You are here:

The Templeton way

Created:
15 July 2008
Updated:
16 July 2008
Written by:
Mr Bearbull

Let's get an insight into what it takes to be a great investor, and we'll begin with anecdotes from the childhood of Warren Buffett and John Templeton. When he was a schoolboy in Washington, where his father was a Republican congressman, the young Buffett started the Wilson Coin-operated Machine Company, which put re-conditioned pinball machines into barbers shops. His first machine cost $25 and generated $4 of income in its first day. "I figured I had discovered the wheel," Mr Buffett told the investment writer John Train. "Eventually we were making $50 a week. I hadn't dreamed life could be so good."

Advertising

Now let's shift to John Templeton's childhood deep in dogpatch country in Winchester, Tennessee. "When I was in third grade, I noticed there was no place to buy fireworks around Winchester. So I sent off to the Brazil Novelty Company up in Cincinnati for some fire crackers and Roman candles," he told the authors of Global Investing: The Templeton Way . "I would take them to school and sell them at a considerable mark up."

So what are the common factors here? It's pretty clear that, even in their short trousers, the young Buffett and Templeton both had a strong desire to make money, both started young, and so both got in lots of practice from an early age. And it’s the practice – the repetitive effort to master a skill – that’s crucial. As Sir John also told Global Investing (I’ll explain how a boy from the old south got a knighthood in a moment): "If you work at looking for bargains, you'll find them."

During a lifetime's investing, Sir John found as many as anyone. And it should also be pretty clear why I'm writing this – because last week he died, aged 95. One of the great equity investors of the 20th century, who ranks alongside, say, T Rowe Price and George Soros, but, in truth, behind the great Buffett, is no more. Perhaps he's up there somewhere in the spiritual world to which he devoted so much of his time and his fortune – but as for stockpicking in the material world, certainly no more.

He was renowned for many things – in particular, for being the first truly global investor, the western investor who "discovered" Japan and who made a virtue of looking where other investors had not yet looked. He was also renowned for giving away much of the fortune he accumulated from running investment businesses, in particular the Templeton group of unit trusts, for almost 60 years. It was from the giving that the knighthood ensued in 1987, expedited by the fact that Sir John, who had lived in the Bahamas since the 1960s, took British citizenship that year.

Most of all, however, he was renowned for being contrarian, for doing – almost as a matter of faith – the opposite of what the crowd was doing. He summed up this aim in his best-known quote, which told us that "it takes patience, discipline and courage to follow the contrarian route to investment success. To buy when others are despondently selling, to sell when others are avidly buying".

And he was, perhaps, at his most prescient when he applied this stoical thinking to the investment world in the aftermath of the stock-market crash of October 1987. Just four days after Wall Street had suffered its worst one-day fall since 1914, with the Dow Jones Industrial Average dropping almost 23 per cent in a day, Sir John appeared on Wall $treet Week, US TV's equivalent of the Money Programme, to declare: "Be a long-term investor. Be prepared financially and psychologically to live through a series of bull markets and bear markets because, in the long run, common stocks will pay off enormously. The next bull market is likely to carry prices far higher than this past one."

Indeed, in this instance, as in others, Sir John proved to be spectacularly right. The Dow soon recovered its losses of October '87 to finish that year higher than it had begun. Then it proceeded to enter the greatest bull market in its history, rising in 11 of the next 12 years and, in the process, quintupling.

Clearly there is much that is sensible about being prepared to live through bear markets as well as bull markets. However, back in the present, the problem we have is that, just because Sir John was right then, it does not mean it is right to buy equities now. The chances are it will be, even if the next bull market turns out to be stunted compared with bull markets of the past two decades. But there is no ineluctable law that says common stocks must pay off enormously in the long run.

Partly that depends on how you define the long run. In the US after the Wall Street Crash of 1929, the long run turned out to be 23 years. At least that was the time it took for the Dow Jones average to pass its 1929 peak. And that was simply too long a haul for investors over the age of 40 or so.

Similarly, take the Japanese equity market, whose rise in the 1960s and '70s fuelled Sir John's most consistent investment performance. But by the late 1980s it was starting to fulfil Sir John's investment aphorism that the most dangerous phrase in investment is, "this time it's different". The theory was that Japanese equities were supposed to be different because Japanese accounting systems were different, so the absence of profits did not matter, because Japanese companies were different and the Japanese way of doing business was different.

It is, therefore, ironically fitting that the bear market in Japanese equities that has persisted for the past 18 years should be different in its scale. At its current level of 13,070 the Nikkei 225 average remains 66 per cent below the level at which it peaked on the final trading day of 1989. So even if it went on a sustained bull run, rising by 10 per cent a year compound, it would still be 2020 before it topped its 1989 peak. In other words, the long haul would mean 30 years just to show an investment profit.

And the truly horrible thought that must be hoving into view is: are UK equities about to undergo their very own Japanese experience? The roots of Japan’s troubles in the 1990s and the UK’s problems now are eerily similar. The Japanese bear market began with the collapse of the Japanese property market, which had been inflated to levels that proved to be ridiculous. Then it was compounded when the banking system retreated into its shell, from which it has yet to fully emerge. Sounds familiar?

Yet no two crises are ever the same, and it is doubtful that the excesses of the Japanese property bubble of the late 1980s were repeated even in the UK and the US in recent times. After all, at the peak of the Japanese bubble, downtown Tokyo was supposed to be worth more than California and the emperor's palace alone worth more than Western Australia (in both cases, which would you have preferred to own?).

Hopefully the demands of better accounting conventions and more open markets will ensure that UK and US bankers address the extent of their losses and move on, rather than pretending the losses don’t exist, as Japan's bankers did. In addition, the touch of inflation that we are all supposed to fear might actually be helpful in the coming years. Not only will it dilute the real value of doubtful debts that banks continue to carry, more importantly it will offer scope for the banking system to reduce the real cost of debt, something that Japan's financial authorities were never able to do as the country's inflation rate hovered at just nominal levels for year after year.

So there are reasons for cautious optimism that the UK's bear market may be close to its bottom. But that's not sufficient reason to pile into the likes of Taylor Wimpey and Marks & Spencer for their recovery potential. As Sir John consistently cautioned – you don’t try to call the top or bottom of a stock market and you never buy shares on a hunch. First, you work through the quantitative analysis that picks out the best-value share in a sector that appeals. And, while I’m at it, I might as well come full circle by adding an apposite bit of advice from Warren Buffett – when you buy a company's shares, imagine that the stock market is about the shut down for five years. In other words, you must be able to live with what you have picked.

And you can rely on these guys for good advice. You only have to look at their investment records.

MORE FROM MR BEARBULL...

Read more Bearbull columns at his IC home page

IC Advantage subscribers can download his Key Questions and Dividend discount model spreadsheets here.

And registered users can download his current portfolios here.

Add your opinions using the YourOpinion form

Get Bearbull's column the minute it's published using IC Desktop Alerts. They're free and the software takes only minutes to install. Click here for more information.

  • Back to top

Advertorial Feature

Take control of your investing with CFDs

Have you ever watched a move in the markets that you saw coming, but you weren't able to exploit?

by Dominic Picarda

Advertorial Feature

Spread your risks with spread trading

With so many big moves in the world's financial markets, there have seldom been more opportunities around for spread traders. Isn't it time you joined them?

by Dominic Picarda