Text / Yao Bin
We usually only know that Philip Fisher became the “father of growth stocks” for his advocacy of growth stock investing, but we don’t know that Benjamin Graham’s contemporary Thomas R. growth stocks” and make great practices. Price Graham Jr. was 4 years old and was born in 1898. They both experienced the Great Crash of 1929, but developed different investment philosophies. Graham created the theory of value investing through Security Analysis. Price developed the theory of growth investment through practice, and finally founded and developed the Puxin Group today.
Cornelius Bond worked in Price’s company for a long time and witnessed the development of Price and his company, so he made a detailed record in a book “Investing in Growth Stocks: Ro Price’s Way of Investing” . According to Bond’s description, Price attended Swarthmore College in his early years, first studying medicine and then chemistry, because he believed that chemistry in the early 20th century might be one of the major technologies facing the future. In 1919, after graduating, he joined the Fort Pitt Enamel Stamping Company as a chemical analyst. The company soon came to the brink of bankruptcy, allowing Price to experience first-hand the importance of a strong economy. In 1921, Price joined the DuPont Company as an industrial chemical analyst. There, he watched DuPont thrive firsthand, obsessed with how the company was built, how new products could underpin large corporations, and how all of this was funded in the stock and bond markets. The two employment experiences allowed him to find the direction of his personal future development.
So he moved into a relatively small financial firm, McCubbin-Goodrich, in 1925. Here, he spent 12 years and developed his basic investment philosophy. As he describes it: “Most people think of common stocks as something that is bought and sold for speculative profit. They think that to be successful you have to guess where the stock market will go. We don’t think that’s a good way to do it. U.S. The greatest wealth comes from investing in a growing business and staying with it through thick and thin.” In 1934, he set up an experimental fund within the company to demonstrate that better growth could be achieved by holding high-quality growth stocks. income. At the same time, Graham published his seminal book “Security Analysis” in the same year, advocating the investment of value stocks. Because it was completely inconsistent with the company’s investment philosophy, Price left McCubbin-Goodrich in 1937 and co-founded his own company, Thomas Roe Price, with two other partners.
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When Price first described his growth stock investing philosophy in 1935, he said, “To find a fertile ground for investing, you don’t have to go to college, you just have to have what my grandmother called practical knowledge.” The claim is similar to Nassim Taleb: The wisdom you learn from your grandmother is vastly superior to the experience you learn from business school. Because expert questions often bring vulnerability.
In 1939, Price was invited to write in Barron’s, a five-part series that comprehensively defined “the theory of investing in growth stocks.” These articles are:
① “Selecting Growth Stocks: Companies Have Life Cycles Like People; Risks Increase When Reaching Maturity” (1939.5.15);
② “Picking Growth Stocks: Measuring Industry Life Cycles; The Fallacy of Investing in High Liquid Income” (1939.5.22);
③ “Selecting Growth Stocks: Application Selection Steps in Three Fields; Factors to Consider” (1939.6.5);
④ “Selecting Growth Stocks: How to Identify Changes from Growth to Maturity, Chrysler vs. General Motors” (1939.6.12);
⑤ “Using Growth Stocks: Stable and Cyclical Flexibility in Portfolio Management” (1939.6.19).
Price’s “growth stock investing philosophy” is well known in the investment community. During his 45-year career in investment management, the content of growth stock theory has remained largely unchanged. The final version of this theory later appeared in a handbook published by the company in April 1973, titled “Successful Investing Ideas Based on Growth Stock Investing Theory.” In Price’s view, growth stocks “correspond to companies that exhibit long-term earnings growth, record EPS at the apex of each successive business cycle, and signs that future business cycle apexes can hit record highs. New highs. Earnings per share should grow faster than the cost of living to offset the expected decline in the purchasing power of the dollar. The goal of the investment is to create a portfolio of companies whose earnings are expected to double within 10 years.”
The cornerstone of Price’s portfolio-building approach is to “build the portion of the portfolio dedicated to investing in common stocks with growth stocks.” In the second in a series of articles for Barron’s, he defines a growth stock as: “A share of a particular business that exhibits good long-term potential growth in earnings and that, carefully researched, shows a future Signs of continued long-term growth.”
