Thomas Rowe Price Jr. , like Peter Lynch was not a pure value investor. In fact he was considered the father of growth investing. However, Price would not invest in high fliers that were abundant during the dotcom bubble.
He was a pure fundamental investor, who was contrarian by nature. In the late 60s, Price warned of the extreme valuations that investors were placing on stocks. He was proven right when the market tanked in 73-74.
During his initial years in the financial markets, Price battled with the tumbling economy brought about by The Great Depression. Originally, Price trained to become a chemist, and received a degree in Chemistry from Swarthmore College from where he graduated in 1919.
After realizing his interest in investment, Price soon joined the world of Wall Street in the 1920s. He started off his career at Mackubin Goodrich, a Baltimore-based brokerage firm, now known as a famous company called Legg Mason. He rose to the position of Chief Investment Officer at the firm before he moved on to establishing his own investment company.
He formed T. Rowe Price Associates in 1937. Price can be considered as having an unconventional personality as he not only adopted a contrarian investment approach, but his way of conducting business with his clients was untraditional as well.
Instead of charging his company’s clients on bases of commission, he adopted a fee-based payment method believing that his firm will flourish if the interests of the clients are put first. Although, fee-based payments are prevalent in the financial industry today, at the time it was considered revolutionary.
In 1950, he established the T. Rowe Price Growth Stock Fund and was CEO till his retirement in late 1960s. It is one of today’s leading investment houses despite the fact that Price sold the company in late 1970s anticipating a meltdown.
After the world saw the truth in Price’s prediction, where the economy could not survive the market crash, he re-emerged in the early 1980s, with strong bond and value funds to match the original investment philosophy of growth stocks. After going public in 1986, the company is now run by a management committee of 7 members which is headed by George Roche. Roche, before becoming Chairman of T. Rowe Price Growth Stock Fund,joined the firm as an analyst in 1968, and had substantial experience working alongside Price.
During the 39 years from 1932 to 1972, Price’s company saw return of 15.4 percent annually, turning an initial investment of $1000 into $271,201!
Price passed away at the age of 85 in 1983. Regardless, his company T. Rowe Price Associates continues to serve clients throughout the world and facilitate successful long-term investment with proper embracing of investment ethics of T. Rowe Price himself. Today the firm has over $500 billion under management.
Price is known as ‘the father of growth stocks’. He presented an investment strategy which departed from the value investment approach as put forward by Benjamin Graham. According to the basic principles of growth investment, as mentioned by Price, the dividend payments and market values increase as company earnings grow, at a faster pace than inflation. Such investments prove to be good hedge against price rises but only if companies have enhanced growth-oriented management.
Price believed the stocks, like humans, had life stages which included the growth, maturity and the decline stage. What his philosophy highlights is the fact that the companies are the most profitable with high return on investment prospect during the growth phase.
During the time when investors were devotedly investing in steel, old rail, oil and other blue chip stocks, T. Rowe Price was keen in investing in companies which were in their initial stages, like IBM, Xerox, Honeywell, Coca Cola and 3M.
His focus was on long-term investments. By the mid 1960s, his growth stock approach to investment gained such popularity that the stocks preferred or prioritized by Price were referred to as ‘T. Rowe Price stocks’.
Price learned much of his investment lessons during the time of The Great Depression and realized it is better to embrace stocks rather than avoid or stay out. Keeping in mind the cyclical nature of the stock market, what Price relied on was extensive research to determine potential good companies and diversification in order to reduce risk.
In a nutshell, Price believed smaller companies in their initial stages of business were a relatively fertile ground with long-term earnings growth potential.
What he considered as primary factors to consider before indulging in long-term investment were rising price-to-earnings ratio, long-term earnings per share greater than inflation rate, and most importantly he only considered companies of the growing industries, old companies with new growing divisions, or companies with new or expanding product lines. As secondary factors he kept in mind the management of the company, little governmental influence, financial soundness, absence of cut-throat competition and good workforce relations.
“The Money Masters” by John Train (1994), elaborates on the investment philosophy of T. Rowe Price and highlights the basic characteristics that Price used when he invested in companies. These characteristics include low cut-throat competition, extensive research and development undertaken by the company, relative immunity to governmental regulations, sound financials for example at least 10% ROI, high profit margins, and lastly properly compensated workforce but with controlled labor costs.
“Change is the investor’s only certainty. Changing social, political and economic trends as well as trends of industries and companies requires change in the selection of shares in business enterprises”
“Every business is manmade. It is a result of individuals. It reflects the personalities and the business philosophy of the founders and those who have directed its affairs throughout its existence. If you want to have an understanding of any business, it is important to know the background of the people who started it and directed its past and the hopes and ambitions of those who are planning its future.”
“Even the amateur investor who lacks training and time to devote to managing his investments can be reasonably successful by selecting the best-managed companies in fertile fields of growth, buying their shares and retaining them until it becomes obvious that they no longer meet the definition of a growth stock.”
“Buy stocks of growing businesses, managed by people of vision, who understand significant social and economic trends and who are preparing for the future through intelligent R&D.”
“If we do well for the client, we’ll be taken care of.”
1965- T. Rowe Price to Sell His Interest In Firm (Limited View)
1965- Chairman Is Selling Control of T. Rowe Price Concern (Limited View)
1969- T. Howe Price Announces Creation Of Mutual Fund (Limited View)
1969- Market Place: About Goodrich And Northwest (Limited View)
1970- Market Place; U.S. Prosperity: Optimistic View (Limited View)
1970- Market Place:; T. Rowe Price Views Inflation (Limited View)
1970- Market Place:; Doubting Cadre On Wall Street (Limited View)
1973- Market Place (Limited View)
1973- ‘Successful philosophy’ offered (Limited View)
1974- The money scene (Limited View)
1977- Market Place; T.Rowe Price Views Growth Stocks (Limited View)
1977- Market Place; Measure of Success: Return on Capital (Limited View)
1983- T. Rowe Price, Stock Market Wizard, Dies (Limited View)