Sir John Templeton: The Gentleman Bargain Hunter
"It’s much easier to be odd when you’re 1,000 miles away."
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Warren Buffett often sounds like a kindly old grandfather, offering up sage advice on markets and life to all who are willing to listen. (It’s obviously not quite that simple, but this is undeniably a huge part of his charm and enduring popularity.)
And if you like that aspect of Buffett, then you probably loved Sir John Templeton — who cranked the grandfatherly vibes all the way up to 11. I would be shocked if the soft-spoken Southern gentleman ever allowed his voice to break an even keel.
In fact, if the whole stock-picking thing hadn’t worked out, he might have had a successful career in narrating ASMR videos.
Templeton, who passed away in 2008, arrived on the investing scene with a series of uber-profitable contrarian bets in the early days of World War II — and continued to outwit Mr. Market with maddening consistency for the next several decades.
By 1985, the man was (deservedly) considered a legend. A first-ballot Hall of Famer. On the investing version of Mount Rushmore. [Insert more superlatives here.]
That year, George Goodman featured Templeton on an episode of his Adam Smith’s Money World television program that aired on PBS. The pseudonymous host interviewed Sir John on the sandy shores of Lyford Cay in the Bahamas — a laidback paradise that the legendary investor called home.
(Incidentally, in the same episode, Goodman traveled to Omaha to speak with Warren Buffett — and, in both cases, marveled at how these two men managed to thrive so far removed from Wall Street.)
For the sake of posterity and further study, I’ve transcribed Templeton’s remarks below. Underneath this brief transcript, I added a few thoughts of my own.
(So, please, stick around ‘til the end!)
Voiceover: John Templeton … came from the small rural town of Winchester, Tennessee, went to Yale, graduated first in his class, went to Oxford as a Rhodes scholar, [and] made his first investments on the eve of World War II.
He thought then that Germany’s invasion of Poland would put the U.S. on a war footing and bring it out of Depression, so he called a broker and bought $100 worth of every stock selling for $1 a share or less. All on $10,000 of borrowed money. Four years later, he sold them for $40,000 — and he has been a bargain hunter ever since.
His mutual funds all carry his name, Templeton, in their titles. The oldest of them is now 31 years old. Today, John Templeton runs his funds from the Bahamas where he has built a home reminiscent of the antebellum mansions of his boyhood Tennessee.
George Goodman: It’s very pleasant here in the Bahamas, but how can you run a couple of billion dollars worth of investments from a surrounding like this? Don’t you have to be on Wall Street?
Sir John Templeton: We did move here because it is so very pleasant, but we now have found that in the 22 years we’ve lived here, the performance of our mutual funds is better than in the 25 years we were managing them from Radio City in New York.
GG: How do you account for this? You could work at Radio City and do things differently [from other investors].
SJT: Yes, we tried to — but we go to the same meetings as the other security analysts and the people who speak are so sensible, that we can’t help being influenced [by them]. It’s much easier to be odd when you’re 1,000 miles away.
Voiceover: Trying to be odd, going against the herd, has been a Templeton trademark as he searches for bargains that others have overlooked.
GG: You’ve always said that you should sell when the herd is happiest and buy when it’s gloomy. How do you know [that] when the herd is gloomy that it isn’t right?
SJT: (Laughs) Sometimes they are [right] and, of course, we make hundreds of mistakes all the time. But we have found, from the very time that we started our investment counsel operation 44 years ago, we published as a motto of our business — “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest reward.”
Now, this applies not only to stock market cycles, but it applies to particular industries and types of stocks. Basically, we determine that by finding out what is selling at a depressed price. If a stock is selling for a quarter or a half of what it’s worth, then it is a bargain and, in most cases, unpopular with other investors.
GG: Mainly, you like to buy companies that are out of favor. For example, I noticed that your biggest position is in Royal Dutch — but everybody is expecting oil prices to go down. Doesn’t that bother you?
SJT: Oh, yes, of course it bothers us — but there are so many other factors.
We do own a very large amount [of Royal Dutch]. In fact, I think Royal Dutch Petroleum is the largest holding in our mutual funds because at the present price, it’s selling for only 4x what we think it will earn this year and we estimate that, in the long run, it will earn more. And it’s selling for less than half what it could liquidate for and only about 3x its present annual cash flow and pays a good dividend. So for many, many reasons, it looks like the best bargain in the energy industry.
It’s very widely expected that there will be a decrease in the price of oil. The low point for share prices is when most investors are expecting bad news — not after the bad news comes out. Now, it is possible that it might get lower, but we are long-range investors. Our average holding period is six years.
GG: Six years!
SJT: So, in the long run, it will be worth much more.
GG: Your global fund looks all over the world for investments and I noticed that, a couple of years ago, you were heavily into Japan and now you’ve brought all that money practically back to the United States. Is that a temporary phenomenon?
SJT: Yes, that is temporary. We are worldwide bargain hunters. We search all over the world and make estimates of the values of each corporation and then buy those shares that have the lowest market price at the time in relation to our estimate of value.
