The first period Mr. Motyl referenced was Japan from 1987 to 1992. He wrote:

Sir John Templeton first began investing in Japan in the 1960s when it was considered an emerging market.  By 1985, Japan had exploded onto the economic landscape . . . Although Japan’s growth rate soared in the mid-1980s, by 1986 we believed valuations in Japan were too high.  Templeton Growth Fund subsequently trailed its benchmark during the height of Japan’s stock market rise from 1987 to 1989. However, over the cumulative six-year period from 1987 to 1992, the fund also outperformed its benchmark by over 33%.

In the late 1990s, the rapid ascent of popular Internet companies fueled massive speculation, record-setting company valuations and rising stock prices. Templeton’s disciplined Bargain List process, which is value driven, prevented us from participating in the technology sector. Similar to its performance in the late 1980s, Templeton Growth Fund lagged its benchmark at the height of the technology boom, from 1997 to 1999. Yet the fund returned 36.84% over the six-year period covering 1997 to 2002 verses 6.33% for its benchmark.

Where we are now identifying value is, ironically, in the formerly high flying technology, telecom and media industries. Templeton’s Bargain List of undervalued securities has recently included large cap companies such as Microsoft, Pfizer, Newscorp, Siemens and General Electric. The interesting aspect about today’s market environment is that some of the least-expensive companies are also of the highest quality.

Mr. Motyl concluded with these words, which I heard over and over from Sir John:

Our experience has taught us that investors who exercise patience and a long-term view during uncertain markets are often the ones who are rewarded over those who chase hot markets or jump in and out with each market quiver.

In Sir John’s beloved religious terminology, patience and a more eternal perspective are indeed virtues.

Gary Moore is author of Faithful Finances and founder of Gary Moore and Company.

Editors’ Note: “What Would John Templeton Say?” is not a site dedicated to giving investment advice. Rather, it is a resource to share the wisdom of John Marks Templeton and provide historical and current perspectives on economic issues.

. . . the financial system has suffered a blow unlike anything since the Great Depression, and the source is the weak financial position of the people holding declining assets.

It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt—especially mortgage debt—that was transmitted into the financial sector during a sharp downturn.

This op ed brings to mind, yet again, the prescience of Sir John Templeton who in 2003 expressed uncharacteristic pessimism about the economy because of his concerns about the housing sector. In the interview with Robert Flaherty in Equities magazine cited below, Sir John states that 

Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak.

Sir John adds,

A home price decline of as little as 20% would put a lot of people in bankruptcy.

Sir John then connects the mortgage bubble with the consumer debt crisis and the ramifications for the economy and the stock market. What Gjerstad and Smith observed in 2009, John Templeton predicted six years earlier.  

Every investor knows to buy low. But in actual practice, this isn’t the way the market works.

When prices are high, demand is high. When prices are low, demand is low—investors have pulled back, and people are discouraged.

More often, stocks in only particular fields fall. Industries such as auto making and casualty insurance go through regular cycles, or occasionally stocks of certain types of companies, such as thrift institutions, fall out of favor all at once.

It is extremely difficult to go against the crowd, to buy when everyone else is selling, when things look darkest. And if we buy with the crowd, we will achieve the same results as everyone else. By definition, we can’t outperform the market if we buy the market. Bernard Baruch, adviser to presidents, put this principle most succinctly when he said, “Never follow the crowd.”

Investment decisions contrary to “conventional wisdom” can be the most rewarding.

Gary Moore, author of Faithful Finances and founder of Gary Moore and Company weighs in:

One of the terribly important things to remember about Sir John’s seemingly optimistic opinion that stocks always go up in the very long run, which seems dubious to many in today’s environment, is that it was not always prompted solely by positive visions for the economy.

Sir John believed very strongly that governments always debase their currencies in the long run as human nature prompts voters in democratic nations to invariably demand more than they’re willing to pay for from government. That would seem particularly true at this moment in history when even our most pro-business CEOs who have openly detested governmental interference in business since the election of Ronald Reagan are going hat in hand to Washington. Those “stimulus” funds, plus the usual deficit spending, must be borrowed and/or printed. And when stocks become cheap enough, as they are rapidly doing, sentiment will change as investors again remember that one must be in some sort of real, as opposed to paper, asset in order to maintain purchasing power.

Then of course, our population will continue to grow and per capita productivity will likely  continue to grow, thus increasing the value of our goods and services, and the resulting profits. And fear will give way to prudence, which will eventually give way to euphoria and the cycle will repeat. Perhaps for all eternity; but certainly until a majority of investors become as spiritually disciplined as Sir John was.