Slow and steady wins the profits.

Whether you are a novice or veteran, the greatest opportunities await the patient investor. No one knows this to be truer from history and experience than John W. Rogers Jr., founder and president of Chicago-based Ariel Capital Management Inc., which as of last December was managing $1.6 billion.

During the past nine years, the young stock secialist--Rogers is only 34--has been busy. First, he built a full-service asset management firm, which attracts investments from institutional clients including colleges, corporations and some of the nation's largest public and private pension funds. Then he created the nations's only equity mutual funds managed by African-Americans.

In 1986, he opened the Calver-Ariel Growth Fund, a small capitalization (small-cap) fund. (Small-cap funds buy stock in companies valued at between $50 million and $1 billion.) The fund is worth $260 million. Four years later, after closing the Growth Fund to new individual and institutional investors, Rogers launched the Calvert-Ariel Appreciation Fund, worth $90 million. It buys stock in companies as large as $3 billion.

Rogers' financial strategy is different from that of most Ivy League graduates working on Wall Street. The 1980 Princeton University graduate both defies conventional stock-picking wisdom and sets a moral standard. How? In January 1983, when Rogers formed his Chicago-based company, most of his peers were chasing an accelerating bull market and larger blue-chip companies. By contrast, Rogers only bought and continues to buy the stock of unspectacular but steady companies. And he will not invest in companies that do business in South Africa, manufacture weapons or harm the environment.

Does the approach work? The number tell the tale. In 1991, the value of the Calvert-Ariel Growth and Appreciation Funds, which combined have more than 30,000 investor, grew more than 30%.

It appears that Rogers has carved a rather lucrative niche for his company. Like the tortoise of Aesop's fable, he knows that slow and steady wins the race--and the profits. In fact, the tortoise and the old saying grace the cover of his quarterly newsletter, The Patient Investor.

Rogers' feeling for the market stems from more than personal experience. Before opening his firm in 1983, he read a University of Chicago study showing that small-cap stocks had soundly outperformed large company stocks for 60 years before 1983. This buoyed him in his strategy because although small company growth stocks in general were climbing in 1977, they peaked in 1983 and stayed in the doldrums for seven years.

During the 1980s, Rogers patiently pursued his strategy of investing in overlooked and undervalued small and medium company stocks. And his instincts paid off. In 1991, small-cap funds scored huge gains. In fact, smaller company stocks outpaced larger company stocks as mostly over-the-counter issues, and gained 34% by year's end, compared with a 30.4% gain by the Standard & Poor's 500 Stock Index.

Equally stunning, mutual funds specializing in small company stocks returned 51.57%, compared with 35.57% for the average general equity fund. Funds specializing in health care, biotechnology and financial services stocks were the big winners, up 74.32% and 60.40%, respectively. These fund sectors may not be able to repeat last year's gains, but investors can expect a wide range of emerging small company stocks to do well this year.

In 1991, the Calvert-Ariel Growth Fund also did well. Its value grew by 32.85%, which was not good compared to the small-cap fund average, but still better than the S&P 500. "Its five-year performance paints an even better picture," says John Rekenthaler, editor of Chicago-based Morningstar Mutual Funds. Of 241 growth mutual funds ranked by Morningstar for five years ending Dec. 31, 1991, Calvert-Ariel Growth was 50th. Meanwhile, in a universe of 58 small-cap stock funds, it placed 15th. The Appreciation Fund was up 33.19% for 1991.

A downside exists, however. In 1990, the Growth Fund fell 16%. Why? Rekenthaler says although Rogers avoid buying hard cyclicals, such as auto or steel stocks, 35% of the Growth Fund's stocks are consumer-durable and industrial-product stocks, which are somewhat sensitive to economic cycles. Other funds typically may have half that weighting. Ironically, the stocks that hurt Rogers in 1990 helped in 1991. "They were flip years," says Rekenthaler. "But if the recession continues, this fund will be vulnerable. Sometimes soft cyclicals can hit you kind of hard."

