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.

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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.

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 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.

We continue our exploration of John Templeton’s twenty-one steps detailed in

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

The 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?

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

We continue our exploration of John Templeton’s twenty-one steps detailed in

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.