Portfolio management
Requires the greatest fortitude
Many investors have heard of John Templeton’s advice to buy at the “time of maximum pessimism.” There’s a lot of pessimism around right now. It is timely to take a deeper look at Templeton’s ideas around buying.
Who was he?
Sir John Templeton was educated at Yale and Oxford and founded the Templeton Growth Fund in 1954. In his 1980 book, John Train reports that over the 20 years ending December, 1978 The Templeton Growth Fund was the top performer of all funds over the previous 20 years. (Train, 1980 The Money Masters – Nine Great Investors: Their Winning Strategies and How You Can Apply Them) p.160.
His reputation grew into legend status through the 1980s and 1990s. Templeton pioneered global diversification in the mutual fund industry. He died in 2008 at age 95. His biography The Templeton Touch by William Proctor and Scott Phillips published in 2012 in a revised edition contains many superb insights into the man from those who knew him and worked with him. (Proctor & Phillips, The Templeton Touch, 1983, 2012) John Templeton was probably one of the two or three greatest investors of the 20th century.
His investment style
John Templeton said in a speech at the Empire Club in Toronto: “So we search for nations or industries where the stock prices are extremely low and they are only extremely low when there are good reasons for it. Things do not get very low for no good reason. They get low because other people are selling them. That’s the only thing that puts the price down. So we search for those things that other people are selling and then if the problem or adverse outlook is temporary we buy them and hold them patiently for years until the public changes its mind.” (Proctor & Phillips, The Templeton Touch, 1983, 2012) p.401.
His investment philosophy was set out in 24 Maxims. I read them soon after I started investing and accepted their wisdom based in part on his successful track record in investing (empirical proof) and his apparent honesty and credibility and my own feeling that he was talking good sense. See here for 1982 version.
The 24 Maxims ultimately morphed into 22 Maxims. Appendix 2 and (Proctor & Phillips, The Templeton Touch, 1983, 2012) p.153.
Let’s look at the first six of these Maxims
Maxim 1. For all long term investors there is only one real objective – “Maximum total real returns after taxes.”
Maxim 2. Achieving a good record takes much study and work and is a lot harder than most people think.
Maxim 3. It is impossible to produce a superior performance unless you do something different from the majority.
Maxim 4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
Maxim 5. To put “Maxim 4” in somewhat different terms, in the stock market the only way to get a bargain is to buy what most investors are selling.
Maxim 6. To buy when others are despondently selling and to sell what others are greedily buying requires the greatest fortitude, even while offering the greatest reward. (Emphasis added)
Maxim 7. Bear markets have always been temporary. Share prices turn upwards from one to twelve months before the bottom of the business cycle.
Let’s be clear
Templeton is not suggesting we try to time the market. I would say his approach was very much like Warren Buffett’s. Buy only at very attractive prices. Growth and value are joined at the hip. It’s not timing the market but buying when the market presents golden opportunities.
Individual stocks vs the market
We need to remember that individual stocks can offer themselves at bargain prices at any time in market and business cycles. S&P 500 index ETFs only offers themselves at a bargain price when the whole market is down.
A recession on the horizon?
Templeton’s Maxim 7 is especially relevant today. All the talk in July of 2022 is about the possibility of a recession. I have no idea whether we will have a recession nor when the business cycle will bottom. I don’t factor this into my investment decisions. I have learned that we will only find out if we are in a recession after it has commenced. The announcement will be something like this: “We are officially in a recession.” A new bull market may be well under way by that time. Or not. These things are imponderable. But that isn’t the point. Bargains present themselves at a time of their own choosing. See my post The joy of higher return with no more risk
I have developed a number of what I call Gap-to-edge rules. They are ideas to keep in mind to avoid the behavioral gap and take advantage of a behavioral edge. They are often taken from the ideas of Warren Buffett, John Templeton and other great investors.
What follows are 13 Gap-to-edge rules that relate to the current bear stock market environment. A full set, for all seasons, of some 65 of them are contained in the Motherlode Appendix 3: Gap-to-Edge Rules
Gap-to-edge rule: Wait for the right pitch.
Not sales pitch but baseball metaphor
Gap-to-edge rule: Expect that the bargain you buy may take several years to become fully priced
Gap-to-edge rule: Put little weight on news, either good or bad, that affects the short term, except when you take advantage of it to buy shares at a bargain price.
Gap-to-edge rule: Avoid watching the nightly TV business news report.
Gap-to-edge rule: Avoid any buying or selling of stocks based on the idea that this is the right time to buy or sell.
Gap-to-edge rule: Pay no attention to forecasts of economic or stock market trends
Gap-to-edge rule: When all is going well in the stock market be wary. When all is going badly, take heart from the opportunities that present themselves.
Gap-to-edge rule: Do not to be contrary just to be contrary. We must be prepared to be contrary when our independent judgment tells us to be.
Sometimes the crowd is right.
Gap-to-edge rule: Maintain some physical and mental distance from Wall Street.
It may be no coincidence that two the most successful investors of the last one hundred years lived and worked a long way from Wall Street. Both Warren Buffett, who has lived and worked in Omaha, Nebraska, and John Templeton, who lived and worked in Lyford Cay in the Bahamas, kept their distance.
John Templeton’s walks along the beach or sitting and watching the sea may have been one of his gap-to-edge rules. Today it might be called a habit of deliberate mindfulness. In a connected world, getting away from the cell phones and the internet allows you to disconnect. This is surely not a bad thing with all the pressures and problems of herding.
Gap-to-edge rule: Take nothing on faith from experts.
Analysts and other experts have many fine ideas and opinions. They also have many bad ideas, suffer from biases and make errors. Every recommendation should be supported by simple empirical evidence that a person of average intelligence can understand.
Gap-to-edge rule: Develop and hold a strong sense of intrinsic value.
Gap-to-edge rule: Don’t be afraid to be out of step with everyone else
Conclusion
As John Templeton reminds us, bear markets have always been temporary. The good news is that they present us with opportunities to buy stocks at bargain prices. So, it’s not all bad.
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For readers wishing to dig into buying tactics, take a look at the Motherlode Chapter 42. Buying
This Chapter contains the following Sections:
42.02 Buying at the bottom can’t be done
42.03 Waiting to buy a superb company at a bargain price
42.04 Point of maximum pessimism
42.05 Take full advantage of opportunities
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You can reach me by email at rodney@investingmotherlode.com
I’m also on Twitter @rodneylksmith
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