John Templeton- The Triumph of Optimism

Sir John Templeton passed away yesterday. He died, much as he spent his life, peacefully.Geoff Gannon (and it is great to have him back in the blogosphere) has an extensive list of articles outlining Templeton's life as well as a list of his books. John Bethel of Controlled Greed also has a good post on Templeton, with reminiscences about Templeton's appearance on Wall Street Week immediately following the October 1987 crash.

Templeton's life was one of great inner reflection and his original sale of Templeton, Dobbrow and Vance was motivated partially by his resolve to never let himself get so busy in managing clients that he ran out of time to think, not only about investments, but also about the larger world, especially spiritual matters and religion. His investment career became focused on just one thing, a small Canadian domiciled mutual fund that Piedmont Management, the buyer of the rest of his firm had declined. So at age 56, Templeton started his career with a clean slate and a single client, the mutual fund.

I believe there is a valuable lesson in Templeton's life, the importance of keeping your perspective. The distance from his home at Lyford Cay to the floor of any global stock exchange was measured in psychological light years, not unlike the distance from Buffett's Kiewit Plaza office to those exchanges.John Train, in his book Money Masters describes this as "a silent reproach to excitement and hyperactivity."

One of the best books about Templeton's investment approach is,at least in my opinion, The Templeton Touch by William Proctor, published in 1983.In it, he highlights twenty-two maxims that Templeton said were his enabling principles. Let me highlight them:

1. For all long-term investors, there is only one objective-"maximum total real return after taxes."
2. Achieving a good record takes much study and work, and is a lot harder than most people think.
3. It is impossible to produce a superior performance unless you do something different from the majority.
4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
5. To put "Maxim 4" in somewhat different terms, in the stock market the only way to get a bargain is to buy what most investors are selling.
6. To buy when others are despondently selling and to sell what others are greedily buying requires the greatest fortitude, even while offering the greatest reward.
7. Bear markets have always been temporary. Share prices turn upward from one to twelve months before the bottom of the business cycle.
8. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, won't return for many years.
9. In the long run, the stock market indexes fluctuate around the long-term upward trend of earnings per share.
10. In free-enter[rise nations, the earnings on stock market indexes fluctuate around the book value of the shares of the index.
11. If you buy the same securities as other people, you will have the same results as other people.
12. The time to buy a stock is when the short-term owners have finished their selling, and the time to sell a stock is often when the short-term owners have finished their buying.
13. Share prices fluctuate more widely than values. Therefore, index funds will never produce the best total return performance.
14. Too many investors focus on "outlook" and "trend." Therefore, more profit is made by focusing on value.
15. If you search worldwide,you will find more bargains and better bargains than by studying only one nation. Also, you gain the safety of diversification.
16. The fluctuation of share prices is roughly proportional to the square root of the price.
17. The time to sell an asset is when you have found a much better bargain to replace it.
18. When any method for selecting stocks becomes popular, then switch to unpopular methods. As has been suggested in "Maxim 3," too many investors can spoil any share-selection method or any market-timing formula.
19. Never adopt permanently any type of asset, or any selection method. Try to stay flexible, open-minded, and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and your methods of selection.
20. The skill factor in selection is largest for the common-stock part of your investments.
21. The best performance is produced by a person, not a committee.
22. If you begin with prayer, you can think more clearly and make fewer stupid mistakes.

Templeton was never afraid to maintain cash reserves when he got edgy about market opportunities, though he always said he had little ability to time markets. He was a pioneer in international investing, as much at home in Japanese and Canadian exchanges as he was in American exchanges. His funds frequently had positions in small, less familiar names.Basically, it came down to this:

"Search among many markets for the companies selling for the smallest fraction of their true worth."

He was always ware of socialism and regulation, which he viewed as disguised expropriation...entanglements that inhibit business and destroy the investor's incentive.

Like Buffett, he greatly feared the impact of inflation on his investments and sough beneficiaries of inflation, companies that possessed the ability to pass through cost increases.

A confident optimistic outlook and a willingness to not follow the crowd over the cliff with momentum stocks served his clientele very well.

And hopefully, following such discipline will continue to serve all of us well. I am grateful for the contribution he made to to world.

May he rest in peace.