An Unrelenting Focus On Value

Foreword from ShareInvestor

This article “An Unrelenting Focus On Value” by Jason Low was first published in The Business Times on 13 Aug 2007 and is reproduced in this blog in its entirety.

In this continuing series on the world’s greatest investors, JASON LOW takes a look at the strategies of legendary John Templeton

Dubbed as the greatest global stock picker of the century by Money Magazine in 1999, John Templeton is regarded today, even at the age of 95, as one of the greatest value investors of our time.

Born in 1912 into a poor family, Templeton worked his way up through sheer hard work and determination. A Yale alumnus who graduated at the top of his class, he was also a Rhodes Scholar and obtained a masters degree in law at Oxford.

His first investment coup came just before World War II when he bought all 104 US stocks that were selling for less than US$1 at the outbreak of the war, using US$10,000 borrowed from his boss at the first brokerage firm that he worked in. Four years later, he sold these stocks (34 of which were bankrupt) for over US$40,000 – a handsome return of over 400 per cent.

Mr Templeton also co-founded Templeton, Dobrow & Vance in 1940. Despite being hit by the effects of the Great Depression, the firm eventually grew to one with US$300 million in assets and eight mutual funds before he sold his stake in the firm in 1969 – although he continued to manage Templeton Growth Fund thereafter.

Then 42, he started the Templeton Growth Fund. This became the top performer among all US funds over the next 20 years, Templeton Growth Fund A shares posting a 15.45 per cent annualised average return from 1968 to 2004 – higher than Standard & Poor’s 11.1 per cent.

Classic Value Investor

Templeton is a classic value investor. He searches furiously for undervalued, fundamentally strong and well managed companies to invest in. He believes that the best bargains are in stocks that are completely neglected by the market and thus have greater potential upside.

He looks for stocks that are attractively priced relative to their intrinsic value – and this is his tried and proven way of investing. Indeed, his mantra has always been to “search for companies around the world that offer low prices and an excellent long- term outlook”.

Templeton often looks for solid companies whose stocks are trading at low multiples of price-to-book value, price-earnings ratios, high dividend yields and increasing sales. He likes to compare current price-earnings ratios to five-year average annual price-earnings (PE) figures when searching for the lowest multiple stocks. There are two apparent advantages of using this first screening criterion: not only does it require the current PE ratio of the stock to be lower than its five-year average but, in addition, any passing company must have been traded for at least five years and had positive annual earnings per share (EPS) for each of the last five financial years.

Further, Templeton also screens for stocks that have a positive and increasing EPS for the past five years. Such companies with consistent earnings growth potential will most likely imply that they have a competitive advantage over their industry peers and thus might be good investments in that particular industry.

Such value investing requires a lot of discipline and there is a need for the individual to be very patient, since value investing yields results only in the long run.

Like many other successful investors such as Warren Buffet, Templeton is thrifty by nature and lives far below his income. Since young, Templeton has cultivated the habit of savings at the very start, allowing him to set aside a substantial sum of income to start investing in the market. It was his principles of thrift and hard work that allowed him to move ahead.

In fact, when he got married, he and his wife set the goal of saving at least 50 per cent of their income. And they aimed to avoid paying consumer debt so much so that they actually paid for their first house with cash! This habit of saving coupled with his hardworking nature – working at least 60 hours a week – allowed him to build up a substantial amount of capital for his investment activities.

Today, he is an active global philanthropist through his John Templeton Foundation, which is dedicated to the pursuit of scientific and spiritual discovery.

Templeton was nicknamed the “Christopher Columbus of investing” mainly due to his exceptional ability to seek out value investments in new markets outside of the US. And more importantly, he was able to spot these opportunities before the crowd, as shown by his astute investments in Japan in the early 1960s and Canadian properties in the 1970s.

The investing legend also advised fellow investors in the London Money Show in 2005 to “avoid investing in those countries with a high level of socialism or government regulation of business”, and that “business growth depends on a strong free-enterprise system”.

Indeed, his ultimate goal has always been to seek out value, finding only the best bargains globally, especially in free-market economies.

Have A Mind Of Your Own

Templeton has always relied on his own judgment and never taken the advice of other gurus or famous stock analysts when it comes to selecting stocks for his own portfolio. He also never believed in allowing the market to determine whether it is a good time to enter the stock or not. Instead, he chooses to trust his own research and analysis in selecting a value company to invest in.

Once he has put his money, his belief in the company is deep-rooted and he is undeterred by the cycles of the market. He will stay the course even in the worst of bear markets as long as the company’s fundamentals do not change. In fact, for Templeton, his belief is that “the time of maximum pessimism can be the best time to buy, and the time of maximum optimism can be the best time to sell”.

He once said: “If you buy the same securities as other people, you will have the same results as other people. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”