There is much Indian equity investors can learn from John M. Templeton, in particular his belief in buying stocks at the point of maximum pessimism
One aspect common to all great investors is that their philosophy towards life and their approach to investment are completely in sync. Often their life?s experiences mould their investment approach. Legendary investor John M. Templeton, who passed away in July this year at the age of 95, exemplified this.
When he was growing up in Tennessee, US, in the Depression era, a lot of farms were foreclosed (because their owners were unable to repay their loans) and auctioned off. Whenever the auctions failed to find a bidder, Templeton?s father, a lawyer and investor, bought them for a song. Decades later, Templeton?s elder brother sold these properties to developers at considerable profit. From watching his father purchase these properties for a pittance was born Templeton?s investment philosophy of buying at the point of maximum pessimism.
As in the case of real estate, in the stock markets too there are times, such as now, when the macro-economic prospects appear so murky that investors are unwilling to touch even high-quality stocks. Such points of pessimism present opportunities to value investors. Templeton once said: ?People are always asking me where the outlook is good, but that?s the wrong question. The right question is: where is the outlook most miserable?? According to Templeton, buying at the point of maximum pessimism allows investors to get their hands on stocks at bargain prices, and this leads to the best returns.
Today, when the stock markets are in the doldrums, Templeton?s teachings are especially relevant.
Pioneer of global investing
What also transformed Templeton into a great investor was his decision to hunt for value stocks worldwide. Intuitively, this makes sense: if you are a bargain hunter looking to buy stocks at depressed prices, why confine yourself to one market? A bull phase in your home market could last many years, making it impossible to find bargain stocks. Since, at a given point, different economies are at different stages of the economic cycle, a bargain hunter would have a wider basket to choose from if he invests globally. Investing in several economies also helps reduce country risk.
Today, global investing is commonplace and many fund managers scour the world?s markets for investment opportunities. Even in India we now have funds that offer you exposure to international markets. But in the US of the fifties, home bias (the phenomenon of investors preferring to invest in the country they are born in) was carried to the extreme – almost to the point of xenophobia. The belief was: if the US economy is the world?s best, why invest abroad? Lack of information and transparency (the result of poor accounting standards) in many foreign markets too deterred fund managers. Templeton treated these deterrents as a challenge, buying up stocks in the Japanese market at a time when Japan was perceived in the US as a manufacturer of shoddy goods. As early as in the fifties, Templeton perceived the stirrings of a change that would eventually transform Japan into an economic superpower by the eighties, one that would challenge American hegemony in many industries such as automobile and electronics. An important lesson here for ordinary investors is not to passively accept the received wisdom of their age, but to step out and check these assumptions themselves. In the information gap that prevails between the view on the Street (Wall or Dalal) and the actual circumstances prevailing out there in the field lie the opportunities for investment.
What made Templeton receptive to the idea of global investing was that during his youth he had undertaken a round-the-world trip. He transformed this gallivanting into an intense learning experience, boning up on the politics, history and culture of the nations he visited. So, while other fund managers responded to the idea of investing abroad with ill-informed hauteur, Templeton, with his bank of knowledge about these countries, was prepared to learn and adapt to the nuances of investing in these markets.
Early investment coup
One of Templeton?s most well-known investment coups came early in his career. In 1939, several years into the Depression, the outlook for the US economy appeared cloudy. Fears of the US getting embroiled in the Second World War had spooked investors further. But studying the impact of previous wars, Templeton concluded that the demands of the War would galvanise the economy. Borrowing $10,000, he bought stocks of 104 companies that were trading at less than $1 on the two exchanges. Templeton believed that even the weakest of companies (and their stocks) would gain from the War. Within four years his bet had paid off as he made a four-fold gain from his investments.
Lone ranger
Avoiding the herd mentality is another lesson ordinary investors could learn from Templeton. Fund managers, especially those who live in a nation?s financial capital (say, Mumbai or New York) become quite homogeneous in their investment approach. This is not surprising, considering that all of them read the same research reports, attend the same conferences, and hear the same presentations. Templeton?s investment record actually improved after he shifted out of New York to the Bahamas. Said Templeton: ?My own independent thinking took over.? Another world-famous investor too has stuck to his perch in Omaha and has done none the worse for it (or perhaps fared better because of it!). The point that needs emphasising here is the importance of thinking for yourself and doing your own research.
If you wish to learn more about Templeton and his investment techniques, read ?Investing the Templeton Way? by Lauren C. Templeton and Scott Phillips. Lauren, a great-niece of the great investor, enjoyed privileged access to his mind and his methods, and has done a good job of documenting his approach.
