Sunday, March 7, 2010

A Star Trader Who Rarely Ever Traded

This week, one of the great traders of the mutual fund industry, John Laporte of T. Rowe Price New Horizons, stepped down. An investor who put $10,000 in the fund when Mr. Laporte took the helm, three weeks before the crash of 1987, now has $78,000; the same investment in the Russell 2000 Growth index of small-company stocks has grown to just $52,000.

The key to Mr. Laporte's trading greatness? Barely trading at all. He has urged his successor, Henry Ellenbogen, to do the same. Jack Laporte's advice holds a lesson for all investors, large and small.

He held his typical stock for four years; the average small-company fund, according to Morningstar, flips its stocks every nine months.

New Horizons has held two-thirds of its top 20 holdings for at least five years apiece. Mr. Laporte has clung to his largest position, the medical-products distributor Henry Schein, for more than 14 years; he has owned his fourth-largest, O'Reilly Automotive, since 1999.

In seeking the great growth companies of tomorrow, Mr. Laporte looks for creative leaders, a strong corporate culture and innovative ways of doing business. He hunts in service industries and in markets not controlled by a handful of giant firms. He also insists on strong cash flows, high returns on capital and low debt.

But spotting growth companies in their infancy requires patience. "It often takes me years to get confident in the business strategy and the management team," Mr. Laporte says.

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