Sweeping up after the 1929 Crash

Today, many investors might not immediately recognize the name of master investor John Templeton. In the final quarter of the last century, however, Templeton was as famous and highly regarded as Warren Buffett is today.

Templeton’s investing strategy focused on value, not negative predictions

Templeton got his start as an investor during the 1930s Depression. At the time, he felt investors were far more pessimistic than the facts warranted. Instead of dwelling on negative predictions, Templeton focused his investing strategy on the low p/e ratios, high dividend yields and other value indicators he saw in the market. In 1939, Templeton famously ordered his broker to buy 100 shares of every New York Stock Exchange stock that traded for less than $1.

He based his approach on the assumption that the entire market was at bargain levels. He felt particularly confident about value in the lowest-priced stocks. They couldn’t be used as collateral for bank loans, and many investment professionals were prohibited from holding them. So there were lots of sellers and few buyers.

Templeton’s investing strategy was correct. Many of his purchases went to zero. But among those that survived, many rose fivefold, tenfold or more. Overall, this investment was a huge success. Templeton went on to launch his Templeton Growth Fund in 1954. It was a market leader for decades.

In the 1960s, Templeton pioneered U.S. investment in Japan during that country’s great multi-decade period of economic growth and stock-market gains after World War II. Many millionaire U.S. investors owe their start to an investment in a Templeton fund.

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Investing strategy: Templeton’s “10 engineers” rule is just as relevant today

I learned a great deal about investing from reading about Templeton’s career, his investing strategy, and the way he expressed his ideas. One of his recurring themes was what he called his “10 engineers” rule. It goes like this: If you want to build a bridge and you ask 10 engineers how to do it, and they all tell you the same thing, that’s probably a good way to build a bridge.

However, if you ask 10 investors about a particular stock or the market outlook and they all agree, they are probably giving you bad advice. Things are likely to work out differently. When investors generally agree on something, it rarely happens.

I see this rule as relevant today. If you asked 10 investors what they foresee for the market for the next 10 years, most, if not all, would probably agree that we face rising taxes, legislative struggles over where to cut the budget, and weak economic growth. That’s the only outcome they can foresee from today’s enormous government debts and budget deficits.

Of course, I don’t know what is going to happen in the next 10 years. No one does. But I suspect that Templeton’s “10 engineers” rule will hold true, and today’s most popular predictions will vary widely from what actually happens.

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