FIR

Sir John Templeton

Reveals the Future of the Stock Market, Real Estate and Life

Recently, NewsMax and Financial Intelligence Report publisher Christopher Ruddy visited with Sir John Templeton in Lyford Cay in the Bahamas - the place Sir John has called home for the past 32 years. His interview with Sir John follows:

At 92 years of age, Sir John Templeton is one of the world's most successful investors, a legend in his own time.

Money magazine calls him "arguably the greatest global stock picker of the century."

Templeton's pioneering concept was to take the old adage "buy low, sell high"and apply it to global investing.

Templeton sought out the best opportunities anywhere in the world he could find them. When he began investing globally in the 1930s, Templeton was truly a pioneer. Many Americans thought it unwise to invest outside the United States and therefore forfeited a world of opportunities. John Templeton's results, however, are the stuff of legend.

When he sold his Templeton Funds in the early 1990s, they were worth an incredible $800 million. Templeton personally walked away with over $900 million.

Sir John's all-consuming goal was to never just make money for himself, but to earn for others. As he told Philanthropy magazine:

"At Yale I was investigating what talents God gave me, and where I thought I could be most beneficial to people was to help them make fewer stupid mistakes in selecting their investments."

"At age 27, I formed my own investment firm, working with just five wealthy people. Eventually, when I sold out, we were helping over a million people with some part of their investments. And I felt that was a ministry, that I was doing a useful job, that I was not wasting the life God gave me. But all during that time, over 50 years, I felt that my benefit to people was not as great as if I were trying to help them get spiritual wealth."

Sir John now works full-time as a philanthropist. His John Templeton Foundation in Radnor, Pa., and his two offshore trusts have a total of $800 million dedicated to philanthropy.

The foundation - run by his son Dr. John Templeton, a retired medical doctor - is one of the few dedicated to discovering how religion can influence the physical world. Though he spends most of his time on his philanthropy, Sir John remains dedicated to his first vocation: the study of investments.

He cannot even utter the "R" word…retirement. In fact, he has thought of writing a book called "Never Retire."

"I have observed in 92 years that the people who are most diligent in working do live many years longer than those who are lazy," Sir John says.

A few years back, he told me he was exercising by walking against the ocean current every day for almost an hour. Today he has cut back his exercise, he says, to just 25 minutes a day.

He is not only physically active, but his mental examinations of the market are sharp.

And his timing has been impeccable. He sold short the dot-com and NASDAQ tech stocks at the very height of the '90s boom, making another small fortune.

During the past few years, Sir John has been very concerned about the lack of quality investments available in the market, and he has repeatedly warned of the possibility of a major collapse in housing prices - and even a '30s-style run on the stock markets.

Here are some of Sir John Templeton's current insights:

Do the Opposite of the Crowd

My job was being paid by wealthy families to help them choose stocks and bonds. And my results were much better when I was working from here than from Manhattan, Radio City and Rockefeller Center. I had good results in New York. But when I came here, I had better results. The secret, I think, is that in order to buy stocks at a bargain price, you have to do the opposite of the crowd. When you're going to the same meetings with the other people in Manhattan, it's hard to be different.

Finding a Spiritual Way

About 12 years ago, I sold out. I had been helping a few thousand wealthy families and I did a lot of thinking that if I could tell you the rest of my life, I might help a few thousand wealthy families to become somewhat wealthier. But by selling out to my strongest competitor [Franklin Resources], I can now devote 100% of my time to trying to help people grow in a spiritual way. And that's a wide-open field - very few people who have any substantial amount of money contribute to helping people grow spiritually.

The Study of Religion

We are tying to persuade people that no human has yet grasped 1% of what can be known about spiritual realities. So we are encouraging people to start using the same methods of science that have been so productive in other areas, in order to discover spiritual realities.

For example, to clarify, my grandfather was a medical doctor. But he had never heard of a germ. That was only 140 years ago. The medical doctors began to use that as a science, and now we know a thousand times as much about your body as my grandfather new as a medical doctor.

Or take the field of communications. As recently as when Abraham Lincoln was assassinated only 140 years ago, nobody in Europe heard about it for 17 days, because communications was so inadequate. Now we have this enormous communication system around us all the time. There's 1,000 times as much communication as there was 140 years ago.

Again, this is due to applying methods of science to discover new modes of communication. So what my foundation is focused on more than anything else is to encourage people to donate to scientific research to help discover aspects of spiritual reality.

Managing My Own Money

I've spent 45 years inviting wealthy families to pay me a fee to help them pick the right investments. We didn't have any salesmen, so it was a slow process to grow.

