The Hindu Business Line : Investment Nuggets

T. Rowe Price is a professional investor who showed that it is possible to beat the market averages consistently over time. He also founded an investment firm in his name — T. Rowe Price Associates. Price was very much an entrepreneur rather than a manager. His favourite companies — Avon Products and Black and Decker — actually became known as “T Rowe Price stocks”. Price published a sample family portfolio to show how he had turned $1,000 invested in 1934 into $271,201 by end-1972. Price was known to be a strong-willed man. He never deviated from the daily agenda he set himself, or from his decisions about when to buy and sell stocks. He demanded the same zeal and discipline from his employees. This unforgiving work ethic turned his firm into one of the largest asset managers of his day. Here are some takeaways from T. Rowe Price.

“Growth stocks’ can be defined as shares in business enterprises that have demonstrated favourable underlying long-term growth in earnings and that, after careful research study, give indications of continued secular growth in future...Secular growth extends through several business cycles, with earnings reaching new high levels at the peak of each subsequent major business cycle…”

“Even the amateur investor who lacks training and time to devote to managing his investments can be reasonably successful by selecting the best-managed companies in fertile fields for growth, buying their shares and retaining them until it becomes obvious that they no longer meet the definition of a growth stock.”

“Concentrate on industry leaders. These can usually be identified by their competitive advantages, including: Outstanding management, leading-edge research and development, Patents, licenses and other legally enforceable product rights, relative protection from government regulation, low labour costs but good labour relations.”

These advantages usually go hand-in-hand with:

A strong balance sheet

A high return on capital

Consistently above-average earnings growth

If these financial ratios are improving, that is often a good indicator that the company is still in its growth phase.”

“The best time to consider buying is when growth stocks are out of fashion. The time to start selling is when the stock is 30 per cent above your upper buying price limit. Also, consider selling if you can be reasonably certain the bull market has peaked, the company appears to be entering the mature phase or the stock price collapses on widespread selling.”

“Look for companies in the earliest identifiable phase of growth. This growth is of two kinds:

Cyclical — growth in unit volumes of sales and in net earnings, which peaks at progressively higher levels at the top of each succeeding business cycle. These stocks are ideal for investors looking for capital gains during the recovery stage of the business cycle.

Stable — growth in unit volumes and in net earnings, which persists through the downturn in the business cycle. These stocks are suitable for investors who need relatively stable income.”

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