What Would John Templeton Say?

Lauren Templeton and Scott Phillips, coauthors of Investing the Templeton Way, share their analysis of John Templeton’s 1945 letter on planned investment.

In John Templeton’s 1945 letter to investors titled “Planned Investment,” he recommends gradually shifting your investment portfolio from stocks into bonds when the stock market rises and then subsequently back from bonds into stocks when the stock market declines. This is prudent investment strategy in an investment environment where inflation is contained. It appears though that in the current economic environment that there is a higher risk for future inflation than has normally been the case. However, Uncle John was always open minded and praised the strategy of switching from expensive assets into less expensive assets as a way to avoid potential  losses in a portfolio. He did this by purchasing stocks in Japan in the late 1950s early 1960s only to sell these stocks as Japan became expensive in the early 1980s which coincided with the ending stages of a long bear market in the U.S. Just as Business Week proclaimed the “Death of Equities” in the United States, Uncle John was busy selling his more expensive Japanese securities for much cheaper U.S. stocks.

In the planned investment letter, Uncle John wisely notes that during a bear market, “every analyst knows that, the fastest rises are to be expected in low priced stocks, stocks of marginal companies, and the stocks of companies having large debt and preferred claims.”  In fact, this is just what we have seen in the recent rise of the stock market from the March 9, 2009 lows. In our recent edition of the Maximum Pessimism Report we highlight this phenomenon, but make the case that instead of switching to fixed income (due to the prospects of higher inflation) that investors transition their portfolio to bargain stocks left behind by the rally off of the March 9 lows. Interestingly, (and as Uncle John would have expected) it was the low-quality stocks that led the rally from March of 2009, and now the higher-quality stocks that did not participate now trade at a discount may offer better bargains.