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'If, on any day over the past few decades, you had chanced to be strolling in the early morning at Lyford Cay in the Bahamas, you might have seen a wiry, determined figure power-walking in the sea. Keen as a whippet, his thin arms pumping, he headed into the prevailing swell', says 'The Economist'.
A true legend
Sir John Templeton needs no introduction to the investing community. He was a legend in his own lifetime. The scale of his success can be gauged from the fact that if a person had invested $10,000 in his Templeton Growth Fund, which was initiated in 1954, it would have ballooned to a humongous $7 million in 2004. This works out to a GAGR (Compound Annual Growth Rate) of 13.8% for fifty straight years. Talk of seeking alpha!
Strangely, for an investor who made millions of dollars, he was generous to others and grateful for the opportunities that came his way. He readily shared his insights and experiences on investing. He had worldwide focus; he thought of the future, and he was always curious. He took reasonable risks, always based on fundamental research and made razor sharp analyses. He prided in maintaining personal relationships with his clients. Clearly he was one of a kind and the investing world remembers him with gratitude and fondness.
Contrarian investment philosophy
His basic philosophy in his own words was, "success is a process of continually seeking answers to new questions." (Forbes May 7, 2013) He insisted that there was always room for study, analysis and learning. It is a measure of the man that he extended this principle even to his well known philanthropic efforts.
As an investor, he can only be classed as a value investor. This is best illustrated in the way he started his investing career. In 1937, as a true contrarian, with the world still mired in the Great Depression, and at a time when most people were chary of stock markets, Templeton founded the investment firm which in time would become Templeton Dobbrow & Vance.
Practical investment strategy
Templeton developed his own ways of investing. While he cannot be classed as part of the Graham and Doddsville School of investing, he followed many of their methods. His investment philosophy shared many of the traits of other great value investors.
His investment philosophy was broad and he admitted of no easy formula by which he invested. Buying cheap and going global can be summed up as the core philosophy of Templeton. A particular feature of this style was that he did not make much use of technical or momentum based investing. He was always on the lookout for cheap stocks and bought when markets were down. He often said that there were up to 100 variables to be analysed when investing in stocks. However, he judged stocks by four main criteria.
P/E ratio Operating profit margins liquidating value Consistency of growth rates
When discussing his investment strategy Templeton says that he always bought when stocks were freely available and people were scared to invest. The breadth of his canny investment vision can be judged from the fact that far from sticking to some dry formulaic pattern like investing only in companies with a certain capitalisation, he picked up shares in many small companies that most investors would not even have heard of. In 1939, on the eve of World War Two, he purchased 100 shares of every stock that was prices under $1. He invested about $10,400 in 104 companies. In 1943, he sold the lot for $40,000, a CAGR of 40%!
Japanese and overseas stocks
This single minded search for bargains led him to invest outside the US, where he found some of the best investments. He was among the first to realise that Japanese stocks were underpriced and succeeded in realising big returns in those stocks. In the early Sixties, he found that Japanese stocks were trading at just two or three times their earnings. He worked hard and found some of the best bargains he could find. In 1970, sixty percent of his investments were in Japan. Closer home he put money in small Canadian realtors whose stock were selling at low prices relative to their earnings. Apart from these countries, he picked some excellent bargains in Australia and New Zealand, while he chose Asian and Chinese stocks with care.
Champion of Free Markets
However he did not go blindly into foreign markets. He was clear about the nature of the markets he sought to invest in. He put his money in those countries which encouraged free enterprise. Templeton was particularly careful about the economic environment where the potential companies operated. No less, he made a careful study of the intellectual and ideological movements in a particular geography. He maintained that the "search for investment bargains involves looking for political and social contexts where free enterprise is thriving." Another aspect of his strategy was that he picked stocks and countries that had transparency. He invested mainly in capitalistic countries which had inflation under control.
He was acutely aware of the social and human side of business and entrepreneurship. His motto was "every successful entrepreneur is a servant. He must be oriented to matters outside of himself. He has to look to consumers and their needs. He must rely on their voluntary patronage to bring about his goals. That is service."
The flip side of his insistence on transparency was that Templeton avoided areas which were opaque, like IPO's for example. He advised against countries where capital markets were not transparent and rule based.
A measure of the man
Templeton's success depended on 'discipline, research and character building than about any magical "touch,"' writes Alejandro Chaufen in Forbes. (Forbes May 7, 2013). Templeton urged his friends and followers to think positively. He was especially thrifty, not just with money but also with time; he was not one to allow wasteful thoughts to occupy the hours that could otherwise be spent usefully.
Guy Spier of Aquamarine Fund, sums up what he got from Templeton: "The key, I believe, is to know yourself, and know who you are, and not force yourself into pockets where you cannot fit." (Forbes May 7, 2013)
A metric of Templeton's surefootedness in investing can be gauged from the fact that in 2000, just before the Dotcom bust, he recommended investing 75% of one's portfolio in bonds. He also advised moving to currencies other than the US dollar, which he feared was then overvalued. He was proved right on both counts.
Think about "areas that other people are not thinking about." Jane Siebels remarks in the book (The Templeton Touch) about Templeton's passion to "open other people's minds and broaden their scope." (Forbes May 7, 2013)
That is Sir John Templeton for you, a true contrarian to the very last.
Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.
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Wise Advice
Two priceless pieces of wise advice from a true legend: open your mind and broaden your scope. Opening his mind enabled Sir John Templeton to become a fearless contrarian investor and a hugely successful value investor. Broadening his scope enabled him to identify great bargains across the world, making him a truly global investor, with portfolios at times having a lot more of overseas investments than US investments. Can you think of a US fund manager who would fearlessly invest over 60% of his portfolio in Japan at one point? Or a US equity fund manager who would honestly tell you to put 75% of your money into bonds and stay away from the US dollar at another point of time? That he got all these big calls right is just one of the reasons he is regarded as one of the legends of the investment world.