Sir John Templeton is one of the world’s most successful investors
Although sadly he is not as well known as others such as Warren Buffett and Benjamin Graham.
What John Templeton is most well known for was his September 1939 investment play where he took big positions on undervalued companies just as World War Two was breaking out in Europe.
Templeton used borrowed money to buy $100 worth of every stock on the US exchanges that was selling for less than $1 per share. He held the stocks for an average of four years and quadrupled his money in the process.
John Templeton is also famous as being one of the pioneers of international investment. At a time when US investors focused mostly on US markets, Templeton was investing all over the world. He searched for bargain stocks wherever he could find them.
This list is 29 things that I learned from Sir John Templeton about investing and investment strategy.
The first 16 are my quick summaries of ideas that come directly from the man himself in a very convenient short book titled 16 Rules for Investment Success.
The remaining 13 are insights that I have picked up from Templeton’s other writing or books that have been written about him.
1. Invest for Maximum Total Real Return
Templeton defines “real return” as return after taxes and inflation. He argues that you must factor these two things into your investment strategy otherwise you will handicap yourself.
He gives the example of a $100,000 portfolio subjected to 4% inflation over 10 years. Without investing that money it would be worth $68,000 after 10 years. To maintain the same purchasing power, that portfolio would have to rise to $147,000 (a 47% gain) just to break even.
This means being too conservative is a risk and investments that outpace inflation should be considered.
2. Invest – Don’t Trade or Speculate
Like Benjamin Graham, Templeton cautions against trading, comparing it to gambling where you lose frequently.
By comparison, he argues a long term buy and hold investor will not only perform better than the trader, but he will be more relaxed, more patient and less emotional.
He cautions against speculation, especially frowning upon unintelligent speculation with no concern for value, where a short term exit at a higher price is the goal.
Personally, I think he would approve of value speculations, especially given we are currently operating in an environment with more aggressive monetary debasement than in his era. With value speculations, investments are attractively valued but also potentially explosive.
3. Remain Flexible and Open-Minded About Types of Investments
“There is no one kind of investment that is always best.”
Templeton argues that there is a time for everything and that an investor should be prepared to consider all types of investment opportunities. Even if that means sitting in cash for a while.
Popularity in certain sectors and investment types comes and goes and is often fleeting. Therefore, if you invest for the long haul there will be a season for everything. And if you are flexible and open-minded you will be ready.
4. Buy Low
“It is extremely difficult to go against the crowd – to buy when everyone else is selling…but if you buy the same securities as everyone else…you will have the same results as everyone else. By definition you can’t outperform the market if you buy the market. And chances are, if you buy what everyone is buying, will do so only after it is already overpriced.”
Templeton acknowledges the difficulty in acting against your natural herd instinct when it comes to investing. Yet if you want to succeed, this is what you must do. You must be contrarian and be prepared to buy when there is fear and pessimism. You must avoid FOMO and following overhyped and overvalued trends.
This concept is best encapsulated in his famous advice to buy at the point of “maximum pessimism.”
And what metric did Templeton look at as the starting point for his analysis? The humble P/E ratio.
5. Buy Bargains Among Quality Stocks
There is a lot of wisdom in this short statement, which acts as a very powerful double filter for picking stocks.
Firstly, only buy quality and secondly, only buy quality when it is at a bargain price.
How do you determine quality? Templeton has some suggestions, although take caution against considering these in isolation:
- Strongly entrenched as a sales leader in a growing market
- The technological leader in a field that depends on technological innovation
- A strong management team with a proven track record
- A well-capitalized company that is among the first to enter a new market
- A well-known trusted brand for a high profit-margin consumer product
6. Buy Value, Not Market Trends or the Economic Outlook
Templeton argues that it is the collective performance of individual stocks that determine the market trend. And not the market trend that determines the performance of individual stocks.
This means that you should limit the attention you give to the economic forecast or whether we are in a bull or bear market. Instead, focus on individual stocks, as individual stocks can rise in a bear market or fall in a bull market.
Templeton also observes that the “stock market and the economy do not always march in lock step.” Therefore, focus on buying quality stocks at attractive valuations regardless of the trend or the forecasts.
The same principle applies if you are looking to invest in a certain industry or a certain country. Don’t just focus on the macroeconomic outlook. Rather, start your analysis at the level of the individual company and generate your industry or country outlook from there.
Most people (and I am guilty of this myself) look at it the other way around. They begin with the macroeconomic analysis before looking at specific companies. But value is value regardless of where you locate it.
