What Sir John Templeton’s “10 engineers” rule tells us about predictions in the market

Sir John Templeton

Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “One of the essential qualities that makes successful investors like John Templeton is the ability to see the market as it is and not try to predict how it might be.”

For many investors today, the name John Templeton might not be familiar except as half the name of big U.S. fund company Franklin Templeton (and it’s Ben Franklin’s face on the company logo rather than Templeton’s). But until a decade or so ago, John Templeton was as well-known and as highly regarded as Warren Buffett is today.

Templeton got his start as an investor during the Great Depression of the 1930s. At the time, he felt investors were far more pessimistic than the facts warranted. Instead of dwelling on negative predictions, Templeton focused his investment strategy on the low p/e ratios, high dividend yields and other value indicators he saw in the market. In a move that has become legendary Templeton in 1939 ordered his broker to buy 100 shares of every New York Stock Exchange stock that traded for less than $1.

He based his approach on the assumption that the entire market was at bargain levels. He felt particularly confident about value in the lowest-priced stocks. They couldn’t be used as collateral for bank loans, and many investment professionals were prohibited from holding them. So there were lots of sellers and few buyers.

He was correct. Many of his purchases went to zero. But among those that survived, many rose fivefold, tenfold or more. Overall, this investment was a huge success. Templeton went on to launch his Templeton Growth Fund in 1954. It was a market leader for decades.

In the 1960s, Templeton pioneered U.S. investment in Japan during that country’s great multi-decade period of economic growth and stock-market gains after World War II. Many millionaire U.S. investors owe their start to an investment in a Templeton fund.

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If 10 investors all agree, it’s probably bad advice

I learned a great deal about investing from reading about Templeton’s career, his approach to investing, and the way he expressed his ideas. One of the recurring themes of his investment advice was what he called his “10 engineers” rule. This is: If you want to build a bridge and you ask 10 engineers how to do it, and they all tell you the same thing, that’s probably a good way to build a bridge.

However, if you ask 10 investors about a particular stock or the market outlook and they all agree, they are probably giving you bad advice. Things are likely to work out differently. When investors generally agree on something, it rarely happens.

I see this rule as relevant today. If you asked 10 investors what they foresee for the market for the next 10 years, most, if not all, would probably agree that we face rising taxes, legislative struggles over where to cut the budget, and weak economic growth. That’s the only outcome they can foresee from today’s enormous government debts and budget deficits.

Of course, I don’t know what is going to happen in the next 10 years. No one does. But I suspect that Templeton’s “10 engineers” rule will hold true, and today’s most popular predictions will vary widely from what actually happens.


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What is the worst investment prediction you have ever heard? Can you think of a prediction that surprised you by being right?

This article was previously published on November 15, 2012.

Comments

  • I found that to be very true with the FED Stimulus Tapering predictions. Before September 2013 majority analysts thought they would taper that month. They were wrong amd the FED’s decided not to taper. Then the other pivotal date was December 2013 and majority of analysts said taper wouldn’t happen until March 2014. Wrong again and the FED’s decided to taper in the December 2013 meeting. I’m starting to agree with Templeton and to the opposite of majority of anslysts.

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