Exactly 75 years ago, Sir John Templeton made a legendary move at the start of World War II.
In September 1939, he was sitting in his office at Rockefeller Plaza in Manhattan when the news broke out that Hitler had invaded Poland. It was obvious that this would lead to a full-fledged war.
He was no millionaire at that time since his Wall Street career was launched a year or two prior. So he borrowed money to buy 100 shares each in 104 companies selling at $1 per share or less, including 34 companies that were in bankruptcy. A few years later he made a nice tidy profit after paying off his debt. Only four (out of 100) turned out to be worthless.
When asked during an interview what made him do it; he answered: During war, everything that was in surplus, and therefore unprofitable, becomes scarce and profitable.
This story aptly sums up Templeton’s investing philosophy which thrived on pessimism-- when it was prevalent in the market. He, on the other hand, tended to brim with optimism at such times. In a tongue-and-cheek fashion, he used to state: When people are desperately trying to sell, help them and buy. When people are enthusiastically trying to buy, help them and sell.
To his credit, he put his money where his mouth was.
In 1978, he started accumulating a stake in Ford when it looked like it was headed for bankruptcy and its shares were at around $2 (split-adjusted). He kept buying the shares even as they slid to around $1 by 1981. In a couple of years, he was vindicated. By 1987, Ford had zoomed to $15.
When everyone else piled into technology stocks in 2000, he was a seller. In an interview in 2001 with Forbes, he stated that he was appalled at the market’s frothiness. This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity.
Templeton is said to have almost single-handedly pioneered global investing. When growing up in Tennessee, he never encountered anyone who owned shares. That changed when he studied at Yale University. There he rubbed shoulders with boys from wealthy families but noticed that not one of them was investing outside the U.S. Surely, he figured, they would get better results if they diversified across the globe and did not limit their investments to one country. He aggressively searched but could not locate an investment counselor who specialised in helping people invest outside America. Instead of seeing this as a drawback, he saw a wide-open opportunity.
Even across borders, he followed the same principle - hunt for undervalued stocks in the midst of pessimism.
In 1980, a Maoist guerrilla organization called the Shining Path took over Peru, imposing what it called "a dictatorship of the proletariat." Western economies branded the organization a terrorist group and curtailed economic activity. The Peruvian stock market collapsed. Peruvian stocks were dirt cheap but Templeton could not get his hands on them as foreigners were not permitted to buy stocks in Peru. But the bargains available were too tempting to ignore. So he formed a Peruvian corporation and used it as a holding company to buy up the nation's leading companies. When the reign of the Shining Path came to an end and political stability was restored in Peru, economic activity picked up taking the Peruvian stock market along with it. John Templeton won hands down.
He is said to be the first Western investor to see the potential of Japan's post-war economic miracle. When Templeton began investing in Japan in the 1960s, it was considered an emerging market and a risky investment adventure. At that time, he found stocks trading at a P/E ratio of only 4x his estimate of earnings while stocks in the U.S. were trading at around 19.5x. At that time, the Japanese economy was growing faster than the U.S. but most stocks cost 80% less than the average of stocks in the U.S. When Japan finally pulled all restrictions on foreign investors in its stock market in the 1960s, Templeton grabbed the opportunity. Japan’s growth rate continued to soar and by 1985 the country had exploded onto the economic landscape. As the rest of the world woke up to what was happening in Japan and the stock market soared, Templeton had already made a fortune for his investors. Not surprisingly, at the peak of Japan’s stock market bubble in 1989, when valuations were very high, he was significantly underweight on the country.
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