T. Rowe Price was a pioneer of growth stocks, and shifted the investment industry away from commissions.
Sometimes called 'the father of growth stocks', T. Rowe Price helped pioneer the idea that shares are more than just cyclical, and that some companies should be bought and held for the very long term.
He also shook up the investment industry by getting rid of commission, thus aligning his business more with the interests of his clients.
Background and early career
Thomas Rowe Price, Jr., was born in Maryland in 1898, the son of a doctor. Having achieved a bachelor's degree in chemistry from Swarthmore College, he initially became a research chemist, while developing his interest in finance and new technologies.
In 1937 he left the chemical industry and, in Baltimore, founded the investment firm that bears his name to this day. At that time, all such companies operated on a commission basis, making money from churning their clients' portfolios. Rowe Price's approach was different: He charged a percentage of the portfolio value, so the more successful the management of the portfolio, the more money he made. "What is good for the client is also good for the firm."
His results were impressive, and in 1950 he launched the T. Rowe Price Growth Stock Fund, his first mutual fund.
Investment style
In the 1950s and '60s, the name T. Rowe Price became synonymous with growth stocks; in his own words, "[shares] in a business enterprise that has demonstrated long-term growth of earnings, reaching a new high level per share at the peak of each subsequent major business cycle and which, after careful research, gives indications of continuing growth from one business cycle to the next at a rate faster than the cost of living".
At first glance that might seem a little vague and aspirational, and it gives us little insight into the process of actually finding these shares, but it was an important departure from the accepted wisdom that all shares were cyclical.
Instead, he saw companies following their own specific paths, which were not necessarily linked to broader economic cycles: "Earnings of most corporations pass through a life cycle which, like the human life cycle, has three important phases -- growth, maturity and decadence."
The objective was to identify companies at the early growth stage, and hold them until maturity, which may be many years in the future. Identifying the companies was a more qualitative process than quantitative, and it involved picking the most robust and resilient market leaders within emerging industries. An obvious difficulty with this approach is that emerging industries, almost by definition, don't have a long history over which to assess their participants.
Desired characteristics included:
- top quality management;
- pioneering and research and development;
- possession of valuable intellectual property;
- good labour relations;
- freedom from regulatory restrictions; and
- a healthy balance sheet.
His preferred method was to 'scale in' to a business, making several incremental purchases towards what he hoped was the low point of the business's popularity; and similarly when the stock appeared mature, to 'scale out', dropping tranches of 10% or so over a period.
This approach brought him much success, including many companies that went on to be very well known, such as Black & Decker, IBM, Coca-Cola and Monsanto. One of is best investments was pharmaceuticals firm Merck, which grew at an average rate of 18.6% per annum over 32 years, not including dividends.
Retirement
By the early 1970s, it seemed everyone had jumped onto the growth stock bandwagon, and in contrarian fashion it was time for him to jump off. He sold his stake in the business in 1971, avoiding the subsequent crash. Being concerned about inflation he shifted his attention to commodities and real estate, which outperformed the stock market hugely for the rest of that decade.
While he likened the life-cycle of companies to that of people -- growth, maturity, and decadence -- he showed little sign of decadence even in his later years, rising early, working hard, and following a strict schedule each day. According to some accounts, he wasn't the most pleasant or friendly individual, but he was dedicated to building his business by achieving success for his clients.
T. Rowe Price's style of investment is difficult to emulate. He died in 1983, but unlike his growth-focused contemporary, Philip Fisher, he didn't share his thoughts with us in book form. The company he founded survived the bear market of the 1970s, and today manages assets of $315bn, so I think it's fair to say that he achieved his objectives.
More investing greats:
John Bogle | George Soros | Ben Graham | Jim Rogers | Warren Buffett | Anthony Bolton | Jesse Livermore | Jim Slater | Charlie Munger | Peter Lynch | Carl Icahn | Philip Fisher | Ken Fisher | John Neff | John Templeton | Mark Mobius | Neil Woodford
