Book name= Investing the Templeton Way
By= Lauren C. Templeton and Scott
Phillips
Some excerpts are views directly from
Sir John Templeton while some are views of the authors.
Sir John Templeton is also known as
‘Dean of Global Investing’.
Most of quotes and views are of Sir
John Templeton, however some may be of the authors as well, we have tried to
clearly state that wherever possible.
Quotations in brackets are our
comments.
---
Major Ideas:
Investing at the point of maximum
pessimism.
Divesting at the point of maximum
optimism time.
Buy low and sell high.
Invest across geographical markets, in
different countries.
Be a bargain hunter in life as in
investing to cultivate spontaneous bargain hunter attitude.
BELOW ARE IMPORTANT EXCERPTS FROM THE
BOOK IN BULLET POINTS:
● A
portfolio with investments around the world is likely to yield, in the long
run, a higher return at a lower level of volatility than will a simple,
diversified single-nation portfolio.
● There
is only one reason a stock is being offered at a bargain price: because other
people are selling. There is no other reason. (To get a bargain price, )you
have to look where the public is most frightened and pessimistic. (Comment:
Think also about the problem with the investor and not just the problem with
the company)
● Bull
markets are born on pessimism, grow on skepticism, mature on optimism, and die
on euphoria.
● ...bargain
hunting does not have to be relegated to investments alone.
● ...a
great bargain is for example when an asset is selling at an 80% discount to its
value.
● ...buying
stocks when no one else will is difficult for the majority of investors.
● Contrarian
investing is not commonplace because the approach in it is counter intuitive to
the way we conduct our normal day-to-day lives-we always look for optimistic
scenario and promising horizons.
● Sir
Templeton moved away from Wall Street so that he can develop ability to think
differently than the people on Walls Street.
● To
make the jump from just another smart guy or gal placing money in the stock market
to a successful investor requires a little something extra, and that something
is called good judgement.
● ...if
the courthouse steps are full of bidders shoving each other and screaming bids
to good bargain. (The important thing to remember is that ) if you buy and sell
stocks, mutual funds, or anything else in the same fashion as everyone else,
your returns will be just like everyone else’s.
● The
Great Depression had persisted for a decade.
● ...buyers
and sellers of stock change their opinion about the company for any number of
reasons.
● It
is important to realize that people in the stock market sell the stocks they
own for reasons that sometimes have little or nothing to do with what they
suppose a company is worth.
● ...brokers
like news and hypes about stocks...in fact, they accomplice in many ways in
dispersement of rumors and news so that we buy and sell stocks on impulsion or
to discount the rumors or news.
● A
tremendous body of research conducted over the last 50 years empirically
confirms that stocks carrying a high ration of price to sales, price to
earnings, or price to book value make bad investments over the long run.
● ...learn
what has caused the stock to lose favor.
● When
people start to lose money in s stock, they instinctively ‘stop the bleeding’
by selling stocks. (however, there is also another counter argument, that
people do not sell and hold on to stocks even when it is falling constantly
because of loss-aversion bias and thus lose a lot of money in trading and
investing both)
● ...look
to purchase a company whose problems have been exposed to the stock market.
● You
should learn to distinguish ‘small problems’ from ‘big problems’ and take
advantage of situations in which the stock market has overreacted to a small
problem...
● Understanding
the history of the market is a huge asset for investing.
● ...people
overreact to surprises in the stock market. They always have and always will.
● In
stock markets, a group of individuals bring their money and opinions into the
stock of a specific company and then bid the price of that stock up and down on
the basis of events that unfold in front of them.
● ...the
importance of studying the situation ahead of time.
● You
can not identify, predict, and prepare for every little risk you may face in
the future. However, you can prepare for common types of events.
● There
is no substitute for donig your homework when it comes to investing.
● In
value investing the price of success is paid in advance.
● ...the
only thing that changed was the onlookers’ perception of the stock. ….In sum,
the only variable that changed were the ‘investing environment’.
● ...is to condition yourself to purchase stocks
on rainy days in the market and sell them on sunny days.
● Volatility
presents opportunities. The greater the volatility, the greater the
opportunities to locate a bargain......if you are a purchaser of popular
story stocks, volatility is your enemy.
