No student of equities needs an introduction to Sir John Templeton, one of the greatest investors of the 20th century. Today marks the 12th anniversary of his death, which, is a good excuse to revisit an article I wrote years ago.
In September 1939, Templeton was sitting in his office at Rockefeller Plaza in Manhattan when the news broke out that Hitler had invaded Poland. It was obvious that this would lead to a full-fledged war.
He decided to capitalize on this turn of events, the only glitch being that he barely had any money since his Wall Street career was launched a year or two prior.
He borrowed money to buy 100 shares each in 104 companies selling at $1 per share or less, including 34 companies that were in bankruptcy. A few years later, he made a nice tidy profit after paying off his debt. Only four (out of 100) turned out to be worthless.
When asked during an interview what made him do it, he answered: "During war, everything that was in surplus, and therefore unprofitable, becomes scarce and profitable."
This story aptly sums up Templeton's investing philosophy, which thrived on pessimism—when it was prevalent in the market. He, on the other hand, tended to brim with optimism at such times. In a tongue-in-cheek fashion, he used to state: "When people are desperately trying to sell, help them and buy. When people are enthusiastically trying to buy, help them and sell."
To his credit, he put his money where his mouth was. In 1978, he started accumulating a stake in Ford when it looked like it was headed for bankruptcy and its shares were at around $2 (split-adjusted). He kept buying the shares even as they slid to around $1 by 1981. In a couple of years, he was vindicated. By 1987, Ford had zoomed to $15.
When everyone else piled into technology stocks in 2000, he was a seller. In an interview in 2001 with Forbes, he said he was appalled at the market's frothiness. "This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity."
The visionary
Templeton is said to have almost single-handedly pioneered global investing. When growing up in Tennessee, he never encountered anyone who owned shares. That changed when he studied at Yale University. There he rubbed shoulders with boys from wealthy families but noticed that not one of them was investing outside the US.
Surely, he figured, they would get better results if they diversified across the globe and did not limit their investments to one country. He aggressively searched but could not locate an investment counsellor who specialised in helping people invest outside America. Instead of seeing this as a drawback, he saw a wide-open opportunity.
Even across borders, he followed the same principle—hunt for undervalued stocks in the midst of pessimism.
In 1980, a Maoist guerrilla organisation called the Shining Path took over Peru, imposing what it called "a dictatorship of the proletariat." Western economies branded the organisation a terrorist group and curtailed economic activity.
The Peruvian stock market collapsed. Peruvian stocks were dirt cheap but Templeton could not get his hands on them as foreigners were not permitted to buy stocks in Peru. But the bargains available were too tempting to ignore. So, he formed a Peruvian corporation and used it as a holding company to buy up the nation's leading companies.
When the reign of the Shining Path ended and political stability was restored in Peru, economic activity picked up, taking the Peruvian stock market along with it. John Templeton won hands down.
He is said to be the first Western investor to see the potential of Japan's post-war economic miracle. When Templeton began investing in Japan in the 1960s, it was considered an emerging market and a risky investment adventure.
At that time, he found stocks trading at a P/E ratio of only 4 times his estimate of earnings while stocks in the US were trading at around 19.5 times. At that time, the Japanese economy was growing faster than the US but most stocks cost 80 per cent less than the average of stocks in the US.
When Japan finally pulled all restrictions on foreign investors in its stock market in the 1960s, Templeton grabbed the opportunity. Japan's growth rate continued to soar and by 1985 the country had exploded onto the economic landscape.
As the rest of the world woke up to what was happening in Japan and the stock market soared, Templeton had already made a fortune for his investors. Not surprisingly, at the peak of Japan's stock market bubble in 1989, when valuations were very high, he was significantly underweight the country.
Whatever be the stock, industry, or country, when it came to value investing, Templeton believed the best bargains could only be found "at the point of maximum pessimism." The Wall Street Journal aptly titled his obituary "Maximum Optimist", since his optimism in the face of bleak pessimism was his greatest weapon as an investor.
In Investing the Templeton Way, a book co-authored by John Templeton's great-niece, the strategy of purchasing shares in the wake of a crisis is detailed.
- The bargain hunter searches for stocks that have fallen in price and are priced too low relative to their intrinsic value.
- The bargain hunter searches for situations in which a large misconception has driven stock prices down, such as the arrival of near-term difficulties for a business that are temporary in nature and should correct over time. In other words, bargain hunters look for stocks that have become mispriced as a result of temporary changes in the near-term perspectives of sellers.
- The bargain hunter always investigates stocks when the outlook is worst according to the market, not best.
A crisis sends all these events into overdrive. Put another way, when the market sells off in a panic or crisis, all the market phenomena a bargain hunter desires condense into a brief and compact period: maybe a day, a few weeks, a few months, perhaps even longer.
To take advantage of such a crisis, the investor must be prepared. Make your decision to buy when you are thinking clearly and your judgment is not being affected by the events at hand. Having done that, maintain a discipline of purchasing stocks that you believe to be a bargain.
Templeton used to make his buy decisions well before a sell-off occurred. He always kept a "wish list" of securities or companies that he believed were well run but priced too high in the market. In fact, he often had standing orders with his brokers to purchase those stocks if for some reason the market sold off enough to drag their prices down to levels at which he considered them a bargain.
In the foreword to the book, he pens down words of wisdom that any value investor should ardently follow: "One principle that I have used through my career is to invest at the point of maximum pessimism. That is the time to be most optimistic."
"Buying when others are despondently selling and selling when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate reward."
