Templeton's Way with Money: Strategies and Philosophy of a Legendary Investor

247 Pages·2012·4.3 MB·English

by  Alasdair Nairn

Contents
Introduction
Chapter 1: The Man and His Life
Into the Investment Business
A Stock Market Coup
Investment Counselor
The Fund Management Business
Moving to the Bahamas
Market Guru: Global Contrarian
How Others See Him
Templeton the Man
Chapter 2: Investment Counsel
The Yale Method
Planned Investment
What is Normal for Stock Prices?
Program “Balancing” Explained
The Best Thing That Could Happen
Which Are the Best Stocks?
How to Increase Your Income from Investments
Memo to Liddell, Scott, Heavner, Palmer, Warner, Andrews
Chapter 3: Fund Manager
Market Beginnings
Changes in the Portfolio
The Glory Years
Performance of the Templeton Growth Fund
Wealthy Long-Term Investors
Consistent Real Returns
Less, Not More Risk
Bull and Bear Markets
Performance Trends Over Time
Chapter 4: Philosophy in Action
An Important Paradox
Investing by the Rules
Chapter 5: Why the Templeton Method Works
Study Conclusions
Findings in More Detail
Implications for Portfolio Construction
Practical Conclusions
Chapter 6: Past, Present, and Future
Templeton’s Legacy
Future Prospects
Autumn 2011 Perspective
Implications for Investors
Appendix
Selected Bibliography
Acknowledgments
About the Authors
Index

