Given the unpopular, increasingly expensive, out‐of‐control war in Vietnam, the huge costs of the Great Society program, and the large ensuing budget deficits, Mr. Price's sensitive antennae were up. His concerns began to increase about the country's future and the outlook for the stock market. He believed that economic history continually repeated itself because it was driven by human nature. As he had written in the 1937 pamphlet “Change: The Investor's Only Certainty”: “The basic social, economic, and political currents flow as long as human beings remain in control.”

The huge postwar economic boom following the war was similar, Mr. Price believed, to what occurred in the 1920s, following World War I. This current boom also had to end. By 1966, the nation's huge pile of gold, which had reached record levels in 1947, had virtually disappeared. Mr. Price wrote in a memo, “Change – The Investor's Only Certainty in 1966” (June 10, 1966), that “gold reserves were at the lowest levels since prior to World War II.”

The 1929 stock market crash had turned into a depression, many believed, because of the leverage from the huge stock market‐related debt taken on by Wall Street, corporations, individuals, and the banks themselves. But, “in the mid‐1960s,” Mr. Price wrote privately, “it was the consumers, supported by the banks and other financial institutions, that had engorged, not on stocks, but on houses and automobiles, under the easy lending conditions following World War II.” The consumer was saturated with goods, loaded with debt, and could not afford to buy much more.

Europe's economic growth was also slowing, Mr. Price pointed out. The long postwar economic expansion of the entire industrialized world was clearly getting overextended. It had been an amazing run – the longest in the history of the United States – while maintaining a very low rate of inflation. Per capita income, after adjusting for inflation, had gone up a remarkable 60 percent between 1946 and 1966. This was capitalism at its finest, showing what it could do with very little government intervention in the corporate world.

As he explained in a memo to clients, “Areas of Concern, 1/27/60,” other changes in the mid‐1960s were subtler. “The United States had financed the reconstruction of the capital nations of the world, friends and enemies alike,” he wrote. “We have transmitted to them our ‘know‐how’ and our ability to build modern plants for mass production at the greatest efficiency. United States corporations have spent billions of dollars to build plants in the principal nations around the world. We are facing now opposition from those we have helped.”

He began to worry about inflation, due to the large government deficits and an end to the long business expansion. In an important statement of a changed investment strategy, “The Long Look Ahead,” February 1964, he wrote: “I am convinced that more inflation, either before or after a business depression, is inevitable…more emphasis should be placed on natural resource companies, such as oils, metals, and timber than has been placed on these companies during the past ten years, when inflation was not an issue.” In “Areas of Concern,” February 1965, he stated, “No nation, including the United States, is rich enough to support all of the Have Nots of the world, or strong enough militarily to protect all of the non‐Communist people against Communism…. President Johnson's Great Society will lead us further down the path to socialism. This means more of a welfare state, more regulation of industry, more government management of money, and a further depreciation of the purchasing power of the dollar.”

Mr. Price was a conservative by almost any standard – hostile to the New Deal, hostile to government regulation, and a strong supporter of American might and leadership. Yet he was also a pragmatist who denounced what he saw as wrong‐headed policies by America's hardliners from both parties.

Mr. Price blamed the country's failures of leadership on the failure of the free world's “dollar diplomacy.” As he said in “The Long Look Ahead” (February 1964), “You cannot buy friends for keeps, whether you are an individual or a nation. You must have understanding and mutual respect for the other fellow's point of view, whether a person or a nation.” He was also very concerned about the increasing U.S. involvement in Vietnam because of the potential drain of manpower and resources, as well as its absolute cost. This was at a time when few people even knew much about that conflict. Mr. Price felt that a bear market of indeterminate magnitude and duration was about to occur and would very possibly be “of greater severity than any since the end of World War II.”

