The Intelligent Investor, 4/20/2006
He’s less well known than some, but Sir John
Templeton was one of the great value investors of the last century.
In January 1999, as the technology bubble expanded towards maximum
inflation, the US magazine Money named one man as ‘arguably
the greatest global stock picker of the century’. Despite the
hubris surrounding technology investments at the time, the
magazine’s choice wasn’t a hot shot young internet
fund manager. Nor did it pick a well-known ‘name’,
such as Peter Lynch or Warren Buffett, because they stuck to investing
in the US and weren’t therefore included in the global
category. Instead, Money picked the then 87-year old Sir John Marks
Templeton, a veteran with more than 60 years’ investing
experience.
Templeton’s record mightn’t be as brilliant as
some, but it is very impressive nonetheless. Between 1954, when he took
control of the Templeton Growth Fund, and when he sold it to funds
management company Franklin Templeton Investments (as it is now known)
in 1992, his annualised return was more than 17%. In dollar terms, a
$10,000 investment in the fund would have grown to about $4m over the
38-year period. And he achieved this excellent return without the
volatility experienced by many of his contemporaries.
Like all successful investors, Templeton stuck to some general
investment principles. These principles survive to this day, and still
underlie many of the funds managed by Franklin Templeton Investments,
including the Australian listed investment company Templeton Global
Growth Fund, which we last mentioned in issue 186/Oct 05
(Hold—$1.40).
In the beginning
Sir John’s first major stockmarket investment, made just as
World War II was about to begin, illustrates his approach. With no
capital of his own, he borrowed $10,000 to invest in 104 small American
companies, many near bankruptcy, on the basis that war would lift
demand out of the doldrums induced by the Great Depression. His
calculated risk paid off handsomely—only a handful of the
companies actually failed, leaving him with more than $40,000 after an
average holding period of four years.
Templeton likes to buy at what he calls ‘points of maximum
pessimism’. That is, when particular stocks, industries or
markets are in complete and utter turmoil. With the Australian
sharemarket near record highs, it’s hard to imagine such a
set of circumstances. But markets—and the stocks within
them—do get very cheap occasionally.
We can imagine, for example, Templeton being interested in the
Australian sharemarket in January 1991, when the economy was in
recession, the All Ordinaries index was at 1,280—about half
the peak it had reached in 1987—and the first Gulf War was
just days away. In this respect he was similar to Philip Fisher, who
also advocated buying on a war scare.
Against the crowd
So Templeton has never been afraid to go against the crowd. Indeed, he
has said that the best bargains are invariably found in the stocks
everyone else is selling. But successful investing isn’t just
about seeking out overlooked and out-of-favour companies; they must
also be undervalued. Templeton, like most other great investors, is
sceptical about complex formulae and financial models, preferring to
look at four main factors—a company’s PER, its
operating margins, what its value might be in liquidation, and the
consistency of earnings growth. Focusing on these factors, Templeton
attempts to measure a company’s intrinsic value.
Yet in many respects, he is not a typical value investor. First of all,
he likes to have a wide diversification, as demonstrated by his
decision, in 1939, to spread $10,000 between more than 100 stocks.
Others, such as Buffett and Fisher, have tended to opt for much more
focused portfolios, perhaps reflecting the confidence they’ve
had in the high quality stocks they’ve typically bought.
Templeton, however, whilst also having an eye for quality, has always
insisted on buying the cheapest stocks. These have produced plenty of
duds, but, because he has bought so cheaply and has been well
diversified, the profits from his winners have offset the occasional
loss.
Templeton’s investment time frame also contrasts with Buffett
and Fisher, who have tended to hold their quality stocks through thick
and thin. While Templeton had the patience to wait for
‘maximum pessimism’ before buying, he was quick to
eject a stock from his portfolio when a better opportunity presented
itself. So his portfolio ‘turnover’ usually ran at
between 15% and 25% a year. Mind you, that’s relatively
sedate compared to the frenetic activity of many of today’s
investment managers, some of whom turn over 100% or more of their
portfolios in a year.
So it might seem that Templeton’s approach is more closely
related to that of Walter and Edwin Schloss, whom we discussed in our
cover story to issue 178/Jun 05. While it certainly hasn’t
stopped them from producing excellent returns, the Schlosses, as we
mentioned in issue 178, have ended up owning a wide selection of pretty
mediocre businesses. But, while Templeton’s portfolio was
also highly diversified, he wasn’t interested in the same
‘junky’ asset plays.
Templeton, make no mistake, has always preferred quality businesses. He
just refuses to pay up for them. But, with Buffett and Fisher teaching
that quality businesses are rarely available cheaply, how did Templeton
buy anything at all?
Bargain hunting
The simple answer is that he looked where others weren’t
looking—overseas. While Templeton initially invested in
American stocks in 1939, he came to realise that the best bargains
weren’t always available in his home country. Most famously,
he first invested in Japan in the early 1960s when the leading stocks
were available on PERs of two to three. Bargains like these seem quite
unbelievable today but casting a wide net makes intuitive sense.
Indeed, Templeton is so convinced of his approach that, while he
expresses great admiration for Buffett, he has described his focus on
the American market as ‘small-sighted’.
For some perspective on the issue of relative global market valuations,
we recommend the ‘2005 AGM Investment Manager
presentation’ of Templeton Global Growth Fund, available in
the company’s ASX announcements on 18 October. It argues,
quite convincingly, that Australia’s bargain basement bin is
rather empty at the moment. Despite that, our view is that all
investors should remain within their circle of competence. If local
bargains are scarce, as they are now, then cash is a good temporary
home for your surplus investment funds. We certainly don’t
advocate rushing off overseas if you’re unwilling to put a
lot of effort into researching international stocks.
Templeton’s approach has other drawbacks for the individual
investor. As a more active approach, identifying very cheap stocks
which you sell as they become more normally priced can be a
time-consuming activity. And, by selling after five years, you
won’t extract full benefit from great growth stocks like
those that sustained Buffett and Fisher for decades.
As we’ve said before, there’s more than one way to
value investing heaven. But in addition to valuing stocks accurately,
all the great investors have been able to think independently of the
crowd. Perhaps, more than anything, this has been Sir John
Templeton’s great strength.
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Publishing Pty Ltd, to the best of its knowledge and belief, considers
accurate. You should make your own enquiries about the investments and
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