Sir John Templeton would need no introduction. He is the founder of Templeton Mutual fund (currently infamous in India). The mutual fund holds over $700bn in asset under managment globally. The book ‘Investing the Templeton Way’ is written by the great niece of Sir John Templeton, ‘Lauren Templeton’. It covers the investment history of Sir John Templeton. I will be sharing my learning in the blog ‘ Learning from the book ‘Investing the Templeton Way’ ‘.
You can read more about the legendary investor here. He was a pioneer in global investing. His investment philosophy was based primarily on the basis of analyzing quantitative aspects of the stock.
Learning from the book 'Investing the Templeton Way'
1. One should wait for a fall to get into the market.
Before taking advantage of a stock price fall, one needs to be ready with their homework understanding the business thoroughly which includes the points:
1. How the business works?
2. What stimulates its sales activity?
3. Types of pressure it faces to sustain profits?
4. Fluctuation of its results over time?
5. How it fares against its competition?
It is also important to understand the reason for the price fall and whether it is a temporary phenomenon or a long term problem.
2. If you want to be ahead of the rest, you need to study the situation ahead of the time. You can’t identify, predict & prepare for every little risk you might face in the future. But can prepare for common types of events.
Reading history helps a lot. History rhymes.
3. If you want to be a successful bargain hunter/ successful investor, one needs to learn to harness the energy of investor perception rather than get stampeded by it. Purchase stocks on rainy days & sell them on sunny days.
What I have learnt that to wait for opportunities it really requires lot of self control & not to give in to the crowd euphoria. The author gives the term ‘ Psychological Inertia’ which makes investors to go with the flow.
4. The ability to fixate on probable future events rather than react on the basis of current events creates a deep divide between successful & mediocre investors.
5. Sir John Templeton was one of the early advocate & practitioner of investment by geographic diversification i.e. investing in companies of different countries.
6. The time to reflect on your investing method is when you are most successful, not when you are making the most mistakes.
7. The belief in an exponential payoff to working harder than the next person is what he refers to as the doctrine of the extra ounce.
8. John Templeton looked for stocks that were trading at no more than five times the current share price divided by the earnings estimate 5 years into the future- That’s ultra cheap. I doubt with the current flow of information, it will be possible to get such companies.
In the US there were times, when he did not get such companies, so he looked for similar bargains in the emerging countries such as South Korea, China etc.
9. When one finds a bargain stock idea, you need to make an honest attempt to find out why they are mispriced.
10. When one invests in stocks of companies in a different country, there runs a risk of currency depreciation that eats away the gains made from the stock price appreciation. So, he made a point to look for countries with modest borrowings and high savings rate. These 2 factors make currencies less risky.
Learning from the book 'Investing the Templeton Way'
11. Sir John Templeton used to look for companies in countries that export more goods than they import. Implying that the country is accumulating reserves, and purchase of its goods from other nations also can create upward pressure on the exporter’s currency.
12. Political landscape also needs to be considered while investing. He used to prefer countries where there is less regulations and govt that were trending toward capitalism and free markets.
For example: China is a communist country but trend there is toward freer markets & capitalism. Along with long term stable policies. India calls itself a democracy but in my view it a highly socialist country by mindset, that why big investors have shied away from investing here since long.
13. If you are holding your stocks as they rise above their estimated worth, you are joining in a game of speculation.
14. The author makes a point that the ability for an investor to better process the information gives you the edge. She given an example on how Sir John Templeton invested in Hitachi, a Japanese conglomerate. Many were apprehensive because of high valuation(PE=16x) but he found out that Hitachi was a conglomerate but Japanese accounting standard showed the accounting numbers just for the standalone company. His case was when the accounting standard changes(he was assured it has to change), there will be immense value emerging out of it.
15.Comparison Shopping:
How much is a company worth in a developing world compared to similar company in a developed world. Usually growth will be higher in an emerging country but if the valuation is quite low compared to the developed world, it provides an excellent opportunity. More often than not, emerging markets follow the trends happening in the global market with a lag.
16.When to sell a stock: When you have found a stock much better than the current one. How to quantify much better: It should be undervalued by atleast 50%.
16. There are ‘100 Yardsticks of value’ and if you can look at more than one to build conviction on the stocks selected. The author selects three primary valuation methods:
17. Sir John Templeton was quantitative in practice and never likes a company but stocks i.e. he was not willing to pay higher for a higher quality company.
18. A common thread to every stock mania is outward display of optimism. Buoyed by outrageous projections of growth for the industry in a straight line fashion without significant disruption. That is done to justify sky high valuation the growth till a disruption takes V turn downwards.
19. Investing on the heels of a crisis, when sellers are scared and driven by fear, represent the best of opportunities. The opportunities are even greater when the economic consequences are not understood or are overestimated.
20. History shows that crises always appear worse at the outset and that all the panics are subdued in time. When panics die down, stock prices rise.
Learning from the book 'Investing the Templeton Way'
21. The lesser you pay, the more are your chances to maximize your returns.
It makes a lot of sense to wait. For both buying & selling. The difference in return is from the buying at different prices. If one buys at a high, the returns will be little compared to buying at a low.
22. If you are buying when everyone else is selling, you are not following the crowd, your results will not follow the crowds either.
23. The path from euphoria to pessimism takes time, at least months but more often years, just as the path from pessimism to euphoria an also take months, if not years.
24. Leaders are defined by their actions when the chips are down, not when everything is going smoothly.
In the stock market, going with the flow is an accelerated path to mediocrity.
The most successful investors are defined by their actions in a bear market, not a bull market.
The only way to execute under this pressure is to have a deep-seated belief in your abilities and the conviction that you are correct in your actions.
25. There are psychological challenges to maintaining a clear head during a sharp sell-off. One way to handle it to make buy decisions well before a sell off has occurred. Keeping a Wishlist of securities representing companies that he believed were well run but priced too high in the market.
Waiting for the stocks to reach such prices will help in coping with the fall as well as you will feel elated on achieving what one set out to do.
26. By keeping an open order to purchase shares at a predetermined price(when the market/stocks are falling), you can sidestep a great deal of the pressure that comes with being a buyer when everyone is a seller.
27. In order to decide to buy a company during a downturn, look for a company that is not over leveraged(high amount of debt), businesses should not lose money if the downturn continues such as a mining company. A grocery store chain will be a safer bet.
28. In the book, Sir John Templeton was not just limited to buying cheap but he also used to do lot of short term trading & short selling as well as investing in bond market. Wherever he thought there is an opportunity to make money, he would go there.
29. Sir John Templeton always went to the markets where there was maximum pessimism.
Foe eg: He bought into South Korean stocks after the asian crisis of 1997. He bought into the US stocks after the late 1970s post the entire decade of pessimism(High inflation- upto 18% & high interest rate), he bought US aviation stocks post the 9/11 attacks, when people feared to fly.
He philosophy was when things are so bad, it can only get better from here.
WHAT I HAVE LEARNT BY READING DIFFERENT BOOKS IS THAT DIFFERENT INVESTORS HAVE REACHED GREATNESS BY FOLLOWING DIFFERENT METHODS. SO, IT IS TOTALLY UPTO ONESELF ON WHAT SUITS THEM. ONE BASIC SIMILAR TEACHINGS BY ALL OF THEM IS ‘BUY CHEAP’/ AND FOR THAT THEY ARE WILLING TO BE IN CASH FOR A LONG TIME WAITING FOR THE OPPORTUNITY.
Further reading: