How to Pick Stocks Like Masters
Contrarian Investor John Templeton
Key Takeaways
● Templeton is the founder of Templeton Group, known as the most intelligent and respected investment guru in the world
● Templeton insists on contrarian investing, believing that the market is always born in despair
● Templeton left the world with "sixteen rules of investment success", emphasizing that investment must maintain a positive attitude and dare to buy in a bear market
Sir John Templeton, one of the most respected investors in the world, famously noted,
"The market is always born in despair, grows in doubt, matures in longing, and perishes in hope. The most pessimistic times are the best times to buy, and the most optimistic times are the best times to sell."
The quote still rings through the investing world today.
As the founder of Templeton Growth Fund, John Templeton was a wise and deeply respected investor. He was knighted by Queen Elizabeth II in 1987.
In 1999, Money magazine named him "arguably the greatest global stock picker of the century." [1]
Investment Philosophy and Style
Sir Templeton was a contrarian. He never championed frequent trading. Instead, he patiently searched for undervalued stocks and waited for opportunities.
He believed a contrarian mindset could help him unlock vast opportunities.
So he increased his stake in many stocks during the Great Depression, while he became a seller when everyone else piled into the technology stocks in the 2000s.
He was also a hunter for the best bargains, i.e., cheap but promising companies worldwide.
16 Rules for Investment Success[2]
Sir Templeton summed up his success story as follows:
No. 1 Invest for maximum total real return.
Templeton thought it was crucial to recognize how taxes and inflation might erode investors' investment returns. So, it's not wise to put too much money into fixed-income securities.
No. 2 Invest—don't trade or speculate.
"Get out of the casino, buy stocks, and hold them forever," said Jack Bogle, father of the index fund. Templeton agreed. He clarified that frequent trades and speculation would consume potential profits and lead to continuous loss.
No.3 Remain flexible and open-minded about types of investment.
"There is no one kind of investment that is always best," said Templeton. There are times when stocks, bonds, or futures generate better-than-average returns. But he noted that the S&P 500 outperformed other investments most of the time.
No. 4 Buy low.
People say it often but don't act this way. Many investors buy stocks when they are expensive. Templeton believed the chance to buy low appeared when most people were pessimistic. So, investors must go against the crowd if they want to outperform the market.
No. 5 When buying stocks, search for bargains among quality stocks.
The underlying company's quality matters. Quality companies are usually technical leaders, have a strong management team with a proven track record, or boast a well-known, trusted brand.
No. 6 Buy value, not market trends or the economic outlook.
Templeton stressed that the stock market was actually a market of stocks. Individual stocks might temporarily be pulled along by a strong bull market, but a stock's performance is ultimately determined by its intrinsic value. After all, there are stocks rising in a bear market.
No. 7 Diversify. In stocks and bonds, as in much else, there is safety in numbers.
No one can predict or control the future. A hurricane, an earthquake, or an unexpected technological advance by a competitor can all affect your investments. As a result, Templeton maintains investors should diversify their portfolios by searching worldwide for better bargains.
No. 8 Do your homework or hire wise experts to help you.
Templeton agreed with the idea of "investigate before you invest." In stock trading, investors are "buying either earnings or assets." "If you expect a company to grow and prosper, you're buying future earnings. If you expect it to be acquired or dissolved at a premium over its market price, you may be buying assets," explained Templeton.
No. 9 Aggressively monitor your investments.
The stock market is dynamic. "There are no stocks you can buy and forget," Templeton said. Investors need to keep tabs on their investments.
No. 10 Don't panic.
"The time to sell is before the crash, not after. If you can't find more attractive stocks, hold on to what you have." Do not panic because other investors do.
No.11 Learn from your mistakes.
Mistakes can be turned into a learning experience. According to Templeton, the big difference between those who are successful and those who are not is the losers don't learn from their mistakes. "This time is different" would cost investors dearly as they simply repeat their mistakes.
No. 12 Begin with a prayer.
Templeton believed a prayer could help investors think more clearly and make fewer mistakes.
No 13 Outperforming the market is a difficult task.
Templeton said that any investment company that kept outperforming the market was doing a better job than you thought because it was not 100% invested (e.g. management fees and commissions.)
No. 14 An investor who has all the answers doesn't even understand all the questions.
Nobody knows everything. Templeton maintained wise investors understood they needed to seek answers to new questions.
No. 15 There's no free lunch.
"Never invest on sentiment, and never invest solely on a tip," Templeton argued. The company that offered you your first job or made your first car isn't necessarily a profitable business. And a tip may get in the way of your judgment, too. So it's not very possible to reap a fast profit.
No. 16 Do not be fearful or negative too often.
Templeton valued a positive attitude. He had a strong faith in globalization and the stock market.
Quotes[3]
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
For those properly prepared, the bear market is not only a calamity but an opportunity.
Outperforming the majority of investors requires doing what they are not doing. Buying when others have despaired and selling when they are full of hope takes fortitude.
Sell a stock only when you have found a new stock that is a 50% better bargain than the one that you hold.
The four most expensive words in the English language are, This time, it's different.
Focus on value because most investors focus on outlooks and trends.
If you want to have a better performance than the crowd, you must do things differently from the crowd.
Never forget: the secret of creating riches for oneself is to create them for others.
What happens to us in life is less important; the real question can be whether or not we use the experience to grow.
When we have no goal or when our vision of the goal is obscured, we may lose our sense of purpose. Even when we've prepared ourselves well and have an aptitude for a given activity, poorly directed efforts can rob us of vital energy.
The Bottom Line
Sir Templeton's investment philosophy has influenced countless investors around the globe.
The Wall Street Journal titled his obituary "Maximum Optimist" to commemorate this great optimistic investor.
If you think his words make sense, you may consider keeping rational in a bull market while staying hopeful in the face of bleak pessimism.
[1]https://money.cnn.com/magazines/moneymag/moneymag_archive/1999/01/01/253723/index.htm
[2]https://www.franklintempleton.com/tools-and-resources/literature/info/TL-R16