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The 22 maxims of Sir John Templeton

Sir John Templeton was a great investor, and a paradox.

When it comes to legendary investors, Sir John Templeton was a legend’s legend.

Templeton is immortalised as the man who opened up international investing to Americans. After he toured the world in his 20s (a racy thing to do seven decades ago, unless you were doing it in uniform) Templeton appreciated the potential of countries like Japan, and backed their companies to the hilt.

Later he did the same with the emerging tiger economies of South East Asia.

This particular legacy lives on, thanks to Templeton’s extremely successful career as a fund manager as well as a stock picker – the popular Templeton Emerging Markets Investment Trust is named for his firm.

But there are numerous other Templeton anecdotes that can teach you more about being a successful contrarian investor.

Probably the most famous was his move in 1939 – on the eve of the Second World War, when he was all of 26-years old – to borrow a then-massive $10,000, in order to buy 100 shares in each of 100 companies trading under a $1. Templeton correctly judged the market was in headless chicken mode, and the money he made from the subsequent recovery set him off on a lifetime of running money.

I once read that Templeton learned about the emotional moods of markets by visiting cattle auctions during the Depression Era, with a bargain-hungry older uncle. I can well believe it – few economists who saw a commodity market in action would be so quick to use the phrase ‘orderly and rational’ with a straight face, let alone if they saw a market in a life-and-death period like that.

Fast-forwarding 60 years, another thing I read recently was that Templeton actively shorted the Dotcom Bubble – in his 80s! What’s more, he picked his targets in a particularly intelligent fashion, working out when the lock-in deals that limited freshly-minted Dotcom millionaires’ trading would expire, and so anticipating how they’d dump their holdings onto the market.

Passing on little quips about his repeatedly profitable exploits matches how I learned about the man myself. In fact, I don’t think I’ve ever read an investing book about Sir John Templeton, unlike with my other favourite old investors. (Templeton finally passed away at the grand old age of 95 in 2008). Instead, I seem to pick up his knowledge via mentions in unrelated books about other investors, through word of mouth, or via magazines and websites.

That’s how I came across Templeton’s 22 maxims for investing success. Some are mainly applicable to active investors trying to beat the market, but there’s also plenty of wise warnings for passive investors, too.

Investing maxims from Sir John Templeton

1. For all long-term investors, there is only one objective: ‘maximum total real return after taxes.’

2. Achieving a good record takes much study and work, and is a lot harder than most people think.

3. It is impossible to produce a superior performance unless you do something different from the majority.

4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

5. To put ‘Maxim 4’ in somewhat different terms, in the stock market the only way to get a bargain is to buy what most investors are selling.

6.  To buy when others are despondently selling and to sell what others are greedily buying requires the greatest fortitude, even while offering the greatest reward.

7. Bear markets have always been temporary. Share prices turn upward from one to twelve months before the bottom of the business cycle.

8. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, won’t return for many years.

9. In the long run, the stock market indexes fluctuate around the long-term upward trend of earnings per share.

10. In free-enterprise nations, the earnings on stock market indexes fluctuate around the book value of the shares of the index.

11. If you buy the same securities as other people, you will have the same results as other people.

12. The time to buy a stock is when the short-term owners have finished their selling, and the time to sell a stock is often when the short-term owners have finished their buying.

13. Share prices fluctuate more widely than values. Therefore, index funds will never produce the best total return performance.

14. Too many investors focus on ‘outlook’ and ‘trend’. Therefore, more profit is made by focusing on value.

15. If you search worldwide, you will find more bargains and better bargains than by studying only one nation. Also, you gain the safety of diversification.

16. The fluctuation of share prices is roughly proportional to the square root of the price.

17. The time to sell an asset is when you have found a much better bargain to replace it.

18.  When any method for selecting stocks becomes popular, then switch to unpopular methods. As has been suggested in ‘Maxim 3’, too many investors can spoil any share-selection method or any market-timing formula.

19. Never adopt permanently any type of asset, or any selection method. Try to stay flexible, open-minded, and skeptical. Long-termy changing from popular to unpopular the types of securities you favor and your methods of selection.

20. The skill factor in selection is largest for the common-stock part of your investments.

21. The best performance is produced by a person, not a committee.

22. If you begin with prayer, you can think more clearly and make fewer stupid mistakes.

More maxims to compare with Templeton’s: The rules of Walter Schloss.

Filed under: Investing

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{ 9 comments… add one and remember nothing here is personal advice }
  • 1 ermine June 17, 2011, 12:10 pm

    This is brilliant. Though I can’t resist being provocative and wonder what

    11. If you buy the same securities as other people, you will have the same results as other people.

    13. Share prices fluctuate more widely than values. Therefore, index funds will never produce the best total return performance.

    18. When any method for selecting stocks becomes popular, then switch to unpopular methods. As has been suggested in ‘Maxim 3′, too many investors can spoil any share-selection method or any market-timing formula.

