If you search the Internet for history’s greatest investors, Sir John Templeton will surely be on the list.  An American by birth, later in life he emigrated to the Bahamas and became a British citizen.

In his early years he worked for a Wall Street investment firm but in 1937 he and a few colleagues went out on their own and founded what would become Templeton, Dobbrow, and Vance.

In 1939, he made what may have been his most famous investment.  While the world worried about Hitler and the future of Europe, Templeton invested $100 into every share listed on the New York and American Stock Exchanges that was trading below $1.00 – a total of 104 companies.

While some saw the move as nothing more than acquiring interest in junk stocks, four years later he sold out for over $40,000. His initial investment? $10,400!

Templeton used his investing philosophy to build and manage a highly successful group of international investment funds. What was that investing philosophy?

 

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Templeton himself described his approach as “bargain hunting.”  However, he brought something new to value investing – he searched the entire world for bargains in a time where the majority of investors rarely looked beyond their own countries.

Templeton was the first to invest big in Japan during the early 1960’s and it helped make him a billionaire.  You can find his investing principles enumerated on the Internet ranging from 10 principles, to 16 principles, to 22 principles.

In 1992, Sir John sold his Templeton Funds to Franklin Investments and many of those funds remain today as the Franklin Templeton Funds.  From the Franklin Templeton Investment website, here are the ten principles they still follow:

1.    Invest for real returns
2.    Keep an open mind
3.    Never follow the crowd
4.    Everything changes
5.    Avoid the popular
6.    Learn from your mistakes
7.    Buy during times of pessimism
8.    Search worldwide
9.    Hunt for value and bargains
10.    No-one knows everything

Investing for “Real” Returns

Templeton was keenly aware of the negative impact of taxes, commissions, and inflation on the investment dollar.  He drew a distinction between investing and speculating and pointed out the returns claimed by some speculators failed to reflect the drain of short-term taxation and brokerage fees.

He also felt far too many investors of his day were over-invested in fixed income securities.  A real return means the return on your investment dollar has to outpace the rate of inflation, which fixed income securities often fail to do over time.

This advice is particularly relevant today, when some investors are so terrified of a return to the depths of the Great Financial Crisis they are putting their cash into investments that do little more than guarantee their principal. Over time, inflation will eat into that principal substantially.

An Open Mind

Templeton believed there were times more favorable to certain types of investments than others were, and staying rigidly fixed on your investment vehicle of choice led to diminishing returns.  He believed there were times to remain in cash, and a time for blue chips, and a time for bonds.  Above all else, he believed in viewing the world with a healthy dose of skepticism, keeping an open mind in the face of popular conventional wisdom.

Stay Away from the Crowd/Avoid the Popular

Templeton was a contrarian investor – buying when others were selling and selling when others were buying.  In his view, buying what the crowd was buying yielded the same results, and by virtue of the size of the herd, those results were often mediocre.

He was also one of the first to point out that popularity can destroy the effectiveness of any market timing technique or sure-fire share selection method.  If you have ever worked with a professional options trading advisory service, you know this to be true. These advisors limit the number of people they place into a given option recommendation since too many people rushing in to buy at the same time artificially drives up the price.

Everything Changes – This too Shall Pass

Templeton loved to point out that both bull and bear markets are temporary.  There are thousands of investors who wish they had followed this advice before the dot.com bubble burst and again in 2009 when it appeared share markets all over the world would never recover.

Learn from your mistakes

Perhaps one of Templeton’s best observations was this – This time is different are among the most costly four words in market history. Many investors make mistakes, swear they have learned a lesson, and then go out and make the same mistake again. One of the biggest mistakes that recur is hanging on to a share in decline in the fervent belief it will go back up again.

Buy During Times of Market Pessimism

Templeton was not the first value investor to make this observation, but many investors fail to heed the advice, hording cash in fear.  Consider this.  In late 2008, an American investor with cash in hand could have bought shares in General Electric for around $5.00.  Today it trades around $20.

Australian investors could have bought shares of BHP Billiton at about the same time for around $25 and today it trades around $45.

Hunt for Value and Bargains

Templeton’s trick for finding both value and bargains was to look at what the crowd is selling.  Some contrarian investors call this “bottom feeding or trawling.”  While this approach requires considerable effort in determining if a sell-off is due to fundamental changes, the rewards of finding beaten down stocks that are still fundamentally strong is substantial.

Search Worldwide

The Australian share market should not be the only place you look for share bargains.  Today, intelligent investors are turning their eyes towards places not many others do – including Africa and even tiny Viet Nam.

No-One Knows Everything

Of all the keen insights of Sir John Templeton, this is the favorite of many a skeptical investor: “An investor who has all the answers doesn’t even understand the questions”.

>>Back to the newsletter to view other articles – June 5th 2011