” Invest at the point of maximum pessimism.” Quote by John Templeton
Templeton studied Graham’s approach
One of the greatest value investors has to be John Templeton who studied Benjamin Graham’s approach to security analysis.
John Templeton was the ultimate bargain hunter, both in the financial markets and also in real life which no doubly came about from his upbringing in a poor family.
He was a comparison shopper who was always looking for the bargain – whether it was clothes, furniture, a home or stocks. John Templeton was a master at the art of value buying.
The basic strategy of John Templeton can be summed up as buying bargain priced good quality stocks and he would then subsequently sell down his holdings as their stock prices became increasingly overvalued.
His value investing approach concentrated on unappreciated stocks trading at attractive prices.
John Templeton had a contrarian view and he searched for fundamentally sound companies where the low stock price would likely be temporary.
He was opposed to growth investing strategies which looks for high priced growing companies with the hope that those high prices will remain overvalued.
One of John Templeton’s philosophies was that high stock prices were nothing more than bubbles, which formed from tips and rumors which artificially created demand to drive prices up.
Eventually some event causes these tips and rumors to no longer be accepted and the bubble then collapses as the participants recognize the true value.
John Templeton was a contrarian who would buy when others are selling and would sell when others are buying.
He was a contrarian who would buy when others are
selling and would sell when others are buying
John Templeton searched the markets globally for good quality companies with low PE ratios.
He liked solid future growth potential and his philosophy was that many good companies had low PE ratios for no other reason than investors were simply not interested in the company at that point in time.
His view was that investors just wanted to buy the stock whose stock price was currently climbing and he referred to these investors as being impatient.
John Templeton was a philosopher who had some sound ideas regarding investing in the stock market. Some of these ideas are presented as follows:
Invest for a Return
John not only considered the return from capital gains but also income from stock dividends and the coupon payments from bonds. He also considered the effect of inflation on the real return.
The real return was the return that needed to be higher than the inflation rate.
For example, if the inflation rate averages 5% over a 10-year period, then the real return must be greater than 5% to maintain the same true value of the investment. A real return is only achieved if the return is greater than the inflation rate.
He also viewed the real return as taking into account any tax liabilities as this again reduces the true return available.
John Templeton was not keen on tying up to much capital in corporate or treasury bonds and preferred to invest more heavily in stocks if market conditions were favorable.
Invest with a Long-term View
John Templeton did not trade or speculate. He was a long-term investor who felt more relaxed, more patient and less emotional when he took a long-term view.
The value investing strategy is well suited to long-term investing and involves less capital gains tax and less commission.
He was not keen on large tax bills or in paying large commissions. This was part of John Templeton’s bargain philosophy – get it for the cheapest price.
Rotating Investment Themes
There are times when John Templeton would rotate the investments he would buy depending on the current economic and business conditions.
He viewed the popularity of a particular industry group or the popularity of a stock as only temporary and when its popularity was gone, it can take many years for its popularity to return.
At times he would buy bargain priced blue-chip stocks and at other times he would buy undervalued cyclical stocks.
There were times he would buy corporate bonds and at other times he would buy treasury Bonds.
John Templeton generally preferred to have some spare cash should any great opportunities come along.
Buy at Low Prices
John Templeton was a bargain hunter who loved to buy at low prices. This approach seems like common sense and for most real life endeavors it is.
However in the stock market this is viewed with skepticism and the general mentality is – when prices are high buy lots and sell them when prices are low.
His view was when stock prices are low then the demand for stocks is low due to investors being discouraged and pessimistic.
John Templeton observed that investors say that they buy low and sell high, but in reality they ended up doing the opposite.
John Templeton stated that it was human nature and extremely difficult to go against the crowd.
After all everyone wants the security and comfort of the analysts all saying it’s a good time to buy. In reality the stock has already made a big move and is usually overvalued.
He never followed the crowd with his contrarian view and his philosophy was to buy when most people including experts are pessimistic and John sells when they are overly optimistic
Buy Bargains amongst Quality
John Templeton was not interested in buying something just because it was cheap. He wanted to buy quality at a cheap price.
