|The Bahamas Investor Magazine
January 1, 2009
January 1, 2009
In the early hours of July 8, 2008, the world of global equity investing lost its patriarch with the passing of Sir John Templeton at age 95. A great philanthropist in later life, Sir John spent 50 years scouring the globe for undervalued and overlooked investment opportunities.
His record is legendary: $10,000 invested in one of his signature funds at its inception in 1954 would be worth over $8 million today. He was declared “arguably the greatest global stock-picker of the century” in 1999 by Money Magazine. Last year he was named one of the 100 Most Influential People by Time. And perhaps most importantly, he popularized the globally diversified mutual fund, today’s investment equivalent of sliced bread.
Sir John lived for nearly half a century in The Bahamas on the island of New Providence. One of The Bahamas’ most renowned investors, his extraordinary strategy was distinguished by one clear discipline: contrarian equity investing on a global scale.
Sir John’s fundamental approach to stock selection was defined by three characteristics: bottom-up stock picking—he constructed investment portfolios by searching for value at the individual security level, eschewing macro-economic forecasting for the more quantifiable science of equity analysis; value investing—Sir John focused on stocks that traded at a discount to their intrinsic value; and long-term investing—he bought stocks with the intention of holding them for three to seven years, allowing his investments the opportunity to ride out near-term uncertainty and eventually realize their latent potential.
These judicious, time-honoured investment principles were implemented with a master’s touch; indeed, they remain the hallmarks of the brand of security analysis practised by Templeton analysts today.
Yet, these tenets were by no means unique to Sir John. Many investors have relied on them over the years—to varying degrees of success—and their virtues as investment applications are well established. So aside from the shrewd employment of a proven investment approach, what other forces propelled Sir John to the top of his industry?
A tale of early triumph sheds light on the secret of his success. In 1939, on the eve of World War II, Sir John, a native Tennesseean and Rhodes Scholar, borrowed money to invest in each of the 104 European stocks that were then trading at less than $1. An advocate of buying stocks at the “moment of maximum pessimism,” Sir John found his opportunity amid the fear and anxiety of pre-war Europe, a market that was almost entirely overlooked by America’s xenophobic money managers.
Sir John reckoned that only a handful of the companies were in real peril (despite the fact that roughly a third of them were already in bankruptcy) and figured that the stocks that didn’t fail were so excessively discounted by pessimism that they had more than enough upside potential to offset losses and register outsized gains. In the end, only four of his investments went bust, and Sir John sold the remaining 100 stocks to realize a significant profit. It was the first major success of his fledgling career and among his most recounted exploits.
The episode is particularly poignant because it highlights the investment pillars that came to be most closely associated with the Sir John approach: a maverick global outlook and doggedly contrarian streak. In those early years, Sir John proved that he would look where no one else was looking, and buy what no one else was buying, to realize gains that no one else could.
Going against the flow
Sir John spoke often of the competitive advantage inherent in a contrarian investment approach. He instinctively dismissed the popular, and was deeply suspicious of the obvious. “Avoid the popular,” he wrote. “When any method of selecting stocks becomes popular, then switch to unpopular methods.”
Ever industrious, Sir John sought to profit from the madness of crowds by “buying when others are despondently selling and selling when others are avidly buying;” which, he concluded, “requires the greatest fortitude and pays the greatest ultimate rewards.”
There is no doubt truth to this claim, as Sir John’s record bears out, yet there is also a risk of over-simplification.
As Benjamin Graham, the father of value investing, pointed out: “The fact that other people either agree or disagree with you makes you neither right nor wrong. You will be right if your facts and reasoning are correct.”
While Sir John gravitated towards unpopular companies, industries and regions, it was never their obscurity that seduced him. His attraction to the unpopular was a starting point, a way of tilting the balance in his favour by ensuring that the stocks he focused on carried rock bottom valuations.
The real art in his work revealed itself in the analytical process. Simply put, Sir John had the highest standards in the business. He once explained that he would only buy stocks trading at an 80 per cent discount to what he reckoned was fair value. It must have taken an awfully patient person, one who looked often in overlooked places, and saw things in a way no one else saw them, to build a portfolio full of stocks trading at 20 cents on the dollar. This revealed discipline, forbearance and tireless industry, all typical character traits of the successful bargain hunter. But more than any other thing, it revealed Sir John’s originality and independence, his ability to capitalize on the potential that others overlooked.
This was perhaps Sir John’s most prodigious talent, and the one he applied with greatest effect to his chosen vocation.
Legacy lives on
After his death in July last year, his presence still remains palpable around Templeton’s global offices, particularly so at its flagship on the western shores of New Providence. The firm’s analysts still faithfully adhere to his proven approach, practising one of the world’s most effective investment strategies in the shadow of that discipline’s pioneering practitioner.
Sir John’s wisdom had a way of calming and clarifying, particularly in times when fundamentals take a back-seat to momentum and bear markets seem to languish inexorably.
The contrarian’s path is often a lonely one, but he helped summon our resolve when he said: “Only when a stock is unpopular is the price likely to be depressed greatly below intrinsic value. It is not easy to act contrary to popular opinion.” He could also keep our humility in check: “The difficulty of producing a superior investment performance is so great that no one can do it all the time.” His words also helped rationalize hope: “It is well to remember that both bear markets and business depressions are temporary. People do not remain pessimistic forever.” And finally, Sir John’s wisdom still today helps investors maintain their focus: “I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is the lowest priced in relation to what I believe it’s worth.’”
Sir John was rebellious, innovative and ultimately, wildly successful. He was also soft-spoken, spiritual and at times intensely self-effacing.
A contrarian through and through, they broke the proverbial mould after him. John Templeton was a powerhouse of ideas and ideals and a legendary Bahamas investor.
Andrew Ridall— international investment writer for Templeton Global Advisors Ltd—the money management firm founded by Sir John Templeton, graduated from Middlebury College, Vermont, in 2005 with a degree in English. He spent two years with Merrill Lynch in San Francisco before moving to New Providence in August 2007.