikro. Writing about Mr. Price is consistent with my belief that investors striving to improve performance will be served well by studying great investors (for other growth superstars, see also Phil Fisher, Ron Baron, and John Calamos, Sr.).

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T. Rowe Price - History

T. Rowe Price was born in Linwood, Maryland, in 1898 and died in 1983. Price graduated from Swathmore College in 1919 with a degree in Chemistry, and then went onto work at Baltimore-based Mackubin Goodrich, which eventually became Legg Mason  Inc. (LM). In 1937 he founded T. Rowe Price Associates (TROW) and successfully ramped up the company before the launch of the T. Rowe Price Growth Stock Fund in 1950. Expansion ensued until he made a timely sale of his company in the late 1960s (fortuitously before the 1973-1974 crash).

Philosophy

How did Price feel about growth investing?

“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”

This philosophy makes perfect sense to me; however it runs contrary to the strategies implemented by many managers whom are categorized in the “growth” style box today. In the hyper-sensitive, short-term focused performance world, many “momentum” managers play in this same “growth” sandbox. Typically this means managers buy stocks that are going up and sell stocks that are going down (see “momentum” article) over relatively short time frames, on average.

Price also firmly believed in fundamental research. As part of the investment process, Price believed in the “Life Cycle Theory of Companies,” meaning companies followed the phases of a human (birth, maturity, and decline). Price expands on this idea by stating the following: “An understanding of the life cycle of earnings growth and judgment in appraising future earnings trends are essential to investing.” He placed emphasis on investing in quality companies in good times and bad. In order to strip out economic cycle impacts, he compared company performance to peer performance  – regardless of macroeconomic conditions.

John Train, the writer of “The Money Masters,” maintained the following factors were key underpinnings of Price’s investments:

  • Superior research to develop products and markets.
  • A lack of cutthroat competition.
  • A comparative immunity from government regulation.
  • Low total labor costs, but well-paid employees.
  • At least a 10%  return on invested capital, sustained high profit margins, and a superior growth of earnings per share.

Buy and Hold

The proof was in the pudding when it came to the “patience” referenced in Price’s quote above. For example, in the early 1970s, Price had accumulated gains of +6,184% in Xerox (XRX), which he held for 12 years, and gains of +23,666% in Merck (MRK), which he held for 31 years (Lessons from the Legends of Wall Street, Nikki Ross). Timing was not the most important factor in pulling the decision trigger:

“It is better to be early than too late in recognizing the passing of one era, the waning of old investment favorites and the advent of a new era affording new opportunities for the investor.”

In the polluted world of mass information that we sift through every day, I recommend reviewing the strategies of greats, including the “Father of Growth Investing” (T. Rowe Price). That’s my fatherly advice for you.

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