Value Investing: Following in The Footsteps of Sir John Templeton

by Alexander Green, Advisory Panelist
Monday, July 20, 2009: Issue #1045

Last week I had a chance to speak with hundreds of investors at FreedomFest in Las Vegas.

I can tell you that the mood out there right now is unremittingly bleak. And when it comes to value investing, that’s cause for celebration. Here’s why…

Analysts will tell you that stocks only reach bargain levels when they are cheap relative to sales, earnings and book value. But here’s how to know when stocks are cheap without looking at a single number:

• It’s when people are apoplectic about their stock portfolios.
• It’s when they are gloomiest about the prospects for the economy.
• It’s when they wish they had never met their stockbroker.

That’s when stocks are truly cheap. So that’s when it pays to buy them…

Sir John Templeton – Value Investing Through Maximum Pessimism

Sir John Templeton, the man who almost single-handedly pioneered global investing – and was one of the world’s great value investors – knew this. When it came to value investing, he swore that the best bargains could only be found “at the point of maximum pessimism.”

These weren’t just words …

In 1980, a Maoist guerilla organization in Peru called the Shining Path took over the country, imposing what it called “a dictatorship of the proletariat.” The country reeled from the violence and brutality. The United States, Canada and the European Union branded the Shining Path a terrorist group and curtailed economic activity.

The Peruvian stock market, understandably, collapsed.

Templeton wanted desperately to buy Peruvian stocks while they were dirt cheap. He knew that things would get better – and so would the performance of the Peruvian market.

Unfortunately, foreigners were not allowed to buy Peruvian shares.

Templeton was undeterred. He formed a Peruvian corporation and used it as a holding company to buy up the nation’s leading companies.

And, sure enough, the Shining Path, at one time a populist group, fell out of favor with Peruvian citizens. Political bonds were restored. Economic activity picked up again. The Peruvian stock market soared.

And, of course, Sir John Templeton made another fortune for his shareholders.

Ignore the Stale Statistics & Stick to Value Investing

Things in the United States right now are not as bad as they were in Peru in 1980; yet everywhere I go I keep hearing the same stale statistics:

• We are in the sixth consecutive quarter recession, making this the longest economic contraction since the Great Depression.
• Unemployment is at a 26-year high – and we’re still losing 500,000 jobs a month.
• Business investment is down.
• Spending – and consumer confidence – is anemic.
• Credit is tight.
• Home prices are still falling.
• Corporate profits are weak.

These things are true, of course. But ask yourself this: Which of these well-known facts are not already factored into stock prices? What here hasn’t already been trumpeted in the media hundreds of times before?

It sounds paradoxical, but rampant pessimism about the economic and investment outlook is the stock market investor’s best friend.

Or as resource analyst Rick Rule likes to say, “You can be a contrarian. Or you can be a victim.”

Know this. Act on it. And buy healthy companies while they’re on sale.

If history is any guide, a year from now you’ll be glad you did.

Good investing,

Alexander Green

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