Templeton's Way With Money
Templeton's Way With Money

Templeton's Way With Money

With the advantage of hindsight now, I think there are two reasons for this success. One is that if you’re going to produce a better record than other people, you must not buy the same things as the other people. If you’re going to have a superior record, you have to (Location 534)

Then, the other factor is that so much of my time in New York was taken up with administration and in serving hundreds of clients that I didn’t have the time for the study and research that are essential for a chartered financial analyst. (Location 540)

I find it’s an excellent place to work. You can work with greater concentration there than you can in an office or in a home. (Location 548)

investing, he had long been convinced that the most reliable way of achieving the best returns was to concentrate on finding bargains wherever they could be found, regardless of prevailing fashion or sentiment. (Location 577)

“The right question is: Where is the outlook most (Location 581)

“Buy stocks for less than they are worth and hold them as long as it takes for the market to appreciate how undervalued they are. (Location 584)

What matters to an investor is how earnings and cash flow are likely to develop in the future, not where they are today. (Location 592)

if the key performance parameters were set to grow in the near future. By definition, therefore, a Templeton-influenced investor is interested in both growth and value. (Location 597)

John had an uncanny knack of letting you blather on indefinitely. (Location 646)

“I don’t care what everyone else says unless they can show me why I’m wrong in my judgment about the value of a company. (Location 664)

One of his key insights was to realize that valuing a stock by reference to the price-earnings ratio today is far too simplistic. (Location 692)

He also believed in flexibility. There is a tendency for people to become rigid, which is not a good idea (Location 695)

When the market was strong, or high compared to its normal trading levels, the proportion in stocks was reduced. When the market was down, and trading at a low level relative to its normal performance, the holdings of equities were increased. (Location 879)

Note in particular the emphasis on looking at both value and growth criteria, and the idea that the most successful investments are likely to be those that are unpopular at the time they are purchased. (Location 1205)

Some of these factors are management ability, growth trend, government control, assets per share, average past market prices for the shares, dividends, current earnings, average earnings in previous years, estimates of future earnings, etc. (Location 1237)

that the worst way for any medium- to long-term investor to generate income from his investments was to buy the highest yielding shares in the market. (Location 1275)

A far wiser method for increasing your income is to select stocks with the highest earnings in relation to market price. (Location 1294)

Such earnings are partly reinvested by the company for the benefit of stockholders which, in turn, leads to still higher earnings per share in future years. (Location 1298)

Growth stocks are most likely to earn more and pay increased dividends in future years. Usually growth companies have a high rate of earnings in relation to net worth. (Location 1302)

The reason for his regret, in other words, was that the economics of the fund business were so clearly superior to that of his earlier profession of investment counseling. (Location 1466)

approach was simplicity itself: a heavy focus on the extraordinary track record of the fund, combined with the payment of hefty upfront sales commissions (typically as much as 7 percent), (Location 1660)

“Sir John,” says fund manager Ken Fisher, “had ice in his veins and really lived the idea: Don’t follow the herd. (Location 2060)

“This time it’s different—the four most dangerous words in investment (Location 2063)

The latter, he believed, was the primary factor that underpins the behavior of security prices and created the bargains for which he spent his life looking. (Location 2077)

The three most important deductions most investors face are: (1) taxation; (2) the change in the purchasing power of the currency they have used to make the initial investment; and (3) the cost of implementing an investment strategy, such as trading costs, professional fees, or (in the case of managed funds) annual management charges. (Location 2137)

The real after tax total return that an investor receives, therefore, depends simply on how much he or she must pay to participate in the future stream of profits, whatever they may turn out to be, and in whatever combination of dividend and capital appreciation they happen to materialize. (Location 2179)

(1) overestimating the future rate of growth; and (2) correctly estimating the rate of future growth, but paying too much for (Location 2183)

In other words, they are investors who focus on picking stocks that they think are going to go up in price without having a sound analytical reason for expecting that result. (Location 2190)

