Tuesday, September 23, 2014

Success story : T. Rowe Price

(from IBD 9/22/14) Launching a stock investment company in 1937, in the thick of the Great Depression, took guts.

But Thomas Rowe Price had the courage of his convictions.

He believed strongly in American ingenuity and the capitalist system despite the battered economy.

Amid that '30s abyss, the notion of investing in anything other than the safest bonds was "pretty foreign," said James Kennedy, the current CEO of investment firm T. Rowe Price Group (NASDAQ:TROW). "But he was a strong believer that we had a lot of years of growth ahead even in an economy on its back that was just starting to sit up."

Today, Price's company manages more than $738 billion of clients' money, and Price's bet on American business ingenuity was proved right. Price became known as the father of growth stock investing.

T. Rowe Price today offers more than 90 mutual funds with an array of strategies. The result for the firm has been soaring revenue — more than doubling from 2005 to $3.5 billion last year — and a 290% stock rise since 2009.

Maryland Man
Price (1898-1983) was born in Glyndon, Md., the son of a country doctor. With a comfortable upbringing, he was expected to follow his father into science or medicine.

He earned a chemistry degree at Swarthmore College in 1919, according to T. Rowe Price's corporate website, and joined DuPont (NYSE:DD).

But the work didn't interest him, and Price reckoned he had more of a knack for business than science.

Price went to work for a small brokerage. But according to George Roche, a former T. Rowe Price president who worked alongside Price at the brokerage, it had poor management and failed.
That was a lesson for Price, who later stressed solid management.

In 1925, he shifted over to Baltimore's Mackubin, Goodrich & Co., the predecessor of Legg Mason (NYSE:LM), rising to become its chief investment officer before deciding to strike out on his own in 1937.

Price hadn't liked the way his employer charged customers for transactions. He thought portfolio managers would have a "greater community of interest" with customers if they were paid based on the assets that clients had with the firm instead, Roche said.

It wasn't just the customer experience that Price wanted to change. He was also working out a new strategy, one that would become known as growth stock investing.

But Mackubin wasn't interested.

Gambling on the growth of U.S. firms while soup lines wound through America took a strong stomach. At the time, bonds yielded far more than stocks. But Price held firm, Roche told IBD: "He said, you want to find good growth companies operating in fertile fields, and they'd compound and grow, and returns would be much higher. Even your income returns, over time, would pass what you could have gotten on fixed income."

All Price had to do was convince people to think differently and let a novice run their investment.
Good luck with that. It wasn't just the recent trauma of the 1929 Wall Street crash that made customers wary. America had yet to dig out of the Depression eight years later.

Then Came A Break
Barron's wrote a glowing profile of the young man in 1939, and customers began to stream in.

That "fertile fields" notion was central to Price's strategy. In a 1973 memo, he wrote that by the early 1930s he was already developing his theory, defining a growth stock as "a share in a business enterprise which has demonstrated long-term growth of earnings, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new-high earnings at the peaks of future business cycles."

A stock's earnings per share should rise faster than the cost of living, Price noted, and the EPS of the overall portfolio should increase an average of 100% over 10 years.

The firm, T. Rowe Price, has always been in Baltimore. Its first formal mutual fund, launched in 1950, invested first in IBM (NYSE:IBM).

In the 1980 book "The Money Masters," John Train wrote that many of Price's early stock picks were winners. Over 35 years, his 1937 investment in Black & Decker (now Stanley Black & Decker (NYSE:SWK)enjoyed an 8,500% return.

Honeywell (NYSE:HON), which he held for 34 years, skyrocketed 3,300%.
"Like most of the greatest investors — or artists or professionals of any sort — Rowe Price lost himself in the task; his first interest was always in superior performance, not in making a killing for himself," Train wrote.

TROW monthly chart

On Top Of Things
As a young T. Rowe Price analyst, CEO Kennedy was surprised to learn that Price, who'd retired years before, was still watching the company's every move.

When Kennedy wrote a note in 1979 recommending the firm invest in railroad stocks, as he believed deregulation loomed for the industry, Price called him and pointed out that railroads were hardly a growth strategy.

Kennedy stood his ground. His buy recommendation carried the day, the railroads were deregulated and the firm made good money on that pick, a result that the CEO remembers fondly.

Gerry Frigon, founder of California's Taylor Frigon Capital Management, hews closely to the growth strategy Price developed.

Frigon's father-in-law and mentor, Richard Taylor, worked alongside Price at T. Rowe Price and passed what he learned to Gerry.

Price was committed to "owning a business, rather than trading a stock, and moving with it through market cycles," Frigon said.

And Price said that investing at the start could be profitable. "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," he wrote.

Price's study led him to see that big shifts in the economy, including the buildup to war and more money spent on social services, meant a spark in inflation. So he developed a fund that would hedge against, even profit from, a higher-inflation environment, with investments in gold and energy.
He used that strategy ahead of the soaring inflation of the 1970s.

New Era Fund (PRNEX), which invested in energy and basic materials companies, saw an average annual return of 17% through the '70s, including two years when returns topped 50%, according to data provided by the company. And it's more than doubled shareholders' investments since 2009.
Beyond quizzing young analysts to make sure that they'd done their homework, Price used a team-of-rivals approach. It helped make sure that everyone on the investment committee thought through every component of a stock. Long before email, Price and his team sent memos back and forth, discussing potential merits and faults of securities, says Frigon.

Price believed in surrounding himself with smart and young people because he valued varied opinions, said Roche: "He used to say, 'I love a good investment fight.'" That made him "a good man to work for."

Price's early experience working for a poorly managed company made strong teams a hallmark of his investment strategy. In a memo, he noted that "capable, dynamic management" was a key trait of good growth companies.

Price eventually sold his stake in the company to his associates and was completely divested by 1971, when he retired, according to a New York Times obituary.

T. Rowe Price Group went public in 1986, three years after Price died of a stroke at his Baltimore home.

Price always had a fine sense of humor, recalls Roche, and was fond of giving out three pieces of advice: Marry an intelligent woman, hang around young people as long as they'll put up with you, and save some money for the nurses.

Price's Keys

  • Launched a successful asset management firm that capitalized on a new investment strategy.
  • Overcame: Depression-scarred investors.
  • Lesson: Apply diligent analysis to smart instincts and macro themes.
  • "One does not have to go to college to be able to select fertile fields. All one needs is what my grandfather called gumption, my grandmother called horse sense, and what most people call common sense."

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