● The
truth is that all companies face problems; some are better known than others,
and some are more serious than others.
● Ask
for where the outlook is most miserable, than looking for where the outlook is
good for successful bargain hunting as per Sir Templeton.
● When
sentiment changes, it changes very quickly. If you wait for sentiment to change
before you invest, guess what? You are following the crowd. (...so
you have to ignore ‘investors’ sentiment’ and ‘investment environment’
thesis...)
● When
sentiments changes, it changes very suddenly, and if you are not invested, you
will miss out on a large proportion of the returns. These
initial returns may be enough by themselves to separate you from the average
returns of the market.
● The
only investors who shouldn't diversify are those who are right 100 percent of
the time.
● ...combining
diversification and bargain hunting into one strategy.
● Does
the stock market have to go up for you to make money? The simple answer is no.
● ...the
stock market contains a number of individual bull markets and bear markets. In
fact, each stock is its own stock market; that is, each stock is
composed of a number of buyer and seller. In applying this perspective, it is
possible to locate a number of stocks that could perform well during a bear
market for the indexes or poorly during a bull market for the indexes.
● Many
great investors...went through periods of under performance in spite of their
long-term ability to outperform the market.
● The
time to reflect on your investing methods is when you are most successful, not
when you are making the most mistakes.
● ...working
harder than the next person is what he refers to as the ‘doctrine of the extra
ounce’.
● Henry
Ford: ‘Genius is 1 percent inspiration and 99 percent perspiration’. Uncle John
believes that in all walks of life, those who became moderately successful did almost
as much work as those who were the most successful. In other words,
what separates the best from all the rest is a willingness to put in that one
extra hour of reading, that one extra hour of conditioning, that one extra hour
of training, that one extra hour of study.
● ...we
have found that the market is still teeming with stocks that have no research
coverage or only a few analysts covering them. These stocks should be
considered a prime hunting ground for bargain hunters...
● For
Uncle John the guiding light most often has been the P/E ratio...is a good
proxy or starting point for valuation....one of the basic premise is to
pay as little as possible for future earnings.
● Uncle
John often looked for stocks that were trading at no more than five times the
current share price divided by his estimate of earnings five years into the
future. (P/E of 5 in 5th year’s estimated earnings)
● ...Most
analysts tackle this question by forecasting a reversion to the average
historical results of the company, provided that no substantial changes
appear to be on the horizon for the company or its industry.
● ...A
conservative bargain hunter may forecast with the 5 per cent margin...
● This
method of applying conservative assumptions in one’s forecast creates a ‘margin
of safety’.
● Uncle
John believed that currency trends last for years.
● ...USA
is poster child of spending.
● Asian
financial crisis came in 1997-98, and Argentina crisis in 2001.
● If
you want to avoid companies operating in riskier currencies, focus on companies
with over 25 percent of their business performed in countries that export more
goods than they import. (countries having trade account surplus)
● ...the
country does not have government debts that exceed 25 percent of its annual
gross national product. This measure gives bargain hunters a benchmark for what
a conservatively managed government balance sheet should look like.
● The
basic idea here is that when you locate bargain stock ideas, you need to make
an honest attempt to find out why they are mispriced.
● ...group
of stocks are underpriced because of a common factor..a single stock is
mispriced because of individual factor.
● In
the early 1960s, the Japanese economy was growing at an average rate of 10
percent and the U.S economy was growing at an average rate of around 4 percent.
● The investors can create negative biases against
stocks, industries, stock markets, and asset classes. Those biases serve as a
set of blinders that keep investors from even considering bargain ideas.
● The
problem with neglected stocks is that they reward patience. The wait
literally can be several years.
● Those
who still resist the idea of selling ‘too soon’ must realize that if you hold
on to your stocks as they rise above their estimated worth, you are joining a
game of speculation and have left the sphere of investing. (we can overcome
this conceptual difficulty by booking out some stocks when the stock price is
overvalued and collect back the return or even the original investment (you can
hold stocks with zero cost only when the stock price has doubled or the stock
price and the dividends, bonus etc have in combined resulted into doubling the
present stock price from your actual purchase price. The point is there are
ways you can hold for ‘speculative gains’. However, you must be aware of that.
