"The important assets of a financial services business leave and go out of the door every night."
Eddie Brown has led a charmed life. Born in 1940 to an unmarried 13-year-old mother in the segregated town of Apopka, Florida, he went on to become the first African-American money manager to work for a major Wall Street investment firm.
Today, he has more than US$4b of assets under management at his Baltimore firm, Brown Capital Management, and has donated more than US$22m to charity.
It's an astonishing success story, but, meeting Brown, it's easy to see how his combination of charm, humility and self-reliance has helped open doors for him. Against almost insurmountable odds, Brown has won people over, and they have given him a chance to prove himself.
"One cannot control the hand that they've been dealt at birth," he says, "and if one had looked at my hand, they'd have said, 'Man, how do you play that hand?' But you can control the way you play what seems to be an unplayable hand. You just have to be persistent, you have to figure out things, and get advice and help."
Brown credits the people who raised him (his grandparents and uncle) with teaching him about self-worth, the importance of hard work and social responsibility. His grandmother, a laborer by the name of Mamie Magdalene Brown, took the young Eddie to the big city, Orlando, on Saturdays. "She would show me the men, white men, sitting behind desks in white shirts and ties," he remembers.
"She would say to me, 'Eddie Carl, if you stay in school, study hard, do well and eventually go to college, you too can sit behind a desk with a white shirt and tie instead of working in the fields.' So that set a vision."
His Uncle Jake, a natural entrepreneur, gave him his business acumen. "I'd never known him to have worked for anyone else except himself," says Brown. "He'd get contracts with the major citrus growers to bring in migrant workers. Over time, he got into a more lucrative business, which was running moonshine, and he became the largest distributor in the state of Florida. If it had been a different time and if he'd had the education, I'm convinced that he could have become a Fortune 500 CEO."
Beginnings in business
When Brown was 11, Uncle Jake paid off the local law enforcement and let Eddie have his first pickup truck. By 13, Eddie had established three small businesses, all legal. The raw materials (offcuts discarded at sawmills, plant cuttings and Spanish moss) were all free, his labor costs were minimal and his profit margins were high.
At 14, he moved to Allentown, Pennsylvania, where his young mother saw him through high school.
Then an anonymous benefactor, a white woman whose identity Brown still does not know, sponsored his education through college — electrical engineering at Howard University in Washington, DC.
"That set this idea," he says, "that if I ever had sufficient resources, I too would like to help people, especially African-American youth, who are less fortunate."
After a stint in the army, he entered IBM as an electrical engineer but continued to pursue further education.
During this time, he began to realize that investing was a profession in which he could make a lot of money. He spent 10 years at T. Rowe Price as a portfolio manager. Then, in 1983, he went it alone. Brown Capital Management was born.
"I always had the idea that one day I'd like to be independent," he says, "but there are several things an entrepreneur needs to be successful. First of all, the right educational background for whatever it is one would like to do. The second thing is specific experience in the area where you plan to pursue that entrepreneurial dream — at least five years. The third thing is adequate capital, preferably without having to borrow money to start the venture."
Brown knew he could survive for three to five years without income, while still supporting his family. "The next thing you need is the ability to take risks. I only take calculated risks, where I know what the downside is." In this case, he was certain that, should it all fail, he had enough experience to get another job.
"The last thing you need is a supportive spouse, if you're married," he smiles, "because there will be those difficult days when things are not going well, so you really want to have full support at home. If you have all of those things, you have the makings of an entrepreneur."
Slow and steady wins the race
Brown has built a reputation as a socially responsible, forward-thinking leader. Over the years, he has had to become more sensitive to how much he was willing to pay for growth. That's when he coined the term "GARP."
As he explains, "It wasn't GASP, growth at a silly price, or GAAP, growth at any price, but GARP, growth at a reasonable price." GARP is a growth strategy that combines growth investing with valuation consciousness, and helps to uncover stocks that are trading at a reasonable price. "It means paying less and getting more in investment terms," he says.
However, Brown Capital's success has not been without hiccups. The most notable of these came in 2004. "We made a major mistake," he admits.
"We began to respond to performance pressures and got off track of our fundamental strength, which was longer-term investment. Our assets went from US$6.5b to about US$1.2b. So we went back to basics, what we knew."
It seems to have worked.
In 2008, when the stock market was down by 37%, the company held on tight and outperformed the market. And in an environment of layoffs, Brown Capital kept its entire staff, but the three best-paid employees took compensation cuts.
This, says Brown, created enormous goodwill.
Today, he is starting to put in place a succession plan to prepare for his absence at some point in the future. Five years ago, he realized the company was full of type-A personalities, which he believes could lead to infighting, so he formed a management committee and appointed company veteran Keith Lee as chair.
Now, he feels like it won't miss a beat. The fact that it remains 100% employee owned also helps. As Brown sees it, this gives employees an incentive to make the firm grow.
He'll also be lowering his personal share over the coming years until the investment team, marketing and client services team, and chief administrative officer become majority owners. Brown believes in looking after his assets — and he doesn't mean the billions he has under management. As he says, "The important assets of a financial services business leave and go out of the door every night."
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