When it comes to legendary investors, Sir John Templeton was a legend’s legend.
Templeton is immortalised as the man who brought international investing to North Americans. Touring the world in his twenties – still a racy thing to do eight decades ago, at least out of uniform – Templeton was one of the first to see the potential of Japan. He backed its firms to the hilt.
Later he did the same with the tiger economies of South East Asia.
Templeton’s winning career as a fund manager and stock picker in foreign markets is immortalized in names like the Templeton Emerging Markets Investment Trust.
But there are plenty of other reminders from John Templeton’s life that can teach us about finding success as an investor.
Templeton did things differently
The most famous of Templeton’s contrarian actions happened in 1939.
On the eve of the Second World War, when Templeton was all of 26-years old, he borrowed a then-massive $10,000. He had decided to buy 100 shares in each of 100 companies whose beaten-up stocks cost less than a $1.
Templeton judged the market was in headless chicken mode due to fears about the upcoming conflict. He wasn’t sure which shares would prosper. But he was convinced they were all trading out of whack.
The profits he banked when the markets recovered initiated a lifetime of running money.
Templeton had learned to read the emotional moods of markets by visiting cattle auctions during the Depression Era with a bargain-hungry older uncle. Perhaps economists would have quicker to get to behavioural economics if they’d spent less time with mathematical models and more time watching farmers yelling at each other!
Even with today’s knowledge though, it takes a rare mindset like Templeton’s to see opportunity on the cusp of a life-or-death conflagration.
Popping the bubble
Fast-forwarding 60 years, and Templeton was actively shorting the Dotcom Bubble. In his 80s! He was no perma-bullish Warren Buffett.
I’ve wondered before about the return sheets of the greatest old investors. Often there’s a presumption that their out-sized success comes courtesy of time and compound interest.
But to be actively betting against your grandkids’ smartest peers on Wall Street by shorting the most popular stocks – and winning – is something else.
What’s more, Templeton chose his targets in a cunning fashion. He studied the Dotcoms that had recently IPO-d, and looked for when the lock-in deals that restricted their freshly-minted founders from selling up would expire. Thus he anticipated who’d first dump their shares on the market. Kerching!
Man of mystery
Passing on little stories about Templeton’s profitable exploits matches how I learned about the man myself.
I’ve never read an investing book about Sir John Templeton, in stark contrast to my other favourite investors. (Templeton passed away at the grand old age of 95 in 2008).
Rather, I found out about Templeton through mentions in unrelated books, word of mouth, and magazines and websites.
That’s how I came across Templeton’s 22 maxims for investing success.
These pointers are most applicable to active investors trying to beat the market.
But there are also nuggets that passive investors should appreciate, too.
Enjoy!
The 22 investing maxims of 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-term results are achieved only by 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.
Want more? Compare Templeton’s maxims to the rules of Walter Schloss.
This is brilliant. Though I can’t resist being provocative and wonder what
have to mean for index investing 😉 JT sounds like a wise old boy, I’m still mulling over quite a few of these…
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 🙂
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!
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!
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… 😉
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!)
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.
@ 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.
RE: The Active/Passive debate, there’s always room in a portfolio for both, but perhaps take Templeton’s advice:
“When any method for selecting stocks becomes popular, then switch to unpopular methods”
It’s fair to say that active adds risk, how much risk? How much would you tilt away from equities to accommodate this risk? Can you accommodate more equities if you’re passive and how does that extra expected return compare to the alpha you’re hoping for with an active?
Unless of course we’re talking capital preservation active funds, in which case can you then accommodate more equities in the rest of your portfolio?
The more I read and the older I get my portfolio grows heavy with passive bets and the proportion of single companies I own by value shrinks. Contrarian bets, I often wonder, must be represented in broad market gains (as must losses from falling off a band-wagon). Do we ‘Have’ to to follow maxim 1?..
‘1. For all long-term investors, there is only one objective: ‘maximum total real return after taxes.’