    21. The best performance is produced by a person, not a committee.

    have to mean for index investing 😉 JT sounds like a wise old boy, I’m still mulling over quite a few of these…

  • 2 Paul Claireaux June 17, 2011, 12:19 pm

    Sorry monevator but you seem to have fallen into the trap of survivorship bias. If JT’s big play on the eve of the second world war had gone the other way he’d have been wiped out and we’d never had heard of him.
    Take 1024 monkeys and get them tossing coins and the chances are you’ll find one who gets 10 heads in a row.
    Does that make him a genius ?
    No.
    JTs first rule of maximising growth net taxes makes only part sense (The tax bit) Maximising growth is not for everyone or we’d all be putting our assets 100% in small companies.
    Yes it might work but also it might not and a lot of folk would get wiped out – particularly if they needed a reasonable income from their funds.
    Invesment is personal and needs to match the risk attitude and more importantly the risk capacity of the invidual investor.

  • 3 Rob June 17, 2011, 12:24 pm

    For index investors, it means “don’t be surprised you only get average performance (minus costs)” – but this is the double-edged sword of index investing we all know anyway.

    Also the “market-timing formula” reference in (18) should tell you you’re dealing with an active vs passive school of thought.

    I see it as Templeton espousing a more Graham-esque view of value selection; nothing wrong with that if that’s what floats your boat (wallet).

    I’ll openly admit though, I’m an indexing fan and therefore will cynically claim that Templeton (and his legendary £10k 1939 punt) is as shining an example of survivor bias as you’ll ever see! Easy to take cheap shots as someone with a load of money 🙂

  • 4 Ken Faulkenberry June 17, 2011, 2:21 pm

    Whether Templeton’s first leveraged investments were luck or an astute value investment his record for the next 60 years is unquestionable. He proved indexing is for people who don’t won’t to take the time to do proper research. The last decade should be enough to cause investors to start paying attention to valuation instead of indexing!

  • 5 The Accumulator June 18, 2011, 7:42 am

    It means that index investors are happy to take the market performance and not worry about the ‘maximum’ performance if it means we can retire without having chucked all our money on the fire.

    The whole market can’t outperform!

  • 6 The Investor June 18, 2011, 11:03 am

    All good comments on both sides of the active/passive fence. I don’t yet know how we’ll resolve this schism among the Monevator audience faithful. We can’t have every post degenerating into a PlayStation vs Nintendo clash. (Not saying we’re there yet, at all. Just predisposed to look forward, darkly…)

    Survivorship bias is of course an issue, although like Ken I do eventually start to think thoughtful and systematic contrarian bets that come off over an 80 year investing lifespan start to compare pretty weakly to a string of 2,000 coin tosses that come up ‘heads’ or what have you.

    But really, I invest actively with a varying portion of my funds – and read about active investors (see my Kindle reading list: http://monevator.com/2011/06/09/kindle-books-about-money-and-investing/) with a full awareness of the odds, psychological biases, and potentially wealth sapping micro-abrasions of a thousand tiny extra costs along the way.

    Perhaps I need to do a post on this soon, and link to it as required. It just seems a bit clumsy to include an ‘active versus passive’ disclaimer into every active-tilted post, especially as I generally point readers towards the passive strategies (which I still believe will serve the vast majority better than active fiddling) and especially as co-blogger Accumulator regularly puts the boot into any active plans without feeling obligated to footnote… 😉

  • 7 OldPro June 18, 2011, 1:37 pm

    What’s the big hoo hah… I don’t see it… If you want to try to beat the market go for it I say you only live once… as long as you know the risks and rewards…

    With respect to Mr Accumulator, you are not going to throw away “all” your money unless you’re utterly witless and incompetent… yes you may do less well than the market, that’s the real risk… I don’t see any recommendations to try ponzi schemes or spreadbetting or putting all your money into options here on the Monevator website…

    Babies and bathwater spring to mind. There’s room for all approaches… in the same investor’s armoury… provided you duck the true risks (giving up and giving all your money to a silver tongued accountant or advisor who puts it all into a single company corporate bond for a 7% yield until it goes bust… it happens!)

  • 8 Paul Claireaux June 18, 2011, 2:06 pm

    I’ll agree with that OldPro.
    There’s benefits in both passive and active methods for most folk provided risk levels are limited.
    And strongly agree about risks of spreadbetting.

  • 9 The Accumulator June 18, 2011, 6:28 pm

    @ OldPro – I was of course exaggerating for effect. The risk for me isn’t even doing worse than the market. It’s not meeting my goals… not paying off the mortgage while I still can… retiring into poverty and so on.

    I have total respect for anyone who backs themselves to beat the market. If you can do it, all power to you. We just shouldn’t be under any illusion as to our chances of success.

    @ The Investor – Don’t remember too many Jets vs Sharks face-offs on Monevator. It does us good to let off some steam once in a while, and I think Ermine trailed the event with mischievous humour.

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