Brown Capital founder Eddie Brown in the company’s boardroom. He learnt entrepreneurship from his uncle, a moonshiner, who taught him to drive at the age of sixImage: Jamel Toppin for Forbes
Inside a four-storey, sumptuously restored 19th-century town house in Baltimore, three of Wall Street’s best stock pickers are roasting each other in a wood-panelled boardroom.
“Usually when we’re getting rid of something [in the portfolio], we’re getting rid of Kempton’s mistakes,” booms Keith Lee with a laugh, referring to Kempton Ingersol, a Brown Capital Management portfolio manager and the son-in-law of the firm’s CEO and founder, Eddie Brown.
Lee, 59, is the president of $12 billion (assets) Brown Capital and leader of a team of portfolio managers that Morningstar has put in its hall of fame.
Brown Capital is an old-school stock-picking operation that doesn’t chase the latest fads on Wall Street. The firm hunts for unglamorous but fast-growing companies. Brown mostly buys growth companies that have revenues of less than $250 million. So far this year, Brown’s flagship Small Company Fund is up by 21 percent, trouncing the market, and has averaged a 19 percent return annually over the past decade. Since its inception in 1992, the fund is up 22-fold.
“We take what we do extremely seriously,” says Lee, who started at the firm 28 years ago. “We just try not to take ourselves that seriously.”
The firm’s informal culture and its commitment to championing unloved growth stocks is in many ways a reflection of the incredible life journey of Eddie Brown, one of the great untold stories of African American success on Wall Street.
Brown, 78, was born in Apopka, Florida, in 1940 to an unwed 13-year-old mother and raised by his grandparents in a part without paved roads, indoor plumbing or electricity. His grandfather toiled in the fields of citrus groves, where Brown also worked as a child driving a truck, and his grandmother was a labourer at a nursery.
Two things drove Brown. His uncle Jake, an entrepreneur who ran a fleet of trucks that transported citrus, labourers and moonshine, showed him that it was possible to earn money without a boss. The teachers at Brown’s segregated schools instilled a different lesson: “They beat it into our heads that as a black you are going to have to be twice as good to make it,” he recalls.
In 1955, when Brown was in class X, his grandmother died. A cousin became fearful that Eddie would follow his uncle’s path (Jake wound up in prison), so she called Brown’s 27-year-old mother, then living with a boyfriend in Allentown, Pennsylvania, to come fetch her son.
Up north, the white administrators at Brown’s new high school assumed (without testing) that he should repeat class X and follow an industrial arts curriculum, but Brown’s mother demanded her son be placed in college prep courses. Then, after taking an aptitude test that indicated he might make a good engineer, Brown applied and was accepted to Howard University, a historically black school in Washington, DC.
An Allentown woman anonymously paid for Brown’s tuition, room, board and books at Howard, where he met his wife, Sylvia. After graduating with a degree in electrical engineering in 1961, Brown worked at Martin Marietta and then as an engineer at IBM. During this time, he discovered a love for investing, so he enrolled in Indiana University’s business school on a scholarship. After graduating in 1970, he took a job in Columbus, Indiana, at Irwin Management, a family office created by J Irwin Miller, the CEO of Cummins Engine. Miller was one of the 20th century’s enlightened capitalists, working with Martin Luther King Jr to organise the March on Washington.
At the firm, Brown became an equities analyst. In 1973, T Rowe Price’s president, Charles Shaeffer, offered Brown a position at the pioneering growth-stock fund manager. He became the Baltimore firm’s first African American portfolio manager. Soon afterward Shaeffer, nearing retirement, turned over many of his accounts to Brown, who was surprised that few of his white clients batted an eyelash: “It taught me something,” Brown says. “Money is green.”
Brown’s next big break came in 1979, when he began appearing on the weekly PBS show Wall $treet Week with Louis Rukeyser. The credibility led Brown to start his own firm in 1983. His first account, $200,000, came to him via a letter sent to the show. It was President Johnson’s former personal secretary, Geraldine Whittington, the first African American to work in the White House in that role. Whittington had been awarded a malpractice settlement.
“Eddie was such an important role model,” says John Rogers, founder of Chicago’s Ariel Investments. “It was an inspiration to see him on that iconic television show.”
In 1992 a former T Rowe colleague Robert Hall urged Brown to launch his unique small company fund, which would measure companies by revenue rather than market capitalisation. The fund, which Hall wound up managing with Lee, soon became heavily weighted in health care, business services and technology. It avoided cyclicals, real estate and banks.
To gain an edge in health care, Brown’s managers enlisted genomics experts at Johns Hopkins University to teach them. Ideas came from everywhere. Hungry on a business trip in the Midwest in 1998, Lee uncovered Panera Bread when he walked into one of its bakery-cafes called Saint Louis Bread Co. Green Mountain Coffee Roasters was discovered in a newspaper article when it was a small Vermont wholesaler. The stock was the firm’s best-ever investment, rising ninetyfold until it was sold in 2012.
“I wish I could sit here and tell you that we have all these incredible algorithms and a very sophisticated way,” Lee says. “It really is fundamental research.”
Not everything has been a success. One of its top holdings, Inogen, had an earnings shortfall and plunged 76 percent in eight months. In 2013, after two decades of average annual returns of 14 percent, Brown Capital’s Small Company Fund closed to new investors.
Now a centimillionaire, by Forbes’s estimate, Brown is bothered by recent closures of African American-owned investment firms like Holland Capital and Herndon Capital. In 2016, he completed an employee stock ownership plan, meaning Brown’s 36 employees—70 percent of them minorities—now own the Baltimore firm. With a succession in place, Brown is giving away his money, inspired by his benefactor in Allentown. Over the past quarter century, he and Sylvia have distributed over $39 million to dozens of educational, religious and artistic endeavours.
“It’s incumbent upon those of us who are of colour in the investing field to do everything we can to spread the word that this is an area of tremendous opportunity to create wealth,” says Brown. “It’s not just about wealth, but to be in a position to then do some good for others.”
(This story appears in the 27 September, 2019 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)