But we got up to the stage where we were helping with about $23 billion worth of other people's money. Twelve years ago, I sold that entire operation - including this building - to a strong competitor in California called Franklin Resources, which was on the NYSE. Now they're helping with $88 billion in assets.

I don't have any connection with that forever. So my main activity now is just managing my own money. Because I think I'm going to do more good by using my wealth to encourage others to use scientific methods to find the answers to spiritual questions.

Finding Stock Bargains Never More Difficult

I do think it's interesting that in all my 92 years, I've never seen a time when it was so hard to find a bargain. I aided wealthy families by helping them find stocks that were selling at a small fraction of what the company was worth. But now, it's very difficult to find companies where you can buy the stock at a fraction of its value.

In all my experience, I don't remember a time when you had to search so diligently to find anything that was a bargain.

Bargain Stock Pick: KIA Is a Future GM

You always find some bargains, but just less than usual.

The last one I bought for myself is a company called Kia Motors. I bought one of their automobiles and it gives me better value than any other car I have ever owned.

They are now growing better than any other major automobile company, selling a great majority of cars outside South Korea in America and Europe and so forth, but they manufacture them in India, China and South Korea.

And yet I bought that stock recently at less than five times earnings. I think there's a chance - maybe not a probability, but a chance - that KIA Motors will be larger than General Motors 30 years from now.

Assess the Risks

In judging the value of the company, you have to consider: What is the risk that somebody might do something stupid? I think there's less risk in South Korea than there would be in China. There are some stocks selling at bargain prices - but the risk is greater.

Are Any American Stocks Undervalued?

I haven't bought any recently. I'd like to. I just buy where the bargains are.

Another Bargain in China

I guess the second one I would suggest is something that I invested in a few months ago. It's called Value Partners and is managed by a Chinese man in Hong Kong. It's a large organization - I have about $100 million in it. It's about five times that big all together.

They specialize in finding ways to buy stocks that are not well known in China and the region, and they invest in about 100 different companies in that area. They invest mainly in things I've never heard of.

Problems with China

It's difficult. The best Chinese companies don't have a public market and are not listed in America. Those that are listed in America are no longer cheap.

All that's true. But still, the rate of growth is so strong in China that I recently guessed that within a short period of 20 years, the gross national product of China will be larger than America's.

With four times the U.S. population, that is definitely achievable within 20 years.

The Dot-Com Crash and the Crash of '29

In 1929, the Dow Jones Industrial went down to 1/9 of where it had been. In this recent decline, it only went down 30%. The NASDAQ went down by 50%.

I am worried about exuberance. Like you just said - you'd like to have a house at Lyford Cay, but you have to pay four times what it costs to build. It's not the values - the prices are high.

Will There Be Another Crash?

Yes, but I've never been able to tell you when. If you find a way, let me know.

Well, I wouldn't use the word "crash." There will be cycles. I do think economics has developed a lot since 1932, so you shouldn't ever expect American prices to go down almost 90%, but I do believe there will be cycles where American prices go down 50%.

Factors Undermining the Market:
American Debt Is Highest Ever

American debt is the highest the nation's ever had. The federal deficit, the federal debt are the largest in history. But that's just the beginning.

Also, the unfavorable trade balance is the largest the nation's ever had.

And the national deficit - the shortage of taxes collected over what's spent - is the largest in the nation's history.

Americans were famous 30 years ago for being so thrifty. They were saving over 20 cents out of every dollar they earned. Last year, Americans saved less than 2 cents on every dollar.

All those things add up to the fact that there is almost sure to be a period of pessimism - a bear market. Not a crash, but a bear market.

The old rule of thumb for brokers was: The bear is about half as long as the bull. If I had to say when this bull market started, I would say 1990. So it's 14 years old.

The immediate future is that there are more dangers than I've ever known before. It's just more dangerous.

More Factors: The Weakening
Dollar and What Are Good Currencies?

Let's not use the word "good." Let's say "less risky" currency. The less risky currencies are probably South Korea, Singapore, India and New Zealand.

A couple of years ago, I bought Canadian strip bonds.

I haven't sold them yet, but I've stopped buying them, because they are up 25% from when I first got them.

And just within the last week, I made what is called a "straddle" - I sold short $25 million worth of Japanese money and bought long $25 million worth of South Korean money.

Why Currencies Are In Danger

The psychology all over the world is that people will not re-elect leaders who want them to be thrifty. The voters will elect the government that spends more money. And consequently, all money is risky. So I'm just taking the currency I think is especially risky and putting it into one that's less of a gamble.

