Topic: Wealth Management

Investor Toolkit: How one of the world’s most successful investors read the market to perfection

Investment Counsellor

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Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “Legendary investor John Templeton began his career with the best possible approach: he read the market as it was and ignored predictions that proved to be wrong.”

For many investors today, the name John Templeton might not be familiar except as half the name of big U.S. fund company Franklin Templeton (and it’s Ben Franklin’s face on the company logo rather than Templeton’s). But until a decade or so ago, John Templeton was as well-known and as highly regarded as Warren Buffett is today.

Templeton got his start as an investor during the Great Depression of the 1930s. At the time, he felt investors were far more pessimistic than the facts warranted. Instead of dwelling on negative predictions, Templeton focused his investment strategy on the low p/e ratios, high dividend yields and other value indicators he saw in the market. In a move that has become legendary Templeton in 1939 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.

He 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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If 10 investors agree, they are probably giving you bad advice

I learned a great deal about investing from reading about Templeton’s career, his approach to investing, and the way he expressed his ideas. One of the recurring themes of his investment advice was what he called his “10 engineers” rule. This is: 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.

Comments

  • You need to read a book like Templeton’s Way with Money: Strategies and Philosophy of a Legendary Investor
    By Alasdair Nairn, Jonathan Davis to fully understand what is being said here. The dichotomy is that the basis is finding a stock that has great long term prospects (for 5 year total return) that is undervalued and perhaps overlooked – the but/however is that unless the market discovers this hidden gem and starts driving its value upwards, it will always be a hidden gem and you will not get your return. I would therefore question an investing belief based on 10 investment advisers being wrong – perhaps in this day of instant analysis they have the hidden gem that will rise and the sales presence with clients to make it rise. A lot of Templton’s success was based on taking a view (through the decades until he was 95) and acting on it and he was not always a 100% contrarian. Great batting average but it had its whiffs.

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