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  • Value Investing: How To Invest Like John Templeton 1 comment
    Jul 27, 2009 9:23 AM

    Guest Editorial by Alexander Green, Advisory Panelist, Investment U

    Editor’s Note: Even while economic and investment pessimism runs rampant… even as many other investors are selling… Investment U columnist Alexander Green returns today with a timely lesson on the best way to combat the gloom. You see, times like this are when savvy value investors can truly come to the fore. And to illustrate the point, Alex turns to one of the world’s greatest in this area - Sir John Templeton. Read on to see what the U.S. and Peru have in common… how to follow in Templeton’s footsteps… and why you should buy, not sell.

    Martin Denholm, Managing Editor, Smart Profits Report

    Three Ways To Know When The Time Is Right To Buy Stocks

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

    And I can tell you that the mood out there right now is unremittingly bleak. And that’s cause for celebration. Why?

    Well, analysts will tell only you that stocks have reached bargain levels when they’re cheap relative to sales, earnings and book value. But here’s how to know when stocks are cheap without looking at a single number…

    • When people are apoplectic about their stock portfolios.
    • When they are gloomiest about the prospects for the economy.
    • 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.

    And one of the world’s greatest value investors knows this, too…

    A Value Investing Lesson From Peru

    John Templeton, the man who almost single-handedly pioneered global investing, swore that when it came to value investing, the best bargains could only be found “at the point of maximum pessimism.”

    These weren’t just words - as the following story demonstrates…

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

    Understandably, the Peruvian stock market collapsed.

    But Templeton knew things would improve - and so would the performance of the Peruvian market. And he desperately wanted to buy Peruvian stocks while they were dirt-cheap.

    Unfortunately, foreigners weren’t allowed to buy Peruvian shares.

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

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

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

    So how does this relate to the U.S. today?

    How To Invest In The Face Of Damning Statistics

    While things here aren’t as bad as they were in Peru in 1980, everywhere I go, I keep hearing the same stale statistics:

    • The recession is now in the sixth consecutive quarter, making it 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.

    While these things are true, ask yourself this: Which of these facts aren’t 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

    Disclosure: No positions

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Comments (1)
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  • Tom Au, CFA
    , contributor
    Comments (6787) | Send Message
     
    All of the above is "bad," and getting worse.

     

    But the stock market is nowhere near the bottom.

     

    The Templeton example is only half-right. "Buy when things are terrible" AND THE MARKET REFLECTS THIS.

     

    People forget the second part.

     

    The Dow dipped below 600 in 1974, when things weren't nearly as bad as now. Escalating for intervening inflation would bring the Dow just over 3000.

     

    THAT's where we would be buying hand over fist.
    27 Jul 2009, 11:38 AM Reply Like
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