Letter #218: Thomas Rowe Price, Jr. (1939)
Founder of T. Rowe Price | This is No Time to be Panicky.
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Today, T. Rowe Price has over $1tn of assets under management. But 85 years ago, right as they were getting off the ground, World War II broke out.
85 years ago today (September 14)—just two weeks after Germany kicked off WWII by invading Poland, and just two years after Thomas Rowe Price, Jr. founded T. Rowe Price, and —Thomas wrote a memo to clients titled This is No Time to be Panicky with advice on how to manage investments through periods of uncertainty.
Today, I’d like to share that memo with you.
At the time, T. Rowe Price was less than two years old, and clients would not be unreasonable to want to pull their investments from this fledgling firm. However, Thomas cautioned his clients from getting too worked up over forecasts (as we like to say at Speedwell Research, “Anything worth forecasting can’t be forecast, and anything that can be forecasted isn’t worth forecasting”). He then lays out what they still didn’t know, what they did know, and what they believed, before ending with some ideas on how to manage their investments through this uncertain time and be prepared for future opportunities.
Thomas Rowe Price, Jr. was the founder of T. Rowe Price, which he established in 1937. He started his career as a chemist at Fort Pitt Enamel and Stamping Co. in Pennsylvania. Less than a year later, the factory workforce went on strike, the bank ceased financing them, and Thomas’s job disappeared. He then joined DuPont as an industrial chemist at one of their Jersey plants, where he began reading business publications, and developed a love for finance, stocks in particular. However, within a year, DuPont’s profits nosedived, and Thomas was once again laid off.
In less than two years, he had had two jobs and been laid off twice. However, he took this opportunity to dedicate himself to the stock market. He struggled to find a job, but ultimately, through a distant relative of his mother, became a stock broker at Smith, Lockhart (a small Baltimore stock brokerage). But once again, less than a year after joining, his company faced financial difficulties, going bankrupt—his bosses would be charged with defrauding customers and were sent to jail (it was a ponzi scheme). Now, three years out of college, he had been laid off twice and two of the companies he worked for went out of business.
However, he remained fascinated by the stock market, and resolved to stay in finance. He searched for a more stable firm, and joined Jenkins, Whedbee & Poe as a bond salesman. But after two years, Thomas decided he wanted to expand his horizons. For the first time in his career, he willingly left a company that was not facing financial difficulties. By this time, he had established a good reputation, and was able to join a firm of his choosing—and he chose Mackubin, Goodrich & Co., which would later be renamed Mackubin, Legg & Co. (after John Legg, who became Thomas’ mentor), and then Legg & Co., before it merged with Mason & Co. to become Legg Mason (known for being the home of Bill Miller where he beat the market for 15 straight years, as well as that of Michael Mauboussin). After over a decade at the firm, Thomas decided it was time to strike out on his own.
I hope you enjoy this letter as much as I do!
Related Resources
Legg Mason
Bill Miller Compilation (379 pages)
Michael Mauboussin Index (300+ research reports, interviews, etc.)
T. Rowe Price
Letter #159: Richard Rainwater (1997) - Brian Rogers feature
Letter
We caution our clients against the danger of becoming panicky now that war is an actuality. The air and the press are full of rumors, reports and prognostications. Commodity and security markets are experiencing violent price fluctuations.
There is very little reliable information on which to base an opinion as to what is going to happen during the months and years ahead. Any forecast is extremely dangerous until we have further information concerning the following questions.
WE DON’T KNOW —
Whether the war will be long or short.
Which other countries will be involved or which side they will support.
Whether the United States will be drawn into the war.
Whether the present Neutrality Act will be revised in accordance with the President’s wishes.
To what extent the Federal Government will attempt to regulate prices of commodities.
To what extent the Federal Government will attempt to control production of vital industries.
To what extent the Federal Government will limit profits.
Whether we shall have further deflation in this country before inflation takes hold.
WE DO KNOW —
High grade bonds, including U.S. Treasuries, dropped from five to ten points within several days — contrary to the general belief prior to the break.
Stock averages advanced sharply upon the advent of war instead of declining as had been so generally forecast.
Many commodities have sharply increased in price despite the existing surpluses and excessive production facilities.
The public is buying steel stocks and other “war babies” in anticipation of big profits such as accrued to these companies during the World War.
The public has been selling sound stocks which are not direct beneficiaries of war, but which may prove to be better investments than the “war babies” in the long run.
WE BELIEVE —
Economic conditions today are quite different from those prior to and during the World War.
Future events are likely to be very different from what most people anticipate today.
A period of readjustment and hesitation of business may occur after the first scramble to buy commodities and stocks.
Because many uncertainties lie ahead, clients should be prepared to make frequent changes in their holdings as developments dictate, regardless of whether such changes involve profits or losses.
For months we have recommended the sale of long term, low coupon bonds and an increase in holdings of high grade, short term obligations, U.S. Savings bonds and bank deposits, where the client’s objective has been conservation of capital.
Common stock funds have been fully invested and purchase recommendations have been predominantly in shares of companies which we thought should prosper with or without war and serve as a partial hedge against inflation.
We now caution against scrambling for “war babies” which have had a sharp rise in market value and throwing overboard good stocks which have been greatly depressed in market value. We have recently recommended the sale, in part, of some of those stocks which have had a substantial rise and may have temporarily overdiscounted near term prospects, in order that each client may have ample cash reserves and be prepared to take advantage of future buying opportunities.
T. ROWE PRICE, JR. AND ASSOCIATES
TRP:MW
September 14, 1939
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