Category Archives: Stock Market

New Video Links for Sir John Templeton on the 1987 Market Crash

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 Week to 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.

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Article from the Wilson College Bulletin on John Templeton

We recently unearthed this profile of John Templeton from the February 1960 edition of the Wilson College Bulletin.

Investment Counselor: Like Doctor, Lawyer

John M. Templeton, M.A. (law) Balliol College, Oxford, has been president of Templeton, Dobbrow & Vance, Inc. for twenty years.

The firm’s three founders, Templeton, Dobbrow and Vance, were not law partners, however, as the name might suggest, but rather investment counselors.

Forty-five minutes from Times Square via express subway and a commuter bus to the suburban community of Englewood, N.J. — across the Hudson from Spuyten Duyvil — is the headquarters office and research center of the firm.

Here, again, there is much that resembles a law office, for in the large house converted to offices there are some 20 rooms where men are hard at work preparing analyses of companies not unlike the way in which lawyers might go about preparing briefs. There is a large reference library to the right of the entrance as well as smaller collections of reference materials in the respective offices. One clue to the research center’s connection with matters financial is the “banker’s green” carpeting in office, reception room and library.

The semblance between investment counseling and the practice of law was affirmed by Mr. Templeton himself. “Our role as investment counsel in not unlike that of a doctor or a lawyer—except that there are no midnight emergencies,” he added with a twinkle in his eye. Continue reading

Follow Up: Lauren Templeton and Scott Phillips Media Appearances

Last week we posted a notice that some of our contributors, Lauren Templeton and Scott Phillips, would be making the media rounds. Not sure I can embed the players in WordPress, so I’ll post links below.

Lauren and Scott really get into the practical side of value investing in these clips (as opposed to the more philosophical angle we try to take her on WWJTS). I love that in the CNBC clip Sue Herera actually channels the essence of our site and asks Lauren directly, What would John Templeton think of our “kettle of fish” right now?

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Lauren Templeton and Scott Phillips on The Principle of Maximum Pessimism, Part 2

In the last few weeks, we have featured interviews with John Templeton discussing the concept of maximum pessimism. This is the second and final part of Lauren Templeton and Scott Phillips discussion of maximum pessimism and its relationship to Templeton:

Another way to consider this activity is in the terms of comparing near-term versus long-term prospects, in many cases sellers lose sight of the longer-term earning power of a firm and sell based solely on the basis of poor near-term prospects. One simple illustration of this behavior is to consider that Sir John held stocks an average of seven-and-half years while managing the Templeton Growth Fund, but today investors in the market only hold stocks for an average of eleven months. This tells us a great deal about the temperament of the average investor and an overwhelming focus on near-term variables.

While the act of taking advantage of near-term pessimism to capitalize on a better long-term result may be simple in concept, executing this behavior in the financial markets is much more difficult in practice. This is owed, perhaps not surprisingly, to human behavior. The fact that humans are mostly wired for instant gratification (obtaining their desired outcome) can be established at the earliest age, as one study conducted by researchers on preschoolers (Mischel, Shoda, Rodriguez, 1989) found that children who opted for short-term rewards of lesser value often grew into adults who did the same.

Obviously, the name of the game in value investing is the sacrifice of near-term gratification for the anticipation of much larger long-term benefits. Buying at the point of maximum pessimism is taking this behavior to its most extreme. All too often though, investors do not buy into falling prices, even when they logically understand the benefits of holding stocks for longer periods. This behavior often comes at the expense of the greatest benefit that the stock market has to offer, which is the magic of long-term compound interest. However, this act of discipline and the ability to see an optimistic outcome in the face of strong adversity was Sir John’s calling card as an investor and what ultimately separated him from the behavior and results of other investors.

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).

Lauren Templeton and Scott Phillips on The Principle of Maximum Pessimism, Part 1

 In the last few weeks, we have featured interviews with John Templeton discussing the concept of maximum pessimism. Lauren Templeton and Scott Phillips discuss the principle of maximum pessimism and its relation to Templeton:

The principle of maximum pessimism has the potential to be a puzzling concept to many casual observers. To begin, this investing maxim—at least on the surface—projects a negative connotation that contrasts heavily to the starkly optimistic nature of its originator, Sir John Templeton. Upon further inspection though, the principle of maximum pessimism and buying at the point of maximum pessimism is unequivocally an act of optimism.

When we place the principle of maximum pessimism more squarely in the context of a value investor searching for a stock whose price has become too low in relation to the intrinsic worth of the company, we can better understand the contrast between connotation and reality. As Sir John explained, “People are always asking me where is the outlook good, but that’s the wrong question . . . the right question is: Where is the outlook the most miserable?”  His reasoning was that the only way a stock price can become too low in relation to its intrinsic worth is from other people selling and pushing the price down. Clearly, the most intense selling and therefore the widest disparity between a stock price and the value of the company it represents occurs where people have become the most pessimistic. For that matter, the most extreme mispricing, and therefore the greatest opportunity, will occur at the point of maximum pessimism. For those investors able to distinguish what should only represent a temporary cause for pessimism from a permanent problem,  then an opportunity may be presented for a wise long-term purchase . . .

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).

Templeton on When to Sell

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.

John Templeton’s Signature Strategy: Maximum Pessimism

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.”

Lauren Templeton and Scott Phillips on the Upside of a Down Market

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).

Templeton on Thrift and Investment Bargains

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.

Templeton’s Self-Confidence

In our last post, we shared the story of John Templeton’s first major investment in 1939 where he invested $100 in 104 different U.S. stocks that were trading below $1 per share. In his 1999 interview with William Green for Money magazine, Templeton observes that he was able to carry out this investment strategy because of his self-confidence:

The only reason he could pull it off, [Templeton] says, was that even then, “I had enough self-confidence to think that most of the people called experts could make big mistakes.” He credits his discipline-free childhood in Winchester, Tenn.: “I don’t remember either my mother or my father ever telling me, ‘Do this’ or ‘Don’t do that.’ They thought it would help me to become self-reliant and self-confident if I had to do everything myself.”

Green continues the article by connecting Templeton’s self-confidence with his willingness to go out on a limb:

Whatever its origin, Templeton’s profound belief in his own judgment is a quality he seems to share with other famed investors. Michael Lipper of Lipper Analytical Services says that Templeton, Warren Buffett, and George Soros all display “the willingness to be lonely, the willingness to take a position that others don’t think is too bright. They have an inner conviction that a lot people do not have.”