The 22 Maxims of John Templeton

Sir John Templeton is probably best known for introducing international investing to U.S. investors. He was the global bargain hunter.

But before all that, he was a Yale graduate, a Rhodes Scholar, and a world traveler (on 90 pounds of poker winnings at Oxford). After the globe-trotting, he landed a job on Wall Street, before opening his own firm four years later.

Templeton’s Growth Fund, created in 1954, went on to earn about a 14% annual return over the next 38 years when he retired in 1992.

He famously bought stocks in 1939 as WWII broke out. He recounted the story in a 1997 interview.

Well, it was clear if ever the companies that are worthless and are losing money ever come back to life, it’s during a major world war. So the– a couple of days after Hitler invaded Poland, I looked over all the New York Stock Exchange and the American Stock Exchange. There were 104 companies whose prices had gone down below a dollar a share. And so I called up Dick Platt and said, ”Buy me $100 worth of everything below a dollar a share” and he did what you just said, he called back and said, ”We’re doing it, but 37 of them are in bankruptcy.” And I said, ”Oh, no. Those are the best of all.” The one outstanding one…was the $7 preferred stock of Missouri-Pacific Railway. It had gotten down to 12 cents a share.

It hadn’t paid dividends in years. But boy, railroads come back in a war. So we bought 800 shares for $100 and when it got up to 40 times what I paid for it, I sold out and it went up to 105.

And he sold short Nasdaq stocks at the peak of the Dot-Com boom. He explained his thought process behind the short position in a 2001 interview.

I gave Merrill Lynch an order to short 84 Nasdaq stocks which were a sizable tech IPO selling at three times the price set in the IPO and where insder holdings were locked up so insiders couldn’t sell. I shorted about 11 days before the lock-up period expired and remained short unless 11 days after the lock-up expired the stock was still going up. I covered because that could mean I had made a mistake and something positive like an acquisition or a new product success might happen.

I lost about a thrid of the time and just broke even or made a little money 17% of the time. In the remaining 50% of the cases I covered the short positions at 1/20th of the short sale price I shorted at. For example, I shorted one stock at $40 and covered it at $2. I had quite a few like that.

Over the course of his career, he collected a list of rules to invest by, which he first wrote about in a 1993 article for World Monitor titled “16 Rules for Investment Success.” An expanded list of 22 maxims was later published in The Templeton Touch.

Here are Templeton’s 22 time-tested maxims:

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 when 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-enterprise nations, the earnings on stock market indexes fluctuate around the replacement 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 short-term owners have finished their buying.
13. Share prices fluctuate much 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 nd 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.

Source:
John Templeton Interview w/ Charlie Rose 5/14/1997
After the Bubble Burst – Equities March/April 2001
The Templeton Touch