Sir John Templeton Legendary Investor
Sir John Templeton, aged 95, passed away yesterday, July 8th, 2008. John Templeton was a legendary contrarian investor and a tireless philanthropist. He will be greatly missed by all who knew him and of his many accomplishments.
In February of 1987, the Templeton Emerging Markets Fund debuted on the New York Stock Exchange. Very few investors in those days cared to dabble in emerging market stocks. After the stock market crash in October of that year few investors indeed cared to dabble in emerging market stocks. The Templeton Emerging Markets Fund, which traded around $14 at the end of its first trading day, lost more than half its value and fell to $6 by the end of the year. Not exactly a great start for a new fund.
For Sir John Templeton that opening performance was not a problem. This super contrarian seemed to relish adversity. He built a career – and a huge fortune – by investing during what he called “the moment of maximum pessimism.”
In 1972, Sir John established the Templeton Prize to honor “a living person who has made an exceptional contribution to affirming life’s spiritual dimension, whether through insight, discovery, or practical works.” The Prize aims, in Templeton’s words, to identify “entrepreneurs of the spirit.” Mother Teresa was the first recipient, fully six years before she won the Nobel Peace Prize. “What we say about investing,” Templeton once remarked, “isn’t as lasting as what we say about spiritual matters.”
So you tell me, was John Templeton a legendary investor or simply a living legend? Here are a few remarks about Sir John Templeton from a professional stock trader and investment fund manager.
“When I think of Templeton’s influence on the investment world I think of two things: his willingness to invest outside the United States and his belief that people focus too little on the opportunities problems create. Templeton was completely comfortable exploring the stock exchanges of South Africa, Japan, Switzerland, Australia, and plenty of others. He helped drive home the idea that quality investments don’t have to mean well-known, large, blue chip, U.S. companies. He took pride in people not knowing a third of the names in his portfolio.
“He was sometimes seen as an optimist, because he had a strong belief that investors generally pay little attention to the opportunities problems create. In a recent foreword, which must be the last thing he published, he called the present time one of “great hope and glorious promise, perhaps a new golden age of opportunity…” which seems remarkable given all the bad developments in recent years. But, it’s perfectly understandable given Templeton’s worldview. I think this is a very important idea, more so now than ever. It’s easy to get scared out of the market, but times like this are
when you plant the seeds for your next big winners. That is as long as you retain a bit of courage and research your investments well.
“I think Templeton’s story is an inspiring one. He grew up relatively poor in Winchester, Tenn. He was studying at Yale when his father could no longer afford to pay to keep him there (this was the Great Depression) and so he worked, earned scholarships and – so legend has it – played lots of winning poker to put himself through school. He also made a famous big bet on U.S. stocks in 1939, buying $100 worth over every stock on the major exchanges selling for less than $1 per share. He turned $10,000 into $40,000 in 4 years. He kept on winning, compiling a great and long track record.
In my opinion, Templeton was one of the best investors of all time.
“I’m approaching my 95th birthday,” Sir John Templeton, the great old investor writes in the foreword to a new book about his methods put together by his great-niece (Investing the Templeton Way). The short foreword has some words of advice. One that stuck with me: “Throughout history, people have focused too little on the opportunities that problems present in investing and in life in general.”
I think that is true. Water crisis, energy crisis, food crisis, housing crisis, … There are always opportunities on the other side of these great challenges. A crisis is an opportunity for you to put your capital to work. At least, that’s what the greatest investors have always done.
If anyone knows about the relationship between trouble and profits, it was Templeton.
Templeton spent his young adult years in the Great Depression, which surely left marks on his approach to life. Templeton, for instance, paid cash for his first house. He never had a mortgage and never borrowed money to buy a car. These thrifty attitudes carried over to his investing style. He gravitated toward cheap stocks. As a result, he was a buyer during the Great Depression, when most people wanted nothing to do with stocks.
Templeton picked up many steals. Of course, at the time to most investors they only looked like nearly worthless stocks. For instance, he bought shares of Missouri Pacific Railroad for 12.5 cents per share, selling them some years later for $5 per share. This style of investing was repeated many times.
Templeton’s fame rests more on the fact that he was a pioneer when it came to investing overseas. The early success of his Templeton Growth Fund in the 1950s was, in part, due to his early identification in overseas opportunities.
Among those opportunities was Japan, a market he rode to great riches – and which he also exited before it all fell apart in the late 1980s. He first invested there after World War II. That took grat foresight and courage at the time.
Today, Japan is an economy with lots of problems. It is not at all like the war torn nation of the 1950s, but it’s suffered through years of bear markets and other economic setbacks. Today, reflecting all that ill sentiment, the Japanese market hovers near two-year lows.
That’s just the way a Templeton-style investor likes it. Templeton liked to invest when there were few interested buyers, during times of “maximum pessimism,” as he liked to say. Japan must fit the bill. Surely there are interesting opportunities there’
Japanese small caps trade at price-to-earnings ratios not seen since 2003. And about 53% sell for less than book value. About 15% sell for less than net current assets, a rare financial sight not seen in great numbers on our shores since the Great Depression. The so-called Jasdaq, a Japanese equivalent to our own Nasdaq, trades for only 12 times next year’s earnings.
Cat Fund AG, in a recent note on Japan, opines, “Balance sheets of companies are the healthiest they have been in the past 40 years.” Cat also points out that the dividend yield on stocks is now higher than the 10-year Japanese government bond yield. This has, in the past, signaled a bottom. “This situation,” Cat notes, “[also] occurred in 1998, 2003, 2005 and was usually followed by a rising market in the following months.”
Japanese management teams seem to realize their shares are awfully cheap. Companies are buying back stock. For the 12 months ending March 2008, there was some $46 billion in stock buybacks. This is something Japanese companies don’t usually do much of, preferring to sit on cash or waste it on uneconomic projects.
Witness the case of Nippon Ceramics. At one point in March, it traded for 90% of cash in the bank and half book value. All while still earning 20% pretax profit margins. You just don’t find those values in the U.S. markets.
“The 21st century offers great hope and glorious promise,” Templeton predicted, “perhaps a new golden age of opportunity.” He could say that because where he saw problems, he also saw opportunity. I see lots of problems today, too… and many opportunities. Japan’s small-cap market is just one interesting possibility.
The huge problems of sub prime mortgage loans and derivatives, of falling housing prices, of increasing inflation, of poor leadership in the US, of high energy prices, of high demand for energy in the developing world, all present tremendous challenges for investors. But as Sir John Templeton would have said be thankful for the challenges as they lead to great opportunities.
