Tem­ple­ton’s win­ning recipe

Con­trar­ian value in­vest­ment style made him and many oth­ers very rich

Finweek English Edition - - Creating Wealth - LU­CAS DE LANGE ldl@mweb.co.za

“BUY when oth­ers are de­spon­dently sell­ing and sell when oth­ers are greed­ily buy­ing” was the foun­da­tion of the in­vest­ment phi­los­o­phy of Sir John Tem­ple­ton, who has on oc­ca­sion been de­scribed as one of the best in­vest­ment man­agers of the 20th Cen­tury. He died last month at the age of 95. His legacy in­cludes the world’s largest unit trust fund – Tem­ple­ton Growth Fund – that’s turned a large num­ber of or­di­nary in­vestors into mil­lion­aires. An amount of US$10 000 in­vested in the fund’s Class A port­fo­lio in 1954 would cur­rently be worth al­most $7m (R52m).

Tem­ple­ton, who was a fol­lower of Ben­jamin Gra­ham, the “fa­ther” of value in­vest­ing, re­alised early in his life that mov­ing against the flow of a neg­a­tive mar­ket emo­tion – that is, when a bear mar­ket is at its worst and peo­ple do ir­ra­tional things – can be very prof­itable. He achieved his first suc­cess af­ter war hys­te­ria hit the mar­kets in 1939. In Septem­ber of that year he went out and bor­rowed $10 000 and bought 100 shares in each com­pany trad­ing at less than $1 on the New York Stock Ex­change. Some were rather shaky, but he rea­soned that a war econ­omy would ben­e­fit com­pa­nies over a wide front.

He was right, and within four years all his shares were sold and he was left with a healthy profit of $40 000 – a lot of money in those days.

Early in 2000 he also sold all his dot­com and tech shares on the Nas­daq, be­cause he was con­vinced that their ex­ces­sive val­u­a­tions were dan­ger­ous, de­spite the glow­ing com­ments of bro­kers and an­a­lysts. Not long af­ter that the Nas­daq be­gan fall­ing and lost 78% of its value be­fore reach­ing its low in Oc­to­ber 2002.

Tem­ple­ton took care­ful note of the psy­cho­log­i­cal cli­mate of the mar­ket. For ex­am­ple, when ex­cep­tional value is avail­able with cer­tain qual­ity shares there will be de­bates on the pos­si­ble dis­as­ters that could over­come them (in SA, pre­dic­tions that a sub-prime mort­gage cri­sis could hit the large banks are per­haps an ex­am­ple of that), de­spite the low val­u­a­tions avail­able. Com­pa­nies with skil­ful man­age­ments usu­ally over­come such prob­lems.

One of Tem­ple­ton’s rules was to com­bine value and re­li­a­bil­ity of a com­pany’s man- age­ment and his­tory. That re­sulted in him be­ing wary of glam­our stocks. How­ever, the heavy­weights of the Dow Jones in­dus­trial av­er­age treated him very well, pro­vided he bought them when they of­fered ex­cep­tional fun­da­men­tal value. He avoided spec­u­la­tion – and that’s con­firmed by the av­er­age life­time of six to seven years of a share in Tem­ple­ton Growth’s port­fo­lio, which he man­aged for 50 years. In his later years he took an in­ter­est in mar­ket-neu­tral hedge funds.

An­other im­por­tant rule was to di­ver­sify in­vest­ments as far as coun­tries, as well as com­pa­nies, in dif­fer­ent sec­tors are con­cerned. Al­ways look for qual­ity com­pa­nies with a low price – but es­pe­cially with ex­cel­lent prospects. A truth that he be­came aware of when trav­el­ling through Europe and the Mid­dle East in 1936 was that there are al­ways good in­vest­ment op­por­tu­ni­ties avail­able, pro­vided you search for them in terms of a set value sys­tem.

Tem­ple­ton be­lieved any­one could be­come fi­nan­cially in­de­pen­dent pro­vided he stuck to cer­tain rules. His for­mula is as fol­lows: Make sure you al­ways take cal­cu­lated risks. Don’t be led astray by the emo­tions of the mar­ket. Try to see things in their proper per­spec­tive. Ex­cep­tional value isn’t dif­fi­cult to iden­tify. Save. Tem­ple­ton grew up in poverty in Ten­nessee and could con­firm from his own ex­pe­ri­ence that thrift and hard work can pro­duce won­der­ful re­sults. When he got mar­ried, he and his wife agreed they would try to save 50% of their in­come. He earned good re­turns on the sav­ings and it en­abled him to buy their first home for cash. He also bought his first Roll­sRoyce (sec­ond-hand) for cash. • When you di­ver­sify your in­vest­ments in­ter­na­tion­ally, avoid coun­tries with high lev­els of so­cial­ism and state in­ter­ven­tion in busi­ness ac­tiv­i­ties. Suc­cess­ful com­pa­nies re­quire a strong, free mar­ket sys­tem. Make sure you pay the min­i­mum tax. In the Six­ties he de­cided to be­come a Bri­tish cit­i­zen and moved to the Ba­hamas, where no tax is paid on in­come or in­vest­ments. Af­ter he’d shaken off his tax wor­ries, his in­vest­ment per­for­mance im­proved. To con­clude: Tem­ple­ton’s suc­cess de­pended to a large ex­tent on the prin­ci­ple that time must be on your side in stock mar­ket in­vest­ment. Give good value shares enough time to re­ward you.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.