Lessons From John Templeton
1. “I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: Where is the one that is lowest priced in relation to what I believe its worth?” Like every other great investor in this series of blog posts John did do not make bets based on macroeconomic predictions. What some talking head may say about markets as a whole going up or down was simply not relevant in his investing. John focused on companies and not macro markets. He was a staunch value investor who once said: “The best book ever written [was Security Analysis by Benjamin Graham].
2. “If you want to have a better performance than the crowd, you must do things differently from the crowd. I’ve found my results for investment clients were far better here [in the Bahamas] than when I had my office in 30 Rockefeller Plaza. When you’re in Manhattan, it’s much more difficult to go opposite the crowd.” The mathematics of investing dictate that investing with the crowd means you will earn zero alpha, because the crowd is the market. You must sometimes be willing to take a position that is different from the crowd and be right about that position, to earn alpha. John put it this way: “If you buy the same securities everyone else is buying, you will have the same results as everyone else.”
3. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell. Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. People are always asking me: where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable? For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.” To be able to sell when people are most pessimistic requires courage. Being courageous is easier if you are making bets with “house money.” Making bets with the rent money is always unwise. Templeton believed problems create opportunity. For example, it was on the day that Germany invaded Poland that he saw one of his best buying opportunities since prices were so low and values so high. Simply telling his broker that day to buy every stock selling under $1 yielded a 4X return for John.
4. “Sell when you find a much better bargain to replace what you are selling. The time to buy a stock is when the short-term owners have finished selling and the time to sell a stock is often when short-term owners have finished their buying.” This to me is about doing an opportunity cost analysis. He once put it this way in three words: “Buy cheap stocks.” John was also a big believer in investing globally: “If you search worldwide, you will find more bargains—and possibly better bargains—than in any single nation.”
5. “Focus on value because most investors focus on outlooks and trends. You must be a fundamentalist to be really successful in the market.”When you focus on value, you are dealing with the simplest systems possible and that makes alpha achievable. In his book The Signal & the Noise Nate Silver wrote: “The more complex you make the model the worse the forecast gets.” In addition, the more complex the system(s) involved the more worthless the forecast gets.
6. “Experience teaches us that one of the most common errors in selecting stocks for purchase, or for sale, is the tendency to emphasize only the most obvious factor; namely the temporary outlook for sales and profits of the company.” Markets fluctuate for many reasons that are not rational. They “just do that sometimes “in the short run. By investing for the long term you harness mean reversion, which is powerful force to have on your side.
7. “The four most dangerous words in investing are: ‘this time it’s different.’” As the market approaches a bubble you inevitably hear that something that has been true is not true anymore. The appearance of this phrase in the mouths of promoters is a sign that Mr. Market is euphoric.
8. “In my 45-year career as an investment counselor, humility did show me the need for worldwide diversification to reduce risk. That career did help me to become more and more humble because statistics showed that when I advised a client to buy one stock to replace another, about one-third of the time the client would have done better to ignore my advice. The only investors who shouldn’t diversify are those who are right 100 percent of the time.”
9. “Successful investing is only common sense. Each system for investing will eventually become obsolete.” There is academic work which shows that any system which may deliver alpha gets eaten by competition as time passes.
10. “An investor who has all the answers doesn’t even understand the questions. …success is a process of continually seeking answers to new questions.” Humility is a theme in accounts of Templeton. ”A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster.”
11. Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote, “is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’” Self-explanatory and I’m at my 999 word limit.
12. “I can sum up my message by reminding you of Will Rogers’ famous advice. ‘Don’t gamble,’ he said. ‘Buy some good stock. Hold it till it goes up… and then sell it. If it doesn’t go up, don’t buy it!’”