When you invest this way it helps give you the resilience to withstand a bad result in the short term. And if you back your conviction and hold on, you should be rewarded in the long run.
It does not matter how well researched you are. You cannot predict the future and it is always possible to make a mistake.
What seemed like a good investment at the time may no longer be a good investment.
To protect yourself, you should diversify. Templeton believes that this means diversification by industry, by risk and by country.
This is why, in the famous bet of 1939, Templeton bought 104 different stocks.
8. Do Your Homework or Hire Wise Experts
Templeton advises that you study companies to learn what makes them successful.
When buying a stock, you are either buying a company’s assets or its future earnings.
Before purchasing you should investigate the value of the company’s assets and assess its earnings. These two things are the primary metrics that influence the price of a stock.
9. Aggressively Monitor Your Investments
While the long term buy and hold investor should be relaxed, he should never be complacent.
The market is always changing and the investor should expect that and be prepared to react to it.
While you shouldn’t check the price too often i.e. everyday, you do need to keep an eye on your investments.
10. Don’t Panic
In an ideal world, you would buy low and sell high with ease, purchasing at the bottom and selling at the top.
But no one can time these things to perfection. And you shouldn’t expect to.
Chances are you will experience a serious downturn or a market crash at some point and will be caught holding the bag.
If you didn’t get out before the crash, don’t panic sell during the crash.
What Templeton advises instead is to assess whether you would buy the stocks in your portfolio at a bargain during the crash if you didn’t already own them.
If the answer is yes, as it should be because you should only own quality, then don’t sell them. Hold as the price will eventually recover.
The only reason to sell in a crash, he says, is to raise funds to buy other more attractive stocks.
If you aren’t doing that then keep what you have and be patient.
11. Learn From Your Mistakes
Investing mistakes are inevitable and they should not put you off from continuing to invest.
Mistakes only harm you in the long run if you get discouraged and give up or you take on much bigger risks to try and recoup your losses.
Instead, Templeton suggests that you examine your mistakes to determine where you went wrong and how you can avoid making the same mistake in the future.
12. Begin With a Prayer
Templeton was a devout Christian and he strongly believed that the moral conviction his faith gave him made him a better investor. (As a Catholic I would agree with him).
However, he also points out the very practical application of prayer. It helps you to “think more clearly and make fewer mistakes.”
13. Outperforming the Market is a Difficult Task
This point is a lesson in humility. Many young investors get into the market thinking they will easily and consistently beat the market. But this is a very difficult thing to do consistently, over a long period of time.
Templeton acknowledges that this is especially the case for an investment firm. They have to pay staff salaries, commissions and are never 100% invested since they have to have cash on hand for buying opportunities.
So while outperforming the market is your aim, don’t expect to necessarily do it by a wide margin. And don’t expect an investment firm to do so either.
Getting ahead by a few small percentage points each year adds up enormously over an investor’s lifetime.
Every 1% makes a massive difference when compounding over decades.
14. An Investor Who Has All The Answers Doesn’t Even Understand All The Questions
This is another lesson in humility where Templeton cautions against being too cocksure.
While there may be investment principles we can draw on, everything is in a constant state of change. As an investor you need to evolve and change and keep asking questions.
The markets change, the macroeconomic outlook changes and the political environment changes. You need to keep evolving your thinking.
15. There is no Free Lunch
Templeton advises to, very simply, never invest on sentiment or on a tip.
Do your research, assess the value of the stock. If it is good quality and attractively priced then buy.
Don’t overspend or purchase a poor quality stock without doing your homework.
16. Do Not be Fearful or Negative Too Often
Templeton was bullish on human progress and he was right to be.
Despite corrections and crashes, he argues that stocks will continue to rise in the long term. This is because growth is driven by human advancement.
He argues that this is what has happened throughout the 20th century and will continue into the future.
Writing in 1993, he specifically notes that geopolitical events such as the fall of communism, the reduction in the threat of nuclear war and the integration of Europe, along with general human progress in communication and travel will make business boom, wealth increase and stock prices will rise accordingly.
Despite all the bad news stories we hear everyday and short term market price action, it is worth remembering that the long term trend of human progress is bullish.
17. Happiness and Success in Life is Largely a Spiritual Endeavor
As I previously mentioned, John Templeton was a deeply spiritual Christian man.
Investing was his life’s work, but he was also a great philanthropist and was very interested in developing and sharing his ideas on happiness and spirituality.
After all, why work hard to make money if you are going to be miserable?
He believed that happiness and success can be examined, tested and taught. He formulated his ideas into what he called the 21 Step Templeton Plan.