Nevertheless, Rogers remains loyal to his contrarian strategy. Ariel Capital will always buy the equities of lesser-known small and medium-size companies, he says, and at bargain prices. "We were successful during the '80s because we picked some good, reasonably price small stocks," he says. "We avoided the go-go, glamorous small stocks that soared in 1980 and then plunged by 1985. Instead, we stuck with low-expectation stocks that didn't go up as much, but also didn't suffer as much."

The ability to stick with a previously ignored sector drives Ariel Capital. Annually, the company only replaces about 20% to 25% of the 30 to 40 stocks that make up each fund.

Laying The Foundation

Rogers paid quick dues before founding Ariel Capital. He spent 2 1/2 years as a stockbroker with William Blair & Co. in Chicago. The economics major was the first person that the company hired right out of college in more than four years. The Chicago native was also the first black professional to work at the 400-employee company.

Rogers didn't stay long because of his confidence in his ability to pick stocks. "I also didn't think the brokerage business was the best place to exercise my strategy, because the brokerage community is transaction-oriented, and my approach is value-oriented," he says.

That certitude and tenacity is paying off, literally. In 1987, his firm had $122 million under management; now it has nearly 14 times more.

Those who know Rogers well are not surprised. In 1980, while varsity basketball team captain at Princeton, he won an annual award given to the team member who exemplifies leadership on and off the court. "If ever there is a guy who was the epitome of what he did on the basketball court and what he does in the real world, it's John Rogers," says his former coach, Pete Carril. "He always knew what he could and couldn't do, and he worked hard at doing what he did best."

This attitude extends to the workplace. But Justin F. Beckett, senior vice president of Durham, N.C.-based NCM Capital Management Group Inc., says sometimes people underestimate Rogers. "They see a mild-mannered, soft-spoken person," he says, "but he is a pure competitor who is out to win."

In 1983, Rogers' strategy and a connection helped get his firm off the ground. Its first investment of $100,000 came from the Howard University endowment fund. Rogers' presentation was helped by the fact that one of his original investors was a Howard Medical School graduate, and that Rogers' mother, prominent Chicago lawyer Jewel Lafontant, was on the University board of trustees.

Today, the average institutional investment is about $30 million. Clients include AT&T Co., Pillsbury Co., the Police and Fire Department Retirement System of the City of Detroit, the United Negro College Fund and the National Football League Players Pension Plan.

At first, however, Ariel Capital, like most start-ups, was underfunded. Initially, Rogers thought he needed $180,000 for two year's working capital and used own funds and those of 14 investors, including his parents, friends, relatives and former classmates. It wasn't enough. After 18 months, investors kicked in $190,000 more.

But finances were just one hurdle. Rogers had no track record. "We were basically going out to all of these large corporations and pension funds managers and saying, 'We have a great investment strategy that we believe in and we've young and energetic. Now, give us some money,'" Rogers says. "Some people were very polite. Others let you know clearly that they didn't think you were credible and could never manage their money."

Two things Rogers did helped to build a presence. One, in 1983 he started a newsletter, The Patient Investor. In each issue, he listed all the stocks he was putting in his portfolio and gave capsule descriptions of their strength. Second, he arranged for several of his clients to invest $500,000 in a venture called Ariel Funds. The money bought common stocks, and every quarter after June 1983, Rogers had a live track record to show his stock-picking ability.

By 1986, the fund had grown to about $2 million. Rogers then brought on Calvert Group Ltd., a Bethesda, Md.-based investment firm, as the fund's distributor and transfer agent. Doing that allowed him to concentrate on stock-picking and ensured that the Calvert-Ariel Growth Fund, a publicly traded mutual fund, would be listed in newspapers.

Rogers has no plans to enter other investment areas. In fact, he has discouraged offers to open a fixed-income mutual fund, run a public finance business or start a brokerage firm.

Since its inception, the firm has grown from two to 16 employees. Senior Vice President Eric T. McKissack, who has an MBA from the University of California at Berkeley, heads a four-person research department. He is also the Appreciation Fund's portfolio manager. In addition to Rogers, there are two other investment traders and two professionals who handle client services. Outside of the company's office manager and CFO, the others are support staff.

