Does T. Rowe Price’s 1950 Growth Stock Checklist Still Work Today?

0:00We say it all the time. We talk about it all the time. One of the hardest things about being an investor is the part where it's knowing if you're investing in a great company or if you're actually investing in the great memory of a company. So today, Andrew and I are going back in a time machine back all the way to the 1950s, where T. Rowe Price wrote a Barron's article about choosing growth stocks for the 1950s. We're going to run his checklist through the ringer and we're going to ask what still holds up, what breaks in our modern economy, and how we can use a three quarters of a century old framework to make better decisions right now.

0:42So here we go.

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2:50Stephen:You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. And welcome back to the Investing for Beginners podcast, everybody. My name is Stephen Morris, and across from me is the slightly younger, maybe debatable, better looking Andrew Saylor. And today, Andrew, we are going back to the 1950s to talk about T. Rowe Price's article, Choosing Gross Stocks in the 1950s.

3:34And I don't know if you did, but I actually printed out, and if you're on YouTube, you can see I have it marked up and highlighted, but I actually printed out the actual article from 1950 and the Barron's national business and financial weekly. This was printed to February 6, 1950. And one of the, this is probably really stupid, but something I think is really cool. Andrew is there's a ad on here and it doesn't, is it says guarded by the growth of the nation farm and home millions are man it's hard to read because it because it's all like old and blurry but anyway it's basic i think it's a cd maybe the it's advertising for and the current dividend at this time was two and a half percent per year and it says down here at the bottom that you're federally insured for up to 5 000 and the very the coolest part of it at the very bottom it says home and loan savings or farm and home savings and loan association right for more details like how cool is that man like man like i don't know i guess i'm weird but yeah that i was super geeked out whenever i saw just like this old timey article and it's like man like i feel like i just went back to the future any who's i just every every single part of that felt old every detail like if we're we're just are you making fun of me are you for real no

5:19Stephen:like like it just sounded old right right in you know yeah right in like but i went up to five grand. Well, what's really interesting to me is like when I was reading it, I thought this was a part of the piece. It took me a minute to realize that it was an advertisement and the advertisement doesn't really say what it's for. So, I mean, obviously it's some sort of investment. I still don't know what kind and maybe it's if I was alive back then I would have recognized it. But I mean, yeah, I don't know. I feel like marketing has come a long way since the 1950s. But anyway, so do you know anything about T.

6:03Rowe Price? And you sent me this article or you told me to look up this article. So how did you find this, first of all?

6:13Stephen:I don't even remember. I think it was on X or something like that. T. Rowe Price has long had a track record of having mutual fund managers and just really a lot of active investors in the market. And so their stocks actually publicly traded, the ticker is T-R-O-W. And for a long time, they were kind of like the growth kings. When you thought of growth stocks, you thought of them. And I haven't looked into how have they changed since passive indexing and all of the big disruptions that you've seen from ETFs. But as far as I know, they're still pretty active in the whole mutual fund space, active management.

6:56Stephen:They just have that track record, that reputation. So I think getting an article from the founder and his name is on the company, I think it's cool to see where his mindset was. And I was surprised, like no spoiler alerts yet, but there are similarities to like how you and I invest, Stephen, and how he's mentioning picking growth stocks. So it's a little amusing to me to hear what used to be considered growth, just kind of being an everyday investor philosophy that does not depend on growth or value. And I think people will see as we go through some of these. yeah absolutely and i i think the very first thing that is just amazing about this piece is he starts off with the definition of what a growth stock is and i'm reading this directly from the the article itself it says uh a growth stock is defined or was defined as a share in a business enterprise which has demonstrated long-term growth in earnings and which after careful research study gives indications of continuing such growth in the future reaching new heights in earnings per share at the end of each subsequent major business cycle i think that's one of the most delicate definitions of of what a growth stock is that i've ever heard or read what do you mean delicate because i think what i mean by delicate it's maybe delicate's the wrong word maybe i should have used the word eloquent there you go like it's very well thought out it's It's very well written.

8:49It's and it's very it communicates very clearly what exactly he defines as a growth stock.

