John Templeton’s 22 Maxims for Investors and 6 Factors for Analysts

John Templeton was one of the greatest mutual fund managers of the 20th century.  The Templeton Growth Fund was established in 1954.  From then until Mr. Templeton sold the fund in 1992, a $10,000 investment with dividends and capital gains reinvested would have grown to $2 million.  

Much of what Mr. Templeton shared through his writings and interviews found its way into my own approach to portfolio management.  

He paid very little attention to the markets, concentrating instead on buying companies throughout the world that were bargains.  If bargains were not available, he would hold as much as 50% of his portfolio in cash, knowing that opportunities to invest would become available in the near future.  He held on to companies for an average of four years.  If his analysis was right, he would earn a “double play” profit from both increased earnings and a higher multiple of those earnings.

Mr. Templeton died in July 2008 at the age of 95.  His wisdom and guidance deserves to be remembered.  In 1983, William Proctor published The Templeton Touch and provided us with Mr. Templeton’s maxims for individual investors.

John Templeton’s 22 Maxims for Investors

1.  For all long-term investors, there is only one objective – “maximum total real return after taxes.”
   
2. Achieving a good record takes much study and work, and is a lot harder than most people think.
   
3. It is impossible to produce a superior performance unless you do something different from the majority.
   
4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
   
5. To put “Maxim 4” in somewhat different terms, in the stock market the only way to get a bargain is to buy what most investors are selling.
   
6. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude, even while offering the greatest reward.
   
7. Bear markets have always been temporary.  Share prices turn upward from one to twelve months before the bottom of the business cycle.
   
8. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, won’t return for many years.
   
9. In the long run, the stock market indexes fluctuate around the long-term upward trend of earnings per share.
   
10. In free-enterprise nations, the earnings on stock market indexes fluctuate around the replacement book value of the shares of the index.
    
11. If you buy the same securities as other people, you will have the same results of other people.
    
12. The time to buy a stock is when the short-term owners have finished their selling, and the time to sell a stock is often when the short-term owners have finished their buying.
    
13. Share prices fluctuate much more widely than values.  Therefore, index funds will never produce the best total return performance.
    
14. Too many investors focus on “outlook” and “trend.”  Therefore, more profit is made by focusing on value.
    
15. If you search worldwide, you will find more bargains and better bargains than by studying only one nation.  Also, you gain the safety of diversification.
    
16. The fluctuation of share prices is roughly proportional to the square root of the price.
    
17. The time to sell an asset is when you have found a much better bargain to replace it.
    
18. When any method for selecting stocks becomes popular, then switch to unpopular methods.  As has been suggested in “Maxim 3,” too many investors can spoil any share-selection method or any market-timing formula.
    
19. Never adopt permanently any type of asset or any selection method.  Try to stay flexible, open minded and skeptical.  Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and your methods of selection.
    
20. The skill factor in selection is largest for the common-stock part of your investments.
    
21. The best performance is produced by a person, not a committee.
    
22. If you begin with prayer, you can think more clearly and make fewer stupid mistakes.

John Train, in his excellent book The Money Masters, shared Mr. Templeton’s advice on stock selection.

John Templeton’s Six Factors for Security Analysts

1.     The price-earnings ratio.
2.     Operating profit margins.
3.     Liquidating value.
4.     Consistency and growth rate of earnings.
5.     Flexibility.
6.     Don’t trust rules and formulas.

I want to draw your attention to these because I believe they have important implications for investors today.  Although we can learn from each one, I particularly want to discuss the sixth factor, “Don’t trust rules and formulas.”  Mr. Templeton employed these maxims and factors before the average person had access to a computer.  Today, however, due to the low cost of computing power, formulaic investing has become a norm that is broadly promoted by brokers, investment advisors, and of course those on-line companies who assure you that a computer can manage your money better than any individual.  In The Money Masters, Mr. Templeton shares a story that his former partner, from his original investment firm Templeton, Dobbrow & Vance, presented in lectures about investing.  In the story, Vance warns the audience about relying upon formulas to select securities.

Templeton’s sometimes partner Vance, then an elderly man, used to enjoy lecturing about investments.  Part of his kit was a huge chart plotted on a roll of wrapping paper.  It was so big that during his lectures he would have to get a volunteer from the audience to help him unroll it and put it on the wall.  This chart plotted the market for the previous twenty years.  Then there were different squiggly lines representing the various factors that influence it – industrial production, money supply and so on.  One squiggly line was best of all.  It worked perfectly.  Year after year if you had followed it you could have known where the market was headed and made a killing.  When the audience, fascinated, demanded to know what it represented, Mr. Vance told them.  It was the rate his hens were laying, in the chicken coop in back of his house. 

Virtually every formula I have ever seen is based on some historical relationship between one or a multitude of factors that proves, without a doubt, if you had just made your investments according to that formula, you would be rich today.  Of course, in order for you to get rich based on these past relationships, the future would have to unfold identically to the past.   

It is rare for an investment advisor to work directly with an individual to build and maintain a portfolio of individual securities based on fundamental analysis.  As rare as it is, we assure you that we will continue to offer this personal service to each of you for as long as we can.

Until next time,

Kendall J. Anderson, CFA