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The Templeton Letters: What is Normal for Stock Prices? Part II

Part I can be found here.

The estimate of normal based on the three principles above is valid only when applied to a diversified list of industrial common stocks. Different principles are needed if we attempt to appraise the normal for any particular stock. In order that our calculations may be always up-to-date, normal for stock prices is recalculated each month. In the latest 20 years normal has shown a strong upward tendency, partly because of the change in the purchasing power of the dollar but more importantly because corporations have retained (after payment of dividends) a large part of their earnings each year.

Normal for stock prices based on the principles expressed above has been computed consistently at a higher figure than the figure arrived at by any other agency attempting to calculate normal. This has meant that the clients of Templeton, Dobbrow & Vance, Inc. have been more heavily invested in common stocks and this has been a profitable situation so far.

John M. Templeton

JMT: jw

May 17, 1954

       This memorandum is confidental — for clients only.

Lauren Templeton and Scott Phillips Media Appearances

Some fun news: two of our favorite contributors to What Would John Templeton Say?, Scott Phillips and Lauren Templeton, are making the media rounds to promote Scott’s excellent new book Buying at the Point of Maximum Pessimism: Six Value Investing Trends from China to Oil to Agriculture.

Be sure to catch them today (Aug. 13th) on CNBC’s “Power Lunch” at 1pmET.

Also, next week there will be new video interviews posted at AOL Daily Finance and TheStreet.com. Check it out!

The Templeton Letters: What is Normal for Stock Prices?

These days, there is certainly plenty of speculation about “when things will return to normal.” These kinds of concerns are nothing new. Just as we worry about defining and seeking “normal” today, so too did John Templeton’s clients worry about what was “normal” for the markets five decades ago. Repeated inquiries prompted him to circulate the following confidential memo to his clients in May of 1954. This is will be part one of a two part series.

The economic theory developed by Templeton, Dobbrow & Vance, Inc. for calculating the normal level of stock prices is simple. There are only three elements:

  1. Stock prices would be normal if they bore the same relationship to current earnings as has been customary for the latest 20 years.
  2. Stock prices would be normal if they bore the same relationship to the current cost of replacing the assets of the corporations as has been customary in the latest 20 years.
  3. When, because of changes in tax laws or changes in the money supply, high-grade preferred stocks sell lower in relation to dividends than has been customary in the latest 20 years, then it should be normal for common stocks to sell lower in relation to earnings; and vice versa.

Although the theory is simple, the actual calculation involves many thousands of figures. We take care to define accurately each word used in the principles above; and then the arithmetic is worked out on the basis of a large sample of representative stocks.

Templeton and the Laws of Life, Part 4

As we explore the topic of morality and the markets in our spring blog contest, we will highlight John Templeton’s favorite “Laws of Life” as referenced in The Templeton Plan in our next few posts.

Altruism is a law of life. The altruistic person tries to make our world a better place to live in. There are medical researchers who have improved our lot by discovering penicillin or insulin. Every person—each in his or her own way—can make the world a better place. Those who search for success and happiness will find a way. One man makes the world a better place by developing his farm with more modern agricultural methods. Another man, a widower, raises his six children on his own. They love him so much that, when they marry, they live near home so that the family needn’t split apart. That man made the world a better place by loving his six children. They had the benefit and warmth of his love, and that is a form of riches that is always passed on.

The altruist discovers an individual way to make the world a better place than it was before. It may be because he writes a book. Or because she paints a picture. Or because he rears his children with intelligence and compassion. Or because she invents a new cooking recipe. Or because his life serves as a shining light for others. There are large and small ways to make the world a better place, and all the paths, as different as they may be, lead to success.

John Templeton and the Virtue of Thrift, III

Continuing our January theme of John Templeton’s relationship with thrift, we have more today from step 12 of The Templeton Plan. If these writings resonate with you be sure to join our campaign to Bring Back National Thrift Week, either by visiting the official website or by becoming a fan on Facebook.

John Templeton loves to quote Charles Dickens’s Mr. Micawber on the subject of thrift: “Annual income twenty pounds, annual expenditure nineteen ninety-six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” To Templeton, that observation is at the heart of the difference between those bound for success and those who will flounder and perhaps never find their way.

What Could Templeton Do with Today’s Technology?

templeton-planWe continue our exploration of John Templeton’s twenty-one steps detailed in The Templeton Plan by reviewing Step 7: Investing Yourself in Your Work. As the summer vacation season winds down and we all begin to refocus on putting in a good day’s work, Templeton’s advice about work and how to be successful may come in handy.

