The great investment managers give sane advice: keep it simple
• Benjamin Graham and Sir John Templeton eschewed complex formulas and arcane theories
Books and papers on investment management have become too complex for the layman. We are bombarded with Greek letters and algebra. It’s getting worse: to get a union ticket to work in fund management it is now almost obligatory to take the Chartered Financial Analysts (CFA) exam, where initiates are spoon-fed the gospel according to such Nobel laureates as Harry Markowitz and Bill Sharpe.
I don’t believe many of these academics have actually managed a portfolio. They are rather like those professors of journalism who have never worked in a newsroom.
I gather the CFA has lots of dense theory. Yet when I went to Warren Buffett’s annual meeting in Omaha, for the one and only time back in 2005, he said managing funds did not require a high IQ, managers might as well pass on the excess to someone else. Psychological strengths such as courage and determination were far more important.
In my experience fund managers who are too bogged down with theory are often ineffective. You do not need a high IQ to understand The Intelligent Investor by Buffett’s mentor, Benjamin Graham. Unlike many writers on the subject, Graham had experience of managing money on Wall Street. Instead of filling his work with hieroglyphics, it remains comprehensible nearly 70 years later.
A concept such as the margin of safety — paying a discount to your valuation of the company — is more common sense than academic rhetoric. Another key insight from Graham is that in the short term the market is a voting machine, as share prices are determined by their popularity with investors. But in the long term it is a weighing machine, as the business’s substance will determine its price.
Another investment luminary who made it far too simple, and could put a certain type of strategist out of work, was the late Sir John Templeton. It would be hard to have had more practical experience of money management than Templeton, whose funds included the first global fund, Templeton Growth.
Employees of what is now called Franklin Templeton carry little booklets with Templeton’s thoughts. It is strangely reminiscent of Mao Zedong’s little red book in 1960s China. And I am sure to everyone’s relief there is not a single reference to triple Sigma events.
Templeton had an unlikely start in the small town of Winchester, Tennessee. He was second in his Yale University class in 1934 and already intended to make a career of investment analysis. Coincidentally, that was the year that Graham’s blockbuster Security Analysis, co-written with David Dodd, was published.
Templeton won a Rhodes scholarship and, after qualifying for a law degree at Oxford, travelled around the world at a time when the US investment world was very insular — not much has changed.
Although Templeton, like Graham, is associated with a value approach, one of his key principles was to keep an open mind. Never adopt permanently any type of asset or selection method. Stay flexible, openminded and sceptical. Very good advice and I wish ideologically based deep-value managers such as John Biccard at Investec and Piet Viljoen at RECM had followed it.
Templeton says the only way to avoid mistakes is not to invest — which is the biggest mistake of all. Forgive yourself for your errors and don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Each mistake should be a learning experience, a maxim that doesn’t apply only to stocks and shares.
Templeton famously said that the most costly four words in investment were: “This time it’s different.”
Another maxim, which is much harder to implement than it looks, is: don’t follow the crowd. What’s the good in being a good mathematician if you lack the fortitude to sell when others are greedily buying and to buy when others are despondently selling?
You have to have gone through numerous business cycles like Templeton before you truly understand that bull markets and bear markets are both temporary: an industry can become popular with investors but this will always prove temporary and when past it may not return for many years.
I doubt that Templeton would be piling into platinum shares right now and certainly not when they were so popular on the JSE 10 years ago.
I find many investment managers lack humility. If they lose money they were “too early” or the market was irrational.
But it is precisely the irrational nature of markets that is so central to the thinking of both Graham and Templeton. The market can’t be explained by a series of equations.
Another cop-out is to blame the mandate: claiming that the client is happy for the manager to lose money because he is being “true to style”.
Fund managers have only one role and that is to make money for their clients. Templeton’s first maxim is to invest for maximum total real returns. The returns must be real over time, after inflation and taxes have been taken into account.
At heart, Templeton’s philosophy revolves around the key role of equities in beating inflation. If there had been a large enough pool of listed property shares in his time he might have included that too.
But he warns that too much trading turns an investor into a gambler. Profits can easily be consumed by commissions and worst of all you might sell a share short just when it starts to rise. He advises investors to be relaxed: get better informed and gain more understanding of essential values, be less emotional and above all don’t think too much, in the sense of worrying.
These days, value and quality are often treated as opposing styles, yet Templeton believes in both. The typical Templeton portfolio includes bargains found in the quality stocks.
IT IS THE IRRATIONAL NATURE OF MARKETS THAT IS SO CENTRAL TO THE THINKING OF BOTH GRAHAM AND TEMPLETON