In the world of investing, there are only a handful of individuals who have been honored with a knighthood by the Queen of England. One such remarkable individual is John Templeton, who received this prestigious recognition at the age of 84.
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“Templeton Plan: 21 Steps to Personal success and Real Happiness” by John Templeton
John Templeton’s investment journey is nothing short of extraordinary. Starting with a loan of $10,000, he managed to create a fortune of $22 billion. His establishment, the Templeton Group, boasts an impressive track record, particularly with their mutual funds.
Over the course of his remarkable 70-year career, John Templeton generated billions of dollars in returns for global investors. He pioneered global investments, reaping substantial profits from the economic boom in Japan, South Korea, and China.
In their new book, “Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter,” John Templeton’s great-granddaughter and her husband provide a comprehensive account of his investment career and the enduring principles that have led to his success.
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Greatest Stock Pickers of the 20th Century
During the darkest times of extreme pessimism in the market, there is always someone who remembers the legendary contrarian investor, John Templeton, and his famous quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
John Templeton is a globally renowned investment guru. In 1999, Money magazine named Templeton as one of the “Greatest Stock Pickers of the 20th Century.”
In 2006, Templeton, along with Warren Buffett, Peter Lynch, Benjamin Graham, and others, was honored as one of the “Top Ten Fund Managers of the 20th Century” by The New York Times.
Forbes referred to Templeton as the “Father of Global Investing” and “one of the most successful fund managers in history.” This highlights Templeton’s exceptionally high reputation and influential position in the investment world.
Templeton established the Templeton Growth Fund in November 1954. If you had invested $10,000 at that time and held it until Templeton’s retirement in 1992, your investment would have grown to $2 million. This translates to an annualized return of 14.5%, outperforming the market by an average of 3.7% per year. Such remarkable performance is rare in the industry.
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria
John Templeton
When Templeton retired and transferred the management of his fund company in 1992, the assets under management reached a staggering $21.3 billion.
5 Fundamentals of Value Investing: Diversification, Global Opportunities, and Contrarian Strategies
In the world of stock market investments, there is a strategy that goes against common sense but has the potential to yield great profits. It’s called contrarian investing, and according to Templeton, the key to successful and cost-effective stock investing lies in buying when everyone else is selling.
01. Contrarian Investing: Achieving High Returns by Going Against the Crowd
When stocks are being sold at a significantly low valuation, there is usually only one reason behind it: because others are selling. There is no other explanation. To acquire stocks at a bargain price, you must seek out and invest in the unpopular stocks that the majority fears and feels pessimistic about.
Contrarian investing contradicts our conventional wisdom, as Templeton explains:
“In almost every aspect of life, people strive to move towards a future that promises the best prospects. When you look for a job, you seek an industry with a promising future. When you establish a business or build a factory, you choose the region with the most favorable prospects.
However, when it comes to stock investing, my perspective is different. If you want to invest in stocks, you must do the opposite – engage in contrarian investing and search for cheap stocks in sectors that have the bleakest prospects.”
Contrarian investing goes against our natural inclinations, but Templeton emphasizes its importance. Why? The challenge lies not in valuing analysis but in having the courage to go against the crowd.
Throughout his more than 70 years of investment experience, Templeton has adhered to this investment motto:
“Buy when others are despondently selling and sell when others are avidly buying. It takes fortitude to do this because it goes against your very instincts, but it ultimately brings generous long-term rewards.”
This reminds me of Warren Buffett’s famous quote in an article he wrote for The New York Times during the 2008 financial crisis: “I simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Contrarian investing is highly profitable precisely because it is challenging to execute and only a few individuals can truly do it.
If you want to invest in stocks, you must do the opposite – engage in contrarian investing and search for cheap stocks in sectors that have the bleakest prospects
John Templeton
The book highlights four typical cases of contrarian investing:
In Chapter 6, it discusses Templeton’s contrarian short-selling of technology stocks during the 1999 tech bubble.
Chapter 7 focuses on his contrarian purchase of airline stocks after the 2001 “9/11” event.
Chapter 8 delves into his contrarian investment in the South Korean stock market through funds following the 1997 Asian financial crisis.
Chapter 9 reveals his contrarian recommendation to buy bonds during the 2000 bull market.
02. The Fundamentals of Value Investing: Buying Cheap Stocks
Value investing, as described by Templeton, is remarkably simple: it involves buying cheap stocks. Templeton referred to himself as a bargain hunter, stating, “There are many investment methods available to us, but the most successful one I have employed over the past 70 years is buying undervalued stocks, those whose market prices are significantly lower than their intrinsic value“.