Copyright © 2012 by Jonathan Davis and Alasdair Nairn. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
Letters, anecdotes, and historical information courtesy of First Trust Bank
Limited as Executor to the Estate of John M. Templeton, unless stated otherwise.
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Library of Congress Cataloging-in-Publication Data:
Davis, Jonathan.
Templeton’s way with money : strategies and philosophy of a legendary investor
/ Jonathan Davis, Alasdair Nairn.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-118-14961-4 (hardback); 978-1-118-23921-6 (ebk); 978-1-118-
22591-5 (ebk); 978-1-118-26390-7 (ebk)
1. Templeton, John, 1912-2008. 2. Capitalists and financiers—United States—
Biography. 3. Investments. I. Nairn, Alasdair G. M. II. Title.
HG172.T45D38 2012
332.6092—dc23
[B]
2011046753
To our families: Kristin, Nick, and Anna Davis and Siobhan, Hannah,
Alexandra, and Lochlann Nairn With love and thanks
Introduction
Sir John Templeton was, by common repute, one of the most successful and
best-known professional investors of the past 100 years, as well as an
outstanding philanthropist, knighted by the queen of the United Kingdom in
1987 for his many years of charitable work. Forbes magazine dubbed him “the
dean of global investing,” in recognition of the trail he blazed in seeking to
invest across the world when others were too afraid to do so. Louis Rukeyser,
host of Wall Street Week, a popular network television program, on which
Templeton appeared many times, said that this “quiet, deeply religious man” was
“one of the genuine heroes of Wall Street.” Prem Watsa, a Canadian fund
manager, described Templeton more recently as a “wonderful man and, for all
practical purposes, perhaps the greatest investor of all time.”1
The detailed research we publish in this book confirms that John Templeton
was indeed one of very few professionals who can rightly claim, hand on heart,
to have consistently obtained the Holy Grail of stock market investment—above
average returns with below average risk. In his case this was a record that he
sustained for the best part of half a century. His best-known mutual fund, the
Templeton Growth Fund, never once in 38 years under his guidance failed to
deliver a positive real (inflation-adjusted) return over any 60-month period. This
is a record that only a handful of other professional investors can claim to have
achieved over such a long period.
Four years after his death, Templeton’s name and investment philosophy live
on around the world through a wide range of funds that either carry the
Templeton name or claim to use his methods. Many billions of investors’ money
is today managed on the basis of the simple but profound principles first laid
down by a man who stands comparison with Warren Buffett, George Soros,
Peter Lynch, and a handful of others as one of the all-time greats of the modern
investment world. The reason for this enduring legacy is simple: His investment
methods have stood the test of time. They work, and in this book, timed to
coincide with the 100th anniversary of his birth, we set out to explain what those
methods were, the truth about his track record as an investor (there are a number
of surprising myths), and why and how his methods continue to be relevant
today.
Given how many words have been written already on the subject, it is
legitimate to inquire whether the world needs a further book on the Templeton
approach to investment. We asked ourselves the same question when we
originally considered embarking on this project. Amazon, the online bookseller,
lists no fewer than 50 books, for example, about Templeton’s life, investment
approach, and spiritual concerns. We came to the conclusion, however, that there
is still room in the market for a single-volume, independent assessment of
Templeton’s investment methods and philosophy, written from a professional
rather than a religious, philanthropic, or family perspective; and with the future,
not the past, in mind.
These are the main reasons why we believe that a single-volume study that
seeks to encapsulate the essence of John Templeton’s investment wisdom is both
fresh and timely:
1. A fresh perspective.
Some of the many books published about Templeton’s life and methods in
the past have verged, we think it is fair to say, on hagiography. Many seem
to have been written to advance his philanthropic and religious interests
rather than primarily to enlighten investors. Others are either out of print, or
sponsored works by close associates, published with the assistance of one
of Sir John’s charitable foundations. This one, in contrast, aspires to be an
independent and objective contemporary assessment by two investment
professionals with many years of direct experience in the investment
business. The 10 years that one of the authors (Sandy Nairn) spent working
directly for Sir John have given us additional first hand insights into what
his approach to investment means in practice.
2. Access to new material.
We are fortunate to have had access to a considerable amount of previously
unpublished information. This includes copies of the letters that Sir John
wrote to his investors and clients over the course of 50 years, as well as
detailed data and analysis of his performance record that have not been
professionally published before. In 1993 Mark Holowesko, then chief
investment officer of Templeton’s fund management business, began the
practice of circulating around the offices of the Franklin Templeton group
copies of internal memos and letters the firm’s founder had written in the
past. They proved popular with the firm’s employees and remain an
invaluable source of insight into his thinking. We reproduce extracts, with
our comments, in this book—some in the text, and others in the Appendix.
As with the essays of Warren Buffett, the clarity and insights that
characterize Templeton’s writings instruct as well today as they did at the
date of origin.
3. Timeless lessons.
Sir John’s philosophy of investing, which is built around the presumption
that investors must have the courage and patience to ride out economic and
market cycles and stick to a rigid investment discipline, remains highly
relevant today. Twice already this century, from 2000 to 2003, and again
from 2007 to 2009, investors have experienced savage bear markets in
which stock markets around the world have fallen, peak to trough, by
around 50 percent. Many investors remain shell-shocked and disillusioned
by the losses they have incurred as a result. Had they followed a disciplined
Templeton approach, we can show that they would not have fared nearly as
badly as many did. Nor, we can say with confidence, would they have
become so disheartened. John Templeton was an optimist by temperament,
but, like many great investors, saved his best investment performance for
bear markets, underlining the fact that success in investment is just as much
about avoiding losses and preserving what you have gained, as it is about
picking winners.
4. Methods that work.
Sir John’s track record as an investor, as we have noted, is remarkable not
just for the consistent returns that he produced for his clients and fund
investors, but also for their below average risk. Ten thousand dollars
invested in the Templeton Growth Fund, his first mutual fund, at its launch
in 1954 would have grown to $1,736,100, 38 years later. The fund
outperformed the equity market for four decades at a compounding rate of
more than 3.7 percent per annum. In investment terms, where investment
genius is typically measured in fractions of a percentage point of superiority
against the market averages, this margin of outperformance constitutes a
genuinely extraordinary track record.
Standard financial theory holds that such a sustained period of
outperformance can only have been achieved by luck, or by the fund
manager taking additional risk. Yet, as we will demonstrate, the fact is that
the Templeton Growth Fund produced its exceptional performance with
less, rather than more, risk than the average fund.
As a value investor, John Templeton’s approach to markets was rooted in
the simple but powerful idea that buying assets for less than they are worth
is the most certain and the least risky path to superior investment returns.
We demonstrate with original research why these methods do indeed work;
why they are so often misunderstood; and why so many investors in
practice fail to take advantage of them.
5. Current opportunities.