I perhaps thought that way when I started out but now after a few bruisings and a few wins, I am content with market returns and low fees.
However.
Looking at a small company and reading widely about it still excites me, my bets are still the same size they were a dozen years ago, they just represent a vastly smaller percentage of my portfolio now.
Room for both for me, please keep informing me with both sides of the argument.
JimJim
@JimJim — I don’t think Maxim 1 is at all incompatible with passive investing.
For most investors, the best way to get a maximum return is through passive funds, because they have no edge.
In the absence of rule #1 you might think (or not *think*, but do it anyway) you need to own active funds for excitement, or to pick stocks to ‘be in the game’ or to stay in cash to sleep at night, et cetera. 🙂
To be honest too, what else is an active fund manager going to say?
Point 2/15 – Do research to beat the market? – wouldn’t look good if he suggested his career was founded on throwing darts at the FT or visiting mystic meg, even though random selection may well put you more into places where there are risk premiums.
Point 3 – Do something different than indexing? – wouldn’t be much of an active fund if it didn’t.
Point 4/5/6/12/18- Be contrarian? – you’re not going to buy low and sell high if you didn’t, what else is active managing aiming to do?
Point 13 – average will never be the best, not to say though what ‘best’ is.
Some of the other points support indexing or at least carry lessons from it without saying as much. Also there is valuation hints which is interesting but I suppose is nolonger a secret.
@TI (12) A fair point well made 🙂
I think I was reading point one in the context of the -mainly active- rest of his Maxims. He beat the market and that was the point of his investments. It can be done, but obviously not by everyone (mathematically impossible).
My own performance does not merit the extra time spent in research over the years, I would have been better off taking on more work and investing the proceeds passively. But as a hobby, time is cheap and if you enjoy it, why not, there is a lot to be learned. 🙂
JimJim
For me, maxim 2 is pretty critical. I’m just not prepared to put the study time in and I don’t have a roomful of analysts to do the job for me. Just being contrarian would be easy, but I suspect you have to be the right sort of contrarian.
Being 100% contrarian would pretty much mean shorting the market all the time, since you’d want to do opposite of everyone else. Reality for active managers is a mixture of momentum with occasional contrarianism, the secret would be timing it/reading it- if he has an edge in this regard he can’t define it in public or else lose it – can we ascertain what edge he has/had at this? He claims it’s hard work – but I’m sure many others are.
@Matthew — I suggest you leave comments about what contrarian investing is to those who do it. Certainly it is not “shorting the market all of the time” and doing so wouldn’t be doing the opposite of everyone else, anymore than owning the market would be. 🙂
I find it difficult to agree with his first maxim: ‘For all long-term investors, there is only one objective: ‘maximum total real return after taxes.’
First, this assumes no leverage. If you are unlevered then you can be path independent but if you are levered then you are path dependent. You simply cannot take any drawdown.
Second, one major purpose of investment is to achieve your objective, most typically hedging a future liability or liabilities, with the least risk of a shortfall. Trying to maximize total returns over the long-term may work most of the time but how much will that excess mean to you, if in the scenarios where it fails, your objective is not met and this is catastrophic.
These two issues are, of course, one and the same since active management can be considered as nothing more than a series of levered investments against the long-term passive benchmark portfolio that would most effectively hedge your liability risks.
Every time I hear the admonishment to “do your own homework” in the context of investing I immediately think of Procter & Gamble in the 1990’s. A nice, safe, unexciting and easily understood business, selling soap and detergents. Then bam, it loses a fortune in currency swaps that none of their investors seemed to know about, let alone understood.
I know my limitations and will stick to a tracker for the bulk of my savings.
Buffet, Graham, Soros, Lynch, Templeton- there are clearly some investors who can do it. Some find that inspires them to go active, and good luck to them. For me, it has the opposite effect, because I can’t help thinking it’s people like that I’d be playing the game against!
