While most participants have been spending the summer trying to read some sense into frantic and bipolar financial markets, I have been fortunate to have spent a lot of time in the company of one of the all-time great investors, whose experience and common sense approach to investment is sorely missed today. Sir John Templeton, alas, is no longer with us in person to offer his latest views on market prospects, but his philosophy and insights live on in the scores of letters and memos he produced during the course of his more than fifty year career as a professional investor.
Rereading these again over the summer, while putting the finishing touches to a forthcoming new book on Templeton’s investment philosophy and methods, has been a useful counterpoint to the increasingly apocalyptic nature of public discussion of the sovereign debt crisis and global market outlook. If there was one thing from which Templeton never wavered, it was the conviction that calm and dispassionate analysis was essential to securing long term investment success.
Not for nothing was one of his famous maxims about investment the simple admonition “Don’t Panic”. During the two decades he spent as an investment counsel, a period that encompassed, the Second World War, Korea, Suez, the Cold War and the Cuban missile crisis, among other global events, his communications with clients remained models of authoritative reassurance.
Markets fluctuate: valuations move from one extreme to another: there is nothing to be gained by abandoning a sensible long term investment plan; every crisis provides an opportunity to find some new bargains. While the market backdrop was constantly changing, the basic principles of effective money management, in his view, did not. Decades after they were first written, his lucid memos on how to invest, from which we quote liberally in the book, are as fresh today as they ever were.
Of course, it can be argued, the markets today are not the same as they were in days gone by, and that is certainly true in some respects. Financial markets are by several orders of magnitude faster moving, more global and more short termist than they were. The biggest market players today are institutional rather than individual investors, and business risk, instant information and the tyranny of relative performance have become dominant drivers of market behaviour.
The twin imposters, fear and greed, however remain, as always, a force to be reckoned with. While insistent on the need for a rigorous investment discipline, Templeton himself was anything but inflexible in his response to events. As one of the pioneers of global investing, he remained, well into his nineties, acutely interested in the changing dynamics of the global economy and the frequently myopic prism through which financial market participants observe and react to those changes.
So, although he is probably most famous for having publicly called the start of the great US bull market of the 1980s and 1990s with uncanny precision, and his reputation rests on his exceptional skill as a stockpicker, he made another beautifully timed public call in March 2000, at the very height of the Internet bubble, urging private investors to abandon technology shares and buy bonds instead.
With his own money he shorted a wide range of technology stocks and, expecting the Federal Reserve to slash interest rates, placed a huge bet on long-dated low coupon Treasuries, funded by borrowings in Japanese yen – a classic carry trade manoeuvre that yielded substantial profits for his charities and foundation over the next few years. Three years later he was already warning about the potentially disastrous consequences of the emerging real estate bubble and levels of indebtedness in the United States. In 2005 he said he expected the resulting “financial chaos” to last for many years.
So what would this great investor be saying now if he were here? We cannot say for certain, but we do know the kind of questions that he would be asking. The key to success, in his experience, always lay in flexibility and anticipation. Or, as he put it: “People are always asking me where the outlook is good, but that’s the wrong question. The right question is: where is the outlook most miserable”? His entire investment credo revolved around one simple idea: finding bargains – stocks or other investments which sold for less than their intrinsic worth.
“There is only one reason a stock is being offered at a bargain price: because other people are selling. There is no other reason. To get a bargain price you have to look where the public is most frightened and pessimistic”. One of the last memos he wrote before his death suggested that a diversified portfolio of stocks with proven global earning power would remain the most certain path to continued prosperity in these difficult times.
There seems little doubt that his bargain-hunting antennae would be starting to twitch today, the worse the news and market sentiment becomes. Equities today are starting to look cheap again, which is not to say that they cannot become cheaper in the short term as worries about the debt crisis intensify. The whole idea of being “risk on”/”risk off” on a daily basis, however, is the antithesis of everything that John Templeton believed the business of investment to be about. He had a 50-year track record to prove that his patient, long term, contrarian approach worked. The world awaits convincing proof that the shorter focus of many market participants today can produce anything remotely as good.