"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."
BackgroundJohn Marks Templeton was born in the USA in 1912. He attended Yale University and went on the Oxford University in the UK as a Rhodes Scholar and earned an M.A. in law. While in college, Templeton studied under one of the forefathers of value investing, Benjamin Graham. In 1937, Templeton co-founded an investment firm that became Templeton, Dobbrow amp; Vance.
He is most famous for his controversial investment in 1939, when he bought $100 of every stock trading below $1 on the New York and American stock exchanges. He invested around $10,400 in 104 companies. In spite of 34 companies going bankrupt four years later, he sold the portfolio for more than $40,000.
His investing style can be summed up as looking for value investments, what he called quot;bargain hunting,quot;by casting a wide net, one that spanned the world. In 1954, he launched the Templeton Growth Fund, based in Nassau in the Bahamas. The Templeton Emerging Markets Fund was the first emerging markets fund available to U.S. investors. In 1992 he sold his company Templeton Growth Funds to the Franklin Group.
Templeton believed that there were no simple formulae to finding good stocks, with over 100 factors that can be considered at times. However, Templeton did have four criteria which he considered particularly important.
- P/E ratio
- Operating profit margins
- Liquidating value
- Consistency of growth rates
Definition of a Templeton ScreenTempleton placed a great deal of importance on qualitative factors: quality products, cost controls, and the intelligent use of earnings by management. However, some indicative quantitative metrics for a John Templeton Screen might be:
- Price-earnings ratio below the 5 year average - "Purchase only when you can pay less than it is worth today, and only if you believe that it will be worth more tomorrow."
- Price-book ratio below the industry average
- EPS growth positive for the last year and the last 5 years - "Search for bargains amongst quality stock"
- Estimated future EPS growth rates must be positive and greater than the industry average. For Templeton, quot;future probable earningsquot; needed to be favourable.
- The operating margin for the last 12 months is positive and above than the industry average
- Total assets/total liabilities is less than the industry average.
Does it work?Sir John's Templeton Growth Fund posted a 13.8% annualized return from 1954 to 2004, well ahead of the S&P 500's 11.1% CARG over the same period. The AAII implementation of this screen has seen a 10 year return of 7% versus 0.7% for the Samp;P 500. However, this is only based on US domestic equities which is not really representative given Templeton's global mandate.
Watch Out forWhen asked where the best investment prospects lied, Templeton pointed that one should instead ask quot;where is the outlook most miserablequot; to find the most promising stocks. He also argued that quot;the time to sell is when you have found a much better bargain to replace it”.
SourcesYou can read Templeton’s 16 Rules of Investing on the Franklin Templeton website. Templeton wrote more extensively on spiritual matters but, for those more interested in his investment philosophy, Templeton’s niece has summarized his early life and investment thinking in “Investing the Templeton Way” which is available on Amazon. There’s also “Spiritual Investments: Wall Street Wisdom From The Career Of Sir John Templetonquot; by Gary Moore and Global Investing: The Templeton Way which was a series of interviews with Sir John in the 1990s.
- Wikipedia on John Templeton
- Investopedia on John Templeton
- The best 16 rules of investing you will ever read
- Investing the Templeton Way Book Review
- Forbes Article: John Templeton’s Global Value Quest
- Money Masters of Our Time
- Value Walk on John Templeton