T Rowe Price

Ten great investors

2. T Rowe Price

Job description
Until his retirement in the late Sixties, Price was the head of the investment firm he founded, T Rowe Price Associates. The firm still exists today and operates out of Baltimore, Maryland, USA.

Investment style
Cyclical investor in long-term growth companies, buying at the bottom of the business cycle and selling at the top. In later life, Price switched to a more value-driven style, investing in steady-growth, oil and gold stocks.

Profile
Price was a strong-willed and egotistical man. He never deviated from the daily agenda he set himself, nor from his decisions about when to buy and sell stocks. He demanded the same zeal and discipline from his employees. This unforgiving work ethic turned his firm into one of the largest asset managers of his day.
Price was very much an entrepreneur rather than a manager. He liked to start a fund, establish it and then move on to launch another one. Some of his most famous funds are still running today: T Rowe Price Growth Stock, New Horizons and New Era. His favourite companies, such as Avon Products and Black and Decker, actually became known as 'T Rowe Price stocks'.

But he sold the business to his associates when he saw that the prices of this group of companies were reaching absurd levels in the late Sixties. He himself changed to a more cautious and diversified approach, buying bonds and stocks from the energy and commodity sectors. The 1973-4 bear market proved the wisdom of this decision. His family portfolios soared, while those of his old firm collapsed.

Long-term returns
Price published a sample family portfolio to show how he had turned $1,000 invested in 1934 into $271,201 by the end of 1972 - a compound return of about 15.4% over 39 years.

Biggest success
Price's sample portfolio contained many striking successes. Among the most remarkable was pharmaceuticals firm Merck, bought for the equivalent of 37.5 cents in 1940 and still held 32 years later at $89.13 - a compound growth rate of about 18.6%, even without any reinvestment of dividends.

Method and guidelines
Like people, companies pass through three phases in their life cycle:

1. Growth
2. Maturity
3. Decadence

Look for companies in the earliest identifiable phase of growth. This growth is of two kinds:

1. Cyclical - growth in unit volumes of sales and in net earnings, which peaks at progressively higher levels at the top of each succeeding business cycle. These stocks are ideal for investors looking for capital gains during the recovery stage of the business cycle
2. Stable - growth in unit volumes and in net earnings, which persists through the downturn in the business cycle. These stocks are suitable for investors who need relatively stable income.

Concentrate on industry leaders. These can usually be identified by their competitive advantages, including:

• Outstanding management
• Leading-edge research and development
• Patents, licences and other legally enforceable product rights
• Relative protection from government regulation
• Low labour costs, but good labour relations

These advantages usually go hand-in-hand with

• A strong balance sheet
• A high return on capital (at least 10%)
• High profit margins
• Consistently above-average earnings growth.

If these financial ratios are improving, that is often a good indicator that the company is still in its growth phase.

The best time to consider buying is when growth stocks are out of fashion. As a group, their P/E ratio will have fallen to roughly the same level as the market. Consider buying when the P/E is about 33% higher than the lowest point it has reached at the bottom of the last few cycles. Continue buying ('scaling in') until the price starts to rise strongly above this initial level.

The time to start selling is when the stock is 30% above your upper buying price limit. Sell off your stock gradually ('scale out') as the price continues to advance. (Price himself sold 10% every time the price rose 10%. Smaller investors may need to think in terms of selling 25-33% on each 20% advance.)

Also consider selling if

• You can be reasonably certain the bull market has peaked
• The company appears to be entering its mature phase
• The company reports bad news
• The stock price collapses on widespread selling.

Key sayings
"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 for growth, buying their shares and retaining them until it becomes obvious that they no longer meet the definition of a growth stock."

"'Growth stocks' can be defined as shares in business enterprises that have demonstrated favourable underlying long-term growth in earnings and that, after careful research study, give indications of continued secular growth in future...Secular growth extends through several business cycles, with earnings reaching new high levels at the peak of each subsequent major business cycle..."

Further information
Start with John Train's profile in The Money Masters (1980). For Price's own views, see the extract 'Picking 'Growth' Stocks' in The Investor's Anthology, edited by Charles Ellis.

http://www.incademy.com/courses/Ten-great-investors/T-Rowe-Price/2/1040/10002