Templeton: Lessons from the dean of contrarians

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.

Sir John Marks TempletonOne 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.