We continue highlighting points John Templeton made in an interview with Forbes magazine in 1995. The article concludes with Templeton’s perspective on how investing has and will change:
“Progress is going to speed up, not slow down,” Templeton adds, “so in the long run people who invest in common stocks of well-managed companies will be better off than people who put their money in other forms of investment.”
But don’t rush out to mortgage the homestead. Prices will continue to fluctuate as optimism and pessimism alternate with the headlines and with people’s moods. Rising markets will continue to be interrupted by falling markets. . . says Templeton. “Bear markets might not get as bad as in the past. But there’s an offsetting factor, namely, the speed of communications. People can now act more like a herd because they’re more in touch with each other. The herd instinct is increasing. I think you saw that last year in China, where the speculators were all in instant touch with each other, and the market went down 70% in seven months. Yet the growth outlook in China is marvelous and will, I think, continue to be.
The moral is: Never, ever, buy stocks with borrowed money or with money that you may need tomorrow. Templeton says he has never even had a home mortgage: “I want to be able to hold on to the stocks I buy–forever if necessary.”
In our last post, we highlighted John Templeton’s maximum pessimism philosophy as he described it to Forbes magazine in 1995. Much of Templeton’s investing approach has to do with finding bargain stocks. In the 1995 article, Templeton discusses when to sell investments:
Having beaten not just the market, but the markets, for so long, what advice does Templeton offer? He agrees with us that most investors are better buyers than sellers: They sell either too soon or too late.
“I spent many years on that problem myself,” [Templeton] replied. “Several years ago I came up with what I believe is the right answer of when to sell. The solution is never to ask when to sell a stock. Instead, you should sell a stock only when you have found a new stock that is a 50% better bargain than the one that you hold.” That’s a constant theme with Templeton. You might call it comparison shopping. It’s as much a search for relative bargains as it is a search for absolute bargains. Compare, compare, compare.
So far, this summer has proven that the U.S. economy is still extremely vulnerable. Housing sales and prices are still low, unemployment is high, and the stock market is volatile.
John Templeton’s investing prowess is key to understanding that there are better days ahead. His principle strategy, maximum pessimism, should be embraced by economists and investors right now. An interview with Templeton in Forbes magazine article from January 16, 1995, outlines his approach to investing and uses historical examples to illustrate why maximum pessimism works.
In our first excerpt of the article, Templeton explains maximum pessimism in his own words:
“People are always asking me where is the outlook good, but that’s the wrong question,” he responds. “The right question is: Where is the outlook the most miserable?” Templeton calls this approach to investing “the principle of maximum pessimism.” Others might call it contrarianism. He explains it this way:
“In almost every activity of normal life people try to go where the outlook is best. You look for a job in an industry with a good future, or build a factory where the prospects are best. But my contention is if you’re selecting publicly traded investments, you have to do the opposite. You’re trying to buy a share at the lowest possible price in relation to what that corporation is worth. And there’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason.
“To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.”
John Templeton had an uncanny ability to invest without getting emotional, as William Green’s January 1999 article in Money magazine describes:
When the U.S. market crashed in 1987, Templeton loaded up on stocks that had been slaughtered. “He doesn’t get carried away by the emotions of Wall Street,” says Jay Bradshaw, who ran Templeton’s trading desk. “He said, ‘Well, if we paid that much for Ford Motor before and it was good value then, it’s even better value now.’” This habit of diving in when stocks are getting crushed requires “Tremendous willpower and strength of personality,” says Mobius. “Everybody else is running out of the burning building.”
Templeton has always been just as immune to euphoria. In 1969, when the U.S. market was surging to breathtaking heights, he was massively underweighted in U.S. stocks. The bubble burst, and many stocks fell 70% between 1969 and 1974. In those terrifying years, his fund–largely invested in Japan and Canada–boasted a positive return of 50%.
We continue posting excerpts from William Green’s January 1999 article in Money magazine on John Templeton. In the article, Green discusses the traits that made Templeton a successful investor. In addition to Templeton’s willingness to strike out on his own when picking investments and his thrifty mentality, he was very punctual and efficient:
Templeton has similarly quirky notions about time. “John won’t engage in small talk,” says John Galbraith, who marketed Templeton’s funds. “The minute you’re through with your common business, he’s onto something else.”
He’s beyond punctual. His friend Gary Moore recalls: “The first time I met John, he said, ‘Be here at 4:02. I’ve got another appointment at 4:13.’” His determination to use every minute productively gave him a major edge in researching stocks. Most investors, he says, “don’t really understand what it is they’re buying. You have to be very industrious and very persevering so that your information will be better than that of other people.”
A few weeks ago, we shared John Templeton’s 1948 letter on the upside of a down market. Given the recent downturn of the stock market, Lauren Templeton and Scott Phillips contribute some of their thoughts:
The upside of a down market is a matter of common sense if an investor holds the perspective of a bargain hunter. Clearly, in light of the current stock market correction, John Templeton’s thoughts on this matter are as relevant today as they were in 1948. Templeton’s remark that “investors generally are unhappy” following a 9 percent correction in the late summer of 1948 is just as applicable to the recent 15.6 percent decline in the S&P 500 from its April 2010 high.
However, if one holds the view that buying future earnings and cash flows for the lowest possible price raises the probability of making a successful investment, and by extension higher future returns in the stock market, then corrections should be welcomed. The basic premise is that the likelihood of making a wise investment is much higher as stock prices fall, but many investors become too distracted by predicting the future path of the market over the near-term and lose sight of these opportunities.
In sum, one oddity of stock investing is that while identifying bargains becomes easier in a correction, the actual act of investing becomes much harder due to focusing too heavily on questions that are unknowable such as fear over what the stock market will do tomorrow, next week, next month, etc. With that said, those investors who focus solely on investing in the multiplying number of bargain stocks during a market sell-off will ultimately position themselves for higher future returns in the years to come, realizing the upside of a down market.
Lauren Templeton is president of Lauren Templeton Capital Management, LLC, and Scott Phillips is author of the newly released Buying at the Point of Maximum Pessimism: Six Value Investing Trends from China to Oil to Agriculture (FT Press, 2010). Templeton and Phillips are also coauthors of Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter (McGraw Hill, 2008).
To become a successful investor, one must have a unique approach to the market. As pointed out in William Green’s 1999 Money article, John Templeton’s approach to his personal finances and investing both relate to thrift:
Templeton’s attitude toward money has always been distinctive. . . . Templeton calls tithing the “single best investment” anyone can make and claims to give away $10 for each dollar he spends on himself. Obsessively thrifty, he boasts that he still flies coach: “I’ve got a lot of better ways to spend my money than on a bigger seat.” As a fund manager, he was famous among his employees for writing notes on scraps of used paper, which he’d staple together into notepads: “I never thought it was wise to waste anything. After my education I had absolutely no money, and neither did my bride. So we deliberately saved 50 cents out of every dollar.”
Templeton employs the same philosophy when he invests. . . . It was Templeton’s miserly eye for a bargain that led him into foreign markets other Americans spurned. In the 1950s, when Japan’s economy was reeling and many Japanese stocks were trading at a P/E of three, he figured it was the world’s cheapest market. He snapped up unwanted gems like Hitachi and Fuji Film, betting 60% of his fund’s assets in a country ridiculed for producing cheap knockoffs. By 1980, exuberant investors were piling into Japanese stocks, and Templeton, looking for cheaper buys, had almost entirely cashed out. He’d quintupled his money.