T. Rowe Price started the T. Rowe Price Growth Stock Fund in 1950
Market Wizards Index: +16%
Compound annual over 38 years
Fund or affiliation
T. Rowe Price Growth Stock Fund, started 1950.
T. Rowe Price Associates Inc.
A pioneer in growth investing.
Research Techniques Employed
Defines growth companies as one with "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 peak of future business cycles." It may however, have declining earnings within a business cycle.
Prices requirements for growth companies:
Superior research to develop products and markets.
A lack of cutthroat competition.
A comparitative immunity from government regulation.
Low total labour cost, but well-paid employees.
Statistically, 10% ROIC, sustained high profit margins, and superior growth of EPS.
Two aspects of capitalizing on the "fertile fields for growth": identifying a growth industry, and settling on the most promising company or companies within it.
Two best indicators of a growth industry: unit volume growth of sales, and net earnings. Both improving right through down phase of a cycle ("stable growth") or showing improvements from cycle peak to cycle peak, or cycle bottom to cycle bottom ("cyclical growth").
Qualities of a company that may contribute to their superiority are:
A favorable location.
Trading/ Valuation Techniques Employed
Switching between cyclical growth and stable growth. During the bottom of a bear market, buy washed-out cyclical growth stocks to get the kick coming off bottom, then switch to stable growth stock that never went down so much.
Amongst other criteria, the P/E one should target is 33% of the lowest P/E touched during the last few market cycles. Once the target is reached, he buys vigorously, without "bottom fishing".
Sell when there is a decline in ROIC, that is a warning of an onset of maturity.
When risen above 30% over his upper buying limit, he sells 10%. Then a further 10% rise prompts the sale of another 10%.
Philosophy and beliefs
The investors best hope of doing well is by seeking the fertile fields for growth, and then stick with the best companies in the highest growth industries as long as their progress continues.
The most profitable and least risky time to own a share is during the early stages of growth.
Prices first interest was always in superior performance; craved immortality in the record books.
Price did not believe in specific predictions, "no one can see ahead 3 years, let alone 5 or 10". "Valuation models" popular in Wall Street are highly suspect if not worthless.
History and other facts
The phrase "T. Rowe Price approach" is instantly understood in Wall Street; like "a real Ben Graham situation".
Price, at 82, still got up at 5 am. He was exceedingly disciplined and organized.
He was dictatorial, and tend too often to compete with the men he is managing; and with ill consequences.
He did not believe his firm will grow after he left and turned down an offer to share future profits, only to see the assets managed increased 4-fold in the next 5 years.
He claimed: a nonprofessional could carry his approach out successfully.
Towards the end of his career, Price even stopped contacting companies firsthand in making his own decisions, relying entirely on company reports, his long experience and a few secondhand sources.
Price never carried his argument to its logical conclusion by comparing countries, as he did industries and companies.
In the late 60s, he decided that the long bull market in growth stocks has ended. He sold his interest in his firm. Then, he came up with his "new era" approach, buying natural resource assets, real estate, etc.. and did particularly well.
Meanwhile, his ex-associates kept accepting new funds and deploying them in the same growth stocks which are all overvalued. Collapse came in 1974, when the term growth stock became taboo in Wall St.
By late 1974, after the correction, Prices portfolio includes 3 categories: "growth stocks of the future", older seasoned growth stocks (which have corrected), and a mixed grill notably gold and silver.
The T. Rowe Price stocks: Black & Decker, Emery Air Freight, Avon Products, Rollins and Fleetwood.
16% over 38 years: "One thousand... in 1934, with dividends reinvested,... become $271,201 by Dec. 21, 1972.".