September 9, 2009
Ronald R. Redfield CPA, PFS
Notes to book “The Templeton Touch” 1st edition - 1983
Written by: William Proctor
Sir John Templeton (November 29, 1912 – July 8, 2008) was an American-born British stock investor, businessman and philanthropist. He attended Yale University and was selected for membership in the Elihu society. Templeton graduated in 1934 near the top of his class. He attended Oxford University as a Rhodes Scholar and graduated with a M.A. in law.
I often keep notes such as this as a future reference. These notes are hardly all inclusive. These are notes that I would like to remember. A reader of the book or these notes may find them to be unimportant to them. Or perhaps, someone would read the book, and find an entirely different set of notes to be important, whereas I did not include such notes. I don't necessarily agree with all of the notes and what is written below. Yet, I did find all that I wrote below to certainly be food for thought.
Overview of key ingredients for a successful investment strategy:
a. Self-reliance - Think and act for yourself.
b. Reasonable risk-taking.
c. A drive toward diversity.
d. Bargain hunting mentality - "Looking for a good investment is nothing more than looking for a good bargain." Sir John Templeton
e. Broad social and political awareness. "Avoid investing in those countries with a high level of socialism or government regulation of business. Business growth depends on a strong, free-enterprise system." "If you are thinking of buying shares in a company that is likely to be the target of nationalization, you're not likely to get fair value if it is nationalized. Some nations actually confiscate a company and give no compensation." Sir John Templeton
f. Flexibility. The author claims always try to examine seriously what has done well for you for several years. With that, consider the possibility that the past few years are not what will serve well in the future.
g. A willingness to devote large quantities of time to studying potential investments and developing sound money-making strategies.
h. A willingness to "retreat" periodically from daily pressures.
i. An ability to develop an extensive friendship network.
j. Patience. "One of the reasons our performance is said to be the best investment record in the world on a twenty to twenty five year basis, is that we always tried to look ahead - and the long-range view requires patience." Sir John Templeton
k. Thought control. What he means by this is to have self-control and self-discipline, and control distracting extraneous influences. He suggested to keep a relaxed frame of mind and avoid the anxiety and pressures that can accompany chronic lateness. He put heavy stress on punctuality.
l. Positive thinking.
m. Simplicity. "When looking for a good stock, just remain "simple-minded." Sir John Templeton
Here are several of his "simple principles." "If you buy what other people are buying, you're going to have the same performance as other people." "Buy the best bargains." "If you are going to buy the best bargains, you have to buy what others are selling." Sir John Templeton
n. Great intuitive powers.
Other various items:
2. He always carried reading materials with him. I like to do this as well. If I get stuck in traffic, waiting for an appointment, or just deciding to hang and read somewhere. Templeton claims that the short time spent reading bits and pieces, adds up quickly.
3. He liked to watch the insiders. Are companies buying up there own shares? Are insiders buying or selling? One can expand this and look at the issuance of stock by corporations. Are companies being too generous to employees via stock options? Are companies counting on employee stock options to generate cash flow? Hence, watching corporations and insiders is clearly something that needs to be analyzed.
5. The author claims that Templeton "occasionally invested in an electric utility company, but only when the price of the company was so low that, despite inflation, the investment was a true bargain."
6. The author claims that Templeton suggested the following guidelines for protection from inflation.
a. Invest in nations which have a record of relatively low inflation rates.
b. Divest yourself of cash, or of anything denominated in cash, such as bonds, mortgages and life insurance.
c. Maximize protection by investing in equities, including real estate and stocks.
7. Templeton was a student of Benjamin Graham. Here is a page we keep on Graham. http://rbcpa.com/benjamin_graham/ben_graham.html
8. How long he held a stock was meaningless. When looking at history, it seems he held stocks for around 6 years. Hence his turnover rate would be around 17%.
9. Proctor claims Templeton kept a close watch on everything that passes before his eyes or drifts into range of his hearing.
The time tested Maxims of the Templeton Touch:
1. For all long-term investors, there is only one objective - "maximize total return after taxes."
2 . Achieving a good record takes much study and work, and is a lot harder than most people think.
3. It is impossible to produce superior performance unless you do something different from the majority.
4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
5. The only way to get a bargain is to buy what most investors are selling.
6. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude, even while offering the greatest reward.
7. Bear markets have always been temporary. Share prices turn upward from one to twelve months before the bottom of the business cycle.
8. If a particular industry or type of security becomes popular with investor, that popularity will always prove temporary and , when lost, won't return for many years.
9. In the long run, the stock market indexes fluctuate around the long-term upward trend of earnings per share.
10. In free-enterprise nations, the earnings on stock market indexes fluctuate around the replacement book value of the shares of the index.
11. If you buy the same securities as other people, you will have the same results as other people.
12. The time to buy a stock is when the short-term owners have finished their selling, and the time to sell a stock is often when the short-term owners have finished their buying.
13. Share prices fluctuate much more wildly than values. Therefore, index funds will never produce the best total performance.
