Sir John Templeton (November 29, 1912 - July 8, 2008) was a legendary investor and a pioneer of global investing. He took value investing to an extreme, picking industries and companies he believed to be at rock bottom, or as he called it 'points of maximum pessimism.'
Templeton did not care where a company was located. If it was selling below what he considered to be its asset value, and if it was in an industry or nation that was 'out of favor,' he was interested in it.
There are many examples of Templeton's investment genius. He was among the first to invest in postwar-Japan and among the first to sell out of Japan in the mid-1980s. He was one of the very few who invested in Peru when the communist Shining Path was running rampant, and by doing so, he reaped a fortune for his investors.
After beginning his career on Wall Street in 1937, Templeton bought a small investment advisory concern in 1940 that managed $2 million. By the time he sold his stake in 1967, it was managing $400 million.
He entered the mutual fund business in 1954 when he established the Templeton Growth Fund. The fund averaged a +14.5% annualized gain over the next 38 years, outperforming the broader stock market indexes. In other words, each $10,000 invested into this fund in 1954, with dividends reinvested, would have grown to $2 million by 1992 when he sold the fund to the Franklin Group.
Templeton revolutionized value investing. Here are four of his invaluable insights that you can put to work in your portfolio today.
Don't Be Afraid of Risk
Templeton believed in taking 'calculated risks.' A real-life example occurred in 1939 when war began in Europe -- a point of high pessimism in the stock market. Templeton borrowed money from his boss to buy 100 shares each in 104 companies that were listed on the New York Stock Exchange and selling at one dollar per share or less.
A high percentage of these companies were close to bankruptcy and 34 of the companies he invested in were actually in bankruptcy already. Templeton took the risk because he reasoned that World War II would pull America out of the Great Depression and that these companies would recover.
Templeton's macroeconomic view of the world turned out to be spot on. Only four of the companies he purchased ended up being worthless, and after holding each stock for an average of four years, he had turned his investment into more than $40,000. This was the first of many times that Templeton's macroeconomic view of the world would prove to be correct.
Be a Value Investor
Above all, Templeton was a value investor. He used a fundamentals-driven, 'bargain-hunting' approach to investing. He would look for shares selling below asset value because of temporary circumstances, and then he would hold those stocks for years. The Templeton Growth Fund, which he ran for decades, held stocks for an average of six to seven years.
Templeton urged investors to focus on value because a majority of investors focus on outlooks and trends. He rejected the 'technical' method for choosing stocks, believing instead that 'you must be a fundamentalist to be really successful in the market.'
Today, the most famous adherent of this investment philosophy is famed investor Warren Buffett. Buffett is legendary for investing in undervalued businesses through his company, Berkshire Hathaway (NYSE: BRK-A).
Don't Run With the Herd
Another of Templeton's investment principles was that the key to outperforming the majority of investors requires doing what they are not doing. In other words, go against the grain -- be what is called a contrarian.
Templeton liked to point out that many investors tend to repeat their mistakes or the mistakes of others and he warned against investing along with the supposed safety of the Wall Street 'herd.'
Speaking about this danger to investors, Templeton uttered one of his most famous quotes: 'The four most dangerous words in investing are 'This time it's different.'' To illustrate his point, think of the height of the dot-com bubble. In 2000, analysts hyped internet stocks, saying that fundamental measures such as revenue and earnings were no longer the most important drivers of stock price. The internet age somehow made things different, and measures like 'clicks' and 'eyeballs' were the new gauge of company health. By following Templeton's advice, it would have been easy to see that internet stocks were not different, and they still need to generate revenues and profits to survive.
Finally, Templeton used his fund to show Americans the value of investing worldwide. At the time he established his fund, most Americans rarely considered investing in foreign markets.
Over his long career, Templeton would go on to create some of the world's largest and most successful international investment funds. In 1999, Money magazine called him 'arguably the greatest global stock picker of the century.' Templeton searched for any company anywhere in the world that offered him a low price and an excellent long-term outlook. 'It's not easy,' he stated, 'but if you're going to buy the best bargains, look in more than one industry, and look in more than one nation.'
Templeton had a long, illustrious career. Numerous publications chronicle his views on both investing and philosophy, giving individual investors a chance to tap into the brain of one of the market's most storied global investors.