Whatever be the stock, industry or country, when it came to value investing, Templeton believed that the best bargains could only be found "at the point of maximum pessimism." The Wall Street Journal aptly titled his obituary "Maximum Optimist" since his optimism in the face of bleak pessimism was his greatest weapon as an investor.
In Investing The Templeton Way, a book co-authored by John Templeton’s great-niece, the strategy of purchasing shares in the wake of a crisis is described.
1) The bargain hunter searches for stocks that have fallen in price and are priced too low relative to their intrinsic value.
2) The bargain hunter searches for situations in which a large misconception has driven stock prices down, such as the arrival of near-term difficulties for a business that are temporary in nature and should correct over time. In other words, bargain hunters look for stocks that have become mispriced as a result of temporary changes in the near-term perspectives of sellers.
3) The bargain hunter always investigates stocks when the outlook is worst according to the market, not best.
A crisis sends all these events into overdrive. Put another way, when the market sells off in a panic or crisis, all the market phenomena a bargain hunter desires condense into a brief and compact period: maybe a day, a few weeks, a few months, perhaps even longer.
To take advantage of such a crisis, the investor must be prepared.
Make your decision to buy when you are thinking clearly and your judgment is not being affected by the events at hand. Having done that, maintain a discipline of purchasing stocks that you believe to be a bargain.
Templeton used to make his buy decisions well before a sell-off occurred. He always kept a “wish list” of securities representing companies that he believed were well run but priced too high in the market. In fact, he often had standing orders with his brokers to purchase those stocks if for some reason the market sold off enough to drag their prices down to levels at which he considered them a bargain.
In the foreword to the book, he pens down words of wisdom that any value investor should ardently follow.
One principle that I have used through my career is to invest at the point of maximum pessimism. That is the time to be most optimistic. Buy when others are despondently selling and sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate reward.
The 'buy' rules
Here are six ‘buy’ rules to follow to be a successful investor. These are taken from his timeless observations in Sixteen Rules for Investment Success published in 1993 but still very relevant today.
Do not trade or speculate. The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short, or deal only in options, or trade in futures-- the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
By trading frequently, you also have to deal with capital gains tax and brokerage.
Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash. There you are, facing a 15% loss in a single day. Maybe more. Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
There will be corrections and crashes. But, over time, studies indicate stocks do go up…and up… and up.
But buy and hold is not synonymous with buy and forget. Don’t get complacent. No investment is forever.
It may be obvious, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.
Yes, they tell you: “Buy low, sell high.” But all too many of them bought high and sold low. Then you ask: “When will you buy the stock?” The usual answer: “Why, after analysts agree on a favorable outlook.”
This is foolish, but it is human nature. It is extremely difficult to go against the crowd—to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now.
But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying you will do so only after it is already overpriced.
Quality comes in different forms. It could be a company strongly entrenched as the sales leader in a growing market; a technological leader in a field that depends on technical innovation; a strong management team with a proven track record; a well-capitalised company that is among the first into a new market; a well-known trusted brand for a high-profit-margin consumer product.
These attributes cannot be viewed in isolation. A company may be a low-cost producer but not a quality stock if its product line is falling out of favour with customers. Likewise, being the technological leader in a technological field means little without adequate capitalisation for expansion and marketing.
Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.
Templeton's advice is to study companies to learn what makes them successful.
Never invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favorite television show of long ago may be a fine company. But that doesn’t mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.
Never invest solely on a tip. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.
He rightly stated that ultimately, it is individual stocks that determine the market, not vice versa. While investors keep their focus on the market trend or economic outlook, individual stocks can rise in a bear market and fall in a bull market. The stock market and the economy do not always march in lock step. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook.
- Buy after doing your homework
Investigate before you invest. Study companies to learn what makes them successful. Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. The earnings on stock market indexes—the fabled Dow Jones Industrials, for example—fluctuate around the replacement book value of the shares of the index. (That’s the money it would take to replace the assets of the companies making up the index at today’s costs.)
If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also.
If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets.
A portfolio must always be diversified - By asset class, by industry, by risk, and by country.
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren’t apparent when you bought the stock.
A great advocator of global investing, he explains that if you search worldwide, you will find more bargains—and possibly better bargains—than in any single nation.