Each word in this definition has its own specific meaning. The object of investment is not a piece of paper, but the real shares of the enterprise. A company has “good earnings growth” because it is growing faster than the economy as a whole. “Long-term sustained growth” is not just a brief acceleration in new products, or a boost from a temporarily favorable business environment. “Careful research” is needed to ensure that growth can continue “into the future”. Growth stock investing theory emphasizes the importance of careful research, not just hope or blind faith that this high growth will continue for years.
The fundamentals of growth stock theory can be traced back to Price’s early years at Fort Pitt Enamel Stamping and DuPont. He compares the two companies, analyzing how they reward investors and reward employees. In a competitive market, Fort Pitt Enamel Stamping does not have a unique advantage. The company’s fragile balance sheet and limited profitability make it vulnerable to even small changes in the market. The best option for investors is to sell the stock to a competitor. And DuPont, which has been in business for more than 100 years, has modern, efficient manufacturing plants and is rapidly expanding into emerging markets. After a long period of diversification, the company had long since moved away from its original gunpowder and explosives business to produce chemicals and chemical products that were increasingly driven by technology. As a leading innovator in the chemical industry, DuPont has solidified its position with significant investment in research and development. Financially, conservative management creates a steady stream of cash to pay for the company’s rapid growth and provides shareholders with a steadily growing dividend.
Modern portfolio theory believes that the volatility of a company’s stock price is an indicator of a company’s risk. The more volatile the stock price, the greater the risk. But in Price’s view, the risk exists only financially, reflecting the possibility of a company going bankrupt. To him, Fort Pitt Enamel Stamping was clearly a big risk, and DuPont was not. For modern theorists, the opposite is true. Because there is little market making or trading in Fort Pitt Enamel Stamping Company’s stock, it is volatile and therefore not considered risky. DuPont stock is actively traded on the public markets and can sometimes fluctuate wildly. Contrary to common sense, this school of theory believes that DuPont is at greater risk.
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In his October 25, 1947 speech “How Much Is a Share in a Business Worth,” Price pointed out that the real wealth of this country “is created by men who put their capital into promising causes. , they worked hard, invested more capital, and held on to their investments throughout the bust and boom, like Ford, DuPont, Rockefeller, Duke, Carnegie, Woolworth, and many others Well-known names that represent legends. People are still creating wealth in this way today.” He continued, “You and I can participate in this kind of continuous growth because the stocks of the companies they represent can be Bought in the market.”
In a January 1954 speech titled “The Contribution of Growth Stocks to America,” Price recounted his early experiences at DuPont, “capable and visionary management encouraged employees to become shareholders and He was “impressed” by the fact that bonuses were given to key people in the form of DuPont stock. “In the years since I entered the investment business in 1921, I have observed that DuPont’s stock price has always been too high to be worth buying compared to most other stocks, while its market value has risen and gone. Another impressive observation is that employees who were trying to make more profit on their company’s stock sold when they thought it was too high and tried to buy it back at a lower price. But their gains Not as good as those who hold the company’s stock throughout the market cycle.”
In 1965, Price published a list of seven growth stocks he had bought and held since the 1930s and 1940s: DuPont, Black & Decker, 3M, Scott Paper, Merck and Pfizer et al. The average appreciation for these stocks is 36 times. He knows that no one is right when it comes to picking growth companies, but he believes that with a 75 percent chance of getting it right, the results will be “remarkable.” According to his account records, he has picked growth stocks correctly more than 80 percent of the time during his investing career. Over the years, he has gradually bought and sold stocks at what he believes they should be. Only after he is convinced that a company’s stock is no longer a growth stock will he fully sell his stake in the company. His expected holding period for any investment is in decades. Gradually buy and sell according to the calculated price, so the timing of buying and selling will not be a problem.
One of the most important concepts in growth stock investing theory is the study and understanding of life cycles, both industry and individual company life cycles. When Price first articulated the growth stock theory, he called it “investment life cycle theory.” In Part 1 of a series of articles in Barron’s, he argues that the life cycle of a company is similar to that of a person, and both have three important phases: growth, maturity, and what he calls decline. Investing in a business when earnings growth is strong can deliver more returns and less risk than investing in mature and recessionary periods. However, recessions are often overshadowed by rising business cycles, making them hard to detect.