As a result of his concerns about the country, the economy, and the stock market, he decided to drastically alter his own accounts in preparation for the rough seas he saw ahead. His largest single asset was the shares that he and his family owned in the firm. These shares were illiquid, and earnings of T. Rowe Price and Associates could suffer significantly in the environment that he foresaw. In what must have been a very difficult decision, in 1965 he offered to sell all of his shares in the company to the other founders and employees of the firm. One suspects that this decision could also have had something to do with his increasing inability to control the firm, with its larger size and complexity. Mr. Price had demonstrated, when he departed from Legg, that he had no desire to be part of an organization that he didn't control. His health also continued to worsen.

Charlie and Mr. Price began a dialogue on the sale of his stock and particularly a fair price. These shares, of course, represented the controlling interest of the firm. Charlie was dragging his feet a bit, however, because he had no idea where the firm was going to get the money that he knew might be required to buy out Mr. Price. Finally, Mr. Price arranged a lunch at the Merchants Club with Charlie and a prominent Baltimore attorney with a number of wealthy clients who could be interested in buying an interest in T. Rowe Price. Toward the end of lunch, Mr. Price asked the attorney if he was interested in buying his share of the company. Charlie recognized this as a transparent ploy to get the ball rolling, but it also evidenced to him that Mr. Price was getting increasingly serious about cutting a deal. Following lunch, Charlie went directly to the First National Bank of Baltimore. By late that afternoon he had sketched out a deal. The price, however, remained an issue when he discovered that Mr. Price was demanding a value well in excess of what a majority of the employees thought the firm was worth. The amount was, also, more than they could afford to pay, even with financing from First National.

The critical turning point came April 12, 1965, when Mr. Price was rushed to the hospital with a blocked small intestine, complicated by an ulcer. For five days, he lay in intensive care, fed only through intravenous tubes. It was two months before he was allowed to come back to the office. This near‐death experience convinced Mr. Price that he should sell his shares in the firm – even at a lower price than he had been hoping for. As he noted in his journal, “I am convinced my illness was due partly to my state of mind. As I had been worrying for many, many, many months about my inability to reach an agreement on the purchase of my stock.”

He wasted little time after his health returned. On June 28, 1965, he signed an agreement with Charlie, Walter, Kirk, and several other senior associates who were large shareholders. Unfortunately, this sale did not go through. Jack Dreyfus, the founder of the Dreyfus Fund, which was the largest public mutual fund at the time, coincidently filed a registration statement to sell his controlling interest of the management company of the Dreyfus Fund on October 5, 1965. In studying this transaction, the SEC discovered that a significant change in ownership of a mutual fund management company had not been included in the Investment Company Act of 1940, yet there were obvious serious implications of such a sale for millions of fund shareholders. The SEC did not allow any sales of controlling interests of other management companies while they studied the Dreyfus issue. This clearly included the sale of Mr. Price's stock. As a representative from the SEC told Charlie, T. Rowe Price and Associates was “like a bird caught in a badminton game.”

Mr. Price began to feel better. The market had improved some. The Growth Stock Fund performance was improved; shareholders were beginning to return. The firm's client performance was also much better. When the one‐year term of his original deal with T. Rowe Price and Associates ran out and with the SEC's freeze on the sale of controlling interests of mutual fund management companies still in effect, Mr. Price decided to ask for a higher price for his stock. This change in the terms of the deal did not go over well with Charlie or most of the T. Rowe Price employees who would be the buyers. They thought that, as the saying goes, “a deal was a deal.”

John Hannon had a different view. Highly regarded for his excellent calls on Xerox and Polaroid, which had made a great deal of money for the firm's clients, as well as his courage to take controversial stands at difficult times, he made a brilliant and impassioned case for the purchase of Mr. Price's shares. Even at the newly elevated price, Hannon argued that it was still a good deal if one took a longer‐term view.

After much grumbling and argument, a new deal was finally signed June 28, 1966. The firm paid Mr. Price $792,000 for his shares, Eleanor received $50,000, possibly related to her original $50,000 note, and the Price children another $50,000, for a total of $892,000 for the controlling shares of T. Rowe Price and Associates. This included the counsel business and the Growth Stock Fund. As it turned out, John was absolutely right. It was a great deal for the firm and for the associates who participated. Almost on cue, the bull market fully blossomed the next year. The money began to roll into the Growth Stock Fund and clients were knocking at the door. The New Horizons Fund continued its excellent performance, as noted in its annual report. Mr. Price went from feeling that he had gotten a very good deal to thinking that he had sold the company way too cheaply. It must have been difficult to remind himself, as he was always a competitor, that making money had never been his objective in starting the firm. As he is quoted in The History of T. Rowe Price and Associates, Inc., “It is better to be too early than too late.”

