Many famous traders and investors’ talent is closed to the participation of ordinary people. They manage money at banks and hedge funds where access is exclusive. Some of the best become famous, close their funds to new investment, or even return money to investors so that the best opportunities are preserved for the money managers themselves and perhaps their most favored clients. The most well-known investors among the common man, outside the financial industry, are those whose talents were accessible to ordinary people. Warren Buffett is perhaps the best known of these; anyone can buy a share in Berkshire Hathaway. Another was the mutual fund manager Sir John Templeton.
Origin
John Templeton was born in Tennessee in 1912. His father was a businessman active in processing cotton and building houses. After finishing school, Templeton attended Yale where he graduated in 1934 near the top of his class. He was a Rhodes scholar at Balliol College, Oxford where he earned a degree in law. While in Britain, he embarked on a seven-month world trip that took him to thirty-five countries. He pulled this off on a $200 budget as he endeavored to live like the locals in the places he visited, often poor countries.
Before leaving on this trip, Templeton applied for various financial positions in the United States. Upon returning, he began a career on Wall Street in 1937 with brokerage firm Fenner & Beane. Within months though, he left this job for a much better paid one with a Texas mineral exploration company though he would later return to New York with money saved from a couple of years of a good salary and low expenses. Templeton was known for his frugality all his life.
The first investment of Templeton’s that we know the details of was the following: in 1939, shortly after the start of the Second World War, a 27-year-old John Templeton invested $100 into each of the 104 U.S. stocks then trading at less than $1 per share. His investment thesis was that the war would turn American companies around, even the most financially desperate among them; 37 of these companies were already in bankruptcy when he invested. Templeton had some savings but he borrowed the money for these purchases from the brokerage firm where he used to work. Thankfully for him, the risky gamble paid off; he quintupled his investment as 100 of the 104 positions ended up turning a profit after five years. After he sold, the shares kept appreciating and Templeton came to regret not holding them for longer.
Templeton Growth Fund
Before unwinding his positions in the 104 companies, with $5,000, Templeton bought into a small investment advisory firm in 1940 when it had just eight clients. The company became Towne, Templeton & Dobbrow and then Templeton, Dubbrow and Vance after a merger with another investment advisor. Templeton forwent a salary to grow the firm and would ultimately sell this investment advisory company in 1959.
Yet, the most important creation of his career was the Templeton Growth Fund, founded in 1954. He formed this fund in Canada since the country then had no capital gains tax; however, the fund invested globally. As a prelude to this, in the 1950s, he bought Japanese stocks for his personal account when few were looking there, buying shares of companies like Hitachi and Fujifilm. At the time, shares in Japanese companies traded low multiples to their earnings and the companies were growing quickly.
In the 1960s, when the Japanese government lifted some capital controls that would have prevented investors from pulling their money out of the country, the Templeton Growth Fund began investing in Japan. By then, Templeton had been invested personally in the country for years. He liked the market a lot in the 1960s just as he had in the 1950s; during the ‘60s, Japanese GDP grew an average of 10.5% per year. It was a large bet; Templeton invested 60% of fund assets in Japan. Besides his global and generalist Templeton Growth Fund though, John Templeton established other lesser-known funds too, including a Nucleonics, Chemistry, and Electronics Fund in 1956, though the Growth Fund would be the flagship and Templeton sold his stake in the science-themed fund just a few years later.
When U.S. stocks were expensive and about to flatline for years in the late 1960s, the Templeton Growth Fund was not very exposed to the U.S.; it was largely invested in Canada and Japan. So, the fund appreciated 50% between 1969 and 1974, a period when U.S. stocks underperformed. Yet, despite all of this success, in 1974, the Growth Fund still had just $13 million in assets. Despite good results, money did not immediately flock to Templeton and he was still an obscure fund manager. Strong growth came only after a marketing chief was hired, John Galbraith.
In 1979, the U.S. markets were keen to end a decade that saw poor performance of listed stocks. That year, Business Week magazine reported that the “death of equities looks like an almost permanent condition” yet by now Templeton had 60% of his fund invested in U.S. stocks. He continued to sell Japanese positions in the 1980s when Japan was booming and stocks there were becoming more expensive. That money flowed to the U.S.; he bought more U.S. stocks after they had depreciated massively with the 1987 market crash. Again, Templeton had managed to move money around the world, buying stocks where they were disfavored and about to appreciate, often against the mainstream opinion.