Interestingly, this reminds me of the recently translated “Warren Buffett’s 2022 Letter to Shareholders.” In the concluding sentence, Buffett also refers to himself as a bargain hunter.
“Bargain hunter” refers to someone who specifically seeks out products that offer good value for the price. In other words, they are individuals who are determined to find affordable and worthwhile bargains.
Mark Mobius, who worked under Templeton for many years and gained fame for managing emerging market funds, recalls that Templeton’s specific investment advice to his fund managers could be summed up in one sentence: “Always search for cheap stocks!”
Investing is a part of life, and life is a form of investment. I particularly appreciate the content discussed in the first chapter of this book. Templeton practiced buying cheap goods in his daily life and applied the same principle to his investments by buying cheap stocks.
In the book’s second chapter, there is a story about a child selling his lemonade stand. This story exemplifies the essence of value investing, emphasizing that buying stocks means investing in companies, and the key factor is whether the price is significantly lower than the company’s intrinsic value.
The cornerstone of Templeton’s contrarian investment strategy is to only buy cheap stocks.
But how does Templeton determine if a stock is cheap and worthwhile? In the book’s third, fourth, and fifth chapters, Templeton’s three major valuation indicators and their application cases are explained: price-to-earnings ratio (P/E), P/E ratio to growth rate (PEG), and price-to-book ratio (P/B).
03. Fundamental of Stock Selection: Value Investing and Diversification
Diversification is the cornerstone of any investment plan, according to Templeton. Even with value investments, it’s possible to make mistakes in stock valuation, which can lead to significant fluctuations in portfolio performance. To mitigate this risk, Templeton stressed the importance of sufficient diversification. As he once said, “the only person who shouldn’t diversify is someone who always gets it right.”
No investment is guaranteed to be profitable, and even Templeton experienced losses. Therefore, diversification is necessary to spread the risk of failure across many stocks, reducing the impact of any one bad investment on the overall portfolio. In this way, diversification serves as a shock absorber and performance stabilizer for reverse investing.
This idea was also emphasized by Graham, who diversified his investments across 200 stocks, and Lynch, who held over 1,000 stocks in his later investment portfolio. Academic research has also shown that diversification leads to a lower volatility of portfolio returns and higher overall returns.
The reality is that many investors fail to outperform the market index, which already incorporates diversification by investing in all stocks on the market. Therefore, following the advice of investment gurus such as Graham, Lynch, and Templeton to diversify your investments is crucial to avoiding overconfidence and achieving a stable portfolio.
04. Templeton’s Global Investments: Expanding Opportunities and Reducing Risks
In Peter Lynch’s book “Beating the Street,” he acknowledged Templeton’s pioneering efforts in global investments, stating, “Apart from John Templeton, I was the first American fund manager to heavily invest in overseas markets. Templeton Growth Fund, the global counterpart to my Magellan Fund, focuses primarily on investments outside the United States.”
Established in Canada in 1954, Templeton Growth Fund has been catering to North American clients and engaging in global investments, surpassing Lynch’s initiatives by three decades. With significantly larger allocations, Templeton has rightfully earned its reputation as the leading American global investment fund manager.
Global investments offer a twofold advantage, expanding opportunities and reducing risks. By venturing beyond domestic markets, Templeton has multiplied its opportunity pool several times over. While the US stock market comprises approximately 5,000 stocks, Templeton’s global investment strategy encompasses over 20,000 stocks, including those in Europe, Japan, South Korea, Southeast Asia, and China. As David Dimpson once remarked, “To find extraordinary trades, one mustn’t confine their search to their home country’s stock market; they must explore far and wide. I have always held firm to the philosophy of global investments—it has been my guiding principle.”
Furthermore, global investments enable portfolio diversification, mitigating risks and enhancing returns. Templeton states, “Throughout my 70-year investment career, I have searched for the most advantageous undervalued stocks in global markets. Studies have shown that, in the long run, investing in and analyzing stocks from various countries globally yields higher returns with lower volatility compared to a simplistic approach of solely diversifying within a single country’s stock market.”
By embracing a global perspective, Templeton has broadened its investment horizons, expanding the range of opportunities and reducing exposure to market-specific risks. Investors who follow their lead can benefit from a diversified portfolio that transcends borders and unlocks the potential for greater returns.
05. Pinnacle of Contrarian Investing: Extreme Pessimism
When is the stock market cheapest? It’s when everyone is selling their stocks.
