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Excerpt
The following is an excerpt from the book 100 Minds That Made the Market
by Ken Fisher
Published by Wiley & Sons, Inc.; August 2007;$19.95US/$23.99CAN; 978-0-470-13951-6
Copyright © 2007 Ken Fisher

T. Rowe Price
Widely Known as the Father of Growth Stocks


Long before it was in vogue to invest in promising new fields on the hope of catching the next hottest trend, Baltimore-based T. Rowe Price was holding tightly to "unpopular" picks as early as the late 1930s. It wasn't until a decade later, when he started realizing phenomenal results and established T. Rowe Price Growth Stock Fund in 1950, that Wall Street took notice. .Within another decade, thanks to Price and others, growth stocks swept the nation and became a major movement in Wall Street.

Before Price, what came to be known as growth stocks were overlooked because Wall Street regarded all stocks as cyclical -- meaning they'd rise and fall within economic cycles. But Rowe Price was the first to see it differently. In 1939, he wrote, "Earnings of most corporations pass through a life cycle which, like the human life cycle, has three important phases -- growth, maturity and decadence."

So he set out to use the phases to his advantage: "I figured that if we bought stocks whose earnings were growing faster than the economy, I could protect myself and my clients against inflation. The old idea of investing for the cyclical swings wouldn't do that." He claimed the least risky time to own a stock -- if it first met his rigorous criteria -- was during the early stages of growth. It was in those early stages that Price mustered up the nerve and foresight to buy into fledgling, unheard of firms like IBM, Coca-Cola, J.C. Penney, Dow Chemical, Monsanto, and Procter & Gamble, then hold on to them until they ultimately paid off.

Choosing the right firms to invest in was no easy matter for the hard-headed Price. Whereas money managers like Benjamin Graham opted for a quantitative approach in choosing stocks, Price denounced such pointed, mathematical approaches as being too rigid, leaving little room for unexpected bad news. Instead, Price sought the top one or two companies in up-and-coming industries which showed consistent unit growth and profits even through the down phase of a cycle. Then, he took into account the following guidelines, as described in John Train's The Money Masters. Price felt a firm had to have:

1. Superior research to develop products and markets.
2. A lack of cutthroat competition and apparent immunity from government regulation.
3. Outstanding management.
4. Low total labor costs, but well-paid employees.
5. Statistically, a 10 percent return on invested capital, sustained high profit margins, and superior growth of earnings per share.

It was time to unload a stock when it had "matured," usually after a decade. Price believed in holding stocks long-term, despite the fact that he was an impatient man. Obvious warning signs of a maturing stock are a decrease in unit sales, profit margins or return on capital, but Price also kept a lookout for the following:

1. Management changes for the worse.
2. Markets becoming saturated.
3. Patents expiring or new inventions deeming them less valuable.
4. Competition intensifying.
5. The legislative environment deteriorating.
6. Labor and raw materials or taxes jumping.

By the mid-1960s, he had a faithful cult-like following who adhered to the "T. Rowe Price approach," which included buying Price's favorite stocks -- like Emery Air Freight and Fleetwood -- dubbed "T. Rowe Price stocks." Yet, instead of being flattered, the egotistical contrarian in him grew increasingly worried. Suddenly, his "finds" were part of everyone's portfolios! To find virgin turf in which to apply his philosophy, he formed yet a third no-load called the "New Era" to invest in natural resources, real estate, and gold. By the late 1960s, with his philosophies and ideas becoming too mainstream for his own comfort, Price sold his interest in T. Rowe Price & Associates -- which included the billion-dollar T. Rowe Price Growth Stock Fund. He got $2.3 million, which by today's standards is a measly sum for an investment  management firm of that size and prestige. For his personal account, he cut back on his growth holdings and invested most of his newly-gotten capital in his "New Era" picks.

Price's preparations paid off in 1974 when growth stocks took a nose dive, some falling 80 percent below their previous highs. His former firm, Price & Associates, lost a sack of money. They never heeded their guru's warnings and in fact, continued supplying their clients with over-priced "Price stocks." Although the firm didn't realize it, it had contributed to the slump by helping saturate the market with trendy growth stocks.

The great 1973-74 bear market made the mere mention of "growth" a taboo on the Street, as many investors panicked and dumped their holdings. For example, those who'd bought Avon at $130 -- a whopping 55 times earnings -- now unloaded it at $25, a more reasonable 13 times earnings. Of course Price -- the king contrarian -- realized that since growth stocks had fallen from favor, it was time to start buying them again, though not necessarily the same stocks that had so enthused everyone in 1972. So he bought, and his selections, like cable television, were successful.

Rowe Price was a sly one. This son of a Maryland county doctor, born in 1898, was a true professional and always looked out for his clients, believing, "If we do well for the client, we'll be taken care of." He was a great salesman who wore a flower in his lapel daily, and had the utmost confidence in himself -- imperative in order to be a true contrarian. He was fiercely dedicated, with barely any friends or interests outside the office. Even his wife and children seemingly came second to his investing.

Thin, steel-gray haired, with a tuft of hair beneath his nose and wistful eyes beneath nerdy, '50s-style black-framed eye-glass, Price was a Swarthmore College graduate who had studied to be a research chemist. His scientific training, however, opened his eyes to the opportunities in upcoming technology when conventional investors still kept faith in heavy industry and business cycles. In 1937, Price permanently shut the door on his personal evolution in chemistry to become an investment counselor. He then formed his firm, Price and Associates.

He was a strict disciplinarian, waking at 5 A.M. every morning even after retirement. Then he went about his day following a strict agenda, dutifully completing each task in exactly the order written and never undertaking tasks not listed on that day's agenda. "Mr. Price" was as selfish with his money as he was with his time. When his firm left its modest quarters for a gleaming new base overlooking the Baltimore harbor, Price -- already retired but still working -- stayed behind to share a more practical two-room office with his secretary of over 55 years. Though he wasn't a notorious tightwad, Price was never known for his generosity and stayed clear of the standard successful businessman's route -- charity. Up until his death in 1983 at age 85, he stood by his staunch ways, and rarely went out of his way to do favors for anyone.

Rowe Price was remembered as an ornery-but-forgivable old guy. Forbes editor James W. Michaels (and my personal mentor in the Forbes organization) recalled in a Price memorial, "He would snap out with things like, 'You don't know anything, do you?' if I failed immediately to grasp some point he was making. But behind my back he said good things about me and this magazine."

As peculiar and narrow-minded as Price was, his contribution was phenomenal. He led a school of thought that blossomed into a huge, new philosophical investment wave that would evolve and endure for generations. Was he the father of growth stocks? Technically he wasn't the first to adopt the philosophy. [My own father was clearly using the growth stock approach on the west coast five years before Price, but Phil Fisher didn't write about it until many years after Price.] Price was the first to articulate growth stock investing in a format that the world embraced and emulated. And for that and his big splash with it, the investment world owes a debt of gratitude.

Copyright © 2007 Ken Fisher