Sir John Templeton famously stated, “the time to buy is at the point of maximum pessimism”.

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The most famous of Sir John Templeton’s market aphorisms was that “the time to buy is at the point of maximum pessimism”, although I believe he has a good claim also to be the true originator of the saying that the four most dangerous words in investment are “this time it’s different”.  Does he think that we have reached such a point in the credit crisis? Alas, we shall never hear his views again, following his death two weeks ago at the grand age of 95.

Is there anything to add to the many words of wisdom that have already been written about this remarkable investor turned philanthropist? Too many of the books written about him, in my view, have verged on hagiography, or were written by acoloytes in an effort to spread his views about the importance of the spiritual dimension to life, or some other cause that he held dear in the latter half of his life.

Having spent many months researching his life and investment methods with one of his former employees, the Edinburgh fund manager Dr Sandy Nairn, one thing that immediately struck me was how constant Sir John’s investment philosophy had remained throughout the course of his long and distinguished career, initially as an investment counsel in New York and latterly as founder and guiding spirit of the mutual fund business which he sold in 1992, but which still bears his name today.

One of the sources that Dr Nairn and I looked at in our researches (still, sad to relate, a work in progress) were the regular letters to investors that Sir John sent to his clients as an investment counsel.  In them, from the very beginning of his business in the early 1940s, could be found all the core beliefs that have since come to be associated with his approach to investing. The importance of value, the need for patience, the power of contrarianism are all clearly foreshadowed in these crudely typed but masterfully simple letters.

Another striking item in the archives was a memo to his colleagues, dated 1953, in which he gave 11 tips on how to keep clients happy. For all his idealism and personal humility, Sir John was also a shrewd and profoundly pragmatic businessman. (“Each of us should keep in mind” he writes “the strong psychological effect of repetition. Pointing out a good record once does not have nearly the effect of pointing out the same record four or five times”).

As a stock market investor, what marked him out most, according to those who worked closely with him, was the simplicity and consistency of his value approach, which combined forensic ability at the stock specific level with an uncanny ability to see – often well ahead of the crowd - the emergence of big macro themes.

When Dr Nairn and I visited him in his office in the Bahamas in June 2003, for example, he deflected our questions about the stock market to tell us that his major concern was the emerging “bubble” in real estate.  “In most nations in the world, real estate prices are way above the cost of reproducing the building, and that’s dangerous.  This is a very big bubble because the amount of money in real estate is several times as big as it is in stocks”.

A good subject for research, he suggested, would be “what governments would do when real estate prices go down 50%”. That was the question that interested him, not least because he was sure it would lead to some money-making opportunities once the bubble burst. It led him on to recall that in the 1930s his father made more money out of “sharecropping”, buying land from bankrupt farmers and giving it back to them in return for a share of the profits, than he did from his day job of practising law.

Careful analysis of the performance track record of the Templeton global mutual fund shows that over the course of his 40 plus years in charge of the fund he outperformed the world index by slightly over 3% per annum, a remarkable achievement over such a long period of time, not least because it was achieved with below-market levels of volatility. As so often with genuine value investors, for whom the risk of losing clients’ money is an over-riding concern, the bulk of the outperformance in his funds came through bear markets and other slow periods.

Many widely held opinions about Templeton’s investment record turn out to have been over-simplifications. For example, while he is famous for buying into the Japanese stock market in the 1960s when no other investors would touch it, less well known is that he sold out many years before the Tokyo market peaked in 1989 – a decision that caused him, ever the perfectionist, a lot of soul-searching thereafter.

Equally striking is that, despite his own deep-seated value philosophy (bordering at times on parsimony), he would happily give his own money to other professional investors with ideas and approaches that were totally at odds with his own. He once commissioned research into the influence of sunspots on investment markets. There was never just one way of doing things. The reason he remains one of the truly great investors of the 20th century is that he never forgot (1) that the money he was managing was someone else’s and (2) that there are many more important things in life than investment success.
 
 


Jonathan Davis
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