How to invest like the best: buy low and sell high like John Templeton

Sir John Templeton. Photo: Ron Bull/Toronto Star via Getty Images.

Today’s febrile market conditions might well have suited Sir John Templeton. An investor and philanthropist, dubbed “arguably the greatest global stock picker of the 20th century” by Money magazine, Sir John built his career on a seemingly simple principle. “The time of maximum pessimism is the best time to buy,” he once explained.

In one famous example of that philosophy, he responded to the outbreak of war in Europe in 1939 by borrowing money to buy 100 shares in each of 104 companies trading at a price of $1 per share or less; the portfolio included 34 companies embroiled in bankruptcy proceedings. Almost all these bombed-out businesses subsequently recovered – Sir John had to write off just four holdings – netting him large profits.

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Born in Tennessee in 1912, Sir John studied at Yale and as a Rhodes Scholar at the University of Oxford, before starting his Wall Street career in 1938. In 1954, he launched the Templeton Growth Fund, which would become one of the most successful and popular mutual funds of all time. In 1992, when Sir John sold his fund management business to Franklin Group, he could point to a 38-year track record of average annual returns of around 15%.

One groundbreaking feature of Templeton Growth – although it might not seem so striking today – was its global approach. Unlike most of his peers in the 1950s, Sir John refused to limit himself to looking for opportunities in the US stock market. There would be many occasions when other countries had more to offer, he reasoned. For example, large holdings in Japan, acquired when the country’s economy was still recovering from the war, would eventually be sold during the boom years of the 1980s, delivering spectacular returns.

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Sir John ran his fund with great discipline, but also with real nerve. At his core, he was a value investor – he sought out businesses with strong long-term prospects that he thought the market was undervaluing. Typically, that meant looking for businesses trading at a share price of no more than 12-14 times’ the value of their forecast earnings.

Often, he found himself taking a contrarian approach, buying positions in companies, industries and countries that were out of favour with other investors. He was prepared to be patient, often holding on to businesses for many years – and riding out ups and downs along the way – before deciding they had reached their full potential.

Equally, he was ready to be decisive. Investing with the aim of buying low and selling high, he was confident enough to make bold calls about market timing, calling the bottom or top of a trend with his trades.

That confidence came from exhaustive research, with Templeton developing methods for valuing companies that foreshadowed work by leading academics such as Robert Shiller several decades later.

Investment gurus such as Sir John are often assumed to have some sort of innate genius or magic formula that explains their success. Templeton certainly possessed a formidable intellect, but his investment decisions reflected hours and days devoted to fundamental analysis of individual companies and global markets. The real secret to his ability to consistently outperform his rivals was that he was better informed than they were.

Not that this prodigious workload prevented him exploring other interests – in religion and spiritualism, as a lifelong Presbyterian, but also in science and nature. In 1972, he set up the Templeton Prize for Progress in Religion, with the first award made to Mother Theresa.

Sir John also launched a series of charitable and philanthropic initiatives, which he ran from Nassau in the Bahamas. He had moved there in 1964 after renouncing his US citizenship and becoming a British national.

The switch naturally increased British interest in his activities, including from notable figures including former Prime Minister Margaret Thatcher. She announced his knighthood for philanthropy in 1987, not long after he had endowed Oxford University’s Templeton College, now known as Green Templeton College.

It might have been wise for more people to take account of Sir John’s views, which often proved remarkably prescient. In 2010, two years after his death at the age of 95, a memo he had written in 2005 was made public. In it, Templeton warned that a serious financial collapse was imminent, predicting a major failure in the housing market and a dramatic decline in government bond yields. Perhaps the financial crisis of 2008 might have been avoided, or at least mitigated, if such warnings had been heeded.

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Still, Sir John has undoubtedly had a major influence on thinking in the investment industry – and that influence endures. He has much in common with Warren Buffett, the other renowned value investor of the 20th century. Like Buffett, he regarded Benjamin Graham, the finance professor often described as the father of value investing, as a mentor, having studied under him in the 1930s.

That said, Sir John’s religiosity was also important in shaping his investment approach. While he was a devoted Christian, he also believed that God was too complex for any single religion to capture the full truth and that enlightened individuals should find out as much as possible about other faiths. Similarly, the idea of concentrating on a single stock market, or of following the crowd, felt limiting and short-sighted to him.

The Templeton Growth Fund (not widely available for UK investors and not available on interactive investor) has survived its founder and is today managed by Franklin Templeton – the group was renamed following the Franklin Group acquisition in 1992. It continues to invest according to Sir John’s principles, with a globally diversified portfolio of stocks regarded as offering good value by the fund’s managers.

In recent times, that approach has seen the fund underperform, largely because its holdings in the big US technology companies, which have dominated the market in recent years, are relatively small-scale. Its managers might point out that Sir John himself also tended to perform less well during extended bull markets, when investors often benefit from momentum rather than any fundamental value in their portfolios, but that this did not detract from his long-term record.

How to invest like Sir John Templeton

Several other funds are worth considering, given their focus on finding undervalued companies with strong growth prospects. One possibility is to look at funds run by Nick Train, well-known as a bottom-up stock picker who looks for high-quality companies with strong long-term growth potential. He manages both the WS Lindsell Train UK Equity Acc fund and Finsbury Growth & Income Ord (LSE:FGT) Investment Trust.

Artemis’ SmartGARP range of funds is another possibility. The acronym stands for “growth at a reasonable price”; the idea is that fund managers should be investing in companies with the best long-term prospects but not overpaying to do so. That’s very much in line with Sir John’s principles.

“Financial markets seem to be increasingly driven by current events, news stories, sentiment and excitement, whereas the beauty of a process like ours is that it cuts through all the noise and focuses our attention on factors that have been proven to drive share prices,” says Philip Wolstencroft, manager of the Artemis SmartGARP Global Equity I Acc GBP fund.

“Portfolios that have lower valuations than the relevant benchmarks while possessing attractive growth characteristics are a great example of how active management can deliver meaningful outperformance.”

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Tobias Bucks, co-manager of the IFSL Marlborough Global Small Cap X GBP Acc fund, thinks Sir John’s philosophies have much to offer. “One thing that was true in Templeton’s heyday and remains true today is that most people are pretty good at making decisions but pretty lousy at identifying opportunities,” he says.

“In our view, the best way to do that is to seek out unrecognised growth rather than expected growth. Take thyssenkrupp AG (XETRA:TKA), a German company that specialises in industrial engineering and steel production. It has performed well in recent years, but we believe there’s still a lot more upside to come.

“Mueller Industries Inc (NYSE:MLI) is another good example. It’s a US business centred on piping and industrial metals. It has a dominant position in various products in its home market and just keeps growing. The business had virtually no analyst coverage when we first invested in it and still has precious little today, but our screening process immediately suggested unrecognised potential.”