The book Investing the Templeton Way, written by John Templeton’s grandniece Lauren C. Templeton, provides invaluable insights into the legendary investor’s contrarian investment philosophy and market-beating strategies. Templeton made his fortune by buying stocks when market sentiment was at its bleakest and selling when euphoria was at its peak. His counter-cyclical approach focused on undervalued stocks trading below their intrinsic value. Templeton believed volatility created opportunities to profit from market overreactions. By going against the crowd and buying beaten-down stocks, he generated exceptional long-term returns. The book examines Templeton’s methods for finding bargain stocks during times of pessimism and controlling risk through diversification. His disciplined search for value and patience during downturns allowed underpriced stocks time to recover. Templeton sought to buy $1 worth of stocks for 20 cents whenever possible. Though contrarian investing requires fortitude, it can yield generous rewards for those with the resolve to follow Templeton’s principles.
Templeton executed counter-cyclical trades by maintaining a wish list of stocks
Templeton always kept a wish list of quality stocks trading above his target price range. When negative market events caused sharp sell-offs in those stocks to price levels he considered cheap, Templeton bought aggressively. By maintaining an updated wish list and acting decisively during downturns, he capitalized on others’ panic selling to acquire shares of strong companies at bargain prices. This required in-depth fundamental analysis on his wish list stocks prior to crises so he could act swiftly when opportunities arose.
Maximum pessimism in the market presents huge opportunities for value investors
Templeton observed that points of peak pessimism generated the best bargains. When fear and panic grip the market during crashes, emotionally-driven sellers dump quality stocks indiscriminately, creating huge mismatches between price and intrinsic value. Whereas most investors see danger at such moments, disciplined value hunters view crashing markets as fertile ground to scoop up shares of promising businesses at deep discounts. The key is having the conviction to stay calm and greedy while others are fearful. Templeton once advised waiting to buy until the 99th investor out of 100 has capitulated and given up hope. By exploiting others’ misconceptions near major bottoms, contrarians reap big rewards.
A long investment time horizon allows undervalued stocks time to recover
After buying beaten-down stocks, Templeton typically held them for an average of four years to allow fundamentals to stabilize and prices to recover towards fair value. He understood mean reversion often took considerable time due to unpredictable swings in market psychology. Patience was essential because the very nature of contrarian investing meant fighting the crowd and waiting for mistakes to correct, which could take several years. Templeton wasn’t focused on short-term noise but rather on an underpriced stock’s long-term earnings power. As long as business conditions remained sound, he let values play out over full cycles. An extended outlook helps tune out temporary distractions that spur market overreactions.
Diversification and sell discipline are key to managing risk
Since bargains emerge across industries during crashes, Templeton diversified his holdings to mitigate risk. He typically owned 100 or more stocks across a wide variety of sectors and geographies. This lowered his portfolio’s volatility and reduced the impact of isolated business failures. Templeton’s rule for selling stocks was to swap them only when replacing with a stock 50% better priced relative to value. This forced him to remain focused on uncovering the next opportunity rather than clinging to previous winners. The constant hunt for even better bargains promoted discipline and prevented complacency as earlier purchases gained in price.
In summary, John Templeton built his stellar investment career by taking advantage of point of maximum pessimism to buy value stocks trading far below intrinsic value, then waiting patiently for these underpriced stocks to recover as market psychology improved. His proven contrarian approach lives on as an influential value investing philosophy.