In the United States, President Bush was the better of the two choices. Offhand, I can't say that there's a single nation where you can depend on the voters to want to be thrifty.

There is tremendous risk in Russia. But inflation is not a problem in Russia so much as it is elsewhere.

One emerging country is Singapore, which doesn't have a real democracy. So the government can afford to have a balanced budget.

The nation of Brazil has share prices that are quite low in relation to earnings. So I wouldn't rule out investing in Brazil. Although there's a lot of risk that goes with it, it always pays to buy bargains. Brazil is at bargain prices.

Bearish on Gold

Gold is too popular, and prices have already gone up. I remember when a British pound would buy an ounce of gold.

There's been a tremendous inflation in gold prices.

On Warren Buffett

I'm a great admirer of Warren Buffett. But he has been focused primarily on U.S investments. That is strange. To that extent, I think he's short-sighted - or small-sighted. Small-sighted, I think. If he had spent more time in foreign nations, he would be better off.

Housing Prices

Now the U.S. has this extraordinary thing - I think in some places we see 50% to 100% gains on the housing market. Other places across the country might be up 25% to 30% in just a matter of three to four years. Incredible gains.

When you invest in stocks, you get the same value all over. The same stock sells at the same value, no matter what nation you're in. But that's impossible in real estate. Real estate value depends on locality. If you're going to be a real estate investor, focus on location, location, location.

So when you're trying to invest in real estate, you have to do a lot of serious research on whether this location is likely to be popular in the long run.

That's why I wound up believing beachfront property is a good investment. I don't think there's ever going to be any more beachfront than there is now. Now people are getting bigger and the amount of money is getting bigger. So beachfront is pretty sure to go up in value.

Owning a home on the ocean is better than owning one that's not on the water.

But there are large tracts of oceanfront property still available in South and Central America in countries where there is a rule of law. You used to be able to buy land at very low prices. But still there are some good deals.

A 50% drop off in prices is quite possible.

I've never, never ever had a mortgage on any house. I learned that long before you were born. When I was a child in Tennessee, I watched so many people lose their farms because they had tiny mortgages, but they got to the end of their years, when it was impossible to earn a profit on the farm. They couldn't meet their payments and their mortgage was sold at auction in the courthouse.

I don't rule out borrowing money. But I think it's risky.

Positive Mental Attitude

Positive mental attitude helps in every way. It helps you physically, mentally, financially - in every way. In fact, I think you ought to focus on that, write articles on it.

As I said - when Abraham Lincoln was assassinated, nobody in Europe heard about it for 17 days. So there were more bad things happening 140 years ago than there are now. But today, communication is so enormous that we're flooded with news and there's a fault in human nature, even with you. If you're passing a newsstand and a stack of newspapers, one of which says 100,000 airplanes landed safely today and one that says one airplane crashed, you'll buy the newspaper that says the one airplane crashed.

Terrorism warps your thinking. It makes people think that there are a lot more troubles than there are. But there are less troubles than ever, and we don't realize, because we read about all the problems.

Pharmaceutical Stocks

I think they will continue to grow, but they're not cheap. They're one of the highest groups of stock.

Baby Boomers Retiring

This is enormous. But the adjustment is so easy. You just don't start pensions until 10 years later. That solves it all. It will happen. Nation after nation - not only America, but other countries - will just have to declare that pensions are going to start 10 years later.

I think it's inevitable. I don't know when, but within the next 20 years, almost every nation will have to change the law to say you can't get your pension as soon as you retire.

The Coming Health Crisis

I don't have answers to everything. I have thought about your big question here. And I think the answer is to say that no health insurance should cover the total cost of insurance. Health insurance should cover maybe 2/3, but not all. That would give people an incentive not to use health insurance excessively.

News Briefs

The Politicized Fed

Created in 1913, today the Federal Reserve is arguably the most dominant of all federal agencies - some say it wields more power than the White House itself.

With the authority to set interest rates and reserve requirements for member banks and thus much of the U.S. economy, the Fed's decisions affect every business and individual in the country - particularly today, when so many people are borrowing money.

Although the Fed is technically independent of partisan influence, in reality it has become increasingly politicized over the years.

In fact, the Washington Post reports that Fed chairman Alan Greenspan (who will go on to an unprecedented fifth term in office this January) met with former President Clinton a record average of 55.4 times a year and with President Bush 45.3 times a year during the first three years of Bush's administration. Greenspan also met with Vice President Cheney at least 17 times dating from early January 2001 and 11 times with Defense Secretary Donald Rumsfeld. Greenspan also meets frequently with Capitol Hill lawmakers - an average of 35.8 times per year.