Immediately following the sale of his stock, the name of the firm changed from T. Rowe Price and Associates to just T. Rowe Price Associates. Mr. Price resigned in 1966 as chairman of the board, and Charlie, already president, became chairman as well. Mr. Price also gave up most of his clients. He did keep the controlling shares and his titles as chairman and president of the Rowe Price Management Company. He also continued as the president of the New Horizons fund, Rowe Price Management's only client at that time. The Growth Stock Theory of Investing had been proven yet again to be a winning strategy, although this very success would become a problem.

Once an investment concept of his had been proven to the world to be successful, the challenge altered for Mr. Price. There was no one left to compete with. He began to seriously develop yet another new strategy, a significant modification of the Growth Stock Theory. It was an investment concept that would prove to suit the new, highly inflationary environment that he saw coming.

Shortly after his agreement to sell his interest in the company had been signed, he wrote “Change – The Investor's Only Certainty in 1966.” This was his first update to the paper written just before he started the firm in 1937. In this version he wrote, “Our national leadership has deteriorated, our dollar diplomacy has failed, and our brand of democracy is not being accepted by the underprivileged of the world. Not only has the metallic backing of our currency been discontinued, and our currency today is only redeemable in paper, but also our silver coins are no longer silver. Our currency has been printed at an accelerated pace and our gold supply continues to diminish.”

To his few remaining clients he wrote a memo in March 1966 titled “My Program for Preparedness Has Been Completed,” informing them that he had trimmed those stocks in his own accounts that he considered overpriced or not suited for the world that he saw developing over the next decade. The proceeds from sales of these stocks had been invested in dollar obligations to provide for:

1. Greater safety of principle.
2. Higher spendable income.
3. Reserves for state taxes.
4. Reserves for future purchases of common stocks.
5. Reserves for unpredicted expenses.
6. Reserves for expenditures for PURE PLEASURE AND EXTRAVAGANCE!

He also outlined several areas for the investment of new funds that would be appropriate for the challenging times that he saw ahead.

1. Business Services.
2. Science and Technology
3. Natural resources: land, gold, silver, timber, oil, and gas.

These three categories consisted of large and small growth stocks, many of which were already approved for the New Horizons and the Growth Stock Fund. The last category was new. Companies in this category weren't growth stocks, but he expected them to do exceptionally well in an inflationary environment.

This sudden shift in his investment strategy was more evidence of Mr. Price's true genius. Well ahead of other investors, he had the ability to recognize a major change in the world's social, political, and economic conditions. This ability wasn't magic, but based on long experience and careful study of important trends, as spelled out throughout this book. An important ingredient was his basic understanding of human nature. “Growing up on a farm,” as he said to us, “had helped a lot.”

His new focus on natural resource stocks was due to the historic emphasis investors had long placed on tangible assets, and the rejection of paper currencies in a highly inflationary environment. The earnings and value of such companies increased rapidly in an accelerating inflation, as did profits. They were able to sell the materials they produced at ever‐increasing prices. These resources had been acquired at low prices over a long period of time, whereas their prices went up rapidly as the overall price structure rose with inflation.

In 1966, the firm's research analysts covered only growth stocks. A new team would be required to analyze this third, natural resource category. For this job Mr. Price hired Howard (Pete) P. Colhoun, a thirty‐one‐year‐old engineer. Since graduating from Princeton and Harvard Business School, Pete had been with the management consulting firm Arthur D. Little, Inc., as a consultant involved in a variety of different industries. Mr. Price immediately put him to work looking at the nuclear power industry. Pete became the first member of this new “inflation” team working directly for Mr. Price at Rowe Price Management.

