The Willingness to be lonely

It is impossible to produce superior performance unless you do something different from the majority.

This story is about the legendary investor Sir John Templeton.

Sir John Templeton (1912-2008) was an American born British investor, banker, fund manager and philanthropist. In 1954, he entered into the mutual fund market and created The Templeton Growth fund, which averaged over 15% per year for 38 years navigating through world war two, Japan stock market collapse, the crash of 89, and the dot com meltdown. Not many have been that skilled or lucky to pick stocks over the long term and outperform the index.

Micheal Lipper, the president of an investment advisory firm called Lipper Advisory services, remarks to the author of Richer, Wiser, Happier that George Soros, Warren Buffett and Sir John Templeton shared one invaluable characteristic “The willingness to be lonely, the willingness to take the positions that other don’t think is too bright.

In December 1939, when Germany invaded Poland, Norway, Holland, and Belgium surrendered to the Nazis. Soon after that, in May 1940, France surrendered too. Following these few events in such period of time, The Dow sank to a new low of 112 points. The UK stock market plunged by 40% within months amid fear of the imminent German invasion of the British Isles.

Credit: Sir John Templeton

How would a conventional investor react to the chain of these events? Cut your losses short, stop the bleeding, move to a safer class of investments such as cash, gold or land and wait for an opportunity to reinvest. Templeton did exactly the opposite. When everyone is selling at the time of mass pessimism, he bought positions in companies left, right and centre.

He could see that the US would eventually have to participate in the war. He thought to himself what company would likely prosper during the war. There will be demand for more than 95% of the product to help with the war effort. There won’t be much competition, and small companies that are on the brink of bankruptcy that a sudden change in the fortune can significantly impact their stock price. They might outperform the stocks of healthier companies. Something like the survival of the most unfit. He opened up the wall street journal and shortlisted 104 small American companies. Later, he called his stockbroker to invest $100 in all of those companies. His stockbroker, who’d been his boss at Fenner & Beane, called to double-checked the order as it was very unusual for the time. His boss said it’s a very unusual order, but we’re going ahead with it apart from 37 companies that are already in the process of bankruptcy. Templeton reassured him to invest in those 37 companies, thinking that they might come out of bankruptcy.

1941, when Japan attacked Pearl Harbour and forced the United States into the World War. US economy plunged, and the Dow was at a generational low of 92 points. Yet Templeton held firm on his positions didn’t sell anything. The heavens smiled upon him in the spring of 1941 when allied forces joined the US war effort. The economy revived, stocks stop falling for once. After five years, he finally sold. “when I liquidated those holdings, I made a profit on one hundred out of one hundred and four,” he said, “I made five times my money in five years.”

Despite his inexperience, he understood enough about economic history, the financial market, and basic human nature to recognise that overwhelming pessimism would eventually lead to unbridled optimism. Even in the darkest of times, he never forgot that the sun eventually rises.

To read more on the topic, check out Richer, Wiser, Happier

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