John Templeton, a famous investor who inspired modern investors, still offers lessons we can use today
Today, many investors might not immediately recognize the name of the master investor John Templeton. In the final quarter of the last century, however, Templeton was a famous investor, and as highly regarded as Warren Buffett is today.
Templeton got his start as an investor during the 1930s Depression. At the time, he felt investors were far more pessimistic than the facts warranted. Instead of dwelling on negative predictions, Templeton focused his investing strategy on the low P/E ratios, high dividend yields and other value indicators he saw in the market. In 1939, he famously ordered his broker to buy 100 shares of every New York Stock Exchange stock that traded for less than $1.
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Templeton 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.
Templeton’s idea 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.
Many millionaire U.S. investors owe their start to an investment in a Templeton fund.
The ‘10 engineers’ rule, created by famous investor John Templeton, still makes sense today
One of Templeton’s recurring themes was what he called his “10 engineers” rule. It goes like this: 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.
We 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 on possible outcomes.
We suspect that Templeton’s “10 engineers” rule will hold true, and today’s most popular predictions will vary widely from what actually happens.
Key point: It’s usually futile to try and imitate the famous investors you read about. You are dealing with a different set of circumstances. But if you look at the ideas that got them where they are, they are invariably based on a rational approach to finding value.
That approach often runs counter to the theories and assumptions of many of the so-called “experts” in the investment industry.
However, some markets are inherently unpredictable, especially energy and mines. The markets for fungible goods like oil, interest rates and gold are especially unpredictable.
Markets like these are so enormous that there is no practical limit to how much you can trade in them. It follows that if you could predict them, you could wind up acquiring a measurable proportion of all the money in the world, and nobody ever does that. That’s why it’s a mistake to build your portfolio in such a way that you have to accurately predict the future direction of fungible goods like oil, interest rates or gold—and apply Templeton’s ten engineers rule if all investors seem to agree on the direction of a commodity.
Instead, invest in sound Resource companies that will gain from rising production and cash flow, rather than commodity-price predictions.
Bonus tip: High dividend yields don’t always mean bargains
When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yield—simply because they have above-average yields.
That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend.
Above all, for a true measure of stability, focus on stocks that have a high dividend yield they have maintained or raised with their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.
Is there a famous investor you admire and strive to emulate the success of? Or do you avoid celebrity investors?
Most famous investors have something going for them that many people don’t the financial backing to lose big. Still, many investors emulate their strategies. Have you made the mistake of copying the strategy of a famous investor?
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