Investment Lessons From John Templeton

by: Roger Nusbaum

Barry Ritholtz posted Sir John Templeton's 16 Rules For Investment Success as follows:

1. Invest for maximum total real return
2. Invest — Don’t trade or speculate
3. Remain flexible and open minded about types of investment
4. Buy Low
5. When buying stocks, search for bargains among quality stocks
6. Buy value, not market trends or the economic outlook
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers
8. Do your homework or hire wise experts to help you
9. Aggressively monitor your investments
10. Don’t Panic
11. Learn from your mistakes
12. Begin with a Prayer
13. Outperforming the market is a difficult task
14. An investor who has all the answers doesn’t even understand all the questions
15. There’s no free lunch
16. Do not be fearful or negative too often

Barry also includes Templeton's writeup on each of the 16 Rules that would be worth clicking through to and reading. A few of them are of particular interest that I wanted to expand upon.

I'll start with number nine and monitoring your investments. Not all news that comes is story-ending or thesis-altering, even if the stock has a big reaction. For anyone using individual stocks or narrow based ETFs, if a lot of time can be spent on the holdings, then there is a better chance of knowing when news does create a sell catalyst and when it doesn't. No one can be perfect, of course, but this does fall under the heading of managing the portfolio.

Not panicking has been a recurring theme in blog posts over the years. Unfortunately, too many investors succumb to emotion and do the wrong thing at precisely the wrong time, driven by some sort of emotion (usually fear or greed). This is very difficult to accept, and some people never come to realize this aspect of investing. I've told the anecdote of one former client who would call me in an absolute panic during market corrections of varying sizes. Often, my end of the conversation included reminding him that he had been through more of these than I had, but he never came to understand this point.

Every investor has made mistakes, and will make mistakes in the future. In addition to learning from mistakes, I would add not letting the consequence of any mistakes have a ruinous impact on the portfolio. If a mistake is unavoidable -- and there is no way to know which future purchase will end up being a mistake -- then this makes the argument for smaller position sizes.

Number 14 is probably my favorite. Included in Templeton's writeup on this one is the need to continue learning. The chance to keep learning is one of the reasons why the job is so fun. The world continues to evolve, as do many aspects of investing. The need to learn creates work that needs to be done, but for people who enjoy it, the task becomes easier. Chances are, anyone spending time on a site like this does want to learn, but we know that most people do not have this interest and thus, long-term investment success could be tougher to come by.

I would sum up that a financial plan, whether it includes equity market participation or not, is a life long endeavor. I believe the Templeton list orients to the long-term investor. Set and forget has not been applicable for awhile, and is unlikely to come back anytime soon. If that is correct, then the work requirement embedded in Templeton's thoughts still stands up today, even though he wrote the list many years ago.