Just as Mr. Price had developed the Growth Stock Philosophy first within his own model accounts, he set up a new model account with the proceeds from the sale of his stock in the firm to invest in the above categories. Because of his concern that there might be a significant decline in the market before the rise in inflation, he kept 50 percent of this model portfolio in short‐term government bonds and treasuries.

After testing this concept for two years, he decided to create a new mutual fund named the New Era Fund. Interestingly, less then a year before the fund was launched, an article called, “Despite Our Current ‘Inflation Psychology,’ a Serious Inflation Is Not in the Cards,” appeared in the February 2, 1968, issue of the New York Times. Mr. Price was well ahead of the economists and market forecasters, as usual. The experts mentioned in the article had no idea what was coming.

He had wanted to call it the Inflation Fund, but the SEC did not allow that. He also wanted to buy raw land and actual commodities, such as copper, gold, and silver, and store these commodities in vaults and warehouses. This was also disallowed by the SEC because of the problem of accurately pricing these materials and, therefore, determining a daily price for the fund.

The New Era Fund was launched in 1969. The previous year George A. Roche, a graduate of Georgetown University and Harvard Business School, had been hired from Proctor and Gamble as the second full‐time analyst at Rowe Price Management, to focus on natural resources. George would prove to be one of Mr. Price's most inspired hires. Working mostly for the groundbreaking New Era Fund, he covered metals, mining, forest products, and precious metals. Later, George would become chairman of the New Era Fund Investment Advisory Committee and the fund's president. In 1984 he would become CFO of T. Rowe Price Associates, gaining the confidence of management with his careful and conservative oversight. He would become president of the firm in 1997.

Because of my background in science and technology, which was a major investment by the fund, I was also a member of the original New Era investment committee and a vice president of the fund. The New Era Fund was successful in quickly gaining assets from the beginning. The track records of the Growth Stock Fund and the New Horizon Fund were there for all to see. Only four years after inception, total assets for the New Era Fund totaled $200 million. As noted in its 1966 annual report, the Growth Stock Fund had taken more than 15 years to reach that level.

In 1968, Mr. Price offered to sell his controlling interest in Rowe Price Management to the associates. It was apparent that it would fit well into the future plans of the firm, which involved more new funds. Retaining the Price name within T. Rowe Price Associates was deemed to be critical. Again, there was much negotiation over price, particularly with the bargain price of the original firm now apparent to all. When Mr. Price threatened to bring in Lehman Brothers Holdings, Inc., as a buyer, the small staff of Rowe Price Management threatened to quit en masse, effectively ending that possibility. These outside negotiations ceased when Walter Kidd pointed out to Mr. Price that the firm had the right of first refusal in a sale of Rowe Price Management.

In the end, the firm agreed to pay Mr. Price $1.5 million for his majority ownership of Rowe Price Management. The deal was consummated in 1968, with the first closing in 1968 and the second in 1969. Mr. Price resigned as president and chairman of the New Horizons fund. Rowe Price Management was merged into the parent company in 1973 to simplify management. Mr. Price put $1 million in cash from the sale into the Equitable Trust Bank in recognition of the $5,000 line of credit, which had been so important to the young organization many years before. The rest went into his new model “inflation” fund, which still consisted of 50 percent in reserves, with the rest in natural resources, business services, and science and technology.

In line with his increasing concern about inflation and its ultimate potential impact on the stock market, the economy, and even society itself, he physically visited both the Mercantile‐Safe Deposit and Trust Company and the Maryland National Bank vaults before deciding which offered the most protection for his bond and stock certificates.

In April 1970, Mr. Price wrote an important memo, which turned into a booklet, “The New Era for Investors” to his clients and the firm stating, “Our balance of trade has worsened and our gold reserves are inadequate to meet the claims of other nations. Total debt of the U.S., including its citizens and corporations, has more than tripled since the end of World War II to $1.7 trillion. Interest rates are higher than they have been at any time in the past 100 years and the liquidity of corporations and banks is critically low.”