Windy
@windinthefens, I’m exactly the same. I enjoy reading about these characters and learning about investing generally. However most of the time it does leave me thinking that I’m far far from being a front runner in the space and as such the passive approach is best for me. I wouldn’t rule out taking a more active approach at some point but it certainly won’t be whilst I’m on the road to FI, trying to progress my career and bring up a young family.
Buying during maximum pessimism is the easiest bit for me. In March last year I cashed in my 50k premium bonds, emergency fund and any cash behind the sofa to buy boring all vanguard all world. I don’t ever sell so just have to sit out the boring bit while the market is doing well.
@Marco – overall by waiting for a dip you’ll still typically be buying at a higher price than if you just bought today/drip fed.
What you’re not seeing is the opportunity cost – all those years when your 50k is not making the index return.
@TI – My assumption being that owning the market is generally what everyone is doing as a whole, and that to take contrarianism to its fullest extent, then at every point in time where there’s optimism you’d sell and that at every time there’s pessimism you’d buy, so done fully you’d have pretty much have the inverse of an index – is it a sensible thing to be advising people to do?
Also I must say that active investors generally, when they have a core that’s like the index and then adding deviations from that – they are not showing full conviction in what they’re doing…
@Matthew 23…
“Also I must say that active investors generally, when they have a core that’s like the index and then adding deviations from that – they are not showing full conviction in what they’re doing…”
That depends upon the outcome and level of risk the deviation takes. A single deviation, taken to its extreme, and fully backed with the capital available would be an edge case example. Any investor would be foolish to have that much confidence in a single conviction as tail risks always exist. (see proctor and gamble example in comments above) I have my main objective fairly well covered at this stage in my investing life – luck and a following wind played some part. My diversification means I can make small punts on companies I “think” stand a chance of doing a bit better than their peers and not have it effect my nearing goal too drastically. This puts me in an entirely different situation to a fund manager who will have vastly more to invest than myself, the pressure of beating the market (otherwise, what’s the point?), the pressure if they do well of having more funds to invest than ideas to invest in and the added pressure of doing it every day of the year even if markets seem overblown.
Not showing full conviction is not a bug, it’s a feature 😉
JimJim
There’s a risk some of this debate wades in to reductio ad absurdum territory. Being active doesn’t mean you can never hold a passive fund; and you shouldn’t burn someone at the stake for playing actively with a small portion of their wealth whilst claiming to be ‘passive’.
Ultimately it’s down to risk tolerance, investment objective, timeframe and whether you have any (real or perceived) ‘edge’.
I tend to think of edge widely; to my mind small individual investors have a (tiny!) edge based on agility and not needing to answer for short-term returns. We can ride the bumps without needing to apologise.
This typically fares badly against planet sized brains and much larger research/information access, but personally some infrequent and relatively small trades on “obvious”(!) future out-performers hasn’t fundamentally changed my life but has kept the bar nicely stocked. Perhaps I should have more “conviction”, cash out everything else, leverage up to the hilt and go all-in on the next “obvious” – but we’re back to risk tolerance and objective. So I’ll stick to playing with sums I could tolerate losing, and claiming to be passive…
That is indeed a definable edge, @Jim and @Pedro, in not having the constraints a fund manager would have.
I suppose I worry that the pros are selling a timing concept that’s otherwise hard to expose, if we can’t time the market it’d be hard to time when to be contrarian. Even a momentum strategy only differs from buy and hold if it involves some timing
@Matthew:
“Even a momentum strategy only differs from buy and hold if it involves some timing”
A momentum strategy typically buys a subset of the market, not the whole market. Unless you are simply stating “a strategy that involves timing when to be in out of the market typically involves some timing” which is not adding much to the discussion, is it?
This sort of word volume (you’ve made 817 comments to Monevator in total!) isn’t adding much to the thread. I haven’t got time to reply to all your comments, such as your incorrect comment above that a contrarian investor must short every share in the market.