For him, investment was a never-ending search for more and better ways of investing. (Location 2252)

He was always asking his colleagues to search for explanations for apparently bizarre phenomena. (Location 2263)

If investment analysis were easy, we would not need to rely on emotional human beings. (Location 2279)

In contrast, Sir John’s most famous saying was that the best time to buy is at the point of “maximum pessimism. (Location 2290)

However, if 10 investment advisers tell you that a particular stock is cheap, then the last thing you should do is invest in it. (Location 2297)

The more logical process, in Templeton’s view, is to start with valuation and then move to portfolio construction. (Location 2308)

Since you were buying a long-term stream of earnings, the solvency and sustainability of those earnings are essential prerequisites. (Location 2316)

it was unwise, in his view, to invest in businesses where the balance sheet was so weak that it was open to question whether the company would survive. (Location 2317)

a strong management team with a proven track record; evidence of technological leadership; an industry with continued growth potential; a respected and valuable brand; and low-cost production. In essence, he was looking for companies that enjoyed a sustainable competitive advantage within a supportive environment. (Location 2322)

pay too much for them and investors are still at risk of losing money. (Location 2335)

The well-known saying that “bull markets have to climb a wall of worry” is just one example of how share prices often seem to be moving in the opposite direction to that which the news seems to justify. (Location 2341)

For the modern investor the difficulty of identifying long-term value in stocks is compounded by the widespread availability of information that appears relevant, but in practice distracts from the main objective. (Location 2360)

The simplest explanation for the myopia of investors lies in the complex matrix of intelligence and emotion that shapes human behavior. Detachment is difficult and the power of conventional wisdom makes it difficult to deviate from it for any sustained length of time. (Location 2375)

A professional investor who believes that a stock is expensive should not own that stock, period. All other justifications are self-serving. (Location 2389)

As we have seen, Templeton himself thought that anyone who gets six out of ten investment decisions right was well on the way to beating the market. (Location 2392)

In his words: “The only investors who shouldn’t diversify are those who are right 100 percent of the time. (Location 2404)

John Templeton subscribed to the golfer Gary Player’s maxim, “the harder you work the luckier you get. (Location 2410)

In investing in a company you are buying a future profits stream or the assets to produce one. (Location 2412)

It is much harder to try to figure out how an industry may evolve in the future and how a particular company will adapt to that changing environment. (Location 2414)

The reason why hard work matters so much in investment is that the task is essentially unlimited. (Location 2430)

grow? As Sir John frequently noted, the world is constantly changing. As a result, it is vital to monitor investments closely once they have been made. (Location 2440)

“the time to sell is before a crash, not afterwards. (Location 2465)

One of his favorite techniques was to determine a price at which he would be willing to buy a range of stocks and leave those orders with a broker to execute should the prices of those stocks fall to the level at which he regarded them as cheap on a five-year (Location 2468)

successful investor should not be tied to one single approach. “The key to long-term success is to keep an open mind,” he told the same authors. (Location 2639)

The yardstick of value for stocks on which he placed most reliance was earnings—and critically, not just a company’s historic earnings, which are known, but their future earnings, which by definition are not. (Location 2650)

effort had zeroed in specifically on five year forward earnings forecasts as being the most important input in the stock picking process. (Location 2657)

Why was Templeton so sure that five-year forward earnings forecasts should be at the heart of his stock picking (Location 2667)

It follows that investors who can forecast, within reasonable margins of error, the five-year forward earnings for most of the stocks they own are likely to be rewarded with above average performance over that time period. (Location 2693)

Having said that, however, by its nature forecasting future earnings remains a hazardous business in which certainty can never be attained. (Location 2703)

The methodology used is based on the assumption of perfect forecasting ability. In other words, for any given period of historical data, the earnings actually achieved by the universe of companies being studied are compared to the price at which their shares traded at specific earlier periods (one, two, three, four, and five years before). (Location 2718)

