The other day I bumped into a video of rare interviews that Adam Smith did with John Templeton, Warren Buffett (Trades, Portfolio) and Robert Wilson in the mid-1980s.
Although the interviews took place more than 30 years ago, the wisdom is timeless. Below are the transcripts I made for the interview parts (AS stands for Adam Smith, JT for John Templeton and RB for Robert Wilson). Please let me know if you find the transcripts format helpful and would like me to continue publish articles containing transcripts of interviews or other videos.
John Templeton interview
AS: It’s very pleasant here in the Bahamas, but how can you run a couple of billions dollars’ worth of investment from a surrounding like this? Don’t you have to be on Wall Street?
JT: We did move here (to the Bahamas) because it is so very pleasant. We now have found that for the 22 years we lived here, the performance of our mutual fund is better than the 25 years when we managed from Radio City in New York.
AS: Well how do you account for this? You could work from Radio City and do things differently.
JT: Well, we tried to. But we go to the same meetings as the other security analysts and the people who speak are so sensible that we can’t help being influenced. It’s much easier to be odd when you are a thousand miles away.
AS: You have always said you should buy when the herd is gloomy and sell when the herd is happiest. How do you know when the herd is gloomy?
JT: Sometimes they are, and of course we make hundreds of mistakes all the time. But we have found from the very time we started our investment consul operation 44 years ago we published the motto of our business: to buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest rewards. And this applies not only to stock market cycles but it applies to particular industries and types of stocks. Basically we determine that by finding out why it’s selling at a depressed price. If a stock is selling at a quarter or a half of what it’s worth, then it’s a bargain and most likely it’s unpopular with other investors.
AS: Your biggest position is Royal Dutch, but everybody is expecting oil price to go down. Does that bother you?
JT: Oh yeah, of course it bothers me, but there are so many other factors. We do own a very large amount; in fact, it’s the largest holding in our mutual fund because at the present price, it’s selling for only four times what we think it will earn this year and we estimate that in the long run, it will earn more, and it’s selling for less than half what they could liquidate for, and only about three times its present annual free cash flow and pays a little dividend. So for many many reasons, it looks like the best bargain in the energy industry. It’s very widely expected that there will be a decrease in the price of oil, and if the low point for share price is when investors are expecting bad news, not after the bad news comes out. It is possible that it may get lower. But we are long-range investors; our average holding period is six years. So in the long run, it will be worth much more.
AS: A couple of years ago, you were heavily in Japan. And now you brought all that money back in the United States. Is this temporary?
JT: Yes it is temporary. We are worldwide bargain hunters. We search all over the world and make estimates of the values of each corporation and buy those shares that have the lowest market price at the time in relation to our estimated value. At one time, that was Japan. In that nation alone, we have over 50% of our total investments because we were buying the very finest companies at three times earnings, some at two times earnings. But now, instead of 50% in Japan, we are less than 3% in Japan because, meanwhile, the prices there have gone up. The Dow Jones Industrial Average in Japan is now over 25 times earnings. And the index of smaller companies in Japan over 41 times earnings, so that now there are very difficult and very few bargains to be found there and more bargains to be found in America and other nations.
AS: What countries around the world would you pick as the best shot?
JT: We never approach it that way. Almost all securities analysts ask themselves which nation and which industry before they make a selection. If no one were doing it, that would be a good method. But since the best results are obtained by [buying] in those areas where other security analysts were not working, we just say we would buy the best bargains we can find and later find out what nation it’s in. Now approaching from that end, we have found an unusually large amount of bargains in the U.S, also in Canada, in Australia and in the Netherlands.
AS: Three years ago, you said you could see the Dow Jones Industrial at 3,000 within five years. Which was almost a triple and certainly a double. You have two years left on that prediction. Do you hold by it?
JT: We keep changing. Well what I said, the chances are as good as even that it would happen. And I’m saying today that the chances are as good as even that the Dow Jones someday might be above 3000 before the next presidential election three and a half years from now. We based it on a very long list of reasons, partly based on valuation, partially based on cash available.
AS: How do you feel personally about the current takeover mania?
JT: It’s an illustration that the share prices are among the best bargains in the world. This takeover mania proves the fact that corporations on the stock exchange are selling for much less than what they are worth. Also the same thing is proven by the fact that more corporations than ever are buying their own shares. Those are evidences that values are unusually low now.
