Sir John Templeton, widely regarded as one of the greatest stock pickers of the 20th century, built his fortune by going against the grain. His investment philosophy was simple yet profound: buy when others are fearful. Templeton’s ability to recognize opportunities in market panics and his disciplined, contrarian approach to investing allowed him to build a significant legacy. This article explores John Templeton’s contrarian investing style, key strategies, and the impact he has had on the investing world.
1. The Early Life and Career of John Templeton
John Templeton was born in 1912 in the small town of Winchester, Tennessee. He showed an early interest in economics and investing, which led him to study at Yale University on a scholarship. After graduating in 1934, Templeton attended Oxford University as a Rhodes Scholar, where he earned a degree in law. His academic background in economics and law provided a solid foundation for his future career in finance.
Templeton began his career on Wall Street during the Great Depression, a period marked by widespread financial instability and fear. This experience shaped his investment philosophy, teaching him the importance of staying calm and rational during periods of market panic. He believed that the best opportunities often arise when emotions run high and markets overreact, leading him to adopt a contrarian approach to investing.
2. The Birth of the Contrarian Approach
Templeton’s contrarian approach was born out of his experience in the markets during times of distress. In 1939, with Europe on the brink of World War II, he made a bold move that would define his career. With $10,000 borrowed money, he purchased 100 shares of every company trading below $1 on the New York Stock Exchange, including 34 companies that were in bankruptcy. His reasoning was simple: the market had become excessively pessimistic due to the uncertainties of war, creating opportunities to buy undervalued stocks.
This audacious bet paid off handsomely. By 1944, most of these companies had recovered as the war-related fears subsided and economic activity picked up. Templeton’s investment had multiplied several times over, cementing his reputation as a savvy contrarian investor. This experience solidified his belief that buying stocks during times of extreme pessimism could yield substantial returns.
3. Core Principles of Templeton’s Contrarian Strategy
John Templeton’s contrarian strategy was underpinned by several core principles that guided his investment decisions throughout his career:
- Buy When There is Blood in the Streets: Templeton famously advised investors to buy when there is “blood in the streets,” meaning to invest when others are panic selling. He believed that market panics and widespread fear often lead to irrational selling, creating opportunities to buy high-quality stocks at deeply discounted prices.
- Focus on Long-Term Value: Templeton was a long-term investor who focused on the intrinsic value of companies rather than short-term market trends. He believed that the market would eventually recognize the true value of a company, even if it took several years. This long-term perspective allowed him to remain patient and committed to his investments, even during periods of volatility.
- Global Perspective: Templeton was a pioneer of global investing, believing that opportunities existed beyond the borders of the United States. He often looked for undervalued stocks in international markets, particularly in countries experiencing economic or political turmoil. His willingness to invest globally gave him access to a broader range of opportunities and helped diversify his portfolio.
- Be Disciplined and Avoid Herd Mentality: One of Templeton’s key tenets was to remain disciplined and avoid following the crowd. He believed that investors who succumb to herd mentality often buy at market tops and sell at market bottoms, leading to subpar returns. By staying disciplined and sticking to his contrarian approach, Templeton was able to capitalize on market inefficiencies and generate superior returns.
4. Key Investments and Market Panics
John Templeton’s contrarian approach was tested and proven during several notable market panics:
- World War II: As mentioned earlier, Templeton’s bold investment in companies trading below $1 during the early days of World War II is a prime example of his contrarian strategy. While many investors were fearful of the uncertainty and potential economic impact of the war, Templeton saw an opportunity to buy undervalued stocks. His decision to invest during a time of widespread fear paid off handsomely as the market recovered.
- The Japanese Stock Market in the 1960s: In the early 1960s, Templeton identified Japan as a market with tremendous growth potential. At the time, Japan was still recovering from the devastation of World War II, and its stock market was largely overlooked by Western investors. Templeton’s contrarian bet on Japanese stocks proved to be incredibly successful, as Japan’s economy experienced rapid growth over the next few decades, leading to significant gains in its stock market.
- The U.S. Savings and Loan Crisis in the 1980s: During the U.S. savings and loan crisis in the late 1980s, many investors were fearful of the potential impact on the broader economy and financial markets. However, Templeton saw an opportunity to buy high-quality stocks at discounted prices. His decision to invest during this period of fear and uncertainty paid off as the economy eventually recovered, and the stock market rebounded.
- The Asian Financial Crisis in the 1990s: In the late 1990s, the Asian financial crisis caused widespread panic in global markets. Many investors fled Asian stocks, fearing further economic turmoil. Templeton, however, saw an opportunity to buy undervalued stocks in the region. His contrarian bet on Asian stocks proved to be successful as the region’s economies eventually stabilized and recovered, leading to substantial gains in the stock market.
5. The Legacy of John Templeton
John Templeton’s contrarian approach to investing has left a lasting legacy in the investing world. His success demonstrated the power of remaining calm and rational during periods of market panic and the importance of focusing on long-term value. Templeton’s willingness to go against the crowd and invest in undervalued stocks during times of fear has inspired countless investors to adopt a similar contrarian approach.
Templeton’s impact extends beyond his investment success. In 1987, he established the Templeton Prize for Progress Toward Research or Discoveries About Spiritual Realities, one of the world’s largest annual monetary awards. The prize reflects Templeton’s belief in the importance of spirituality and ethics, both in investing and in life.
6. Lessons for Modern Investors
John Templeton’s contrarian approach to investing offers several valuable lessons for modern investors:
- Remain Calm During Market Panics: One of the key takeaways from Templeton’s success is the importance of staying calm and rational during periods of market panic. By avoiding emotional decision-making and focusing on long-term value, investors can identify opportunities that others may miss.
- Invest When Others Are Fearful: Templeton’s philosophy of buying when others are fearful can be a powerful strategy for achieving superior returns. By taking a contrarian approach and investing in undervalued stocks during times of market distress, investors can capitalize on market inefficiencies and generate significant gains.
- Diversify Globally: Templeton’s willingness to invest globally highlights the importance of diversification. By looking for opportunities beyond domestic markets, investors can access a broader range of investment opportunities and reduce risk.
- Be Patient and Disciplined: Templeton’s success was built on his ability to remain patient and disciplined, even during periods of market volatility. By sticking to a long-term perspective and avoiding the herd mentality, investors can improve their chances of achieving sustained success.
Conclusion
John Templeton’s contrarian approach to investing, characterized by buying when others are fearful and focusing on long-term value, has had a profound impact on the investing world. His willingness to go against the crowd and invest during times of market panic allowed him to build a significant legacy and achieve remarkable success. Modern investors can learn valuable lessons from Templeton’s approach, including the importance of staying calm during market panics, investing with a contrarian mindset, and maintaining a long-term perspective.