When you are investing it is worth thinking about what greater purpose you are investing for and where your ultimate happiness lies.
18. Hard Work is Important
Anyone getting into investment so they can get rich quick and retire early for a life of leisure would not meet the approval of Sir John Templeton.
He believed very strongly in the importance of hard work as something honourable, medicinal and character building.
He cautioned against idleness or searching for happiness as a goal in itself. Happiness instead should come as a result of work.
You should work hard on your investments but you should also work hard in your job or business.
Avoid the modern escapist fantasies of avoiding work for a life of leisure. A life of leisure has little meaning.
Templeton didn’t invest merely to get rich. He found worth and dignity in his work as a fund manager. This is because it enabled him to help his clients send their children to college or fund their retirement. He was not just in the money business, he was in the people business and he was there to help and serve.
19. Master Your Thoughts
Templeton believed that self-control was a virtue.
He thought it was important to impose discipline on your thoughts and emotions from within.
This is incredibly important for contrarian investing. You need the wisdom and courage to go against the crowd. The discipline to avoid the short term news. And the emotional control to avoid getting too high when prices rise or too sullen when prices fall.
20. Take Calculated Risks
Templeton’s famous World War Two investment in 1939 was a risk. But it was a calculated risk.
The USA had just come out of the worst depression in its history and was still recovering. While she wasn’t yet in the war (that would come in 1941), Templeton believed that the USA would soon be supplying the Allies and would subsequently enter the war herself.
He believed that the start of the war in 1939 was a geopolitical shock that caused a crash in the market. Thus he bought a lot of quality stocks for a bargain price.
This wasn’t a fluke as Templeton repeated this calculated risk taking throughout his career.
Another example was in 1985, when political instability and rampant inflation caused the Argentine stock market to become extremely undervalued. Templeton entered the market and made a 70% gain in four months.
Other examples are when he successfully shorted the dot com bubble and when he invested heavily in South Korea in the wake of the Asian Financial Crisis.
21. Avoid Debt But If You Must Use It, Do So On Production Not Consumption
Templeton applied his value investing mentality to his whole life, always seeking a bargain and always paying cash.
He abhorred debt and would avoid it wherever possible, preferring to be a “receiver and not a payer of interest.”
On the rare occasions he went into debt, such as to purchase all those shares in 1939, it was only ever for productive purposes and never for consumption.
When debt is invested in order to make a return it is a productive use of debt. If debt is spent on consumption like buying a car or a holiday then the purchase will never be able to cover the debt. And it will have to be paid by some other means, most probably your salary.
Templeton’s frugality is just as applicable now as it was back then, both in investing and in life.
22. A Bargain is Something Selling at an 80% Discount
With value investing it can be difficult to determine just how much of a discount something needs to be selling at in order for it be worth a buy.
After all, if something is selling at a 10% value of its intrinsic worth, what is stopping it falling further to 30% of its intrinsic worth? While it may eventually return to its intrinsic value and turn a profit, by purchasing at a 10% discount rather than a 30% discount, you have taken longer to make a profit and missed out on a better buying opportunity.
Templeton believed that a bargain was something selling at 80% its intrinsic value. While this investment is very difficult to find, if it is a quality purchase then the rewards are well worth it.
23. The Educated Investor is a Student of History and Geopolitics
For the investor who understands history, geopolitical shocks often offer excellent buying opportunities.
After finishing his studies at Oxford University, Templeton set out on a world trip of 35 countries, including a stop at the Berlin Olympics of 1936.
According to his great niece, Lauren Templeton, who recounts the story, this was not a leisure trip but an intense learning experience where he studied history, culture and geopolitics.
It was this experience that provided Templeton the courage to become an international investor. He believed that those who only invested in the US to be short-sighted.
The courage to heavily invest during the market decline of 1939 came because Templeton had studied the geopolitics of the 1930s very carefully. Therefore he believed that US industry would be needed to support the war effort and that a significant wave of economic activity was imminent.
He based this view on an analysis of World War One and the US Civil War, which both resulted in businesses doing very well in supplying the government with war materials and transportation.
Lauren Templeton writes:
“[He] had an asymmetrical perspective on the future because of his ability to focus on longer-term prospects and disregard the prevailing current views. This ability to fixate on probable future events rather than react on the basis of current events creates a deep divide between successful investors and mediocre investors…In light of the deep conviction that he developed from years of study, firsthand observation of the Nazis, the willingness of the United States to defend freedom, and the probable effects of war on industry in the context of historical precedent, he calculated a bold move: He would borrow money to purchase the shares.”
