To buy when others are despondently selling and sell when others are avidly buying requires the greatest fortitude and pays the greatest potential reward. - Sir John Marks Templeton
Sir John Marks Templeton is regarded by many as one of the greatest investors ever to live. In terms of fame among investors arguably only Buffett and Lynch surpass him. A devout Christian, he is often called "God's Venture Capitalist", and is without a doubt simultaneously one of Wall Streets finest fund managers, and one of Wall Street's greatest nuts, writing extensively in his own individual style trying to unite science and religion, to bring the same level of research and development to spirituality that technology and the mainstream sciences have enjoyed for so long.
Templeton's approach is bottom-up, he only analysed individual companies, not caring much for buying entire markets the way so-called top-down funds do. Templeton was a value investor who sought out cheap stocks all over the world. He and his analysts were among the first westerners to recognise the potential of Japan as an emerging market, in fact he was dealing in Japan long before the phrase "emerging market" was even coined.
Templeton liked maximum pessimism. "It's simple common logic", he once said, "that you can only buy at the lowest price when pessimism is highest." Templeton didn't just go for stable countries with a future, later on when the trend started for funds to invest in these countries Templeton still set himself apart from the crowd by finding value stocks in the "worst" countries. Whenever a political leader was assassinated, a war broke out, a plague occurred, a vote of no-confidence was held in the nation's parliament, Templeton was often first on the scene to buy the stocks that stampeding speculators were only too keen to sell at a bargain price.
Templeton bought solid companies, one might call them "blue chips" perhaps, but only when they trade at enormously inexpensive valuations. Although he insisted on quality, he never really insisted on great size, being perfectly happy to buy tiny companies that few people outside of local specialists had even heard of. There are about eleven major principals to Templeton's investment style:
- Transaction pattern: Templeton always bought companies that were being sold down with many more sellers lined up than buyers.
- Diversification: Templeton was never a focus investor, he insisted on very widely diversifying his portfolio, holding as many companies as he could find that met his criteria.
- Patience: Give a purchase time to work out. Templeton held stocks an average of four years, extending his holding period up to six years. If a stock had not started to reflect fair intrinsic value after six years Templeton would quietly drop it from his portfolio.
- Low Price/Earnings ratio (PER): The average PER of Templeton's portfolio is under one half that of the Morgan Stanley Capital International (MSCI) index. He likes his stocks cheap.
- Use longer term data: In Templeton's own words, "Instead of comparing the customary 12-month earnings figure, we prefer to use figures from the latest five years. This largely eliminates normal cyclical distortions. So we compute the aggregate price to average five-year earnings data and then determine whether the resulting price/earnings ratio is high or low by comparison to historical price to earnings ratios. This is one of the yardsticks by which we calculate that prices are above or below normal, and that stocks may be either bargains or overpriced."
- Operating profit margins: Healthy profit margins. He didn't buy "dogs", his stocks were cheap but they were never bad. When you are willing to look in far flung markets in the midst of national crisis you can find lots of companies like this every day of every year.
- Liquidating value: Companies should never be trading at much more than book value. Templeton did look at companies for their fire sale price, and used this as his ultimate downside risk.
- Growth rate: Some might find him hard to peg, but he was always a value investor. Nevertheless, Templeton did always insist on companies with an above average growth rate, in particular favouring companies that have been able to grow their earnings per share with great consistency. Templeton's minimum criteria was the potential for a company to grow its profits at 20%pa. This in itself would have been a severe filter that eliminated the majority of issues, when he combined it with an equally harsh value criterion, you can probably see why Templeton had to run all over the world to find such companies.
- Flexibility: Be prepared for the unexpected, be ready to change your strategy if necessary to adjust for new events, even if it means undoing a portfolio that has been painstakingly constructed over a long time. Templeton was happy enough to sit on mountains of cash if he felt there were not enough cheap companies to buy, and he was happy enough to buy bonds and real estate as well if he felt they were favourable. This probably has something to do with his fondness for diversification as well.
- Exit strategy: Templeton was quite ready to sell all stocks in his portfolio that ceased to be undervalued. As soon as they became fairly priced he would sell and put money into something very undervalued.
- Don't trust rules: Even today, with Templeton retired and living the life of a rich religious eccentric in the Bahamas (a tax haven), the Franklin-Templeton funds management group is still tinkering with his system and improving on it. Flexibility and possibly even a sense of humour are needed for investing in pessimistic markets.
There are a few other insights that Templeton applied to his investments:
- The best investments are in sectors and stocks that are completely neglected, that other investors are just ignoring.
- Inflation and socialism (or excessive regulation) are conditions to be avoided.
- Newspapers are good investments in democratic countries because regulation is often seen as an impediment to freedom of the press!
- Banks are natural candidates for regulation.
- Supermarkets are a pretty good inflation hedge.
- To find the most bargains, look all over the world. Templeton looked in small markets like Thailand, Australia, Peru and Malaysia.
- Templeton studied the portfolios of his peers, he tracked about 20 managed funds. He also made extensive use of brokers for information, though only to establish facts, never to hear their recommendations.
- Everything has its seasons, nothing lasts forever. The world changes its spots, and the investor must change with it. After his interest in small "special situations" and growth stocks, he went to Japan when he bought many stocks on a PER of 3 (the Japanese portion of his portfolio peaked at 60% in 1970, he started seriously selling out of Japan when PERs reached a market average of 30, though he remained with his bargain purchases for a long time) and other foreign countries, then later, big multinationals like Ford and Royal Dutch. When Templeton exited Japan he followed value elsewhere, this brought him to America, where he was able to buy many great American companies very cheaply. This also illustrates his "global" approach rather than an "international" approach, many international investors shun domestic stocks, Templeton doesn't care where he finds a company, so long as it is cheap.
- Templeton regarded his role as a comparison shopper, searching the world for companies trading at the most miniscule fraction of their intrinsic value. Again in his own words: "I never ask if the market is going to go up or down next month, I know that there is nobody that can tell me that. Instead, I search, country by country for stocks, asking where is the one that's lowest in price relative to what our securities analysts estimate its worth to be. Usually a stock has to be a bargain or I won't buy it."