Also, if you follow the ‘booking out whenever overvalued’ doctrine, you have to
remain very active in buying and selling stocks, as every (most if not all, in
its lifetime) stock become overvalued. This will amount into churning every
stock at regular interval or say, 5 year at max, so if you are a lifelong
investor, you can choose to remain invested even if the stock prices are
soaring to speculative euphoria and you are gaining thousand fold returns.
These is called lifelong investing. This is Buffett style investing. These is
investing for dividends and wealth for next generation. So, in such case don’t
worry about the ‘doctrine of booking out when overvalued’.
● ..not
to invest blindly in situations in which information is lacking.
● ...bargain
hunting should not run from misinformation should not run from misinformation
but embrace it and seek the truth.
● ...as
a successful bargain hunter you must remain an agnostic about the superficial
distinction between a value investor and a growth investor and resist creating
biases that prevent you from spotting bargains.
● the PEG (price/earnings to growth) is simply
the price/earnings ratio of the stock divided by the long-term estimate of
growth in earnings. (the less the PEG ratio, the better it is)
● Ratios
are not necessarily the beginning and end to investing unless you have
investigated everything in between and trust that the relationship is true.
● To
prevent possibility of churning your stocks and creating wasteful activity,
Uncle John recommends that you purchase a replacement only when you have found
a stock that is 50 percent better.
● To
have staying power in the game, you must remain focused on the next
opportunity.
● ...mechanical,
quantitative process of comparing bargains with one another should continuously
push you into the best bargains available and out of harm’s way.
● First
and foremost, bargain hunters are not looking to follow the masses anywhere,
period.
● Uncle
John was asked about finding the point of maximum pessimism, and his advice was
‘to wait until the ninety-ninth person out of a hundred gives up’.
● ...and
now the last group of buyers was coming into that market. Once they were in,
who else was left to buy commodities and bid them higher? No one.
● ...if
you have only one method for selecting bargains, you may miss obvious
opportunities elsewhere.
● ...stock
prices relative to the replacement values of assets.
● ...one
always should be an active interpreter of financial ratios.
● Bargain
hunters are active interpreters of the data and dig deeper to interpret
accurately what is being presented to them in accounting terms and then compare
and contrast the data with what they see as the real world economic reality of
the situation.
● Remaining
in a constant search for the best bargains in the market prevents the bargain
hunter from missing opportunities...
● ...spend
nearly as much time researching the company’s competitors as they do
researching the company itself. Best information on any company often came from
competitors rather than the company under consideration.
● Enterprise
value= equity market value (market cap) + total debt - cash
● ...the
company’s enterprise value is 3 times its EBITDA and we have observed
competitors in the industry buying other companies for 6 times their EBITDA, we
may be able to conclude that the stock is bargain on this basis.
● Uncle
John reasoned that companies purchasing their own shares provided good
confirmation that share prices had fallen too low relative to the worth of the
companies....
● The
way to overcome this human handicap is to rely on quantitative reasoning versus
qualitative reasoning. Uncle John always told us that he was quantitative in
practice and ‘never liked a company, only stocks.’
● Tulip
bulb bubble was in 1630s in Holland. There was a Mississippi bubble conceived
by French speculators. There was a South Sea bubble in England in 1720. The
wireless telegraph bubble of 1904 was in USA.
● Remember
the first rule in bargain hunting for stocks: Distinguish between the stock
price and the company the stock represents.
● Many
day traders committed the cardinal sin of confusing a bull market with genius
and quit their jobs to trade full-time.
● Day
traders have been an ongoing fixture in bubbles dating back at least to
eighteenth-century England. In every instance, their willingness to leave all
their worldly duties behind in exchange for stock market riches has been
unquenchable.
● Julian
Robertson was a successful value investor.
● ...individual
investors now account for more than 30% of the New York Stock Exchange’s
trading volume, up from less than 15% in 1989.
● Short
selling is not for the meek investor because the most you can make in a short
sell is 100 percent.
● John
Maynard Keynes said ‘Market can stay irrational longer than you can stay
solvent’
● Story
stocks typically are backed by some product on which investors become fixated.
Some of those stocks did not even have products backing them. These were stocks
representing companies that in many cases were not really companies in a
traditional sense but were just ‘business ideas.’
● ...day
traders were running the show, and the main feature was momentum.