In Part 3 of a Barron’s series, he wrote, “Both corn seeds and companies grow easily on fertile soil. Just as weeds can stunt corn, so can competition hamper companies. “Fertile land is free from barriers such as stiff competition and government interference. However, no matter how competent and diligent a farmer is, “if the field is barren and rocky, its yield and profit will be limited.” It is important to continuously monitor the fertility of the entire field, not just the results of individual companies. . An early warning sign could be a decline in industry turnover (sales) growth, especially if sales per unit time are still rising. This situation indicates that unit prices are falling, and it is a sign of declining profitability of companies in the industry.
Growth companies can emerge in dynamic emerging industries, in older companies that are thriving with new products, or as a result of management changes. A growth company can also be a specialized company that does not belong to any single industry, such as 3M, which produces a variety of unique and innovative products for many markets.
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For judging whether a company is a good investment project, the second important financial indicator after sales growth is its return on invested capital. DuPont was the pioneer of this concept, which is also a major factor in its success. Most companies in the 1930s and even today measure profitability by profit margin, or profit per dollar of sales after all expenses. This is a great way to compare companies in the same industry, but it doesn’t determine how much money a company makes, how fast it can grow, or how long it can stay in business.
For years, DuPont required its managers to only take on projects that earned 20 percent or more of the projected capital investment required. This requirement allows the company to limit its focus to the few projects that can simultaneously meet this threshold, and allows it to fully account for the risks inherent in any new project that could involve millions of dollars in up-front capital investment and marketing costs . The reasons for chasing a 20% return are subtle. If DuPont earns a 20% after-tax return on invested capital, its plant and equipment can expand at a 20% rate, which, in turn, will support a 20% increase in sales. That’s double the minimum return that Price would hope for a portfolio of growth-company stocks. Many fast-growing, otherwise successful companies have gone bankrupt by failing to focus on this important metric. They hit sales targets but ended up mired in debt due to insufficient returns on capital. Finally, the emphasis on the 20% rate of return keeps DuPont on the lookout for profitable new products and new businesses to continue its rapid growth in sales and earnings in the future. Thus, in 1921, for the young Price, the 122-year-old DuPont was far more dynamic than the 8-year-old Fort Pitt Enamel Stamping Company.
In his November 1954 speech on growth stocks at Johns Hopkins University, Price outlined other characteristics of a typical growth company:
(a) Intelligent research: Intelligent research for developing new products or developing markets for existing products, or both, is essential if a company wants to forge ahead in a rapidly changing world. It is easier for a company to generate high profits with a new product than with an older product that already has competition.
(b) Strong economic strength: Strong economic strength enables management to seize opportunities to expand the business when things are going well, and to avoid bankruptcy or financial crunch when the economy is bad.
(c) Appropriate profit margin: The pre-tax profit margin must be reasonable and the percentage varies by industry. A 6% profit margin is satisfactory for a company that sells consumer goods such as food, clothing and low-priced groceries because the company turns around quickly enough. A profit margin of 10% to 15% is necessary for companies that sell high-priced products with low marketing volume.
(d) Good management and employee relations: Employees should be paid well, but with a relatively low gross salary and easy adjustment to changes in business volume.
As Price emphasizes, it’s hard to tell when a company goes from a growth phase to a mature phase to a recession phase. The best time to sell is usually before the eventual slowdown begins. The problem is that there may be a temporary economic slowdown due to a natural downturn in the business cycle, product transitions, shortages of raw materials, or some other temporary factor that can mask reality. In the first of a series of articles in Barron’s, Price uses the railroad industry as an example of an industry that is maturing. Before World War I, the rail industry had been growing strongly. The ton-mile nearly doubled in the 10 years before the war, but competition from trucks and pipelines slowed postwar ton-mile growth and plummeted during the Great Depression, with profits plummeting.