8:59Stephen:It sounds like the type of stock I want in my portfolio. It's funny how the way people when I think of growth today, I think of. Uber expensive, like we're just paying ridiculous amounts of money, you know, one point seven trillion dollars for a company. or I think of a company who hasn't seen growth slowing down. It's funny how a company will go from like 20 % growth to 10 % growth. And now all of a sudden it's not a quote unquote growth stock. This definition is saying like, look, as long as you're getting growth over the long term, that's what really matters. And that's what leads to returns.

9:40Stephen:It's not whether you had a deceleration or not. And it's just funny how Wall Street is so dramatic about levels of growth. I love that dramatic. Yes. Wall Wall Street is very dramatic, as we're saying today with tech stocks, because everyone is losing their mind over tech stocks being down. It's groundhog day. It is like every morning because like my AI prepares me a, you know, like a daily briefing when I start my work day every morning. and one of the things it does it pulls me the top five most trending headlines in the financial news and for like the past four weeks all it's been is tech stocks bring down the market tech stocks bring down the market like just constant that's all it is and like every morning it's like I'm drinking coffee like I'm so sick of this I can't wait for this to be over but anyway um And as I said in the beginning, basically what Andrew and I are going to do today is we're going to pressure test his checklist of eight items and see if they still hold up today.

10:49And one of the other things that he mentions right before he gets started in his checklist, which is something that definitely still holds up today, is he makes a point of mentioning that no mathematical formula or yardstick alone can be relied upon to identify growth stocks. And that's something we preach every single episode just about like it's, you know, yes, some of that mathematical formula goes into it, but also gut intuition, research, understanding the business. Like there are so many other factors. And he even in the 1950s, he's identifying this to his readers and trying to educate them in that way.

11:35So, Andrew, the very first factor that we have to take into account on his checklist is management quality and employee goodwill. He says management must be aggressive, efficient, understand social trends and have the goodwill of employees and leaders should also own stock in the company. Yeah, it's it's great.

12:04Stephen:I mean, you think about what do you want a CEO to be good at? You want them to be aggressive. You want them to be able to be growing the business, but also doing it with a discipline, a cost efficiency. So both of those aspects, you don't want one without the other, right? He mentions both of those aspects. I thought it was interesting, the social influence, or I'm sorry, understanding social trends. you saw kind of how there was some backlash in early, the early 2020s, 2020, 2021. It seemed like corporations almost took it too far with, with the DEI, but for a while you did have investors who were investing with their heart in a way, you know, investing alongside their values and thinking of corporations and investing as more than just dollar signs, but also of how are they impacting society?

12:58Stephen:And I mean, we could go down a rabbit hole on that, but I think having a good grip of that, I never really considered. I'm curious how your thoughts on kind of being aware of social trends, but it just seems like, I don't know, maybe good business sense that you don't want to be doing anything that could piss off the wrong people when you're managing a corporation and then the, the, the insider ownership. I think that's, that's so big. And you do see that and all this stuff is just kind of down the line, makes sense, makes sense, makes sense. We want managers who have the incentives aligned with shareholders and having big stock ownership can be a great way to do that.

13:42But like, what are your, what are your thoughts on like a management being at least aware of social trends well i think it's important especially maybe more so now than when we were growing up in business because uh one thing i've i've definitely noticed and it's been comment on commented on quite a bit about like the gen z generation is that they're more inclined to and we see this with Evan, especially, um, they're more inclined to want to work for companies that make impact, that have make a difference. And it doesn't necessarily matter to them if they get a giant pay raise, if they don't believe in the morals and values of the company.

14:29Um, and we see that a lot, um, in this generation. So I think, I think especially today, it's very, very important. And I think goodwill of employees is probably one of the one of the things that spoke to me the best is because you can tell a lot about a company by the way it treats its employees. um there there are companies uh fedex is the first one that comes to mind who has a notorious reputation for just how badly it treats its employees you know how um crappy their work conditions are and their expectations are um and that's not just me assuming like you can go on glassdoor.com and see what their employees are saying about the company.

