5 Investing Tips From Stock-Picking Legend Sir John Templeton

 |  Includes: AXP, BAC, BRK.A, CL, EMR, IBM, JNJ, KHC, KO, KODK, PG, WFC
by: Tim McAleenan Jr.

The late Sir John Templeton certainly lived an interesting life—he went to Yale, paid for a significant part of his tuition with poker winnings, became a Rhodes Scholar, and then went on to become a revolutionary leader in the field of mutual funds for his advocacy of investing beyond the borders of the United States.

Although he was born in Tennessee, a short-lived squabble with the US government over income taxes led Templeton to make good on his threat to leave the United States—in 1968, he renounced his American citizenship and became a citizen of Great Britain, establishing primary residency in the Bahamas to avoid higher taxes.

In 1999, Money magazine called Templeton arguably the greatest stock picker of the century. Certainly, Templeton’s disciplined, steadfast approach to investing gives long-term investors a lot to emulate. I made a list of my five favorite investing tips from the late Sir John Templeton.

1. "'This time is different' are among the most costly four words in market history." While I would throw in the qualifier that technological obsolescence can make this statement true—just ask Eastman Kodak (EK) shareholders—Templeton was on to something. While no two recessions in American history are the same, a general pattern does emerge. In August 1979, Businessweek ran a cover story titled “The Death of Equities” that predicted the end for the US stock market (I’m not making this up). As if on cue, the very next year, the United States began one of the greatest bull markets in its history, providing double digit returns from 1980-2000.

Not too many people were predicting a bull market in 1979—but, if instead, you asked them “Do you think Coca-Cola (NYSE:KO) will be selling more Cokes in 1984, do you think Gillette (now Procter & Gamble (NYSE:PG)) will be selling more razors in 1984, and do you think Heinz (HNZ) will be selling more ketchup in 1984?” You probably would have gotten more yeses to that prediction. Instead of letting housing slumps, trouble in Europe, and political stalemate at home cloud your judgment, focus on looking for companies with predictable earnings that you believe will grow over time, make sure the evaluation seems appropriate, and then buy shares and tune out the "world is ending" noise from the talk shows.

2. “Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.” I really like this quote in the context of my own investing strategy—my plan is to load up on shares of the highest-quality companies, like Pepsi (NYSE:PEP), Coke (KO), and Johnson & Johnson (NYSE:JNJ), for the long haul, and buying them during periods of market decline (like we’re experiencing these days) seems to be a reasonable path to long-term success. If you bought Coke for $40 per share in 2009, you’ll probably be very happy about that decision in 2019. When the prices of blue-chip companies dip into the 9-13x earnings range, it can often imply that the stock is trading at a discount to its true value.

3. “The only investors who shouldn’t diversify are those who are right 100 percent of the time.” Sometimes it seems that the Warren Buffett quote, “Diversification is for those who don’t know what they’re doing” gets too much attention. Yes, Buffett has made big bets on Coke (KO), IBM (NYSE:IBM), Wells Fargo (NYSE:WFC), and American Express (NYSE:AXP), but he also owns thirty other stocks and has a stable of dozens and dozens of operating companies that send streams of income back to Old Man River himself on a quarterly basis. Berkshire might be the most diversified conglomerate in the country.

Either way, once you reach a certain point, avoiding wipe out risk should become one of your top priorities. As Berkshire Hathaway (NYSE:BRK.A) Vice Chairman Charlie Munger once said, “Avoid going back to 'Go' on the Monopoly board.” If you have $750,000, then it makes no sense to invest $400,000 into one company, even if you think it will produce marginally better returns. If the failure of one stock holding could greatly reduce your standard of living, then you are probably going to be better off sacrificing the opportunity to chase that extra percent return in exchange for the relative safety that relying on an array of firms to fuel your long-term growth can provide.

4. Successful investing is only common sense. Each system for investing will eventually become obsolete. I like this quote because it goes against the notion that you can just look at a chart or moving average graph to determine whether a company is a good candidate for investment (it might be a good candidate for speculation, but that’s not what long-term investing is interested in). No, Bank of America (NYSE:BAC) doesn’t have to go up because some chart says so. It will go up in the long-run if it plugs the holes on its balance sheet, removes toxic assets, and then grows sustainable, reliable profits— the bottom line is this: that you can’t let a chart or a graph replace your independent thinking ability.

5. For those properly prepared in advance, a bear market in stocks is not a calamity, but an opportunity. I think that one of the tipping points for investors on the path to substantial wealth creation is when they generating a meaningful amount of monthly income to plow into investments. This could take many forms—maybe you have a $50,000 in bond holdings that generate $150-$200 per month, or maybe you own a part interest in the local pizzeria, hotel, restaurant franchise, or storage unit complex that generates $1,000 per month in discretionary income for you to do as you please.

However you may get there, the possession of cash-generating assets that throw off reliable monthly income allows you to make shrewd investments when a stock on your radar screen falls well below your estimate of its intrinsic value. If you have $4,000-$10,000 in a bank account ready to deploy at a moment’s notice, stock market declines (without accompanying earnings impairment) can be your best friend, because they allow you to buy an ownership claim on more assets due to the lower price. The key, of course, is persevering through the tough slog on your way to establishing cash-generating assets.

Templeton is absolutely correct—they key is being properly prepared in advance, and that’s the most difficult part. In the past three years, you could have purchased: Colgate-Palmolive (NYSE:CL) at $55, IBM (IBM) at $75, Coca-Cola (KO) at $39, and Emerson Electric at $25. But first, you have to put yourself in the position to have the cash on hand to pounce when these opportunities arrive.

Templeton certainly practiced what he preached. In 1939, Templeton bought 100 shares of every company on the stock exchange trading for less than $1 per share and held those companies for the next four years, earning very substantial profits. While that’s not a strategy I’d recommend to anyone, Templeton did come out much better than the poor folks on the other end who were selling the stock at that time.

Templeton shows us that the key to financial success is two-fold; not only do you have to know when companies are trading at attractive prices, but you need to structure your life so that you have the ability to generate enough cash to seize those opportunities when they arise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.