John Templeton’s Investment Strategy
Templeton was a contrarian investor because he liked stocks trading at a low price, companies with good prospects, stocks that investors would avoid due to their unattractiveness.
Whether it’s in fashion, furniture, real estate, or stock, Templeton was the ultimate bargain hunter looking for underpriced investment opportunities.
He opposed investing in high-priced growing companies because they are “bubbles” that are eventually brought down by market influences. Instead, he scoured the market for companies with relatively low PE ratios. He believed these were the real deals.
Templeton had many interesting strategies that are relevant to modern-day investors. We will dicuss shortly what they are and how you and I can benefit from them.
About John Templeton
Sir John Marks Templeton (November 29, 1912 – July 8, 2008) was a legendary investor, banker, fund manager and philanthropist.
The American-born British founded the Templeton Growth Fund in 1954. At that time he had 5 funds and $66 million under management. The fund has averaged a 14.5% annual return over a 38 year period outperforming the stock market indexes in the process.
Investing $10,000 in the fund in 1954 would have grown to $2 million by 1992 when the fund was sold. This made him a top-performing manager, year after year.
Some might say he was the greatest investor of the 20th century, and they may not be far from the truth; no wonder the Money magazine named him “arguably the greatest global stock picker of the century” in 1999. He was also knighted by Queen Elizabeth II in 1987 for his philanthropy.
After retirement, Templeton turned more to philanthropic work and remained chairman of Templeton Growth Fund, mentoring investors in making investment decisions.
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Templeton’s Approach and Philosophy
Templeton’s strategies focused on industries and companies that were out of favor but had the potential to do better. He would buy these stocks and hold them for five years before selling at fair market values.
Templeton used this approach, along with a philosophy that turned out to make him a very successful investor. Some of these ideas will help an investor to make the right choices.
1- Buy Value, Not Market Trends or the Economic Outlook
Templeton was a value investor rather than a growth investor. In contrast to the more general technical analysis, he used a fundamentals-driven bargain-hunting approach to stock trading.
He looked for bargains in shares that are below the asset value. He felt the stock prices were low because investors were not interested in them. He was more value-oriented than most other investor.
Templeton held on to stocks for a good number of years and sold when others bought and bought when they sold.
Templeton identified companies with strong and proven track records in their industry and well-trusted brands for high profit-margin consumer products. These attributes, he warned, do not work in isolation.
A low-cost value company does not always mean it is a good company, and vice versa. Investors should be thoughtful about their choices.
So what you should pay attention to is the fundamentals of the company, not how much the stock has gone up or down. He believed individual stocks are the key determinant of the market, and more focus should be placed on them.
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2- Embrace Maximum Pessimism
Such pessimism exists when investors do not purchase stocks because of low prices or when the public is discouraged about an industry. Tim Templeton believes that is the best time to buy.
“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Templeton practiced this theory in 1939. He bought all stocks that were below $1. (104 in total). This was a time of serious economic difficulties (1929-1939).
Templeton believed the war would boost the economy; he predicted the government would produce a wartime tax on profits. The proposed tax would mainly hurt the large profitable companies, as opposed to small and uninteresting companies.
Templeton diversified by not putting all his eggs in one basket. He admitted that he was no soothsayer and that he was uncertain about most of his projections. Within a few years and an average holding time of four years, the total investment of $10,000 became $40,000.
He believed to beat the market, one must beat the competition. Investors need to be more analytical and research-oriented and should buy during a strong pessimism.
3- Invest for Maximum Total Real Return
Templeton advises investors to refrain from buying stock and selling low due to market factors but to make sure they get returns on their investments after taxes and inflation has been deducted.
To him, this is what real returns mean. If you always prefer to trade your investments very regularly, you may end up having your profits consumed by commissions and taxes. When this happens, you cannot boast of actual profits.
Templeton posits that this is the only rational objective for investors, especially those focused on the long term. Any investment strategy that ignores the massive impact of taxes and inflations does not realize the actual nature of the investment environment and, as such, is severely handicapped.
One big mistake investors make is putting a lot of money in fixed-income securities. For instance, what a dollar would buy today would have been what 35 cents could buy in the mid-1970s, what 21 cents bought in 1960, and 15 cents just after the Second World War.
