Like many people, Thomas Rowe Price tried a variety of jobs in his youth. What he experienced was to have a deep influence on his style as an investor.
Thomas Row Price
His very first job, immediately after the First World War, was with a stamping and enamelling firm. He joined simply because he liked the young graduates who ran the firm, but it went bust after a strike because it was financially weak.
After a job at DuPont, he worked for a stockbroker – which also went bust, this time because of the dishonesty of its principals.
His final job before he started T. Rowe Price – today one of the world’s largest asset managers – was at the brokerage Mackubin, Goodrich & Co (now Legg Mason). Here he grew increasingly convinced of two things: that the existing means of charging clients, earning commission on share trades and making profits by selling shares on the company’s own books, was not in their best interests; and that the way clients were recommended to invest – in his words, “constantly switching from one security to another” – was also flawed.
So he started to charge his own clients at the firm for “best advice” rather than relying on trading commission. Price also “started to use my own judgment as to which securities were best for the client”. This may sound obvious today, but it emphasises how new the idea of research-led active management of investments was at the time. As he had seen the Wall Street crash firsthand, Price knew markets were hugely cyclical. But he believed investors could still make money by “investing in growth stocks for longterm holding”.
He said: “During the late 20s and early 30s the idea of investing in ‘growth stocks’ was developing in my mind. I realised that most of the big fortunes of the country had resulted from investing in a growing business and staying with it through thick and thin.”
He tried to convince his managers at Mackubin that investing in growth stocks and charging for advice was the way forward. But his superiors remained lukewarm. So he quit and in 1937 started his own firm. In a letter setting out how the firm would operate, he said: “We want as clients only investors, who have as their objective growth of income over a number of years. We do not want speculators who expect us to guess the short-term swings in the market, which we are not capable of doing.”
He said his emphasis on identifying growth stocks contrasted with the approach of most investment advisers at the time, “who recommend that clients buy the well-known stocks and endeavour to profit from the ups and downs of the market”. But how did he pick his stocks? According to John Train in his book Money Masters of our Time, he looked for a number of qualities, such as superior research to develop products and markets, a lack of cut-throat competition, a comparative immunity from government regulation, low total labour costs but well-paid employees, a return on invested capital of at least 10pc, sustained high profit margins and a superior growth of EPS.
“My experiences with companies that were financially weak, or run by inexperienced or dishonest people, made me extremely critical and sceptical, and led to a desire to acquire full knowledge about the companies whose securities we recommend,” he said.
And he had a straightforward means of acquiring this knowledge – he sent his analysts away from his firm’s offices in Baltimore and told them to travel, getting to know the people who ran the firms in the sectors he was interested in. James Kennedy, the current head of T. Rowe Price, said: “Two of his early hires in the new firm were analysts and he’d have them on the road – they’d be gone for weeks. They used to take 100-watt light bulbs with them because in those days hotels were not lit brightly enough for the analysts to type up their reports in the evening.”
Price didn’t believe in just having an investment method, he also thought it was vital to apply it consistently even if the market seemed to be saying that it wasn’t working. “When the market goes against you it’s hard to stand against it,” Mr Kennedy said. “To be a great investor you need guts as well as brains. “But Price had started investing in growth stocks after the Great Depression.
This was heresy at the time, so he needed intellectual fortitude and guts to go forward.” But he also believed investors needed to keep an open mind and perceived, in the late 60s, that growth stocks were becoming overvalued – which was borne out by events a few years later. “Change is the investor’s only certainty,” he said.
This article was published before on Telegraph.co.uk.