● It
is not unusual to invest a little early and feel the pain of watching continued
selling in your stock and seeing its price drop.
● ...Sir
John bet $185 of his own money that tech stocks would plummet at the height of
the bubble.
● ...the
point of maximum pessimism is-when the last holder decides to throw in the
towel and sell the stock, all the sellers by definition are gone and buyers are
all that can be left.
● ...the
path from euphoria to pessimism takes time, at least months but more often
years, just as the path from pessimism.
● ...when
sellers are scared and driven by fear, represents the best of these
opportunities.
● Typically,
the best opportunities to capture these bargains come during periods of highly
volatile stock prices.
● Bargain
hunters seek misconception, and panicked selling is the height of misconception
because of the overwhelming presence of fear. People’s fear become
exaggerated in a crisis, and so do their reactions.
● ..investors
can be assured that there will be future instances of stock market selling that
are based on a crisis or panic. However, you also may notice that these events
do not happen every day. In fact, you could surmise that only a few pop up
every decade.....you need to realize that these are precious opportunities.
● ..best
time to buy is when there is blood in the streets, even if some of it is
your own.
● The
goal in investing is to raise your long-term returns...
● One
of the simple truths in media is that negative news gets attention and positive
news does not.
● ...journalists
covering the events are experts at focusing on the problems at hand and
magnifying them for the public.
● 1962
sell of in USA stocks known as Blue Monday.
● The
simple fact that bad news sells newspapers is good news for the bargain hunter.
The public’s fixation on bad news and the media’s willingness to supply it to
the public ensure that the stock market periodically will receive too much
negative attention.
● ...leader’s
behaviour under great pressure. Leaders are defined by their actions when the
chips are down.
● Similarly,
the most successful investors are defined by their actions in a bear market,
not a bull market.
● ...to
buy in a panic and free fall market requires far more than the ability to
analyze a company.
● One
way Uncle John used to handle this was to make his buy decisions well before a
sell-off occurred.
● Keep
a ‘wishlist’ of securities that you want to buy at prices.
● Each
crisis probably will look at least somewhat different from precious ones...
● The Asian financial crisis is acknowledged to have begun with the devaluation of
Thailand’s currency (the Thai baht) in July 1997.
● John
Templeton published a book called ‘The Templeton Touch’ in 1983.
● South
Korea often is referred to as the best case of an economy rising from poverty
to industrial power. The country’s economy had the highest average growth in
the world over the 27-year period leading up to the Asian financial crisis.
● Chasing
good performance in mutual funds is often no different from chasing good
performance in individual stocks.
● The
truth is that bargain hunters should look to buy mutual funds after their
performance has been bad rather than good, provided that the managers are
capable investors.
● ...how
long the fund manager holds the average stock in his or her portfolio.
● The
internet (NASDAQ) bubble of 2000 was the biggest bubble of all.
● Bond
investors can operate the way stock bargain hunters do and look for
mispricings, good deals, and so on.
● The
concept of ‘imputed interest’.
● ‘Greenspan
put’= the idea that markets will always be bailed out by Federal bank’s
expansionary monetary policy.
● Japan
had exceedingly low interest rates because of the lasting effect of an economic
downturn that was precipitated by its own stock market and real estate bubble.
Japan had kept its interest rates at very low levels since its 1990s.
● Manhattan
is the commercial and financial center of USA.
● Forward
thinking is the calling card of successful bargain hunters.
● Always
looking
for investments differently than others do (whether in a different country,
with a different method, with a different time horizon, with a different level
of optimism, or with a different level of pessimism) is the only way to
separate yourself from the crowd.
Our disagreement points:
There are some ideas, tactics and concepts
given which are given as bargain hunting investing strategy, however we believe
they are not ‘investing’ or ‘value investing’ but are ‘trading’ ideas.
At one place the authors have
mentioned that ‘if you are reading a research report, the information is
already into the stock’. We strongly disagree, as this is implying ‘perfect
discounting’ which can not be possible in markets. Market discount past,
present and future (information available in public domain, information
available in private domain, event which has occurred, event which is
occurring, even which is yet to occur) information/inputs in completely
Truly very informative for every investor to learn, compare and relearn to stay in profitable mode with sound judgement application of mind.
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