The “number one problem,” he continued, “is accelerating inflation. The Full [sic] Employment Act of 1946 insures that inflation will continue. We cannot have full employment without inflation. Minimum wages have been continuously adjusted and insure that labor costs and its prices will escalate.”

He notably stated one of his favorite themes: “Even the richest nation in the world cannot continue to spend more money than it collects without going broke. It is only a question of time.” In no uncertain terms, he warned of the coming apocalypse: “Uncontrolled inflation creates ever larger booms and busts. There is no turning back once it is entrenched into society. Ultimately, there will be a very serious business depression that will create social revolution and confiscation of property of the Haves by the Have Nots. Destruction of the wealth of those that have created it will be by taxation, devaluation of the paper currency and confiscation of property.” He was forecasting a return to the 1930s and worse. The employees and clients of T. Rowe Price were certainly warned what he thought their future held, in his opinion.

In Mr. Price's view, the best indicator of inflation was the U.S. Department of Labor's Consumer Index (CPI). The annual rate of increase in the CPI tripled to 6.2% between 1965 and 1969. Mr. Price felt that no future government could be elected that sought to control an inflation of this magnitude. He concluded his memo by insisting, “control of inflation can only be achieved by balanced budgets and increased savings. Such [unpopular] measures slow the economy and add to unemployment.”

Mr. Price foresaw that profits would suffer for most corporations. Prices for labor and raw material would rise faster than corporate sales. Moreover, the government would raise taxes to pay for the increased cost of government services, and this would also negatively impact corporate profits. It would be doubtful that the majority of consumer stocks would give an investor enough protection again inflation.

To deal with the increasingly “dark new era” that he foresaw, he suggested raising the percent of a portfolio invested in natural resource companies to more than 30 percent. Such companies were certainly not growth stocks. They were mature, and in some cases not managed in an overly astute manner. Their natural resource holdings of timber, raw land, oil, gold, and silver, however, should substantially benefit from inflation. Gold and silver, in particular, were increasingly favored by Mr. Price, as the decade of the 1970s progressed.

He was very selective about the growth stocks that he thought were appropriate for this environment of accelerating inflation. He believed that their return on invested capital should be significantly higher than had been the norm for many growth stocks in earlier low inflation years. To make a real profit in a world where rampant inflation might exceed 10 percent, a company's return on invested capital must also exceed 10 percent. He favored faster‐growing companies much earlier in their life cycle, such as were included in the New Horizons Fund. His model portfolio for the environment of the 1970s that he foresaw was structured very differently than the T. Rowe Price Growth Stock Fund and the portfolios of most of the firm's clients. As the list of growth companies with high ROIs narrowed in this new era, Mr. Price felt that there would be increased investor demand for those companies that still qualified. Continuing care would have to be exercised not to overpay as these companies rose in value.

The price of natural resource stocks indeed began to rise and was based on the value of their assets and not current earnings, as Mr. Price had forecast. In fact, he believed that such companies might not have any earnings under some conditions, but sell as highly valuable commodities in the market. “Throughout history,” he wrote in the same April 1970 memo, “precious metals, such as gold and silver, have been a haven for people with wealth desiring protection against the ravages of inflation and the depreciation of paper money.” For many years, Swiss bankers had recommended that their clients hold at least 5 percent of their assets in gold bars. With inflation relatively low since World War II, this had not been a profitable strategy. After 1968, however, the worm began to turn as inflation increased. Precious metals holdings began to be quite profitable. The price of gold rose first due to the declining dollar, and then with accelerating inflation, as Mr. Price had anticipated.

With the New Era Fund successfully launched and a new management in place, Pete Colhoun became president of the New Era Fund. Mr. Price and Marie Walper both officially retired from T. Rowe Price Associates on April 30, 1971; Isabella Craig retired at the same time. But Mr. Price was like the Cheshire Cat in Lewis Carroll's Alice's Adventures in Wonderland, slowly beginning to disappear, but then reappearing, while raising philosophical and baffling issues. Ultimately, all that would be left was his grin.