AS: How do you distinguish yourself from Philip Fisher or Warren Buffett (Trades, Portfolio)?
JT: Probably in the fact that I look worldwide more than the others do and search for a wider variety of areas. Probably because I’m willing to make estimates of the earnings power further into the future than others are. And certainly because I rely on prayer in everything we do. We open all our directors meeting with prayer. We pray about every decision we make. In the long run, that means we’ll still make hundreds of mistakes but less mistakes than otherwise. We try to follow Solomon and pray for wisdom.
Warren Buffett (Trades, Portfolio) interview
AS: What do you considered the most important quality for an investment manager?
WB: It's the temperament. You don't need tons of IQ in this business. I mean you have to have enough of IQ to get from here to downtown Omaha but you do not have to be able to play three dimensional chess or being the top player in a bridge league. You need a stable personality and temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls; it's a business where you think. Ben Graham would say that you're not right or wrong because a thousand people agree with you and you're not right or wrong because a thousand people disagree with you. You're right because your facts and your reasoning are right.
AS: What are you doing that's different than 90% of the money managers who were in the market?
WB: Certainly most of the professional investor focus on what the stock is likely to do in the next year. There are all kinds of arcane methods of approaching that. But they do not really think of themselves as owning a piece of the business. The real test of whether you're investing from a value standpoint or not is whether you care whether the stock market is open tomorrow. If you're making a good investment in a security, it shouldn’t bother you if they close down the stock market for five years. All the tickers tells me is the price and I can look at the price occasionally to see whether the price is outlandishly cheap or outlandishly high. But prices don’t tell me anything about the business. Business figures themselves tell me something about the business. I would rather value a stock or a business first and not even know the price so that I'm not influenced by the price and establishing my valuation and then look at the price later to see what its way out of line with my valuation.
AS: How can you stay away from Wall Street?
WB: if I were on Wall Street I'd probably be a lot poorer. You get overstimulated on Wall Street. You hear lots of things. You may shorten your focus and a short focus is not conducive to long profits. Here I can just focus on what the business is worth. I don’t need to be in Washington to figure out what the Washington Post newspaper is worth. And I don’t need to be in New York to figure out what a company is worth. It’s an intellectual process and the less static there is in the intellectural process really the better off you are.
AS: What is the intellectual process?
WB: Intellectual process is defining your area of competence in valuing business and then within that area of competence finding whatever sells is the cheapest price in relation to value. And they're all kinds of things I'm not competent to value and there are a few that I am competent to value.
AS: Have you bought any technology company?
WB: No I haven’t.
AS: In 30 years of investing not even one?
WB: I haven’t understood any.
AS: So you haven't ever owned for example IBM (IBM, Financial)?
WB: Never owned IBM. It’s a sensational company but I haven’t owned IBM.
AS: So here is this technological revolution going on and you haven’t participated in it?
WB: No, gone right past me.
AS: Is that all right with you?
WB: It’s OK with me. I don’t have to make money in every game. I don’t know what the cocoa bean is going to do. There are kinds of things that I don’t know about. And that may be too bad but why should I know about them? I haven’t worked hard on them. In securities business every day you have thousands of the major American corporations offered you at a price that changes daily and you don't have to make any decision. Nothing is forced upon you so there are no called strikes in the business. The pitcher just stands there and throws balls at you and if you're playing real baseball and it's between the knees and the shoulders you either swing or you going to get a strike call and if you get too many calls on you and you're out. In the securities business, you sit there and they throw U.S Steel at 25 and General Motors at 16 and you don’t have to swing at any of them. They may be wonderful pitches to swing at but if you don't know anything about them, if you don't have to swing, and you can sit there and watch thousands of pitches, and finally got one right and you understand and then you swing.
AS: So you may not swing for six months?
WB: I may not swing for two years.
AS: Is it boring?
WB: It would bore most people and certainly boredom is a problem with most professional money managers if they sit out an inning or two. Not only do they get somewhat antsy, but their clients are starting to yelling swing. That’s very tough for people to do.
AS: Your approach seems so simple. Why doesn't everybody do it?