If the inflation rate averages 5% over a period of 10 years, then the real return must be greater than 5% in order to maintain the same true value of the investment.
A real return can only be achieved when the return is greater than the inflation rate.
4- Invest; Don’t Trade or Speculate
Templeton affirms that the stock market is not a casino. You only make it one when you move in and out of stocks every time they move a point or two, if you continue selling your stock short, or if you deal only in options or futures. Just like the outcomes, when you do not focus on real returns, you are more likely to lose your profits to commissions trading in this manner.
People that criticize the stock market often liken it to casinos because many stock traders develop addictive personalities just like gamblers. They always look out for quick riches and, most times, overestimate their chances of success. Every time stock market news breaks, they are on edge.
The stock market is unlike casinos where you put your money on this today and that tomorrow; the odds of winning are quite clearly defined in a gambling environment like casinos. The players are faced with the known unknowns, meaning that they are faced with risks where the odds are laid bare for them, as opposed to uncertainties.
Contrarily, there are no given odds of beating the stock market or making a good bargain. Investors are faced with unknown unknowns, and as a result of this, many investors are met with uncertainty as opposed to risk.
Templeton acknowledges these uncertainties as anything can happen one day, and a booming company could drastically crumble. People do not have powers over things like natural disasters, for instance, and so investors must learn to diversify.
5- Remain Flexible and Open-minded
Templeton’s advice to diversify hinges on flexibility when making investments. He said, “There are times to buy blue-chip stocks, cyclical stocks, corporate bonds, US Treasury instruments, and so on.
And there are also times to sit on cash because sometimes cash enables you to take advantage of investment opportunities. The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and when lost may not return for many years.
Thus, investors should be open to all kinds of investment opportunities and not restrict themselves to a particular niche or industry.
Templeton knew the unpredictable psychology of investors that all markets face. This is why he mentions that different investment types will only be popular temporarily. Flexibility is crucial for long-term value investing.
Although he pursued different investment types, Templeton’s portfolio was to a large extent filled with common stock.
He was particularly invested in small-cap firms because he believed they had a perceived higher potential than the well known and established companies (large-cap). He believes this because intensive research and studies have credited small caps with being the best opportunities for private investors.
6- There’s No Free Lunch
This principle encompasses a broad array of principles and guidelines. You should never invest based on sentiment.
The fact that a particular company offered you your first job or got you their custom-made car, or sponsored a favorite television that you love definitely shows that it may be a fine and good company. But that doesn’t mean its stock is a fine investment. Even if the corporation is truly excellent, the prices of its shares may be too high.
Templeton says never invest in an initial public offering (IPO) to “save” the commission. That commission is built into the price of the stock; this is why most new stocks suffer a decline in value after the offering.
This is not to discourage you from buying an IPO, but never make that decision based on a tip. As simple as the reasons may seem, you would be surprised how many investors, people who are well-educated and successful, do exactly this.
Unfortunately, there is something psychologically compelling about a tip; the human mind is attracted to free lunch or profits without much work. The nature of such IPOs suggests inside information, a tip-off on ways to make a quick profit.
Templeton warns investors to flee from such and avoid cutting corners.
7- Do Not Be Fearful
All investments involve risks, including possible loss of principal. All investors are always advised to carefully go through the terms and conditions, the risks, charges, investment goals, etc., before deciding whether or not to invest.
The value of investments can either go up or down, and investors must have this at the back of their minds because they may not get back the full amount they invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability, and political developments. Diversification does not guarantee the protection of profits against loss.
Templeton believes that these market fluctuations are normal parts of stock market trading; he refers to them as minor setbacks and encourages investors to stay dogged and positive.
8- Learn From Your Mistakes
The only way to avoid making mistakes would be to not invest at all, which is the biggest mistake of all. So do not beat yourself up when you make a mistake, don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks; don’t be like a gambler. Instead, turn each mistake into a learning experience and forgive yourself.
Determine exactly what went wrong and how you can avoid the same mistake in the future. The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.
The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.
These strategies and philosophies are part of the few that the man, who is considered one of the greatest investors of his time, employed during his reign as the manager of Templeton Growth Fund.
He accrued lots of achievements and amazing feats in the investing world, and these strategies will help you to know more about investments and the unique styles of Templeton.
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”
-Sir John Templeton