It shows that in aggregate any shares which were trading at the outset at more than 11 times their earnings five years later were destined on average to deliver negative real total returns to those who bought them at that point. (Location 2744)

This has some important implications. Over one- and two-year periods, the study demonstrates that there is no certain relationship between the starting P/E, even assuming perfect foresight, and the total returns subsequently achieved. (Location 2779)

in the long-run share prices are determined by profits, it follows that the central task of the investor is to seek to forecast these profits, which is far from easy. (Location 2796)

His philosophy is the belief that securities are valued relative to their long-term earnings. (Location 2809)

Books that claim to have discovered a magic formula for generating investment returns often fall foul of the important distinction between philosophy and process. (Location 2813)

Similarly a company that is trading on six times next year’s earnings may still be expensive if its earnings are set to fall thereafter. (Location 2840)

shows a simple cycle set on top of an underlying growth. For most of the time linear extrapolation represents the best forecast with the lowest error. (Location 2843)

John Templeton was once asked what had made the greatest difference to the quality of his investment decision making. He replied, “Every mile I moved away from New York. (Location 2853)

Investment analysis is, or should be, a contemplative and peaceful task. (Location 2856)

or the number of offices they have around the globe. Access to instant information, web-based systems, and technology are deployed as reasons why they have an information edge. (Location 2862)

Ever improving technology is one of the spurs that challenges the modern professional investor to greater levels of activity than is either necessary or desirable, and distracts attention from what is genuinely important to the main task of forecasting future earnings. (Location 2880)

While value investors focus on historic measures such as price to book, price to sales, or price to earnings, growth investors concentrate instead on future profits or cash-flow growth. (Location 2892)

was never precisely right. The focus on individual company analysis makes the task of asset allocation much more straightforward. If a professional investor can find enough cheap stocks to buy, then as a general rule it is right to be as fully invested in them as general portfolio considerations allow. (Location 2943)

How to distance oneself from the crowd? Ignoring the headlines and concentrating solely on the operating characteristics and prospects of individual companies is an essential part of the discipline required. (Location 2982)

As noted earlier, the Templeton investment approach rarely succeeds in identifying the precise moment at which the share prices of companies deemed to be cheap hit bottom. (Location 2991)

One reason for including so many examples of John Templeton’s letters to his clients in this book is to enable readers to see for themselves how he thought about the business of making investment decisions. (Location 3168)

This can best be appreciated by immersion in his way of thinking, for which the original source material of his own writing remains the best guide. (Location 3173)

was achieved without the use of debt to leverage returns. (Location 3191)

is the mark of someone who, we assert, can be said to have found the Holy Grail of professional investment—above average returns with below average risk. (Location 3195)

One critical one was his insistence that the stock picker’s task is to look forward to the future sustainable earnings potential of a company, and not simply back at its historic ratios. (Location 3208)

few investors take the analysis as far out as five years, which was Templeton’s preferred time frame. (Location 3210)

The issue with growth companies is always (1) whether the growth can in fact be sustained into the future; (Location 3236)

(2) whether those improved earnings have already been discounted at the time of purchase. (Location 3237)

Our study suggests that paying more than 11 times five-year forward earnings for any kind of stock will be an unrewarding exercise; (Location 3238)

His greatest failing as a businessman was his inability over many years to maximize the commercial value of his skills as a fund manager. (Location 3292)

John Templeton’s principal innovation as a stock picker was to insist on factoring forward earnings projections into the analytical task. (Location 3298)

Readers who are interested in a corrective to the diet of gloom should turn for balance to well argued books such as Matt Ridley’s The Rational Optimist (Harper Collins, 2010). (Location 3396)

The higher the adjusted P/E ratio, the lower in general the subsequent return, and vice versa. (Location 3499)

So, while equities, particularly in the United States, are not obviously cheap, they do have the advantage that they can offer what the traditional safe havens no longer can, which is protection against the loss of wealth. (Location 3558)