Saturday, May 21, 2016

Brian Rogers reflects

Last October, Brian Rogers completed an extraordinary 30-year tenure managing the Equity Income Fund, though he continues serving on the fund’s Investment Advisory Committee and as T. Rowe Price’s chairman and chief investment officer. Over a three-decade period leading to October 31, 2015, Mr. Rogers managed the fund through many challenging market cycles.

Reflecting on that long career, Mr. Rogers offers several investing insights. Some may be basic common sense but are often difficult to achieve in practice.

First, when confronted with market setbacks, investors should try to keep a long-term perspective and take advantage of short-term volatility, he urges.

“When you look at a lot of these market declines on a long-term price chart, you realize how unimportant they seem,” he says. “The 1987 crash, for example, seemed like a huge incident at the time, but now it looks like a little blip on the chart. Many fund investors tend not to do as well as the market because they buy high and sell low.

In fact, Mr. Rogers says investors should try to take advantage of market declines by investing more in higher-quality companies selling at attractive prices.

“You have to be a counter-puncher, a contrarian,” he adds. “The long-term trend of economic growth is positive, and the long-term trend of markets is upward, but in any short-term period you can be down sharply. In the past, it has almost always made sense to ride through it.”

As a value investor, he says investors should focus on the quality of a company and its stock price rather than macro concerns. “The price you pay often determines investment success,” he says. “Over time, price and value will converge.

“We have always tried to capitalize on controversy, buying stocks that are out of favor often with lower price/ earnings ratios and higher dividend yields than average,” he adds. “If the company’s earnings and dividends grow over time, the value of the enterprise should rise, notwithstanding short-term fluctuations.”

To judge corporate quality, focus on its balance sheet and whether the company has the financial strength to withstand adversity, he says: “My worst investments were companies where the degree of financial leverage and illiquidity on the balance sheet got me into trouble. If you buy a good company and it doesn’t work out, the worst outcome may be little or no return rather than significant losses.”

“Simplicity is a virtue when it comes to investing,” he says. “Complexity is a friend of Wall Street and the enemy of Main Street.”

*** [8/8/16 - T. Rowe Price Report, Winter 2011]

Looking back over the last 25 years, Mr. Rogers notes several key lessons he has gleaned—first and foremost that, despite many challenging periods, “the world is a very resilient place.”

He cites four such periods in particular that shook market foundations and really rattled investors’ nerves:

• The market crash of 1987. “It was over so quickly that it hardly mattered in the long run, but that was as scary a couple of days as I have ever seen.”

• The credit crisis of the early 1990s. “That was really, really difficult, exacerbated by Saddam Hussein invading Kuwait, causing oil prices to spike dramatically,” Mr. Rogers says.

• The 2000–2002 bear market. “To me,” he says, “that wasn’t quite as frightening because it wasn’t as systemically challenging. It was more the result of several overvalued market sectors coming back to reality.”

• The crash of 2008. “This was a terrifying time because of the household name institutions that collapsed due to imprudent use of leverage and poor management decisions.”

After each of these crises, however, equilibrium returned to global markets and the financial world moved forward. “So we’ve seen a lot of things over 25 years, but what you realize over time is how resilient the system is,” Mr. Rogers says. “I sometimes think we forget that in periods of market dislocations.”

The second lesson, harkening back to the technology stock bubble of the late 1990s, “is that trees don’t grow to the sky,” he says. “And so if it seems too good to be true, it may be. Very few companies grow at 20% to 25% on a sustainable basis, and you have to be sensitive to what you what pay for an investment. And at times, when valuations become extended, you have to be willing to walk away and sell something when it looks too richly valued.

“I think that’s something that’s very hard for investors to do, because in periods of high valuation everything looks good.”

Accordingly, Mr. Rogers says, “The third lesson—and this is really hard— is that you have to force yourself to be a bit of a contrarian and avoid investing in something simply because it has recently done well.

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