In my previous column, I related that Sir John’s predictions had evolved from one of great optimism during the pessimistic years around 1990, when the Dow Jones Industrial Average was around the 2500 level, to periods of pessimism around 2000 and 2007 when the Dow was around the 14,000 level. Yet I also intimated that I thought he might have been buying a few carefully selected stocks during the panic of 2008 when the Dow dropped to around 8,000. I should explain why.
In early 1999, Sir John asked me to co-author an article about why the Dow might probably rise to the one million level during the next century. The article was intended for his friends at Equities magazine, which had interviewed John annually for quite some time. To be quite honest, my initial reaction was to question John’s judgment this time! After all, he had also predicted the Dow would be flat during the coming decade. But I’d learned over the years, often the expensive way, not to question John’s financial insights. So I pulled out a financial calculator and discovered the Dow would only have to rise less than 5% annually for the Dow to reach one million. In essence, it was difficult for even me to believe the Dow might rise at one-half the rate it had during the twentieth century. Yet at the time, everyone around me believed a computer bug would end Western civilization! Many even believed the Second Coming was imminent.
The period from the collapse of the Berlin Wall in 1989 to our credit crisis of 2009 has been one of watching Sir John’s evolving predictions—from anticipating “the twenty most prosperous years in history” to “financial chaos,” as he predicted in 2005—come true. Clearly, he was a prophet among us.
Unfortunately, as the Bible relates about old Ezekiel (Chapter 33, verse 31), people always “crowd in” to listen to men like Sir John but few do even a “single thing” they say as they only realize they were listening to a prophet “after all your words come true” (verse 33), which is too late to do them any good. After thirty years on Wall Street, I’ve grown to understand that’s usually due to there being so many “false prophets” around, wildly making predictions about that of which they know little and often saying the opposite of what true prophets are saying. I’ve also realized the most financially impoverishing ones are religious leaders who know little about economics but assure us they are speaking for God. The unsophisticated usually take them far more seriously than the secular prophets of Wall Street, who are always taken with a grain of salt. Continue reading →
In July 2008, John Marks Templeton, picked by Money magazine in 1999 as the “twentieth century’s greatest stock picker” died of pneumonia at the age of 95. However, he left a legacy in the investment world that will not soon be forgotten.
As the United States and world face a shrinking economy, there is a great need to find comfort and perspective in a phenomenal investor such as John Templeton. Therefore, we have established this web resource to serve as a hub for sharing financial wisdom from John Templeton, at times written by him and at times written by his close friends and confidants.
We hope you find this information useful as we tread through the waters of uncertain financial times.
In 2005, John Templeton wrote this memo to be shared with as many people as possible. In the wake of the current economic storm, those close to him have been circulating and commenting about this memo, which predicts a financial crisis as well as offers other predictions related to higher education and technology.
Financial Chaos–probably in many nations in the next five years.
The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.
By John M. Templeton
June 15, 2005
Increasingly often, people ask opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my life time. Quite likely, in the early months of 2005, the peak of prosperity is behind us.
In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great, that most currencies and bonds are likely to continue losing their purchasing power.
Mortgages and other forms of debts are over ten fold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.
Surplus capacity, which leads to intense competition, has already shown devastating affects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages to zero when adjusted for higher cost of living. Clearly, major corrections are likely in next few years.
“Will United States be forced to nationalize banks?” reads a recent Reuters headline. As fears about the well-being of the banking industry continue to mount, some analysts are predicting that the government may have to assume managerial control of some of the country’s major financial institutions.
For insight about what the late John Templeton might have said about such a scenario, we turn to his niece, Lauren Templeton, principal of Lauren Templeton Capital Management.
Uncle John believes that ultimately you must leave people to their own devices and allow them to pursue their economic goals in an unfettered manner. This notion of leaving markets alone was popularized by Adam Smith as laissez-faire, or hands-off. The underlying belief is that an “invisible hand” will guide the overall results to positive ground as capitalists allocate resources to the best opportunities and avoid the worst. In contrast to the invisible hand is what we could call a forcible hand utilized by government.
One of the most regrettable economic actions employed by a forcible hand is transferring ownership away from individuals and into the hands of public entities controlled by the government. The action is antithetical to a system of free enterprise. Moreover, the lack of competition that results from nationalizing an industry usually creates an environment where lethargy and complacency dominate the mindset, and this in turn leads to mediocre performance. As soon as ownership is transferred, the remaining operators lose their sense of having a stake in the assets or the activity of the assets. They sense that the conventional risk of failure ended in bankruptcy is low, and this mentality can set an enterprise back years or even decades compared with free enterprise-based competition, in which companies must improve constantly or be forced out of the market. Therefore, nationalizing assets not only represents a poor investment but also goes against a deep philosophical belief that Uncle John held. That belief is that free enterprise and the competition that results from it lead to progress. Progress is a very good and necessary thing for businesses. Progress is also a very good and necessary thing in all walks of life, whether technology, science, or any other discipline. When competition is stifled, progress is too.
In October of 1987, the stock market took a tumble that left investors shell-shocked. In the wake of that meltdown, John Templeton appeared on a panel of experts on the television show Wall Street Weekto share his insights on recent events. There are valuable lessons to be gleaned from this footage, so we’re very thankful to our friends at Maryland Public Television for allowing us to repost excerpts here.
First, we’ll let host Luis Rukeyser set the scene for us:
And now here’s John Templeton offering some historical perspective on the situation (which isn’t terribly different from our present circumstances):
We’ll get some more clips from this program up soon. Some of his later comments are truly fascinating.