15:19And so I think, I think that is huge. And that's not something that I hear a lot of investors today talk about. So I'll be perfectly honest, that's not something I even really look at when I do my research. Of course, I want to know how many employees they have and stuff like that, when their last layoff was or whatever. But it never it never even crossed my mind to go use it, utilize a tool like Glassdoor.com just to see what the employees say. And you were talking last episode about I don't remember. I think it was a professor. I don't remember who you said it was, but they were doing research for a class they were teaching.

16:05and they wanted to invest in Uber, I think you said. And one of the first things he did was get into an Uber and start talking to the driver. And that speaks directly to what I'm talking about, the goodwill of the employees. And then I think the aggressiveness is something we definitely learned from Buffett because when you talk about aggressive and efficient, what are we really talking about? We're talking about capital allocation. We're talking about discipline. We're talking about speed of decision making. We're talking about even the willingness to disrupt their own product if it's for the betterment of the company.

16:49You know, we see that with CAT as a good example. So, yeah, as far as I'm concerned, checklist item one, management definitely checks off. as it withstands the pressure test today. Is there anything you would want to watch out for when it comes to management just as kind of a cautionary tale for the listeners? Yeah, I think bad capital allocation.

17:23Stephen:I guess just the opposite of what we just said. But bad capital allocation is a big one to me personally. yeah another one which you're just not thinking of right now but i know you're as soon as i say you're gonna be like oh yeah and that's a share share uh share based compensation as a percentage of revenue um huge huge red flag uh for management um but yeah i don't know andrew do you think this one uh passes the pressure test for today yes i gave it a cha-ching that cha-ching i like that So factor two he mentions on this checklist for 1950 is intelligent research And I'm going to read directly from his article And I apologize, this article is really blurry Because I printed it off directly from the site So it's pretty old even though it's on freshly printed paper but it says intelligent research which develops new products new markets for existing products or both is essential if a company is to forge ahead in a rapidly changing world it is easier for a company to realize high profits on new products than on old ones which have attracted competition and that i have underlined like as many times as i could underline it on this because it's an article.

18:53So the letter, the line spacing is really thin, but I've managed to get like four underlines in there because that is brilliant. Something else that I know, but I never really, it's never really at the front of my mind. The longer a product's on market, the more competition is going to attract, especially if it's really profitable.

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21:34Stephen:What's the best way to get started in the market, download my ebook for free at stockmarketpdf.com. Yeah. I don't know why Coke and Pepsi, we haven't talked about them enough on this podcast, right? But I really think of them when you talked about this because obviously technology and hardware, software, all of this thing, everybody kind of knows, yeah, that stuff's, you got to be on the cutting edge. But even a company that's been around for seemingly forever, Coca-Cola and Pepsi, they looked at threats like what's a substitute for soda? Well, bottled water. And that was a big craze for a while.

22:20Stephen:And so who purchased up Dasani? Right. So they're being very proactive and companies can do that. They can do that through developing the product themselves. They can take the Microsoft route and just wait for somebody to create something and then copy it and do it like a little bit better. Or they can take the acquisition route like Zuckerberg dig acquiring Instagram. And I think you acquire WhatsApp as well. So you can do it in all of these certain ways, but you don't, you definitely don't want to be sleeping at the wheel. And we've seen too many examples and we talked about that probably ad nauseum in the last couple episodes.

22:59Stephen:But being in those products that people are willing to pay money for, consumers are notoriously fickle. And so I think resting on your laurels is a thing that, you know, obviously people do, but also companies can do too. And as an investor, you want to try to avoid those type of situations. yeah it's funny because uh when i was when i was doing the research like coke and pepsi like obviously was the first thing that came to my mind and i had that exact thought like we talk about them way too much so so i went digging into it and so what i did was i kind of put my own words to it so obviously product iteration you can't really replace that uh phrasing but i mean mean look at apple iphone i mean other than maybe a little bit thinner i think i have the iphone 13 and my wife has the newest one whatever that is i think and it's pretty much the same looking phone i think hers is a little bit thinner but not much but i mean the the the software inside is gradually getting better so it's just new iterations of the same thing basically um i think that's brilliant because they've already established the brand they already have the loyalty they already have all that stuff just slightly making it better it's worked great for them um it has created some backlash as well so i mean with everything there's always a negative um distribution innovation we can look at amazon for that they really they you know i ordered a coffee uh from amazon uh got it the next day ordered dog food got it the same day like you know it's their distribution is hands down uh revolutionary in my opinion and then we look at just the evolution of business models we can look at netflix they started as dvd mail-ins you know they mail dvd straight to your home then they they gradually shifted to streaming and then they gradually drifted to ad supported streaming and so i mean just over the years we see them slightly switching their business model to keep up with changing times and i think that speaks highly to exactly why he's talking about in this is, you know, is, does the company have a robust R and D that isn't just talk like they're just not saying, Hey, we want to make these, these amazing 3d meta goggle things.