WB: I think partly because it is so simple. The academics, for example, focus on all kinds of variables. The data is there, so they focus on whether you buy stocks on Tuesday and sell them on Friday you are better offer, or if you buy on election and sell them another years you are better offer. Or you buy small companies. There are all these variables. Because the data is there and they’ve learned how to manipulate data. And as a friend of mine says, to a man with a hammer everything looks like a nail, and once you have these skills you just are dying to utilize them in some way. But they aren't important. If I were being asked to participate in a business opportunity would it make any difference whether I bought it on a Tuesday or a Saturday or on an election year? It’s not what a business man thinks about buying businesses. Then why think about it buying stocks? Because stocks are just pieces of businesses.
Robert Wilson interview:
AS: John Templeton lives his flower garden in the Bahamas and Warren Buffett (Trades, Portfolio) lives in Omaha Nebraska and both of them say that living out of New York keeps them out of everyday flow of overload of information. How do you survive in New York?
RW: Well in the first place I would be bored to death simply living in either the Bahamas or Omaha and so the most important thing is to enjoy life but secondly, I never really did that all that well in the market until I came to New York. Unlike these other distinguished gentlemen, I am not an original thinker. I tend to rely on other people to feed me, if you will, ideas and I'm very interested and what a lot of other people are thinking. And more bright people are in New York in this business than anywhere else. I think the difference really is that they are original thinkers and I'm not. I’m a derivative thinker.
AS: A lot of people say you can’t beat the stock market consistently, but you've beaten the market and consistently. What’s the principle?
RW: My philosophy is to invest in stocks where earnings are growing rapidly at the time when I'm investing in them, conversely to short stocks, earnings are contracting rapidly or when earnings are illusory for one reason or another. I lead a rather placid personal life; it's been a quiet pleasant life. And the market provides to me the excitement and drama. I like to be in things that are have a great potential for huge gains or in the case of shorts great potential for losses. I often tell brokers who give me ideas, I say I'm not interested in buying it if it can't go down 30%. I'm not interested in stock with limited downside risks. If the downside side risk is limited then the upside potential is probably also limited. So part of it is a way of getting by carrying the excitement of another life, a rather placid life.
AS: How do you find the companies that have the rapid growing earnings?
RW: I tend to sit at my desk waiting for people to call me.
AS: But rapidly growing earnings, those companies are prizes if they are scan for my computer screen. Mutual fund look for them -- isn't this quality already reflected in the price of each of those stocks?
RW: The only way one makes money in the market is when the markets perception of the stock changes, so basically I am looking for stocks where perhaps the earnings have not started to improve yet, or if they have started to improve, they are going to accelerate. There has to be an improved perception of that particular stock and that company to make money, so you're absolutely right about that. To buy a stock simply because earnings have been going up 30% a year for the last three years and to just do that on a rote bases could be very good way to lose money fast because when the earnings slow down the stock could easily go down
AS: Tell me about the short side. That's what characterizes year was a little bit. Haven't you had an experience on the short side there was at least chastening?
RB: Yes indeed, during the 1970s when the stock market was by and large going down, I shorted I would think a thousand different stocks and they have been wrong about five times. I mean I was almost god-like in my ability to pick shorts and you know what happens to god's who inhabits earth rather than the heavens -- they begin to think that just because they shorted a stock, they will go down, and this happened to be in the case of Resorts International, which I shorted because I did not think Atlantic City would amount to anything as a gambling center. And the earnings came in and I was just so sure that because I had shorted it I would be right. It was hubris started to run riot and it’s a very human thing and it happens to all of us. And I think it particularly happens on Wall Street. We tend to, in this business, to be terribly right for a while, or terribly wrong, and no matter how long or how often we have been wrong in the past when we had the period when we are right, it’s so wonderful that we think we are so good. And well I lost a great deal of money and I made the front page of the Wall Street Journal. I’d often aspired to be on the front page of the Wall Street Journal but not the way I made it.
AS: If a young person come to you and said when I'm your age I want to be as rich as you are or where you are today -- how do I do it? What would you tell him?
RW: Money in the abstract, not what money would buy, has to be the important thing in the world. It is not the most important thing in the world for the vast majority of the people.
AS: You have an object in mind in your investing career?
RW: Yes I want to make a billion dollars. I'm not at all sure I'll be able to do it but I'm going to try.
The important thing is to try to do it.
Concluding Words:
AS: I think you can see that as different as these three remarkable investors are, they have some traits in common. They have Independence of minds. They are not afraid to act alone when the crowd is going the other way. They trust their own perceptions. They stick to the style they know and they are all so smart they all probably would have succeeded at anything. And finally, and most significantly after decades of investing, they still find it so much fun they can rarely stand to do anything else.