This scenario also occurred in the later personal computer (PC) market. But that doesn’t mean all companies in the industry are stagnant or unprofitable. Some companies switch to other businesses or focus on a less competitive niche. In 2007, Apple launched the iPhone, which has since become a massive business. The company has a loyal following because their PCs have their own dedicated software that allows them to maintain prices. The company’s sales and earnings continued to grow. In an April 2013 report, Fortune magazine wrote, “Apple has only achieved a 5% market share while bringing back 45% of its profits.” Clearly, this profit comes from the other 95% PC Company.
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One of Price’s favorite old sayings in the late 1960s was, “A bird in the hand is better than two in the wood.” As he described in his August 9, 1978 brief, Investing for Future Income and Growth in Market Value, in his analogy, income is like a bird in the hand, dollars that can be used. Capital appreciation is like two birds in the forest. You have no chance of realizing appreciation unless you sell the stock. He feels that too many corporate employees are buying stocks for appreciation and forgetting the importance of dividends in their portfolios. “In order to rationally buy or sell growth stocks, it is necessary to determine ‘what the business is worth’. There is often a large difference between what a stock is selling for in the market and what it actually represents for the business. There is no magic Mathematical formulas can be used to determine this price. To a large extent, the determination of the price relies on experience.”
However, based on years of investing experience, Price has developed some guidelines related to stock value. He argues that stock valuations are directly related to interest rates on bank deposits, U.S. government bonds and corporate bonds. If the company is a growth company with interest rates at 3% to 5%, the stock should be worth 20 to 25 times its earnings over the next 12 months. He sees growth stocks at essentially twice the average valuation of stocks. Stock prices can continue to irrationally trade above or below their own value and may be overvalued or undervalued for extended periods of time.
So Price always advises investors to be patient, buy or sell at reasonable prices over time, and always be alert to snap up more stocks when the opportunity presents itself. News events often provide excellent buying opportunities. If the stock is trading at a significant premium to its valuation, he recommends selling some shares until the total cost of stock allocation and capital gains tax expenses can be covered. And the profits represented by the remaining shares in the portfolio should continue until the company has matured and is no longer considered a growth company. This portion of the stock has virtually no cost. For such views, Charlie Munger once said that a friend of his did just that. But I don’t know if Munger’s friend is Price. Munger said he had no objection to friends doing it, but he wouldn’t.
This simple but very important asset management rule produces amazing results. In an April 15, 1969, non-public paper titled “Performance: Thomas Roe Price & Company Growth Stock Funds and Portfolio Models,” Price mentioned some of the Company’s investment yield: By 1968, investment in 3M yielded more than 10,000%, and its shares were first purchased in 1939; investment in Merck yielded nearly 12,000%, first purchased in 1941; investment in IBM yielded more than 5,000% , first purchased in 1949; nearly 7,000% investment in Avon, first purchased in 1955; and nearly 4,000% investment in Xerox, first purchased in 1961. Most of these companies are still “built to last” today. Of course, there are plenty of other companies that don’t perform as well, but it’s like a well-manicured garden, allowing the strong companies to continue to grow while cutting back on the weaker ones, so that over time the strong companies will gradually become dominant in the group.
From early 1934 to late 1972, assuming all dividends were reinvested, Price said his growth-stock portfolio increased in value by more than 2,600%, while the Dow Jones Industrial Average rose 600% over the same period and the portfolio’s The dividend has grown by 600%. This is an outstanding record, especially during an extremely challenging period for the stock market, which has been through the Great Depression, World War II and post-war transition. And so, we saw that in the decades after World War II, Price’s growth stock idea became famous for its excellence.
Interestingly, in the 1970s, the market replicated Price’s growth stock investment strategy, and many companies in Price’s portfolio also made it to the “Nifty 50.” When the market frantically pushed up the “Pretty 50” stock price, it soon ushered in a sharp decline, causing Thomas Row Price to fail for a long time. This shows that any successful strategy is not always effective. No single investing style dominates all seasons. But even so, the Ro Price company has grown into one of the largest actively managed money companies in the U.S., with more than $1 trillion in assets under management as of March 31, 2018 . This may be something that Philip Fisher, the “father of growth stocks”, could never have dreamed of. In my opinion, if Fisher is the “father of growth stocks,” then Price is the “grandfather of growth stocks.”
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