Templeton’s winning recipe
Contrarian value investment style made him and many others very rich
“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.