Buy early and hang on. Such was the investment process of Thomas Rowe Price.
Price is most famous for founding the investment firm that bears his name. But he was a very successful investor in his own right. He was an advocate of buying obscure or out-of-favor growth stocks. In general, Price bought growth stocks only when they were cheap. He knew price paid was the most important consideration.
In fact, twice in his career, Price closed his fund because he thought the market was too expensive, based on his inability to find cheap growth stocks. Once he closed it from October 1967-June 1970. And the other time was from March 1972-September 1974. During both periods, the market slumped.
Keep in mind that when he closed these funds, he could have been taking in more than $1 million a day in new money from investors wanting to get in the market. Few fund managers today would have the integrity to close their fund when so much money – the source of their fees – was coming in. But this integrity enabled Price to invest when stock prices were reasonable. Ironically, when Price reopened his fund near the market bottoms – when things were cheap – investor interest was minimal. So there you go. Some things never change.
Price’s idea was very simple on the surface. He thought the best way for an investor to make money in stocks was to buy growth – and then hang on for the long haul. He defined a growth stock this way: “Long- term earnings growth, 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.” Note, by Price’s definition, you could own cyclical stocks, which many growth investors these days shun.
Where Price turned Wall Street on its head was in what he thought was the least risky time to own such stocks. Price thought the best and least risky time to own a growth stock was during the early stages of growth.
Most people think that larger, more mature companies are less risky than younger, faster-growing ones. Not so for Price, who looked at companies as following a life cycle, like people do. There was growth, maturity and, finally, degradation. Here is Price in his own words, from a 1939 pamphlet:
“Insurance companies know that a greater risk is involved in insuring the life of a man 50 years old than a man 25, and that a much greater risk is involved in insuring a man of 75 than one of 50. They know, in other words, that risk increases as a man reaches maturity and starts to decline…
“In very much the same way, common sense tells us that an investment in a business affords great gain possibilities and involves less risk of loss while the long-term, or secular, earnings trend is still growing than after it has reached maturity and starts to decline… The risk factor increases when maturity is reached and decadence begins…”
Price went on to show that investing his way during the Great Depression would’ve produced a 67% gain, whereas the rest of the market lost money. In the 1930s, people focused on current dividends, and that meant they were reluctant to invest in a growth stock (which typically pays no dividend). Price thought that was a mistake. “High current income,” he wrote, “is obtained at the sacrifice of future income…”
He wasn’t just talking. Price did very well by his own ideas. He is somewhat forgotten today, probably because he did not write a book that people can refer to now as a classic. But maybe it’s time for some publisher to cobble together Price’s work. (Hmm…)
In his day, Price was a force of nature. He was known as “Mr. Price” to nearly everyone. He was passionate about investing and still came to the office at the age of 83, rising at 5 a.m. every day. If you want to read more about Price, I would recommend John Train’s The Money Masters, which includes a chapter on Price, along with chapters on many other great investors.
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