A common value among the staff is commitment to others. All staff members volunteer with nonprofit organizations. And Rogers holds positions in at least a dozen or more associations such as the Princeton University trustees and the Chicago Urban League board.

This year, Rogers says Ariel Capital will put more emphasis on the medium-cap fund, which he hopes will grow much larger than the first fund before it closes. He also says his personal goal is to continue to outperform the S&P 500 Stock Index.

To get a better understanding of how Ariel Capital operates and to pick up some equity tips, BLACK ENTERPRISE conducted an exclusive Q&A with Rogers.

BE: How did you arrive at your particular investment strategy?

John Rogers: I started to develop my investment strategy when I was with William Blair, which specializes in small-growth companies. It was a great place to learn because it had everything under one roof: corporate finance, public finance, trading, money management, mutual funds and research. At the same time, the reading I was doing on my own and my experience as an economics major taught me about value investing and the contrarian investment strategy. International equities expert John Templeton was famous even back then, talking about the benefits of buying low-priced stocks with low expectations.

BE: What specific criteria do you use to pick the companies you invest in? Is it strictly a quantitative approach: balance sheets, price/earning ratios and trading history?

Rogers: Our approach is threefold. We start off with statistics. We look for companies that are relatively small ($50 million to $1 billion market capitalizations) and unpopular or they don't have a lot of expectations. We also look for cheap stocks--those that are selling

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with low price/earnings multiples of 11 or less, low price book-value ratios and low debt-to-capital ratios.

Secondly, we want to make sure we are buying a great company. We want it to grow 12% to 15% a year consistently. The company has to have a high-quality product. For example, we look for companies that dominate a niche in the marketplace by performing one service or manufacturing one product that is superior to its competitors.

So, a lot of our work is really tire kicking--going out and visiting the companies, getting to know the employees and management and talking to the customers, competitors and suppliers. The final judgment is whether there will be long-term demand for that product.

BE: How does this approach differ from that of other money managers?

Rogers: There are two things that we do differently. One, there are not too many people trying to blend smaller company investing with value investing. Traditionally, value investors have purchased big blue-chip companies that fall into disfavor. And small company investors have bought the glamorous, fast-growth companies. We try to get the best of both worlds: smaller, undiscovered companies that are selling at reasonable prices.

The second thing that we do differently is that we spend more time than others evaluating the company's management. How long have they been in that particular business? What schools did they attend, and essentially what are their intentions? We want managers to wake up in the morning with the attitude, 'How can I make a better product and provide better service?' Most managers of large firms get up thinking about 'How much publicity can I get? How much money can I make? What acquisition can I acquire?'

Those folks who invested in Donald Trump or Robert Maxwell were mesmerized by what they were saying, and the numbers. But investors neglected to look at the character of the people. Another example is Cascade International Inc. No one can find the CEO. He left the company busted and the stores he was supposed to manufacture weren't real. We (Ariel) would have been out there visiting those stores, seeing that they did or didn't exist, not depending on an analyst's report. In a nutshell, that's what we do better than other firms.

BE: What is your relationship with Calvert?

Rogers: A mutual fund is owned by shareholders and has several entities. An investment adviser manages the assets; a board of directors oversees the fund and makes the policies; a transfer agent keeps track (day-to-day record keeping) of the securities and fund shares; a custodian bank holds all of the securities and cash; and a distribution agent or firm markets and sells the funds. Half of the board members are representatives I came up with, and the other half are representatives of Calvert.

Be: But why Calvert as opposed to Fidelity, Dreyfus or Vanguard?

Rogers: At the time, Calvert had a wholesaling network of marketing people who went and called on the Merrill Lynchs and Dean Witters of the world and convinced them to sell their funds. We didn't think we'd get that marketing experience anywhere else. Calvert was also known for its socially responsible investing.

BE: What distinguishes your fund from other socially responsible funds?