14. Too many investors focus on "outlook" and "trend." Therefore, more profit is made by focusing on value.
15. If you search worldwide, you will find more bargains and better bargains than by studying only one nation. Also, you gain the safety of diversification.
16. The fluctuation of share prices is roughly proportional to the square root of the price.
17. The time to sell an asset is when you have found a much better bargain to replace it.
18. When any method for selecting stocks becomes popular, then switch to unpopular methods. Too many investors can spoil any share-selection method or any market-timing formula.
19. Never adopt permanently any type of asset or any selection method. Try to stay flexible, open minded and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and the methods of your selection.
20. The skill factor in selection is the largest for the common-stock part of your investments.
21. The best performance is produced by a person, not a committee.
22. If you begin with prayer, you can think more clearly and make fewer stupid mistakes. (Ron writes: Perhaps one can substitute the word "prayer" for inner peace, clear mind, meditation and relaxation.)
These are notes of mine from a different Templeton book, "Investing the Templeton Way." These notes were from October 9, 2008.
I am very quickly reading "Investing the
Templeton Way." As I was reading, I was asking myself, "Would Sir John be buying
now?" He avoided the US stock market in late 2003, because of reasons that we
are seeing now. If he was alive, would he now invest?
Chapter 4, page 87... "Uncle John found the Japanese market of the 1960's so attractive, in addition to its obviously superior growth rates and low P/E ratios. "Fluctuations in stock prices are too extreme." "There is not enough information." She went on to write, "Believe it or not, these are direct quotations.
At first, I thought for sure he would buy now. Yet, I reread what is written and what we do not have right now are "superior growth rates." Yet, we are at severe pessimism. If you look at sentiment indicators, you will see pessimism. http://www.market-harmonics.com/free-charts/sentiment/invest... There are currently 53% Bears and 37% Bulls. Each Saturday, Barron's prints the sentiment indicators. If I am not mistaken, last Saturday's was on the high side of Bears vs. Bulls. But that is too macro. I guess I was just saying, we see pessimism everywhere. At least that is my perception. You don't know who to trust. Is GE going be cool tomorrow?) And I don't mean as a stock. I follow some of there bonds, and they have taken a swell hit recently. In all cases that I know of , cost of capital is up, way up. Yet, won't lenders be able to charge for the excess cost once some type of liquidity enters the market?
The author of the Templeton book writes (John's niece), "When people start to lose money in a stock, they instinctively "stop the bleeding" by selling the stock. There's no way around that knee-jerk reaction, but it is often the wrong response when one is investing in stocks."
"Bargain hunters who consistently buy stocks for less than they are worth need to get used to the idea of people not confirming or agreeing with their actions."
"The point is that investors can create negative biases against stocks, industries, stock markets, and asset classes. Those biases serve as a set of blinders that keep investors from even considering bargain ideas."
Yet, now perhaps is different this time, since we really don't know if the system and/or banks are solvent. Yet, whenever I hear "it's different this time," it typically isn't. The constant confusion.
The author explains that when you start hearing that stocks are dead, they probably aren't. Yet, we here on CNBC many calling a bottom, maybe we haven't heard that stocks are dead, yet. Well, when it really is a bottom we will probably here something similar to what the author wrote, "If and when you read these statements in the future, they should activate every alarm, bell and whistle in your bargain-hunting soul."
Are P/E's cheap enough now. You have some companies with low double digits, perhaps they need to be brought down to mid single digits. Then, you could have more of a retracement. According to the book on page 115, the 10th lowest P/E ratio was 9.2 in 1924. I think I hold some stocks whose normalized earnings are in that area. Yet, AIG had metrics like that. 1979 was the cheapest P/E ratio year with 6.8X.
Templeton reminds us to use Price/Book Value, along with Price/Replacement Value.
Short the bubbles.....Are there any bubbles left? Commercial real estate? Banks that hold commercial real estate with excessive leverage?
'Crisis is Opportunity' is one of the chapters. I prefer the saying, "Crisis is the seed of opportunity."
Apparently Templeton liked using leverage ratios.
EBITDA Coverage Ratio = earnings + interest expense + taxes + depreciation / Interest Expense. He calls 6 a conservative benchmark.
He then uses Total Debt to Trailing 12 Months EBITDA and feels a ratio of 3 or less is a conservative benchmark.
I think with above and almost everything, you can just refer to and properly apply Graham's 'Security Analysis' and "Intelligent Investor." If my memory is correct, chapters 8 and 20 of Intelligent Investor is terribly useful per Buffett.
Always compare returns to bonds. When valuing real estate, look at the replacement cost of the asset.
It's getting late. I need to one day reread the chapter on China Is history repeating itself with China's build-out? Will China be able to utilize her factories without massive world over-consumption. Is China big enough to absorb all anyway?
side note..... I keep thinking GM and Ford seem financially sunk. A reorganization? So goes GM, so goes America? Is GE going to get funky on us? Will Citi go bust and get her long needed sleep?