At one time, that was in Japan. In that one nation alone, we had over 50% of our total investments because we were buying the very finest companies at 3x earnings. Some at 2x earnings.
But, now, instead of 50% in Japan, we’re less than 3% in Japan because, meanwhile, the prices there have gone up. The Dow Jones Industrial Average in Japan is now over 25x earnings and the index of smaller companies in Japan is over 41x earnings.
So, now, it’s very difficult and [there are] few bargains to be found there — and more bargains to be found in America and other nations.
GG: If you’re looking around the world, what country or countries would you pick as the best shot?
SJT: We never approach it that way.
Almost all security analysts ask themselves which nation and which industry before they make a selection. If no one were doing it, that would be a good method — but since the best results are obtained in those areas where other security analysts are not working, we just say we will buy the best bargain we can find and then later find out what nation it is in.
Now, approaching it from that end, we have found an unusually large amount of bargains recently in the United States. Also in Canada and in Australia and in the Netherlands.
GG: Three years ago, you said that you could see the Dow Jones at 3,000 within five years. Which was almost a triple and certainly a double. You have two years left on that prediction — do you hold by it?
SJT: We keep changing. (Laughs)
What I said — and we do not ordinarily make predictions — but I said that the chances were as good as even that that would happen. And I’m saying today that the chances are as good as even that the Dow Jones someday might be above 3,000 before the next presidential election three-and-a-half years from now. We base that on a long list of reasons — partly based on value and partly based on cash available.
GG: How do you feel personally about the current takeover mania?
SJT: It’s an illustration that share prices are among the best bargains in the world. This takeover mania proves the fact that corporations on the stock exchange are selling for much less than they are really worth. Also, the same thing is proven by the fact that more corporations than ever are buying in their own shares. So it’s further evidence that values are unusually low now.
GG: Academicians have a theory that no one can beat the market consistently — that the markets are efficient and all the news is already in the price — and yet there are a handful of great investors who have singlehandedly disproved that theory by consistently beating the market over a period of many years — and you’re one of them. How would you distinguish yourself, say, from Philip Fisher or Warren Buffett?
SJT: Probably in the fact that I look worldwide more than the others do and search in a wider variety of areas. Probably because I’m willing to make estimates of earnings power further into the future than others are. And certainly because I rely on prayer in everything we do.
We open all of our directors meetings with prayer. We pray about every decision we make. And, in the long run, that means you will still make hundreds of mistakes — but less mistakes than otherwise.
GG: Did they ask you whether you prayed for stocks to go up?
SJT: Well… (Laughs) That would not work, of course.
If we prayed for something we bought to go up, it would be ridiculous. So, instead of that, we try to follow Solomon who prayed for wisdom.
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Three quick thoughts on Sir John Templeton’s comments:
(1) An investor moving out of New York City might seem odd enough today, but in the internet-less world of the 1960s, it was downright unthinkable. In one fell swoop, Templeton severed himself from the nerve center and beating heart of finance. He unplugged himself from the market machine.
George Goodman, who built his career on mingling with market insiders and then (anonymously) bringing their tales of Wall Street to a wider audience, was shocked by Templeton’s claim that this distance actually improved his investing performance.
(2) Being a contrarian is not for the faint of heart. Sometimes, when investors preach the importance of a contrarian approach, of staking out a position opposite that of the thundering herd, it almost sounds like they enjoy the resultant slings and arrows.
That they relish standing out on that limb alone — as the others all point and laugh.
Obviously, some investors are like this. Just wired in such a way as to not care one jot about what other people think or say. (Charlie Munger, for example.)
But many of us are not.
And, here, Templeton concedes that it does bother him when the “experts” of public opinion run counter to his own outlook. Those of us who do not come by contrarianism naturally can take heart from Templeton’s honest admission.
It’s reminiscent of the point that you can only be brave when you are afraid. It’s not the discomfort with staking out a contrarian position that matters — after all, we’re only human — but the willingness to push past it and follow our convictions anyway.
(3) You won’t hear a lot of legendary investors endorse the power of prayer. And, for my money, that’s what makes Sir John Templeton such a fascinating character.
His response to Goodman’s question about praying for stocks to go up reminds me of my high school days. In theology class, when it came time for prayer intentions, someone would inevitably pipe up with a request that our football team win that weekend’s game. Our teacher (gently) chided that student — it wasn’t me, I swear — about praying for the right thing. Not for the team to win the game, but that the players involved would perform to the best of their abilities.
Just like Templeton didn’t pray for his stocks to go up — but for wisdom.
Warren and Charlie have likewise commented on the benefits of working from Omaha/Pasadena vs thinking amidst the overwhelming clamor of Wall Street. Easier to defy the herd if you're not part of it.
Today it is harder to get away from "conventional wisdom" since so much of the conversation about the conventional wisdom is online rather than in physical locations. I'm sure it still helps to be away from Wall Street but maybe less than in the past. Today the edge would be to get off "fintwit" and other social media spots, I think...