John Templeton: The Ultimate Contrarian, And More
Wherever we are and whatever we are doing, it is possible to learn something that can enrich our lives and the lives of others... No one's education is ever complete.-- John Templeton (1912-2008)
As many are likely aware by now, John Templeton, one of the top contrarian investors of all time, passed away last week. While everyone is running scared in the week when we had the second largest bank failure in US history (it isn't as big as it seems when adjusted for inflation) and rumours of imminent collapse of Freddie Mac and Fannie Mae circle the world, I suspect John Templeton would have been cool, stayed calm, and probably started looking at investing in some names.
Although many investors would not pick the quote I show above, I think it sums up the essence of what John Templeton was. John Templeton was very religious and, myself being an atheist, I am sure I would disagree strongly on many of his views on life. Nevertheless, I respect people who can be spiritual even during the worst of times. The fact that he prays for everyone--even so-called enemies--after 9/11, while Ann Coulters of the world call for nuclear bombing the Middle East, says something about the man. It almost feels like he found bliss on earth. (Click here to read an overview of John Templeton's life from The New York Times.)
I can't say I know much about, or have been directly influenced by, John Templeton. He stopped investing by the time I started getting into investing, and he didn't really publish many books on investing. However, many of his ideas are so influential that it is ubiquitous in present-day investing whether one realizes it or not.
The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.
If there is a contrarian investing hall of fame, John Templeton may be the first one to be inducted. I can't think of too many others who made such bold moves going against the crowd as he has. The most famous of his contrarian investments was when he bought 104 stocks trading below $1 on the NYSE in 1939, after the Great Depression and the beginning of World War II. Of the 104, 34 went bankrupt and on the rest he made around 284% in 4 years. It would have been totally unfashionable to invest as the war was breaking out and everyone was panicking. Yet, Templeton did it and immortalized himself in contrarian investing lore. The other big contrarian investment he is known for are his investments in Japan in the 60's, when it was totally out of favour and no one really thought of investing there.
The four most dangerous words in investing are "This time it's different."
Although most of John Templeton's ideas are well known by contrarian investors, it is still good to review them. To get a feel for them, check out this post by Rick of Value Discipline where he summarizes Templeton's 22 maxims (thanks to ControlledGreed.com for original mention). John Christy of Borderless Investor also has a short summary of Templeton's key ideas (thanks to seekingalpha.com).
I'll finish off by mentioning the quote from Templeton that I find most insightful and try to based my investing on...
If you want to have a better performance than the crowd, you must do things differently from the crowd.
John Templeton invested in 1939. As far as I know, he didn't invest in 1929, 1930, 1931, 1932, and 1937.
ReplyDeleteIt is important to stay ahead of the crowd, but also important to avoid being trampled by the crowd.
Again, I draw a distinction between naive contrarianism, and true contrarianism. The difference is not always clear, as an element of luck and timing is involved.
http://blogs.wsj.com/deals/2008/07/10/mean-street-losing-faith-in-freddie-mac-and-bill-miller/
ReplyDeleteI'm pretty sure Your Main Man as a naive contrarian wants to average down on FRE and FNM (and AIG, EK, UNH, YHOO, SHLD, etc.), the question is whether fund redemptions would prevent him from doing so.
As I said, I am waiting with bated breath how Your Main Man (YMM, from now on) will explain himself in his next quarterly commentary).
I agree with you that being contrarian for the sake of being contrarian is dangerous. But if you follow this strategy you won't know if you are right until well after the fact. It's not like people are blindly investing in everything that falls. The question is one's stock picking skills and avoiding the failures.
ReplyDeleteAs for Templeton, I think he was investing before the time period that was cited. It's just that his big bet was on that date.
As for Miller, as I said before, let's revisit this in a few years and see where he stands...
As for Fannie and Freddie, I think the fears are overblown (somwhat similar issue as the monoline insurers but with better balance sheet.) Equityholders are under threat of being diluted heavily but I think a bet on Fannie or Freddie is safer than many other financials...
ReplyDelete