John Templeton sold his fund management business in 1992 for $400 million. By this point, the company managed several funds with $13 billion in assets across them. Over its life up to this point, the Templeton Growth Fund had achieved an average annual return of 14.5%.
Strategy
Central to John Templeton’s investment strategy was finding bargains at moments of pessimism. Buying when others were not (and because others are not) is a contrarian investment strategy, which means being lonely in your investment focus. Many dismissed Japan when Templeton was investing there. Besides being contrarian, he would also stress the importance of not being carried away by emotion. An investor should not be too optimistic when everyone else is euphoric and, just the same, should not be too pessimistic when others around them are.
Beyond this, one cannot ignore Templeton’s global focus. Compared to investors in Europe, who for centuries were more accustomed to investing in foreign and colonial securities due to the relative insufficiency of enticing investments at home, American investors were not known for being particularly globetrotting. Templeton was an exception; he thought his understanding of the world and the people who lived in different parts of it would make him a better investor. That said, sometimes, his investment decisions seemed to rest on simple foundations; his decision to invest so much in Japan rested on his positive assessment of the Japanese work ethic, for example. Yet, he was not only heavily invested outside the United States in 1960s Japan; in the 1990s, he was investing in emerging and often formerly-communist countries in Europe and Asia. Also encouraging him to invest in these seeming long-shot bets was a long-term investment time horizon.
That said, there was more to Templeton’s strategy than rotating in-and-out of different markets around the world; he was also a good stock picker. He believed in closely studying target investments through a fundamental analysis of the business. As just one practical example, his decision to invest in Hitachi stemmed from understanding that Japanese accounting rules then in effect made the earnings of diversified conglomerates like Hitachi look lower than they were. This was because companies reported financials without consolidating the earnings of various subsidiaries. This in turn made the stock look more expensive in relation to company earnings than it really was.
Templeton rejected investing based on the current price of a stock and how it had moved recently. Simply put, the price is not always right. If a stock fell from $20 to $15, it’s not necessarily because it has become less valuable. Often, it will be a better buy at the lower price, even considering whatever prompted the depreciation to begin with.
Templeton mused that in the early 1980s, when the U.S. economy was admittedly in rough shape, stocks were more cheaply valued than they were in the depths of the Great Depression yet investors who wondered how great it would have been to catch the bottom of the market in the ‘30s were sitting on the sidelines in the early ‘80s. However, prices do get too high too. He warned that technology stocks were too expensive just before the bubble in those shares burst in 2000; he was short selling some stocks that fell 95%, profiting from bets against these shares. Templeton also warned that house prices were similarly excessive just before that bubble burst in 2007-08.
Bahamas and Philanthropy
In 1968, John Templeton gave up American citizenship and moved to Lyford Cay in the Bahamas. It was then still a British territory and Templeton became a naturalized citizen of the United Kingdom. He funded the establishment of Templeton College (today’s Green Templeton College), a business school, at Oxford. For this philanthropy, Templeton was recipient of a knighthood in 1987.
Sir John Templeton established the Templeton Foundation with the money he made from selling his fund management company. This was a foundation focused on applying science to spiritual questions, like funding research into the healing power of prayer. It was a topic he cared a lot about; Templeton published his own books on religion and spirituality. Sir John Templeton died in 2008 by which point his charities were giving away $70 million annually.
Lesson
Investing on the basis of value and fundamental analysis is often associated with contrarianism. Besides Templeton, Warren Buffett offers another example; he avoided software and IT investments during the 1990s and invested in financial firms like Bank of America and Goldman Sachs after the 2008 financial crisis. This association is inevitable. At its core is the question of whether the market price is always right. Investors like Templeton would say ‘no’ and the implication of this is that the greatest opportunity lies where others are not investing and, conversely, little is to be gained from just following the momentum of what is popular at the time.
More from the Tontine Coffee-House
Read about Benjamin Graham, the “father of value investing”, and another famous investor employing fundamental analysis in his work, Warren Buffett and in particular his insurance investments (part 1 and part 2). Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Green, William. “The Secrets of Sir John Templeton.” Money, Jan. 1999, pp. 101–05.
2. McFadden, Robert D. “Sir John M. Templeton, Philanthropist, Dies at 95.” The New York Times, 9 July 2008.
3. Templeton, Lauren C., and Scott Phillips. Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter. McGraw Hill Professional, 2008.
4. Veneziani, Vincent W. The Greatest Trades of All Time: Top Traders Making Big Profits from the Crash of 1929 to Today. John Wiley and Sons, 2011.
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Richard Di Stefano