John Templeton was an investor and fund manager considered by many as one the greatest stock-pickers of all time. His approach to investment should be recognizable to any value investor -- he was a great believer that “the time of greatest pessimism is the best time to buy.” As well as being active in the U.S. and European stock markets, he looked for value outside the developed markets, considering himself to be a global bargain hunter. In this interview, he explained some of the tenets of his investment philosophy.
On playing market expectations
At the time of this interview, Templeton had a large position in Royal Dutch Shell (RDS.A)( RDS.B) at a time when the market was expecting the price of oil to fall. When quizzed on this, Templeton replied:
“Royal Dutch Petroleum is the largest holding in our mutual funds because at the present price, it is selling at only four times what we think it will earn this year and we estimate that in the long run it will earn more. It’s selling for less than half of what it could liquidate for, and only about three times its present annual free cash flow and pays a good 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 the low point for share prices is when most investors are expecting bad news, not after the bad news comes out. Now, it is possible that it might 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.”
The first part of this statement is standard value investing analysis. But it is the second part that interests me. It is virtually impossible to forecast large-scale macro events like changes in the price of oil, but what you can do is look at the market’s expectations and plan accordingly. Buy the rumor, sell the news. If everyone has already priced in the possibility that oil prices will be low, then in the long run there is a decent probability that they will rebound. Of course, that alone is not enough to make a play, which is why Templeton also looked at the fundamental factors affecting Shell’s share price.
On the value of staying away from the market
When asked how he managed to run billions of dollars worth of investments from the comfort of his office in the Bahamas, Templeton said that it actually made it easier to make contrarian decisions:
“We’ve found that in the 22 years we’ve lived here, the performance of our mutual funds is better than in the 25 years we were managing them from Radio City in New York. We tried to [do things differently in New York], but we went to the same meetings as other security analysts and the people who speak there are so sensible, that we can’t help being influenced. It’s much easier to be odd when you’re a thousand miles away.”
Even the most intellectually independent individuals are likely to be swayed by their peers. While you may think that to be a great investor you will need to get as much data as possible, and be constantly tuned in to every source of information out there, the reality is that 95% of that is just noise that will either confuse you, or worse, make you abandon your contrarian picks. By creating physical (and intellectual) distance from the herd, you can focus on the things that actually matter. Sometimes, less is more.
Disclosure: The author owns no stocks mentioned.
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