24. Judgement is More Important Than Intelligence
Lauren Templeton’s words here demonstrate a similar sentiment to what Warren Buffett preaches:
“It is not unusual to meet professional investors who are skilled in the technical aspects of finance, accounting or economics. In fact, the world is full of smart people who can deconstruct an income statement, balance sheet, and statement of cash flows; apply aspects of microeconomics such as competitive strategy; sniff out accounting gimmicks; assign an intrinsic value to a company; and so on. At the same time, the ingredient needed to transform someone from just another smart guy or gal into a successful investor is the ability not to act foolishly…To make the jump from just another smart guy or gal placing money in the stock market to a successful investor requires a little something extra and that something is good judgement. [Templeton] believed that his judgement set him apart from other investors…he credits [it] as one of the main differentiating factors in his success rate.”
As someone with a History background and no formal training in finance or accounting, those technical aspects have never been my strong suit. But I do my best to try and learn them as well as I can.
What I have done, and what you can do as well, is try to hone your judgement through wisdom and experience. Don’t doubt yourself because you lack financial training. Learn the principles of good investing and apply them with conviction.
If investing was an intelligence competition then the smartest or most educated would be the wealthiest, but this isn’t true. Don’t neglect the importance of educating yourself, just remember that it is judgement that matters most.
25. Misguided Market Participants are Your Friends
It may be tempting to be frustrated by volatility in the markets but volatility is your friend. It gives you opportunities.
People who overreact to bad news or sell on emotion are what drives a falling stock price even lower. Thus creating an even more attractive bargain for the wise investor.
These people are your friends. And in a strange way you are actually helping them too, by providing market liquidity. You are helping them by buying the stock they are so desperate to sell in a crash or by selling them to stock they are so desperate to buy in a bubble.
26. The Ability to Discern Bad News Comes With Experience
To be a contrarian value investor often means buying companies on bad news when they are unloved by the market.
What you are looking for is temporary bad news that was unexpected by the market, therefore causing a sell off, but something that doesn’t change the fundamental positive outlook for the company.
What you want to avoid is buying a company where the bad news is actually a big problem. This threatens the viability of the company. It will depress the stock price further for longer or even force the company out of business.
Discerning the difference between the two is something that comes with experience and also from understanding the history of the market. Patterns of events repeat themselves and the market reaction is often quite predictable.
27. Use Different Methods of Valuation Analysis
Templeton believed that you shouldn’t just use one method of valuation analysis but should employ several. He had multiple reasons for this.
Firstly, if you only have one measure of analysis there may be times when you cannot find stocks on that measure alone. Secondly, methods of valuation that have proven valuable in the past become less valuable over time as their adoption becomes more widespread.
A third reason for having different measurements of value is that you can use them for confirmation. If your analysis shows that a stock is attractively valued based on multiple measurements then that should give you the encouragement to buy it.
28. Keep a Wish List
Being a value investor requires patience. You may have identified a stock that you would like to buy but it is overvalued.
Write down those stocks on a list and keep it. Sometime in the future, when a crisis hits, they may become an attractive buying opportunity.
Crises that jolt the stock market in a serious way don’t come around all that frequently. Having a pre-determined list with predetermined entry prices will help you take advantage of a temporary market decline when it does in fact occur.
29. When Investing in a Mutual Fund, Find a Manager Who Thinks Like You
Most people who invest in a mutual fund look at past returns and performance. However, what you should be really looking for is a fund manager who has the same value investment outlook as you do. Just as you wouldn’t necessarily buy individual stocks because of recent price appreciation, neither should you do so in a mutual fund.
When Templeton invested in South Korea in the wake of the Asian Financial Crisis he did so through a mutual fund. Even a great stock picker like himself was prepared to use somebody else to pick his stocks for him. But he made sure to use someone whose investment values aligned with his own.
Sir John Templeton was a legend and is my favourite investor.
As someone who studied History and geopolitics and was prepared to make courageous contrarian picks at times of “maximum pessimism” I have the utmost respect and admiration for him.
He was also an extremely principled man who believed in hard work, good character and the importance of good morals.
You can learn the timeless wisdom of value investing from John Templeton, but more importantly, I think, his experience demonstrates the opportunity in a crisis if you are willing to look globally, think differently and act with courage and conviction.
Templeton, John, and James Whitfield Ellison. The Templeton Plan : 21 Steps to Success and Happiness. West Conshohocken, Pa.: Templeton Press, 2013.
Templeton, Lauren C, and Scott Phillips. Investing the Templeton Way : The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter. New York: Mcgraw-Hill, 2008.
German troops in Warsaw is in the public domain