Investigate before investing was one of John Templeton’s philosophies. He studied the companies to learn what made them successful.
He considered qualitative factors along with quantitative figures in evaluating a company.
Amongst his qualitative considerations were companies that were revenue leaders in their industry, companies with a strong management team and proven track record, technological leaders in their industry and a well known trusted brand.
He looked for any qualitative factor that might attract the attention of investors in the near future. These included changing industry conditions, a new product line being developed and mergers or acquisitions.
John Templeton quantitative evaluation included viewing the last five years of income statements for the company’s earnings trend.
He was looking for growing companies with increasing revenue and earnings. John also looked for stable operating margins and also checked the balance sheet statement for debt to see if it was under control.
Don’t Buy Market Trends or the Economic Outlook
John Templeton stated that a wise investor knows that the stock market is actually a market of stocks. It is the individual stocks that determine the market and not vice versa.
The stock market indices are merely an average of the performance of individual stocks. These individual stocks can rise in bear markets and fall in bull markets.
John Templeton did not buy because of bull markets or because of a rosy economic outlook. The stock market and the economy do not always move together in sync.
Some bear markets do not coincide with recessions and some bull markets form from mild expansions in economic growth.
Also with reporting seasons, an overall decline in earnings over the previous corresponding period does not always cause a market correction.
Diversify with stocks and bonds
John Templeton was aware that any single company could always run into some financial problems in the future.
He diversified by spreading risk across stocks and bonds although his portfolios were usually more heavily weighted with stocks.
John Templeton was a keen global investor who diversified across different industries from different economies.
Global markets were appealing to John Templeton as this increased his university of potential candidates. He could find more bargains or better bargains as he had more to choose from.
Monitoring Investments
While John Templeton was an investor with a long-term view, he still actively monitored his portfolio.
He expected markets to change and reacted accordingly as no bull market or bear market is permanent.
John Templeton has stated that he was relaxed but not complacent. A company can merge with another company, it can be acquired by a foreign company, it can go bankrupt or it can even delist and go private.
His philosophy was that no investment is forever.
Don’t Panic
John Templeton was a remarkably calm investor and his philosophy with panic selling was – if he did not sell before a market crash, then he did not sell after a market crash.
John reasoned that if he did not own the stocks, then would he want to buy them now at a reduced price.
His only reason to sell after a market crash was to buy stocks which were more attractively priced. If John Templeton could not find more attractive stocks to buy, he would hold onto the stocks he had.
Learn from Mistakes
John Templeton’s view was that the only way he could avoid mistakes was never to invest, but then he would never learn.
As far as he was concerned, an investor who has all the answers does not understand all the questions.
His philosophy was don’t become discouraged by mistakes and don’t try to recoup losses by taking on more risk. John Templeton turned each mistake into a learning experience.
He would determine what went wrong and how to avoid the same mistake in the future.
His view was that successful investors learnt from their mistakes and the mistakes of others.
Never invest on sentiment
John Templeton never invested on sentiment. This is a classic beginner investor trap – buying shares in companies for sentimental reasons.
These include the company which gave the beginner investor their job, the company make of their car or the company which sponsored their favorite television show.
While these companies have sentimental value, this does not necessarily make then a good stock to invest in. Even if it’s a good company then its stock price may be too high.
John Templeton never invests on a tip or rumor – it’s a psychological draw card and it suggests some inside information which he does not have.
John Templeton always conducted his own research.
Positive Attitude
John Templeton had no reason for being fearful and was always positive in his attitude towards the financial markets.
He stated that there will always be market corrections, bear markets and market crashes.
These are part of the stock market and over time the stock market heads upwards and these adverse market conditions are only minor setbacks.
His philosophy is to be prepared emotionally and financially for the inevitable market corrections, bear markets and market crashes.
As a Long-term investor John Templeton views these adverse market conditions as an opportunity to make money.