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LEARN FROM GENERALS OF THE MARKETS – PART 32
“I never blamed the market… I had to have the proper process from mentality to preparation to execution if I was going to make it.” – Anthony Crudele
Thomas Rowe Price, Jr. was born in Maryland, USA. He lived from 1898 to 1983. Receiving his first degree in chemistry (Swarthmore College), he’d first-hand experience of the economic Depression, and instead of developing a great hate for the markets, he fell in love with them. Yes, he found that he preferred figures to chemicals. He began working at a brokerage firm in Baltimore, where he worked his way upwards the company’s ladder.
Because he didn’t see eye-to-eye with the investment philosophy of the firm he worked for, he established his own firm in 1937 – T. Rowe Price Associates. He invariably gave his investors’ interests a priority, also charging investment-based fees rather than commissions. The logic is this: if your investors succeed, you’ll succeed too. He founded a mutual fund in 1950; which he presided over till he retired. The Fund, named T. Rowe Price Growth Stock Fund, was actually purchased by his erstwhile workers. Yet it remains a functional trading firm till today.
Lessons
What can we learn from this mad genius?
1. What others see as reasons for abandoning the markets are what trading geniuses see as the reasons for embracing the markets. I’ve seen misinformed people swearing never to trade or invest again because of the effects of the 2008 bear markets. What happened then have made some traders reach the pinnacle of their achievements. Thomas’ early years as a market player made him come to grips with the effects of the Depression, but this only made him a better market player.
2. Customers, clients, and investors come first. They need to be given priority in everything. If this is done, then you’ll be well compensated. This is what Thomas believed, and it worked for him, just as it still works today.
3. Honestly, the best market forecasters don’t know tomorrow with utmost certainty. The art of forecasting is essentially probabilistic in nature. You don’t know what’ll happen in a few years’ time, not to mention several years. There are rivals and cutting-edge innovations; and things like that. These things can have severe impact in the world of trading. The only thing you can be sure of is that there’ll always be changes, and the only thing you can always control is your risk.
4. Why was Thomas a successful investor? He knew the markets have some patterns caused by herd mentality. The logic is to go against that herd mentality, not to go with the crowd. His investment approach; which is growth investing, was totally something that looked so novel. It’s all about specializing on some instruments that could go northward in the long term. Self-control, sticking to his strategy and good knowledge of the fundamentals are some of his secret principles.
5. Thomas was called the father of growth investing because he believed that hot and well-organized companies can deliver returns that could outpace the growth rate of the economy. Therefore good research is needed in stock picking, diversification, and risk reduction. These principles have proven to be correct. When selecting stocks, Thomas often considered a company’s research excellence in product developments, absence of deadly rivals, non-intervention by the government, cost-effective budget, well-compensated workers, decent percentage profit, good profit margin, and an enviable increase in earnings per share. This is the definition of a growth stock. The shares of a company are worth holding as long as this definition is still valid. When it’s clear that the definition is no longer valid, it’s time to dump the shares. Newbies can use these principles successfully.
6. Thomas was smart enough to know when to hold on to stocks and when to let go. Although he espoused growth investing for more than 3 decades, he tended to become aware of the blind overconfidence of the public. When the price gains had gone too far and the public enthusiasm is irrational, then the bullish biases were over. He knew when to sell. Do you also have exit strategies?
Conclusion: Rookies tend to visualize how much they can make from then markets, without thinking of how they can control the impact of the uncertainty when things go wrong. You can really control what happens to your account… plus you can deal with your trades with clean rationality. Strategies that make sense have logical positive expectancy incorporated into them, since following the line of the least resistance may sometimes have very low accuracy.
This piece is ended with a quote from Thomas:
“It is better to be early than too late in recognizing the passing of one era, the waning of old investment favorites and the advent of a new era affording new opportunities for the investor.”
Source: Paxforex.com
Ground-breaking lessons from expert traders: http://www.harriman-house.com/experttraders