I appreciate you have zero bad intentions here and likely feel you are just having an open-ended discussion, but the problem is it introduces lots of noise and misdirection that less experienced readers might mistake for truths.
I’ve politely requested many times, here and elsewhere, that you curb the frequency of your contributions rather than feeling a need to reply or comment on everything. Particularly when it’s a subject you don’t know much about but just speculate (see also the immigration discussion previously).
I am glad you want to contribute to this site and welcome a measured contribution, but I fear we’re well beyond that now.
So this is a moderation warning: I am going to begin to delete your comments without notice if I judge them to be superflous or misleading. I don’t mean this with any ill-feeling, I am looking to preserve Monevator’s healthy comment section.
This isn’t up for discussion and I will likely delete any reply on the subject. I’d be pleased to see you adding a comment to an article where you have some light to shed in the future — this isn’t anything like a ban — but please think before you write and try to say your piece in one comment.
All the best!
4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
This works fine with passive index trackers. My rule of thumb is that if stockmarkets hace fallen enough to make headline news, wade in and fill your boots. As maxim 7 says, the fall is always temporary.
But it’s difficult for most people to put this into practice as it means going against the prevailing mood, and most people base major decisions on their emotions, not on logical reasoning.
$10k borrowed to invest in 1939; worth around $190k today adjusting for inflation. Its hard to imagine getting that sort of loan without serious collateral or some completely.. trusting friends or relatives. I imagine by 1942 he was getting very nervous. Would be interested to read more.
Good rules for those with cash ready to buy on dips, not so easy for those who are fully invested, who need to sell their winners to buy what might be tomorrow’s losers, nor for those who tuck away spare cash when it becomes available – time in the market versus timing the market. I suspect there won’t be that many Templetons among us to try what he did.
Having said that, if you can afford to do so, I’m happy to run a passive portfolio alongside an active one, at least to compare the outcomes. Does momentum factor investing best VWRL? Will putting some of my money into SMT improve my returns? Even a passive portfolio involves active choices – a target retirement fund or LS60? What bond percentage does my situation demand? Should I include an S&P 500 ETF to spice things up?
Do we buy blind and just copy The Accumulator’s passive portfolio or do we think about the options? To do the former is probably the safest bet but could one do more? Reading posts such as this latest one provides a lot of food for thought, and might be dangerous for some but can build confidence for others to exercise their investing curiosity, possibly successfully. Learning from one’s personal successes and mistakes is a great way forward, but only if you can afford to risk it. If your future security depends on reaching your financial objectives though, it’s probably wiser to learn vicariously through the experience of others, more likely by way of The Investor and The Accumulator than Mr Templeton. So much depends on individual circumstances, it makes no sense to be dogmatic about passive versus active investing for other people.
@ Ben
>> This works fine with passive index trackers. My rule of thumb is that if stockmarkets hace fallen enough to make headline news, wade in and fill your boots. As maxim 7 says, the fall is always temporary.
Please can someone remind me – and I’m sure it’s been posted here before, so sorry to ask – the explanation why in the long term stocks always do out-strip other assets, and inflation?
You’d think eventually everyone would realise this and borrow to buy more stocks long-term, thereby pushing up the price so that stocks no longer *would* always beat inflation. But it never seems to happens.
Just interested in the theory. Thanks …..
@Valiant – good Qs.
To your first Q about why stocks outperform over time – because they are productive assets. Similar, arguably, to well-located farms (absent global warming!) – as I tried to explain in this post.
https://firevlondon.com/2017/05/29/why-investing-beginners-should-consider-stock-markets/
Many assets are really ‘trophies’ (e.g. art, gold, trophy homes) – they have a value because others will buy them – but they don’t inherently deliver any income/crops/rent/etc. Stocks will in general outperform these things.
As to your second Q – if stocks outperform in the long term why not borrow to hilt – is all because of risk / price volatility. The long term can be very long – a lifetime, in many countries e.g. Germany – and borrowing increases that risk.
@FIRE v London
Thank you!