Taylor Frigon Capital Management LLC has deep roots in investment management.
Our investment philosophy is directly descended from the growth stock theory developed in the late 1930s by Thomas Rowe Price, Jr.
Because Mr. Price was a money manager and not an academic, he did not publish books or dissertations about growth stock investing. He produced portfolios. Because of this fact, it seems that there is less literature surrounding the growth stock theory of investment than other investment management styles (such as value investing). As a consequence, growth stock theory is less understood and is often completely misunderstood.
During the 1990s in particular, the popular understanding of the term "growth" had been distorted into something very different from the original meaning. Mutual funds with the word "growth" in their label were often characterized by extremely high turnover of stocks (sometimes in excess of 200% turnover per year) and the purchase of companies with little or no earnings. What should be called "momentum investing" was often called growth investing and the two were seen as interchangeable, when nothing could be further from the truth. Investors came to think of "growth" stocks as speculative plays on companies with huge potential that made current fundamental measurements unimportant.
However, this popular misconception of the concept of growth investing is quite opposed to the sense Mr. Price wanted to convey when he coined the term in the 1930s. In a paper entitled "A Successful Investment Philosophy based on the Growth Stock Theory of Investing," which he wrote in April of 1973, Mr. Price explained that "In the early 1930s, after 10 years experience in the investment business, several things were learned which helped to formulate my investment philosophy." Specifically, he noted that neither he nor anyone else (including the big investment houses and stock market firms) had the ability to correctly forecast the trends in the markets to the extent that they could base a long-term strategy on calling the next move correctly, year-in and year-out. "The various systems usually failed at crucial turning points in the market," he noted.
Instead, Price developed what he called the growth stock theory of investing, which meant NOT trying to call the next cycle but instead "retaining ownership of successful business enterprises which continued to grow and prosper over a long period of years." Most of the big fortunes in the 1930s (he noted) were made by men who did not attempt to time the ups and downs of the business and stock market cycles. Fortunes were made by owning great companies back then -- and if you think about it, that is exactly the way most of the big fortunes have been made in this country in the 1980s, 1990s, and in this decade. When Price coined the term "growth," he meant a philosophy that tried to make money the very same way: by owning good businesses through the up and down cycles, rather than trying to time those cycles.
This is very different from the picture most investors have of "growth" investing as it is depicted in the "style box" simplification used by tens of thousands of retail "financial advisors" and those in the financial press.
The classic growth stock theory, in the words of Rowe Price, looked for "capable, dynamic management operating in a fertile field for future growth." He set out a variety of fundamental criteria, including parameters for return on invested capital, profit margins, and annual earnings growth.
Ultimately, the investment philosophy based on the growth stock theory of investment places the long-term financial health of a family on a foundation of sound businesses, as opposed to investment theories that place long-term success on a shaky foundation of trying to call one or more market trends (such as trends in this sector versus that sector, this currency versus that currency, trends in the direction of interest rates, or trends in the direction of the price of oil or some other commodity, among countless other trends).
Basing your financial future upon the ability to call the next move in the price of oil is extremely hazardous. Even if you are better than the next man at doing so, the possibility that someone would be able to call those moves correctly for thirty years, day-in and day-out, is dubious.
At Taylor Frigon Capital Management, we are proud of our heritage as practitioners of the classic growth stock theory of investment for over twenty years. Please stay tuned to the Taylor Frigon Review for more information about investment management, and about the larger questions of wealth planning.
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During the 1990s in particular, the popular understanding of the term "growth" had been distorted into something very different from the original meaning. Mutual funds with the word "growth" in their label were often characterized by extremely high turnover of stocks (sometimes in excess of 200% turnover per year) and the purchase of companies with little or no earnings. What should be called "momentum investing" was often called growth investing and the two were seen as interchangeable, when nothing could be further from the truth. Investors came to think of "growth" stocks as speculative plays on companies with huge potential that made current fundamental measurements unimportant.
However, this popular misconception of the concept of growth investing is quite opposed to the sense Mr. Price wanted to convey when he coined the term in the 1930s. In a paper entitled "A Successful Investment Philosophy based on the Growth Stock Theory of Investing," which he wrote in April of 1973, Mr. Price explained that "In the early 1930s, after 10 years experience in the investment business, several things were learned which helped to formulate my investment philosophy." Specifically, he noted that neither he nor anyone else (including the big investment houses and stock market firms) had the ability to correctly forecast the trends in the markets to the extent that they could base a long-term strategy on calling the next move correctly, year-in and year-out. "The various systems usually failed at crucial turning points in the market," he noted.
Instead, Price developed what he called the growth stock theory of investing, which meant NOT trying to call the next cycle but instead "retaining ownership of successful business enterprises which continued to grow and prosper over a long period of years." Most of the big fortunes in the 1930s (he noted) were made by men who did not attempt to time the ups and downs of the business and stock market cycles. Fortunes were made by owning great companies back then -- and if you think about it, that is exactly the way most of the big fortunes have been made in this country in the 1980s, 1990s, and in this decade. When Price coined the term "growth," he meant a philosophy that tried to make money the very same way: by owning good businesses through the up and down cycles, rather than trying to time those cycles.
This is very different from the picture most investors have of "growth" investing as it is depicted in the "style box" simplification used by tens of thousands of retail "financial advisors" and those in the financial press.
The classic growth stock theory, in the words of Rowe Price, looked for "capable, dynamic management operating in a fertile field for future growth." He set out a variety of fundamental criteria, including parameters for return on invested capital, profit margins, and annual earnings growth.
Ultimately, the investment philosophy based on the growth stock theory of investment places the long-term financial health of a family on a foundation of sound businesses, as opposed to investment theories that place long-term success on a shaky foundation of trying to call one or more market trends (such as trends in this sector versus that sector, this currency versus that currency, trends in the direction of interest rates, or trends in the direction of the price of oil or some other commodity, among countless other trends).
Basing your financial future upon the ability to call the next move in the price of oil is extremely hazardous. Even if you are better than the next man at doing so, the possibility that someone would be able to call those moves correctly for thirty years, day-in and day-out, is dubious.
At Taylor Frigon Capital Management, we are proud of our heritage as practitioners of the classic growth stock theory of investment for over twenty years. Please stay tuned to the Taylor Frigon Review for more information about investment management, and about the larger questions of wealth planning.
our web site
Subscribe (no cost) to receive new posts from the Taylor Frigon Advisor via email -- click here.
I happened on your blog and found it really interesting. I'm a college student and was wondering where I can find the paper that T.Rowe Price wrote about his growth stock investing theory. I've been looking for it online and can't seem to find it anywhere. thanks alot.
ReplyDeleteHi Justin --
ReplyDeleteThanks for your interest. You're right -- it doesn't appear to be online anywhere at this time. However, we'll see what we can do about that for you.
Please email dmathisen [at] taylorfrigon [dot] com, and I will see about providing you with access to that 1973 essay.
DM