John Templeton
And when does everyone rush to sell in the market? It’s when market sentiment reaches extreme pessimism.
John Templeton refers to this as the point of maximum pessimism:
“Invest when the market reaches the point of maximum pessimism. This has been the fundamental principle I’ve used throughout my 70-year investment career“.
In other words, when the market is at its most pessimistic, that’s when you should be most optimistic.
Contrarian investing at the point of maximum pessimism is the pinnacle of contrarian investing because extreme pessimism leads to panic selling, resulting in stocks being severely undervalued. It’s during these times that bold buying opportunities arise, and if held for the long term, can yield substantial profits.
Throughout his 70-year investment career, Templeton engaged in contrarian investing at the point of maximum pessimism not just once, but multiple times. This book highlights three cases, and it becomes evident that these were not ordinary instances of extreme pessimism.
Templeton’s first case of extreme pessimism brought him his first fortune. From March 1937 to March 1938, concerns about the Second World War caused a 49% decline in the U.S. stock market within just 12 months. With worries about a global war and the stock market crashing by half, the market reached the point of maximum pessimism.
In 1939, Templeton borrowed $10,000 from his former employer and bought all the stocks priced below $1 on two U.S. exchanges. He purchased a total of 104 stocks. He held these stocks for an average of four years, and out of the 104 stocks, only four resulted in losses. Overall, his profits tripled, turning $10,000 into $40,000.
This was equivalent to ten years’ worth of income for a white-collar worker in New York and could buy a standalone villa.
Templeton’s second case of extreme pessimism is described in Chapter Five. In August 1979, the cover of the American magazine “BusinessWeek” read “The Death of Stocks.”
In 1982, while the Dow Jones Industrial Average was fluctuating around 800 points, Templeton publicly stated on a television program that American investors were on the brink of a major bull market, and he predicted that the Dow Jones would reach 3,000 points in the next ten years.
In other words, he forecasted a fourfold increase in the market over the next ten years, starting from 1982. As a result, in 1991, Templeton’s prediction of “ten years, fourfold” came true.
Templeton’s third case of extreme pessimism is presented in Chapter Seven. After the September 11th attacks in 2001, the aviation industry faced severe challenges. However, Templeton made contrarian investments in airline stocks during this time. This reminds me of Warren Buffett buying large quantities of bank stocks during the most pessimistic period of the financial crisis.
To be considered a master, one must achieve great success, and to achieve great success, one must possess great courage. Investing when the market reaches the point of extreme pessimism is the ultimate value investment and the ultimate contrarian investment.
Contrarian investing at the point of maximum pessimism is Templeton’s signature and his greatest tactic. He has achieved significant success by boldly investing against extreme pessimism multiple times. This is why I call Templeton the “Contrarian Investment Guru.”
In recent years, the world has faced the fierce COVID-19 pandemic, political instability, and other “black swan events, leading to a highly pessimistic market sentiment. However, within every crisis lies an opportunity.
Contrarian investing is often a long-term commitment. It involves buying when others are selling and may even require enduring prolonged periods of uncertainty and hardship. It’s not an easy path, but successful contrarian investing can yield substantial long-term profits.
Let’s once again recite the most widely circulated quote from the “Contrarian Investment Guru” John Templeton:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
As an investor, it’s crucial to detach yourself from the emotions that often drive the market. Embracing a contrarian mindset allows you to see opportunities where others see only risks.
When the market is engulfed in pessimism, it’s essential to conduct thorough research and identify undervalued assets with strong long-term potential. Contrarian investors look for quality investments that have been overlooked or neglected by the majority.
Contrarian investing requires discipline, patience, and a willingness to swim against the current. It’s about having the conviction to go against popular opinion and make decisions based on sound analysis and rational judgment.
While contrarian investing has proven successful for John Templeton and other legendary investors, it’s important to note that it’s not a foolproof strategy. Timing the market accurately is challenging, and there are risks involved. Diversification and careful risk management are essential to mitigate potential downsides.
In conclusion, contrarian investing at the point of maximum pessimism can be a powerful approach to achieving long-term investment success. Following in the footsteps of John Templeton, embracing a contrarian mindset allows you to capitalize on market opportunities when others are gripped by fear and uncertainty.
Remember, the path of a contrarian investor requires courage, research, and an unwavering belief in your analysis. By remaining disciplined and patient, you can navigate the market’s ups and downs and potentially reap significant rewards.
Stay tuned for our next blog post on effective strategies for identifying undervalued stocks in times of market pessimism.