25:54And they're going to be awesome. Everybody's going to have them and live in them. Like they're actually producing decent R and D returns basically.

26:06Stephen:yeah no that's brilliant so number three on their uh competition of a cutthroat nature should be guarded against as it impedes growth what what thoughts come to mind when you hear this um this one i don't i'm not entirely sure holds up because i think as times have changed over the past you know 76 years i think business has definitely got a lot more cut throat than maybe it had been back then obviously i wasn't alive but um so i don't know for certain but in the research i've done like you know in business school and you know for for the work we do um i definitely think there needs definitely needs to be a more cutthroat nature uh in businesses today but i also see where we can still apply this to our investing today as in um you know those companies we talk about all they do is try to nickel and dime you um and the the the best example of that is the gaming industry they have really they've really ticked off a lot of people with uh what what are they called um

27:31microtransactions inside games. You know, you buy a game, but you no longer buy a game. And they're even going so far now as they're not even making hard copies anymore. Like I think in the next two years is going to be straight digital. And so, I mean, which is, which is, I hate because at that point, all you're doing is buying a license. You're not actually buying a product and they can revoke your license anytime. So, you know, you buy a game and suddenly you know society says grand theft auto is immoral and people shouldn't play it and so they buckled to society and now they've taken something you've bought um i don't like it and so i think that is definitely something anyway man i got on a soapbox there didn't i apologize getting back on topic i think uh nowadays being cut through would more speak to like the nickel and diming aspect of a business.

28:28And you can definitely see where that has hurt the gaming industry.

28:32Stephen:Yeah, I guess the first three really kind of all feed into this thinking of the customer. You know, if management does its job, then the employees can create a good customer experience, customer service. If the research is good, R &D is good, create products that customers are happy to pay for. And then what you're illustrating too, on the flip side of how you can erode that. And I've had an investment in a video game publisher and it did not go well for me. It definitely underperformed the market did not make as much as I wanted it to. So I know what you're talking about at a very painful level.

29:17Stephen:So I hope we can just move on. um i i would say to to kind of put a feather in this is one thing to definitely watch out for in in that regard and and what i was speaking to is uh cac uh customer acquisition cost um you can see that on on their on their financial statements you can you know the the problem with it is that they try to use fancy wording to hide it but um or a lot of times they do but that's something definitely you got to watch out for because once that customer acquisition cost starts to to get outrageous um that's what's going to start eating into that bottom line and that that like andrew said that's definitely something we see in the gaming industry again going back to that example um so yeah so number four or i'm sorry andrew did you think uh avoid cutthroat competition holds up today i i was going to go a different direction but i hear what you're saying and it makes sense what was your direction you're gonna go i was gonna like the race to the bottom i think customers should uh customers i think companies should avoid the race to the bottom but sometimes you have no choice sometimes amazon comes in and drags you down to a race to the bottom and you just have to fight but very preferable if you can avoid the race to the bottom how do you identify that in real time like when that's what's happening with the company

31:00Stephen:uh one that comes to mind i was reading netflix's 10k so this isn't like a perfect example but they mentioned in the risk factor how they're having a deal with piracy. Piracy meaning people who are downloading or streaming entertainment content for free. Obviously, a lot of that's against the law and it's basically intellectual property rights not being defended. But that would be an example of when a competitor is selling things at a loss. I guess so one would be like China. A lot of Chinese commodity companies and other types of companies are subsidized by the government. And so because they have this extra funding that companies like in the United States might not have, they will aggressively lower their prices to where they're actually losing money on products.