One of our favourite investing stories is John Templeton.
If you know anything about Templeton, you may think that’s a strange choice. After all, John Templeton is famous for being a diversified stock investor…he believed you couldn’t beat the market. He believed in buying a portfolio of many stocks to spread risk and profit as the whole economy grows.
But he also believed in an investing basic – buy low and sell high.
That’s right, it’s not rocket science. But it’s something many investors forget when they rush to buy the latest hot and booming stock.
So John Templeton and us wouldn’t see eye to eye on every aspect of investing. But when it comes to buying low and selling high we would completely agree. Yet Templeton’s investing approach isn’t the only reason we mention him to you today.
If you’ve heard of John Templeton (he actually dropped his US citizenship to become a British citizen and earned a knighthood from Queen Elizabeth II) you’ll know he’s famous for two things.
One of those things was his pioneering role in the mutual funds industry. To the extent that in 1992 Templeton sold his Templeton Funds business to the Franklin Group. This created Franklin Templeton Investments, one of the world’s biggest fund managers. The sale of his business was the curtain call on a lifetime’s work.
But before then, the young Templeton (just 26 at the time) made one of the gutsiest trades in stock market history.
Templeton grew up on a farm near the small town of Winchester, Tennessee (population today of just 8,502), in the deep south of the United States. But coming from a small town didn’t stop his ambition.
He graduated from high school to attend the renowned Yale University. From there he earned a Rhodes scholarship to Balliol College, Oxford. He graduated with a law degree in 1936.
Templeton returned to the US, and in 1938 started a career on Wall Street. By then, he was 26 years old, and not long out of university.
For most twenty-something’s that would be good enough. It would be time to knuckle down and start climbing Wall Street’s greasy pole.
But just one year later, in 1939, with Western Europe heading to war, the 27-year-old former Tennessee farm boy did something extraordinary…especially for someone with just a year of Wall Street experience.
Remember, Herr Hitler had annexed the Sudetenland (current Czech Republic); divided
Poland between Germany and the Soviet Union; and just a few months later, Germany would invade Belgium, France, Luxembourg and the Netherlands.
All wars end up lasting longer than most people think. So perhaps if Templeton knew the war would last until 1945, he wouldn’t have done what he did next. After being in his Wall Street job for a year he approached his boss and asked for a $10,000 loan.
That’s the equivalent of $166,415 today.
What’s more, Templeton intended to invest the money in the stock market. Amazingly, his boss gave him the cash. We’ll say it again, Europe was at war, and no one knew how long the war would last or the damage it would cause. Yet Templeton borrowed $10,000 from his boss…to invest in stocks.
But if that wasn’t ballsy enough, Templeton added an extra degree of risk. He didn’t invest in safe and dependable stocks. He invested in 104 of the New York Stock Exchange’s most beaten down and riskiest stocks.
Templeton wasn’t a momentum investor, buying stocks in a rising market. And he wasn’t a Warren Buffett-style value investor, as a third of the companies he invested in had filed for bankruptcy.
Templeton was a speculator.
What he did was risky, but it paid off because he understood the risk.
But there’s one more part to the Templeton story. Note the year: 1939. Did I mention that at that point the US economy was in the eleventh year of the Great Depression?
Well, it was.
Not only had a world war just begun, but also the US economy was still mired in the Great Depression.
Of course, 1939 was also the year that many believe the Great Depression ended…but again, Templeton couldn’t possibly have known that at the time.
It’s like today. The world economy is now into the fourth year of a worldwide recession – arguably, a depression – and stock markets are at their most volatile in living memory.
Add to that the constant threat of war in the Middle East; the chances of civil unrest in Europe; the fall of one super power in the West (US); the rise of a new super power in the East (China); attacks on freedom in the United States and elsewhere; and governments and central banks that have no ideas about achieving economic growth other than printing money.
Put in that context, it’s not hard to see that the world economy is in just as bad shape today as it was in 1939. That’s why we’re convinced that now is a great time to speculate on beaten down stocks.
It’s also why we’ve got more stocks on our recommended buy list than we’ve had for more than two years.
However, this is where our strategy differs from John Templeton’s. He bought 100 shares in 104 different beaten down companies. But unlike 1939, we’re not convinced you’ll see a broad market rally over the next five years.
For a start, the Aussie stock market is concentrated in two key sectors: resources and banking. So you don’t have the broad market diversity that Templeton had when he made his ballsy punt.
Second, we’re a stock picker. In the long-term we believe it’s possible to beat the market averages, simply by selecting the stocks you believe have a better chance of succeeding than others.
We believe you’ll see an uneven market where some stocks rise, others fall, but the broad market index stays roughly the same. In short, we believe there’s a better and lower risk way to bet on rising stock prices.
That is, rather than investing in a diversified share portfolio, you should allocate most of your savings to cash, four or five dividend paying stocks and gold, and then you should put what’s left over (say, 5-10% of your savings) into speculative stocks.
And when we say speculative, we mean it. We’re talking about the potential for these stocks to rise 200%, 300% or more…not just the low double digit percentage gains you can expect from most blue-chips stocks.
Kris Sayce,
Editor, Money Morning
From the Archives…
Now it’s the Turn of These Small-Cap Stocks to Rally…
31-11-2012 – Callum Newman
Why It’s Possible to Buy AND Sell This Market
30-11-2012 – Kris Sayce
William Knox D’Arcy: The Greatest Australian You’ve Never Heard Of
30-11-2012 – Callum Newman
Why I’m Bullish on These Beaten-Down Stocks
28-11-2012 – Kris Sayce
Natural Gas to Rule the World
27-11-2012 – Dr. Alex Cowie
Templeton’s Ghost: Why Now is a Great Time to Speculate on Cheap Stocks