A great believer in not listening to "market noise", John Templeton, the legendary money manager whose "Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria" is something few would discount today. Investors have a lot to learn from him, especially now when pessimism rules the market. By Vivek Sharma
Equity investors all over the world, especially in emerging markets like India, now gripe that they have been caught in a "perfect storm' - one of the worst credit crises in history, soaring commodity prices, inflation and growth slowdown. To most investors, it can't get any worse than this and they are too scared to look for attractive investment opportunities when stocks are trading way below their intrinsic values. But the few brave souls who venture out and invest in times of absolute despair reap rich harvests when the storms die down and the world is calm again.
They also become the stuff legends are made of.
One such brave soul was Sir John Marks Templeton, one of the greatest investors of all time, who died last week. In 1939, a young Templeton made the biggest bet of his life. If you go by conventional wisdom, his timing could not have been worse. The world was yet to recover from the worst economic depression in history, the pain and suffering still too raw in memory. And the world was about to plunge into the biggest war ever, which will eventually claim millions of lives and destroy entire economies.
For Templeton, the timing could not have been any better. There was absolute panic in the markets and there were any number of stocks trading at huge discounts to their true worth. He borrowed $10,000 and invested the money in stocks which met one simple condition - trading below $1 per share. There were 104 such stocks on the New York Stock Exchange and he invested in all of them, though 37 of those companies were actually bankrupt. When the war was over many years later and the markets recovered, Templeton made a fortune. Only four of the 104 stocks turned out to be bad bets!
Templeton had another rationale for investing when the Second World War was about to break out. He reckoned that many businesses would actually benefit from the war. In his own words, "during war, everything that was in surplus and therefore unprofitable, becomes scarce and profitable". One can blame him for trying to profit from a war, but no one can fault his investment logic! Over a career that lasted many decades, Templeton benefited immensely by investing in what he called "points of maximum pessimism".
This contrarian streak, the ability to see things in a different light, set Templeton apart. He perfected this to an art and is now universally recognised as the dean of contrarian investors. He invested in Japanese equities in the sixties when nobody else was willing to consider them and sold out in the '80s when everyone was scrambling to buy them. He bought American auto stocks when Japanese cars were getting popular, predicting that American manufacturers would survive the onslaught. They did.
Templeton invested in technology stocks in the '90s, when the likes of Warren Buffett stayed away from them. Unlike most others, he exited his positions before the internet bubble burst and went on to short sell technology stocks heavily, and quite profitably.
"To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward", Templeton said. He used to joke that he was helping others by being contrarian. "When people are desperately trying to sell, help them and buy. When people are enthusiastically trying to buy, help them and sell"!
|In 1972, he set up the Templeton Prize because "there was no Nobel Prize for promoting religion and spirituality'. He ensured that the Templeton Prize was richer than the Nobel Prize and this year the winner will receive almost $2 million. The first winner of the Templeton Prize was Mother Theresa. Other prominent Indian winners include, Dr. S Radhakrishnan, Baba Amte and Pandurang Athavale. |
Templeton was also a big believer in not listening to "market noise". He often used to say that his investment performance improved after he moved out of Manhattan and settled in the Bahamas, far away from the investment community. "If you want to have a better performance than the crowd, you must do things differently from the crowd", Templeton said. And if you want to do things differently from the crowd, never listen to the crowd. All investors who follow of the prophecies of the investment evangelists on business television, please take note.
His investment horizon was much longer than most. A few years back, he invested in the stock of South Korea car manufacturer Kia Motors because "there is a chance - maybe not a probability, but a chance - that Kia will be larger than General Motors 30 years from now". He was close to 90 when he made that investment, based on something he didn't expect to happen for another 30 years!
"Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria", Templeton said. Something all investors should always keep in mind.
Pioneer of international investing
While studying at Oxford on a Rhodes scholarship, Templeton met boys from very rich families. Those days only the rich invested in stocks, but they hardly ever ventured into foreign stocks. He thought that was just not sensible. "Surely they'd get better results if they searched everywhere rather than limiting their search to one country". He set out to find investment advisors specialising in international stocks. When he found none, he saw a "wide-open opportunity" and decided to focus on opportunities outside America.
| He was equally optimistic about India too. "You could say almost the same thing about India, except in terms of speed. The improvement in India is wonderful but not as fast (as China)."|
Templeton was probably the first prominent American investor who actively searched for opportunities in foreign countries. As mentioned earlier, he was probably the first foreign investor to bet on the post-war industrial boom in Japan. Later, he was equally enthused by South Korean and Chinese stocks. "If you're investing, you should put a fairly large part of your total assets in China because within as short a period as 30 years, China is likely to have the largest gross national product any nation has ever had", Templeton said many years back.
He was equally optimistic about India too. "You could say almost the same thing about India, except in terms of speed. The improvement in India is wonderful but not as fast."
While Templeton admired Buffett, he used to say the latter was "small-sighted" in ignoring foreign stocks for a good part of his career. Of late, even Buffett seems to be following Templeton's lead by actively searching for opportunities in foreign markets.
His biggest legacy - making mutual funds popular
Templeton's biggest legacy was that he made investing in stocks popular among ordinary Americans. Until then, the American middle class was suspicious of Wall Street - then perceived as a club of schemers, manipulators and fat cats. The huge success of his Templeton Growth Fund, launched in 1954, helped popularise mutual funds in a big way. Every $10,000 invested in Templeton Growth Fund had grown to over $2 million by 1992, when he sold the Templeton fund family to Franklin Resources. The Franklin-Templeton funds continue to do well, especially in emerging markets including India.
The annual return of 14.5 per cent clocked by Templeton Growth Fund between 1954 and 1992 may be lower than Buffett's performance at Berkshire Hathaway. But Templeton was running a mutual fund with money from retail investors, unlike Buffett who is running a diversified business conglomerate. Like any mutual fund manager, Templeton had to face redemption pressures and did not have the luxury of buying out entire businesses like Buffett often does for Berkshire.
For Templeton, the ultimate goal was not to just make money for himself, but to earn for others. He was deeply spiritual and believed that "helping investors make fewer stupid mistakes in selecting their investments' was the best way of "not wasting the life God gave me". The Templeton Foundation, set up using the money he received after selling his mutual fund business, now has an endowment worth $1.5 billion and gives out $70 million every year.
It may seem ironic that a man who waited patiently for points of extreme pessimism, was the "Maximum Optimist' as the Wall Street Journal described in its editorial last week. "Very few people realize how fortunate we are to live in the most glorious period in world history. There has been more progress in prosperity than in any previous century. Probably in the next century, the increase will be equally great, if not greater', Templeton said in one of his last interviews, when in his early nineties. If only we could be half as optimistic as he was!