During his lifetime of investing in the market, he came up with some principles to help him guide through the ups and downs in the market. When the author asked him if any other investor helped him discover these principles, he independently came with them. I couldn’t find anyone to learn these from, he says.
Most people get led astray by emotion in investing. They get led astray by being exessively careless and optimistic when they have big profits, and getting execcivel pessimistic and too cautious when they have big losses.
As a money manager, he helped his clients “get away from that emotionalism. It was a major element in my success.” He didn’t just avoid pitfalls of emotions in good and bad times; he exploited the emotion of other investors by buying when they were bearish and selling when they were extremely optimistic. “To buy when others are selling and to sell when others are buying is most difficult,” he says, “but it pays the greatest reward.”
It was natural for him to make decisions analytically rather than emotionally. Whether it was the decision of choosing the profession, picking stocks or the city to live in. Before he moves to Lyford Cay, he took several sheets of paper and wrote down the name of every city he was planning to live in. He proceeds to write about every advantage of living at that place. It was not an emotional decision. It was a thoughtful and thoroughly analysed decision to him.
Beaware of your own ignorance, which is probably even bigger problem then your emotions. So many people buy things with tiniest amount of information on the product. They don’t really understand the product they are buying.
It pays to remember the simple fact that is two sides to every investment transaction. The one with the greatest information is likely to come out on top. It takes a huge amount of time, research and effort to put yourself in such a position. He often spoke of his determination to “give an extra ounce” to make the extra call, make another research trip, or schedule the extra phone call. He was similarly dedicated to his program of lifelong self-education.
Templeton argued that amateurs and professionals alike must avoid fooling themselves into believing that it’s easy to build a strong investment record. “Even with professionals, not many of them turn out to produce superior results. So the way to invest is to ask yourself, do I have more knowledge and expertise than a professional? If your answer is no. Then the best thing you can do is to hire a professional and let them do it. Don’t be so egotistical that you think you’ll do better than experts.
You should diversify broadly to protect yourself from your own mistakes
By his calculation, John Templeton made almost half a million investment related decisions. He kept a detailed record of the buy and sell recommendations he gave to his clients for many years. This revealed an uncomfortable truth: about a third of his advice was the opposite of wisdom. He concluded that investing is so complicated that even the best investor should assume that they’ll be no more than 66% of the time, however hard they work.
Get your ego and risk exposure under control. As the saying goes, “Don’t put all of your eggs in one basket.” Don’t invest all of your money in one expert, company, sector, or country, for that matter. Nobody is that smart. So the wise thing to do is to diversify. Templeton recommended that an average investor should invest in a minimum of five mutual funds. Each focusing on a different aspect of the financial market. Again, we need to be honest about the limits of our knowledge. Don’t be so egotistical that you know who the right expert is?
Successful investing takes patience
When he bought US stocks at the outbreak of World War II, he knew how cheap the stocks were at that time, but he didn’t know how long it would be before the market agreed with him. His edge lay not only in his superior insight but his willingness to wait for years on end.
To illustrate this principle, Templeton uses the example from 1626, the story of Dutch immigrants buying Manhattan for $24 in 1626. If the native Americans had invested this sum at the 8% ROI, he said they would have enormously more money than the value of Manhattan, including all the buildings. Templeton regarded this as an extreme example of fundamental financial principles.”In order to have an excellent investment record, all you need is patience.” He warned that almost all investors are ‘too impatient’, adding, “people who change funds every year are basing their decisions more on emotions than investigation.
Best way to find bargains is to analyse the assets that have performed most dismally in past five years
Most investors flock to the investments that have performed well in the past. In this case, the asset can be overpriced due to its hype, so it’s probably a bet for suckers. Templeton took the opposite approach to invest; most of the time, when he went against the investment herd, he made an enormous profit on his bets.
He wanted to know, “where is the worst outlook?” These pockets were likely to produce enticing bargains Since the asset price has built-in pessimism from the tribe of investors. To illustrate this principle, he told the author about his investment in Matthews fund in late 1997, after the destruction from the Asian financial crisis in 1997. He poured $10 million into the fund after losing more than 65% in recent years. In June 1999, Blumberg reported the Matthews Korean Fund had risen over 266% in the past year. Making it the single best performer in its ranking of 5,307 stocks.
One of the most important thing for an investor is to not chase the fads
In the 1980s, The Templeton Foundation published a book, “Extraordinary Popular Delusion and the Madness of Crowd”, Written in 1841 by Charles Mackay; it tells the history of crazes such as the tulip mania and south sea bubble. Templeton wrote a foreword that offered a rational antidote to financial insanity: “The best way for an investor to avoid the popular delusions is to focus not on the outlook but the value.”
He suggested that we ground ourselves in reality by investigating the specific measures to reach the fundamental analysis. This critical analysis of fundamental value acts as a safeguard against crowd madness.
In mid-1998, at the height of the dot com bubble, all investment banks took the internet companies public. The sales machine of wall street moved into overdrive, hyping and hawking, and the half-credited company that naive and greedy investors were willing to invest in. “It was the classical outbreak of investment insanity,” said Templeton. He targeted 84 of the most overvalued stocks, all of which had tripled since their IPO’s. After the IPO, a lockup period followed in which company employees weren’t allowed to sell their stocks typically for six months. Templeton reasoned that all insider employees will rush to take their profit at first sight of opportunity before the hype faded. This stampede will cause the stock to crash.
Soon after his research, Templeton shorted all those 84 companies betting that the stock will nose dive after their six month lockup period. He placed $2.2 million per company, a total of about $184 million. In March of 2000, when the dot com bubble burst, he made over $90 million in months.
In conclusion, Templeton recommended that an average investor should invest in a minimum of five mutual funds. Templeton regarded this as an extreme example of fundamental financial principles. In order to have an excellent investment record, all you need is patience. He warned that almost all investors are too impatient, adding, people who change funds every year are basing their decisions more on emotions than investigation. Templeton took the opposite approach to invest; most of the time, when he went against the investment herd, he made an enormous profit on his bets.