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Milestones in Thomas Rowe Price’s Career
The investment funds founded and led by Thomas Rowe Price, thanks to the growth investment approach, have achieved an average annual profit rate of 28%, despite the toughest periods in the U.S. stock market. And of course, his investment principles can be summarized in a few fundamental points.
Thomas Rowe Price was born on March 16, 1898, in Glyndon, Maryland, into a family with a medical tradition. Both his father and mother worked in the medical and chemical field. In his youth, his family also steered him towards a career in medicine or chemistry.
However, he soon realized that he was more interested in financial management than scientific research and left DuPont to gain practical experience in various small investment and brokerage firms.
When he first entered the investment field, he began working for a brokerage firm based in Baltimore, Mackubin Goodrich, now known as Legg Mason. After a period of learning and gaining expertise, Price became the company’s Chief Investment Officer.
Despite holding a high position in the company, he became increasingly frustrated with the internal conflicts and the company’s lack of understanding and support for his growth stock investment method.
Consequently, Price resigned and founded T. Rowe Price Associates.
At that time, Price completely changed the perspective on charging investment advisory fees based on clients’ investments. His company completely eliminated the concept of commissions, offered free investment advice, and, most importantly, prioritized the clients’ interests above all.
Price believed that when the portfolio value of the company’s clients improved, the company itself would benefit. After the business gained momentum, in 1950, he established the first mutual fund bearing his name: T. Rowe Price Growth Stock Fund. He served as the CEO of the company until his retirement in the late 1960s. Eventually, he sold the company in the early 1970s, but the company retained his name and is now one of the leading investment firms in the United States. As of the end of 2018, T. Rowe Price managed assets worth over $1 trillion.
It can be said that Thomas Rowe Price dedicated much of his career to studying the growth model during his investment years.
He believed: “Every business is created by people. It is the result of individuals, reflecting the character and business philosophy of the founders, as well as the leaders who guide the company through the difficulties of survival. If you want to understand any company, the important thing is that you need to understand the foundation of the people who created that company and led it in the past, as well as the hopes and ambitions of those who are mapping out its future.”
It can be said that Thomas Rowe Price’s investment management philosophy is based on discipline, perseverance in the process, fundamental analysis, and maintaining value in the present. He pioneered the method of investing in growth stocks by focusing on well-managed companies in sectors with the potential for higher profitability than the inflation rate of the entire economy.
Understanding the Company Thoroughly
Price only invested in companies that he thoroughly understood their operations. He leaned towards companies with simple and understandable operating systems. He was particularly concerned with the competence and ethics of the company’s leadership. If he did not trust the management, he would not invest, even if the current profitability figures or other indicators were attractive.
Long-Term Investment
According to Price, when investing, we are not buying stocks but buying ownership rights to the company and enjoying what the company will bring in the future. If the right good company is chosen, with high profitability, we will own increasingly large money-printing machines. To enjoy this great outcome, the first and crucial thing is that the investment funds for this strategy must be long-term money.
There are some investors who initially also intend to invest for the “long term”, but when they see stock prices rise sharply compared to the purchase price, they sell to make a profit and are attracted to short-term investment strategies. According to him, it is time for investors to allocate their money to invest in 2-3 different approaches and be consistent with each chosen approach. If too flexible, we will never have a long-term value investment portfolio.
Seeking Companies with Not Too High Growth
Price always looked for companies with an average growth rate of 8-10%, as he wanted to make sure that these were not bad companies. However, he did not like companies with too high growth rates (over 20%), as when there is a decrease in profitability, the stock prices of these companies will plummet. He believed that, under the same circumstances, the stock prices of companies with low P/E ratios would only decrease slightly, and the loss would be negligible.
Thorough Research on Important Financial Ratios
Price once said, “To be a successful fundamental investor, you should spend time reading hundreds, hundreds of annual reports from companies”. This is the point that makes a big difference between him and other investors. When reading reports, Price was particularly interested in certain ratios and issues:
- Historical and current growth rate: This is one of the foundations for predicting a company’s future growth.
- Profit margin/return on investment: He was particularly interested in this ratio and only invested in companies that produced a high return on equity.
- Debt/equity ratio; profit/debt: Assuming that profits do not meet expectations, can the company repay its debts when they are due?
- Reinvestment: Price was very interested in reinvestment. According to him, if the company operates efficiently and achieves a high return on equity, the company should retain most of the profits for reinvestment, rather than distributing dividends. In that case, the company will become a money-printing machine with an increasingly high speed due to the wonderful effect of compound interest.
Collected by Pham Thanh Bien
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