This politicization of the Fed is troubling, as it could easily result in far-reaching economic decisions that aid the particular party in power but harm the U.S. economy.

Early Warning Indicator of Recession

Is there a scientifically proven way to predict that an economy is about to slip into recession?

In 1996, the New York Federal Reserve examined which indicators reliably forecasted recession. Of the twenty they looked at, only one was significantly reliable: An inverted yield curve.

An inverted yield curve occurs when short-term interest rates are higher than long-term rates - the opposite of a normal situation. The New York Fed found that when the yield curve is inverted for 90 days, a recession generally occurs in about 12 months.

In the United States, every time there has been an inverted yield curve, there has been a recession within one year.

Today in America, the yield curve is slowly flattening, but it is not yet negative. However, in England, the yield curve has recently gone negative. That could very well portend a not-too-distant negative yield curve for the United States as well.

The current parallels between the economies of England and America are striking: England has enjoyed years of soaring housing prices (which may now be peaking), with rising interest rates, little job growth (outside of government employment), ever-increasing government spending, slowly rising inflation, a flattening stock market and a large trade deficit.

If the "negative yield curve" effect holds true for England, that nation could be only six to nine months away from recession - and America might be just six months behind.

(Source for this article: John Mauldin, "Canary In A Coalmine,"The Daily Reckoning, 12-22-04)

ROE: Key to Steady Returns?

In an investment environment replete with a dazzling array of new gimmicks and systems, investment adviser Robert Morgenthau is a throwback to an earlier era.

Morgenthau, the great-grandson of real estate magnate Henry Morgenthau, bases his investment decisions on "return on equity" (ROE). As Forbes reports, "to Morgenthau, old-fashioned ROE is a better investment tool than betas, style boxes or any of the mumbo jumbo that fellow managers throw around. It is the first metric his firm, NorthRoad Capital Management, uses when picking large-company stocks (minimum market capitalization $10 billion) for its $1.2 billion of individual and institutional money."

Step One for NorthRoad is screening companies with an average ROE of 10% for the last five years. Morgenthau makes sure that ROE isn't exaggerated by one-time events like sales of assets, debt or stock buybacks.

Step Two is examining gross profit margin and EBIT margin (earnings before interest and taxes as a percentage of sales).

This process has resulted in a mutual fund that produces steady, if modest, annual returns, currently in the 10 to 12% range.

Current stocks in Morgenthau's portfolio include Barclays, Cadbury Schweppes, Diageo, Fannie Mae, Heineken, Johnson & Johnson and Sanofi-Aventis.

(Source: John H. Christy, "The Classic Approach,"Forbes, November 29, 2004.)

Oil Terror Premium: $15

Saudi oil minister Ali Naimi says 'fears of shortages and geopolitical issues in the Middle East' are inflating oil prices by as much as $15 a barrel.

We believe Naimi is right, and if fears subside in the next few months, oil could return to the $35-a-barrel range.

However, if the situation in Iraq continues to deteriorate, Iran announces it has nuclear weapons or there are significant terrorist attacks against Middle Eastern oil pipelines and wells, oil will likely head north of $60 a barrel.

If you missed a past issue of Financial Intelligence Report, send an e-mail to fir@newsmax.com to request the report you want. We will send you the report and charge your credit card.

Issue 1: Crisis Investing: Protect & Grow Your Wealth

Issue 2: High Yield Dividend Stocks

Issue 3: Protecting Yourself Against the Next Market Decline

Issue 4: Sector Investing: How to Beat the S&P Every Year

Issue 5: Gold: The Ultimate Insurance

Issue 6: Oil: The Critical Key to the World Economy

Issue 7: The Other Warren Buffett: Meet Walter Schloss

Issue 8: The Dangerous Dollar: Protecting Your Wealth by Investing Abroad

Issue 9: David Tice: Protect Yourself from the Coming Bear Market

Issue 10: Interest Rates and Bonds What You Need to Know

Issue 11: The Baby Boomer Crisis Looms: Prepare Before It's Too Late

Issue 12: The Coming Baby Boom Storm: Part II The Pension Crisis Is Already Here

Issue 13: Royalty Trusts Pay High Yields

Issue 14: Wayne Rogers Beats the Market - So Can You

Issue 15 (Jan. '05): 2005: Bush's Boomlet

Cost: $7.97 per past issue

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