John Templeton believed in hard work and always maximizing one’s time. In The Templeton Plan, he describes ways to maximize time:

technologyThe successful person learns to avoid wasting precious moments. It is helpful to carry with you reading material that is necessary in your career. Then, when you have a few minutes between appointments or while riding on a bus or train, you can absorb a page or two, or an entire article. Thus you’ve used your time fruitfully.

Whenever possible, carry a tape recorder with you in your briefcase. You will find that you can jot down ideas and dictate letters, accomplishing something in what might otherwise be wasted time. Career success depends on such tactics. If you can learn to use all that time that would otherwise be wasted, you are learning the meaning of hard work.

Given Templeton’s desire to be efficient and hard-working, we began to ponder what he would have been accomplish given today’s technology. Would Templeton have used a BlackBerry or iPhone to maximize his time away from the office? Would he have considered Twitter or blogs  useful to success in the investing world?

More Quick Quotes

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THE ONLY INVESTORS WHO shouldn’t diversify are those who are right 100% of the time. — The Templeton Touch, 1983

 

TO AVOID HAVING ALL YOUR EGGS in the wrong basket at the wrong time, every investor should diversify.  If you search worldwide, you will find more and better bargains than by studying only one nation.  You also gain the safety of diversification. — March 1994

The Benefits of Embracing Change

templeton-planWe continue our exploration of John Templeton’s twenty-one steps detailed in The Templeton Plan by reviewing Step 6: Finding the Positive with Every Negative. With the recession still holding strong, we will explore this step and provide some examples of why living a more optimistic life is beneficial.

Throughout his life, John Templeton looked for opportunities to try new things and travel as much as he could. Rather than stay in his comfort zone and rely only on what he already knew, he tried to learn new things all of the time, which resulted in much of his success as an investor.

In this passage from Step 6 of The Templeton Plan, James Ellison details some of the methods Templeton used to try new things:

Another way to accentuate the positive is to welcome change each day. It is human nature to get stuck in a rut and resist innovation, but you must teach yourself to try new paths. Don’t let a day go by without learning something new. The successful life is an adventurous one.

When John Templeton goes to restaurants with clients in connection with his investment counseling work, he makes it a point to order one item on the menu that he’s never tried before. That way he assures himself that the day will not be like any other day; he assures himself of an adventure, a seminar in living, no matter how small.

A successful life depends less on how long you live than on how much you can pack into the time you have. If you can find a way to make every day an adventure—even if it’s only a matter of walking down an unfamiliar street or ordering an untried cut of meat—you will find that your life becomes more productive, richer, and more interesting. You also become more interesting to others.

The same rule applies to travel. For example, make it your objective to visit all fifty states in the Union and at least a dozen other nations. You will thus have a positive goal worth pursuing and, as you begin to fulfill your goal, a sense of accomplishment. You will also begin to develop a worldview that will contribute to building a successful career.

So far, in his seventy-four years, John Templeton has visited forty-nine of the fifty states of the U.S. and seventy-seven nations in the world. He feels that extensive travel has enabled him to have viewpoints not obtainable to those who stay at home; he has also discovered wonderful new opportunities for investments.

The Consequences of Failing to “Put First Things First”

templeton-planThese days you don’t need to look very far to find news items that validate Sir John’s advice to “Put First Things First.” As we pointed out in the last post, he noted that, “All of us have been taught that crime does not pay and, of course, it’s true. Crime of any kind is a sin and leads to failure. The virtues provide the underpinning for success in life, both in business and spiritually.”

Few cases demonstrate the importance of the virtues in business better than the fall of disgraced financier, Bernie Madoff:

Bernard Madoff, the self-confessed author of the biggest financial swindle in history, was sentenced to the maximum 150 years behind bars for what his judge called an “extraordinarily evil” fraud that shook the nation’s faith in its financial and legal systems and took “a staggering toll” on rich and poor alike.

The landmark sentence, one of the stiffest ever given for a white-collar crime, came just six months after Mr. Madoff, a pioneer on Wall Street, allegedly told his sons that his entire business was a massive Ponzi scheme. The penalty sparked a burst of applause in a courtroom packed with victims of the fraud.

via The Wall Street Journal

Over the next few weeks we’ll be publishing have several more posts on this idea of “putting first things first.” We’ll be looking not only at how attention to the virtues can help you steer clear of failure,  but also how the virtues can enrich and elevate your professional endeavors to new levels of success.