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Learn from Sir John Templeton

Learn from Sir John Templeton

Sir John Templeton died yesterday at the age of 95. Templeton's ideas were a huge contribution to the world of investing, he prescribed a value-bent philosophy, but was better known as one of the first investors who advocated that we invest in foreign countries.

Today everyone seems obsessed with foreign markets, from India and China to hidden gems in the frontiers of Africa and Asia. It wasn't always like this and we have Templeton to thank for it.

One of my most popular posts here at Street Capitalist was Learning from Eddie Lampert. I've always wanted to turn it into a series, and yesterday's passing of Sir John Templeton seems like a good occasion to re-read and analyze some of his thoughts.

Templeton is famous for his maxims on investing. These basic rules or ideas that govern how you should invest in financial markets. When you read them, you'll realize that many are timeless and should be taken to heart. They are listed below:

1. Invest for Real Returns

The idea of investing for real returns must strike people as dumb and obvious. Why else would someone invest? In reality though - many take actions when investing that actually produces negative returns.

Often, someone thinks that they are investing when they are really speculating. I characterize this as shoot for the moon investments, where you are hoping to either win big or lose your invested money. In these cases, you're speculating or simply gambling. Then, other investors feel the need to be constantly buying and selling companies. Usually this sort of indecision leads to high commissions fees and gives your broker real returns while subjecting you to negative returns.

Investing for real returns on the other hand is an action where you not only try to preserve capital but also have that capital appreciate.

2. Keep an Open Mind

As value investors I feel that sometimes we forget to keep open minds. While we mostly spend our time investing in equities, mispricings can happen everywhere. A good example of this is with bankruptcy situations. When a company enters the bankruptcy proceedings, their equity is usually worthless and often it gets wiped out when the company emerges. However, sometimes bonds are grossly mispriced and make an optimal investing opportunity.

The same really goes for any asset class. All asset classes can become mispriced. Value investors do not simply have to look at equities, bonds or even real estate prevent opportunities as well. Seth Klarman's Baupost Group has done over 200 real estate deals and Samuel Zell earned the nickname the "grave dancer" because of his investments in distressed properties.

I think that keeping an open mind means trying to look at all opportunities that you come across. An initial glance lets you sort them into the yes, no, and too hard buckets. This also motivates an investor to continuously learn as much as they can. You can try to learn about different industries and asset classes on a daily basis so that you can tackle a wider ranger of opportunities than most people.

3. Never Follow the Crowd

If most investors underperform the market, then generally, following the crowd should lead to under performance. I regard crowd following as detrimental because usually it showcases shoddy research on your part.

Templeton himself felt that he invested better when he moved away from New York to Nassau. It's probably true, by being so far away he would be insulated from the manias of Wall Street and free to come up with his own more original ideas.

4. Everything Changes

Sometimes when we take positions, we become overconfident and fail to look at shifts in the environment and sectors we invest in.

Investors took positions in sub-prime mortgage companies because they felt that they were getting favorable price to book ratios. Yet they failed to take into account problems like a lock up in liquidity or the permanent impairment of sub-prime loans all together. These companies are now either bankrupt or sitting in the -90% range, neither of which is good for performance.

The key seems to be that if you have a thesis for a company, you must not only conduct thorough, but also retest it often. By doing this you can become more aware of shifts and act accordingly.

5. Avoid the Popular

The greatest inefficiencies and opportunities in the market usually come from situations that are ignored by the general population. This can be small and undiscovered areas of the market or areas in the aftermath of a panic. Think mutual thrift conversions or American Express with the salad oil crisis.

6. Learn from your Mistakes

By not learning from your mistakes, you leave yourself open to repeating them again.

"This time it is different" - No, probably not. Bubbles burst. They've been doing that since the 1650's with tulips. Don't delude yourself into thinking otherwise.

7. Buy During Times of Pessimism

The most hated and unloved areas of the market usually hold some of the best bargains. A good place to start is the 52 weeks low list.

Templeton says that we should buy on maximum pessimism and sell on maximum optimism. At the age of 26 he bought 100 shares in 104 companies that were selling at less than $1 when World War II began. In a few years, Templeton made profits on all but four of these companies which is a testament to buying on maximum pessimism.

8. Hunt for Value and Bargains

Investing in undervalued assets is difficult. Buying something that everyone is selling is incredibly difficult. Psychologically, you're forced to question the mentality of the crowd. That's why most investors don't look for bargains.

However, if you accept Templeton's idea that the crowd is usually wrong (as in 3, 5, and 7) then bargains is precisely where you need to be. How do you find bargains? Look in the red. Again, look at the 52 week low list. Also try seeing what companies are rated "sell" by analysts. Look at other asset classes that appear to be having a major sell off and apply a bottom-up analysis of them.

9. Search Worldwide

Bargain hunting is a universal concept. Go wherever you can find good accounting standards and good management. You'll find more opportunities which can be particularly important if your own domestic market becomes overheated. By investing in multiple markets you can diversify or hedge against problems in your ownnation.

Frontier markets can be an excellent place to look. They are normally less correlated with global markets and not followed by average investors. I have a feeling that we'll see more investors stalk companies in Africa and Asia as they look for opportunities, especially if the credit crunch continues.

10. No-one Knows Everything

If we're close-minded, we don't learn. It inhibits learning and the finding of new investing opportunities. That's why I think communication is important. One of the best things about blogs and investing communities is that you can bounce your ideas off of each other and hear contrary views. All of this will refine your own analysis and either make it stronger or show you the holes or failings of your investment idea.

I also use blogs/communities to find out how to invest in other assets. While I have only invested in equities so far, I've reached out to certain bloggers to learn more about sectors that I didn't understand, or assets like currencies which I knew nothing about. You should try practicing this too. Continuous learning is a healthy and rewarding objective to have for yourself.

Now take a moment to follow this link to Templeton's obituary in the New York Times. I spent most of this post discussing investing, but the article goes into some of the more important aspects about Templeton. His life, his philanthropy, and his family.

Mr. Templeton said his investment record improved after he distanced himself from Wall Street and no longer worried about the tax consequences of his decisions. He was an early investor in Japan in the 1960s and later in Russia, as well as in China and other Asian markets. He sold large holdings before the technology bubble burst in 2000, and warned several years ago that real estate prices were dangerously high.

In Nassau, his net worth swelled into the billions, but his lifestyle remained relatively modest. He drove his own car and spent his days reading, writing and managing his foundation. Visitors were given sandwiches, tea and courtly advice in the afternoon at his white-columned antebellum-style home on Lyford Cay, set on a hillside lush with citrus trees and bougainvillea, overlooking a golf course and the ocean.

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