Rogers: The thing is, "socially responsible" to one group is different to another. For example, Carter-Wallace is a company in the Calvert-Ariel Appreciation Fund, which makes condoms. People who are affiliated with religious organizations don't like this company for that reason, whereas other, more liberal groups think that such a company is in keeping with being socially responsible. We avoid any companies that do business in South Africa. We also avoid companies involved in weapons research and manufacturing. We look for companies that are doing positive things for the environment. Calvert conducts extensive research and gets into some esoteric issues, such as, whether certain companies experiment with animals or have poor affirmative-action hiring policies.

Be: What stocks do your funds hold?

Rogers: The ones I am excited about are Berlitz International, a worldwide leader in language instruction, and First Brands Corp., the maker of Glad garbage bags, Prestone antifreeze and STP products. First Brands has an enormously high cash flow, is very cheap statistically and it's a solid company that's good at what it does. Another favorite is Long's Drug Stores, which is the largest drugstore chain in Hawaii and California. It's a superbly managed, family-owned operation. They own the land on most of their stores. And they have a real strong desire to provide quality customer service.

The office products area has also been good. We are content to own names such as General Binding Corp., which makes the GBC machines; United Stationers Inc., the largest wholesaler of office products in the U.S.; Sanford Corp., which manufactures Magic Marker[R] and highlighters; and Hunt Manufacturing Co., which owns the Boston stapler line. Children-oriented kinds of products also will do well. Companies such as Oshkosh B'Gosh Inc. have been a longtime favorite of ours. Another is Hasbro Inc., which recently bought Tonka Toys. Another key area is leisure-oriented companies. Two solid companies are Johnson Worldwide Associates Inc., which manufactures products for fishing and camping; and Russell Corp., which makes athletic wear and uniforms for major-league professional teams.

Each of our funds holds roughly 30 to 40 common stocks. Some firms have hundreds. For instance, the Fidelity Magellan Fund has some 600 stocks in its portfolio. There are only so many companies that you can follow and understand well.

I would be very cautious about chasing hot markets--health care, biotechnology and software companies. Any stock that someone comes and tells me how much it has gone up in the last year or two and says now is the time to jump on the bandwagon, I avoid. My feeling is that it's probably too late. So that leads me to areas that are a little less glamorous. People should stick with companies that they know well. For example, the company where they work or the companies their friends work for. They should look at the three sectors we are in: office products, children's products and leisure or sporting goods.

BE: What's the best way to enter the market?

Rogers: Just get started. Get a broker and buy something. Once you have money invested, it becomes more intriguing and you learn a lot faster. Subscribe to investor newsletter. Investors Daily, Valueline and Morningstar Mutual Funds are three good publications. I'm constantly looking for tips that will lead to untapped opportunities.

BE: How did you get interested in stocks?

Rogers: I had a small portfolio when I was 12 years old. My father started buying stocks for me for every birthday and every Christmas instead of normal presents like other kids got. He felt it was important for me to get exposed to the financial markets early.

I also spent a lot of time after school in the office of my father's broker, Stacy Adams, who was one of the first black stockbrokers in Chicago. When I went to college, I quickly found a broker in Princeton. His enthusiasm rubbed off on me, and by my senior year I felt I could do the same thing for a living.

BE: What investment mix would you advise?

Rogers: The average individual should have between 60% to 70% of their assets in common stocks and invested in fixed-income, money-market funds and maybe something extra, such as real estate. The person should try to split the stock portion evenly between stock mutual funds and individual stocks. He or she should try individual stock to, too, just try it out. As a person gets older, closer to retirement, he or she may want to change that mix to 40% to 60% in common stocks.

BE: Where should risk-adverse investors look?

Rogers: You should always try to put your money in stocks to protect yourself against inflation. If you put most or all of your money in fixed-income instruments and inflation is 20% in 10 years, you would have a real loss of your purchasing power. Stocks will compound as the years go on. Also, stocks have consistently outperformed bonds and cash over the last 70 years.