This article about learning how to invest like John Templeton was written by Colin Richardson. Colin is a private investor based in Alberta, Canada. He focuses on applying a quantitative strategy to eliminate behavioral biases in his personal account. Article image (Creative Commons) by TheDigitalWay edited by Broken Leg Investing.
Let's be honest—most of us don’t know how to invest like John Templeton. Maybe it’s because we have never been taught—or worse, just choose to ignore—the late money manager’s investment philosophy. Either way, it certainly is not because there is nothing to learn from Sir John. In just 20 years, he turned every $1,000 in his fund into $20,000—a 16% annualized return. At the time this made him a top performing manager, year after year. He should be revered to the same level as Warren Buffett, Peter Lynch, and Walter Schloss. Still, Templeton’s above-average career has been overlooked by the investment world.
Does this mean we shouldn’t invest like John Templeton? Since he is not from Graham and Doddsville, should his philosophy just be ignored by deep value investors? What could we possibly learn from him that will benefit our portfolios? More than you can imagine!
In a World of His Own
Templeton may have been overlooked by his peers, but this was not of any concern to him. He spent much of his life isolating himself from the rest. With the heart of the American stock market on Wall Street, Sir John built himself a home in Nassau, Bahamas. This is where he felt most comfortable managing a portfolio, over 1,100 miles away from the center of action.
John Train—author of The Money Masters—describes Templeton’s desire for detachment best:
“The distance from his large, cool, porticoed white house on its little hill overlooking the grounds of Lyford Cay to the roar and shouting of the floor of the stock exchange is measured in psychological light-years. The house itself and everything in it are silent reproach to excitement and hyperactivity. Templeton himself—a spare, neat man, even in that warm climate carefully dressed in pale lime-colored trousers and a striped lemon-colored jacket with neat striped tie—would be, one knows at once, the last man in creation to fall victim to some ephemeral enthusiasm. As he drives slowly in his blue Rolls from his house to the club to have a light lunch with a Canadian banker, his soul full of passionate yearnings to catch a one-week move in some over-the-counter speculation? Scarcely. Does he spend feverish days on the telephone, getting the latest gossip from the bankers, the latest news and the jokes going round the floor? Scarcely.”
This is the most valuable lesson we can learn from Sir John. No, you don’t have to go buy yourself a house on an island to beat the market. The idea is to simply avoid the noise created by brokers and other investors. Today, many of us get distracted by speculation opportunities that falsely get labeled as investments. Cryptocurrency or cannabis firms are just two examples that are relevant today. To invest like John Templeton, we need to focus on historically proven strategies—such as value investing.
Purchasing the Neglected
Not only did Sir John live in a different location than the rest, he also followed a different investment philosophy. At some point during World War II, John became convinced the market was acting irrationally. To take advantage of this, he bought stocks in 104 companies selling below $1. He considered these the forgotten-about firms.
Many of us would consider this approach extremely risky and speculative. However, Sir John was not so worried. Only four years later, he sold every share for a total capital gain of 300%. What he recognized was that everyone else was panicking over the war. He identified this as a temporary event that forced some stocks to suffer. Templeton bought these shares, waited for the event to end, and cashed in for a massive profit.
Templeton continued this contrarian philosophy throughout his career. He was well-known for buying companies that no one had ever heard of. Sir John used to allow his peers to look over his portfolio and bet that they weren’t familiar with even one-third of the companies. It is no surprise that he used to say, “The best bargains will be in stocks that are completely neglected, that other investors are not even studying.”
To invest like John Templeton, we need to be okay with being different. Unfortunately, this is not as easy as it sounds. We are psychologically wired to favour following the crowd and popular trends. This is the reason why most people are not capable of being long-term deep value investors.
At one point in Templeton’s career, the well-known grocery chain Safeway seemed like an attractive opportunity. It was selling at a price/earnings ratio of eight, and analysts were projecting a 15% growth rate. While many investors purchased shares of the company, Sir John focused elsewhere—not just within the same exchange, but outside of the country.
He had his eyes focused on the Japanese supermarket chain Ito Yokado, still undervalued at a price/earnings of 10 and doubling Safeway with a growth rate at 30%. This was justified by the fact that at the time, grocery stores were not as popular in Japan as they were in America. The up-and-coming sector offered a huge opportunity for expansion. He purchased shares in Ito Yokado and made a rewarding profit.
Templeton showed a willingness to invest internationally. As we saw with Ito Yokado, by simply expanding his horizons, Sir John was able to find better opportunities. Deep value investors can find the same possibilities worldwide today.
