Learning From Sir John Templeton

Sir John Templeton (November 29, 1912 – July 8, 2008) was a legendary investor and a pioneer of global investing. He took value investing to an extreme, picking industries and companies he believed to be at rock bottom, or as he called it “points of maximum pessimism.”He bought when there was blood on the streets. For example,when investors fled the New York market after the Second World War was declared, Templeton borrowed $10,000 to scoop up stocks priced at less than a dollar, often in companies that were near bankruptcy. In four years, he sold the stock, paid off the debt and pocketed $40,000—the seed money for Templeton Growth Fund, a market beater for many years.

Templeton did not care where a company was located. If it was selling below what he considered to be its asset value, and if it was in an industry or nation that was “out of favor,” he was interested in it. He was among the first to invest in postwar-Japan and among the first to sell out of Japan in the mid-1980s. He was one of the very few who invested in Peru when the communist Shining Path was running rampant, and by doing so, he reaped a fortune for his investors.  

After beginning his career on Wall Street in 1937, Templeton bought a small investment advisory concern in 1940 that managed $2 million. By the time he sold his stake in 1967, it was managing $400 million.

He entered the mutual fund business in 1954 when he established the Templeton Growth Fund. The fund averaged a +14.5% annualized gain over the next 38 years, outperforming the broader stock market indexes. In other words, each $10,000 invested into this fund in 1954, with dividends reinvested, would have grown to $2 million by 1992 when he sold the fund to the Franklin Group.

Sir John knew what he liked. Common stocks, like Dow Jones industrials, were unglamorous but usually dependable. Government bonds were steady, if they were from a country with no trade or fiscal deficits and a high savings rate. He disliked speculation, and any instrument over-geared to make money. But he was open-minded. He accepted that some moments were good for Treasuries, some for equities, and some for blue-chip stocks. Late in life, he favoured market-neutral hedge funds. To him diversity was important, in countries as well as instruments.

Here’s what we can learn from Templeton

Take calculated Risks

Templeton believed in taking “calculated risks.” A real-life example occurred in 1939 when war began in Europe — a point of high pessimism in the stock market. Templeton borrowed $10,000 from his boss to buy 100 shares each in 104 companies that were listed on the New York Stock Exchange and selling at one dollar per share or less.

A high percentage of these companies were close to bankruptcy and 34 of the companies he invested in were actually in bankruptcy already. Templeton took the risk because he reasoned that World War II would pull America out of the Great Depression and that these companies would recover.
Templeton’s macroeconomic view of the world turned out to be right. Only four of the companies he purchased ended up being worthless, and after holding each stock for an average of four years, he had turned his investment into more than $40,000. This was the first of many times that Templeton’s macroeconomic view of the world would prove to be correct.

Be a Deep Value Investor

Above all, Templeton was a deep value investor.His iron principle of investing was “to buy when others are despondently selling and to sell when others are greedily buying”. At the point of “maximum pessimism” he would enter, and clean up. He used a fundamentals-driven, “bargain-hunting” approach to investing. He would look for shares selling below asset value because of temporary circumstances, and then he would hold those stocks for years. The Templeton Growth Fund, which he ran for decades, held stocks for an average of six to seven years.

Templeton urged investors to focus on value because a majority of investors focus on outlooks and trends. He rejected the “technical” method for choosing stocks, believing instead that “you must be a fundamentalist to be really successful in the market.”

Don’t Run With the Herd

Another of Templeton’s investment principles was that the key to outperforming the majority of investors requires doing what they are not doing. In other words, go against the grain — be contrarian.

Speaking about this danger to investors, Templeton uttered one of his most famous quotes: “The four most dangerous words in investing are ‘This time it’s different.'” To illustrate his point, think of the height of the dot-com bubble. In 2000, analysts hyped internet stocks, saying that fundamental measures such as revenue and earnings were no longer the most important drivers of stock price. The internet age somehow made things different, and measures like “clicks” and “eyeballs” were the new gauge of company health. By following Templeton’s advice, it would have been easy to see that internet stocks were not different, and they still need to generate revenues and profits to survive.

Invest Worldwide

Over his long career, Templeton created some of the world’s largest and most successful international investment funds. In 1999, Money magazine called him “arguably the greatest global stock picker of the century.” Templeton searched for any company anywhere in the world that offered him a low price and an excellent long-term outlook. “It’s not easy,” he stated, “but if you’re going to buy the best bargains, look in more than one industry, and look in more than one nation.”