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.