Thomas Rowe Price’s background

Thomas Rowe Price started his own investment firm when he was 40 years old.

He started his career as a chemist/scientist, but switched tracks after a few years, when he realized he had more talent for investing.

Between 30 and 40, he worked at three different financial firms, during which time he created his own investment philosophy. When he started his own firm, a clear differentiator was that they wouldn’t have commissions; they wouldn’t sell into companies short-term, but they would own companies that grew long-term and take a percentage from assets under management (AUM). This business model is now common among investment companies and hedge funds.

Thomas Rowe Price’s strategies for value investing

As mentioned, Thomas Rowe Price was the founder of growth investing. He defined this as a company whose earnings per share rose from boom cycle to boom cycle.

Some of his main guidelines were:

• Avoid companies in mature industries
• In particular, avoid companies in saturated industries with high fixed costs
• Stick to leaders in fast growing industries
• Growth should usually be defined as increasing turnover (sales) and increasing profits
• Two ways to find growth companies: (1) identify areas that are growing faster than others, (2) find the best companies in those areas
• Companies should preferably have no competition
• The industry should be far from being regulated by authorities
• Look at P/S ratios and turnover that change rapidly from year to year
• Cyclical companies will go up and down the most, but since they are often unpredictable, you should put a premium on companies within the same industry that are more stable and growing (AKA: cyclical compounders).
• A good and growing stock is typically a good buy somewhere in the interval of 70-130% of its 10 year average valuation.

Ahead of his time?

Like many other famous value investors, Thomas Rowe Price’s sense of timing was perhaps too early at times.

He stopped believing in growth stocks (the investment category he himself created) by 1965, as he felt it had become too popular. Price believed that the future expectations for growth stocks were too great, and that their valuation would not be able to exceed these expectations. So he switched his focus to other asset classes such as precious metals and real estate instead, which he felt were relatively undervalued compared to growth stocks.

Almost 10 years later, in 1974, after a crash, he returned to growth stocks again.

He was right about the underlying situation, but was premature. Admittedly, he didn’t make as much as he did before, but on the other hand, he didn’t lose any money when the crash came and others (including his former company) took a big hit.

This is a common situation for value investors: Being too early. 

It often takes the market a few years to understand and digest asset bubbles.

Read on: About the strategies of other renowned value investors.