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Although legendary investor like Warren Buffet has reckoned that ‘Growth and Value Investing are joined at the hip’, the market obsession with the divergences in the market multiples across businesses continues to ignite Growth and Value debate. Thomas Rowe Price Jr is called the father of Growth Investing. Initially a chemist at DuPont, he later opted to work at a brokerage. He set up T. Rowe Price Associates, an investment advisory firm in 1937 and T. Rowe Price Growth Stock Fund was incorporated in 1950.
T. Rowe Price Associates is now T. Rowe Price Group, Inc. – a publicly listed global investment management firm. And the T. Rowe Price Growth Stock Fund is still operating.
According to Mr Price, a growth stock should be able to retain growth in purchasing power terms, meaning that earnings of the enterprise should increase at a rate more than the existing level of inflation.
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He stressed that a cyclical upside in the earnings of an enterprise should not be perceived as the growth of the firm, and the opposite is true when earnings of an enterprise are under strain during a cyclical slowdown.
Mr Price often held stocks for decades and noted that Growth Stocks should be held until the growth in the enterprise is exhausted, or the enterprise is no longer a Growth Stock. He published a list of stocks that were owned by him in the 1930s and 1940s, delivering outstanding returns. These stocks were Black & Decker, 3M, Scott Paper, IBM, Pfizer, DuPont, and Merck & Co.
Investors chase Growth Stock to realise long-term capital appreciation from the investments, which are expected to deliver better-than-average growth in the share price. Growing companies carry the potential to outperform income stocks since growing companies reinvest their profits instead of distributions to exhibit further growth.
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