It would be wrong to say that Sir John didn’t have his favourite countries to invest in. Atop his list, you’d find Japan, Canada, and the United States. However, he was also able to find suitable opportunities in Germany, Switzerland, Spain, Australia, New Zealand, Hong Kong, Singapore, and South Korea. Templeton also identified countries that he was not interested in. Anywhere with conditions that may limit growth—such as socialism or inflation—made it difficult for him to invest within.
There are some other reasons we choose to avoid certain countries. Often, we consider emerging markets more risky than beneficial. This may be because of a high incidence of fraud, unknown property rights, foreign investment policies, or liquidity restrictions. Although not all firms within emerging markets are dangerous, it is best if we just avoid them. There will be enough deep value investments within Sir John’s 11 favourites to fill a portfolio.
Templeton not only expanded his search for deep value to different countries, but he also was open to all types of opportunities. Many of us like to pick a niche and stick with what we know best. However, to invest like John Templeton, we must not inhibit ourselves. He describes this as remaining flexible and open-minded about different opportunities:
“There are times to buy blue chip stocks, cyclical stocks, corporate bonds, US Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities. The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.”
Templeton was well aware of the unpredictable investor psychology that all markets face. This is why he mentions that different investment types will only be popular temporarily. Flexibility is crucial for long-term value investing.
Although he pursued different investment types, Sir John’s portfolio mostly consisted of common stock. Specifically, he specialized in small-cap firms. He saw these as having higher potential than the large-cap, well-known companies. This is in line with the multiple studies that find small caps being the best opportunities for private investors.
Looking back on Templeton’s career, we find a great example of when he had an open mind regarding the purchase of small-cap stocks. He recognized bargain opportunities within the Canadian real estate market. To take advantage of it, he discovered neglected, unheard of, and ignored firms. These included Abbey Glen Property, Daon Development, S.B. McLaughlin Associates, Nu-West Development, and Allarco. Sir John purchased the package at between two to five times cash flow per share. It was an incredible opportunity that contributed to his spectacular portfolio performance.
The Ideal Business
We now know that to invest like John Templeton, we must look internationally for small and neglected companies. Once we are comfortable exploring these opportunities, we need to know what company-specific criteria to look for. Every investor will have slightly different criteria, and this is what makes them unique. For Sir John, he has said there are hundreds of different things he looks for. It always varies, depending on factors such as the company, its sector, and country. However, he was able to share four criteria that he considers universally applicable.
- A low price/earnings ratio
- A high operating margin.
- Selling close to or below liquidation value.
- A consistent historic growth rate.
A Unique Part of His Philosophy
From what we have learned so far, Sir John seems like a regular international value investor. However, there is an element of his philosophy that distinguishes him from the rest.
To invest like John Templeton, we need to be active investors. For example, he recommends consistently monitoring one’s portfolio, verifying underlying values of holdings, and selling after a short term. This differs from the buy-and-hold strategy that most of us have been taught. Fortunately, he provides us with an explanation:
“Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent. Consider, for example, just the 30 issues that comprise the Dow Jones Industrials. From 1978 through 1990, one of every three issues changed—because the company was in decline, or was acquired, or went private, or went bankrupt. Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business. Remember, no investment is forever.”
Sir John does have a valid argument—our stock market constantly changes. He wants to ensure that his companies continue to show profitability and potential. If we just forget about our portfolio, we may miss an opportunity to interrupt a negative return. Definitely, this is a unique perspective to consider.
Our Final Appreciation
Learning to invest like John Templeton is accessible because of his willingness to share. In 1993, he published 16 Rules for Investment Success. The following checklist allows us to fully understand and implement the principles underpinning his investment philosophy:
- Invest for maximum total real (after-inflation) return.
- Invest – don’t trade or speculate.
- Remain flexible and open-minded about types of investments.
- Buy low.
- When buying stocks, search for bargains among quality stocks.
- Buy value, not market trends or economic outlook.
- Diversify. In stocks and bonds, as in much else, there is safety in numbers.
- Do your homework or hire wise experts to help you.
- Aggressively monitor your investments.
- Don’t panic.
- Learn from your mistakes.
- Begin with a prayer.
- Outperforming the market is a difficult task.
- An investor who has all the answers doesn’t even understand all the questions.
- There’s no free lunch.
- Do not be too fearful or negative too often.
Many people may overlook Templeton as an investor. However, even after his passing, his lessons and perspective remain relevant. We can all better our portfolios by ignoring distractions, exploring internationally, and remaining open-minded.
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