By John Christy, Forbes International Investment Report
Sir John Templeton left behind a lifetime of investing wisdom when he passed away on July 8, 2008 at the age of 95. Many of Templeton’s greatest lessons were first chronicled in the pages of Forbes. Here are eight worth remembering:
1. All investing is global. Templeton became famous in America for promoting the idea of global diversification, but he didn’t invent the concept. After studying law as a Rhodes Scholar at Oxford, Templeton embarked on a whirlwind journey that took him to 35 countries in seven months. In his travels, Templeton simply noticed that there were far too many opportunities outside the U.S. to ignore. And that was back in the 1930s. To this day, academics and financial advisers use fancy equations and pie-charts to justify the case for international investing. For Templeton, it was always just common sense.
2. Always take a contrarian approach … “People are always asking me where the outlook is good, but that’s the wrong question,” Templeton explained to Forbes in 1995. “The right question is: ‘Where is the outlook most miserable?’ ” This is Templeton’s famous “principle of maximum pessimism.” It runs counter to almost every other big decision we make in life: choosing a company to work for, a neighborhood to live in or a person to marry. But that’s what makes investing so difficult and the reward for successfully betting against the crowd so compelling.
3. … But make sure the fundamentals are intact. Identifying out of fashion sectors or countries is merely a starting point. The corollary to the principle of maximum pessimism is that the underlying, long-run fundamentals must be sound. Pessimism once ran high at Bear Stearns, and for good reason.
4. Let valuation be your guide. Many “sophisticated” international investors insist on divvying up the world into a catalogue of developed, emerging and frontier markets, based on Morgan Stanley Capital International’s classification system. But Templeton had already made a killing in Japanese stocks in the 1960s before MSCI even existed. Was Japan developed or emerging back then? It didn’t matter. Its stock market traded at four times earnings and the Japanese economy was growing like gangbusters.
5. Don’t be afraid of big bets. At one point in the 1960s, Templeton held more than 60% of the Templeton Growth Fund’s assets in Japan, an allocation that would get a manager fired on the spot at most mutual fund houses today. That’s an extreme example, but investors shouldn’t be afraid of bold bets whenever their research uncovers a big opportunity. Besides, Templeton wasn’t a big fan of investment committees anyhow: “I am not aware of any mutual fund that was run by a committee that ever had a superior record, except accidentally.”
6. Don’t rush into positions. Templeton was an investor, not a trader. But even for patient investors, it can be frustrating to watch a cheap stock get even cheaper before the rest of the crowd catches on. Bottom fishers in financial stocks today know this all too well. In 1988, Templeton gave Forbes readers an important piece of advice that is especially relevant today: Always put your new investment ideas on a watch list, or take a small position before rushing in. If it’s a truly great bargain, there’s no need to hurry.
7. Get away from the crowd. “Outstanding performance cannot come from someone who is always part of the herd.” While Templeton meant this in the sense of being a contrarian, he physically distanced himself, too. One of his early investment partnerships, Templeton, Dubbrow & Vance, was in the heart of Manhattan at Rockefeller Center, but Templeton spent the latter part of his career in the Bahamas, where he moved in the 1960s. Avoiding U.S. taxes was the big reason, but Templeton frequently cited the distance from Wall Street’s noise as an advantage to his decision-making. And this was in the days before Bloomberg terminals, BlackBerrys and CNBC.
8. Don’t worry about the direction of the market. In a 1978 Forbes cover story, Templeton summed it up this way: “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 it is worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.”