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16 Rules for International Investing Success & Conquering Emerging Markets

|Includes: iShares MSCI Brazil Capped ETF (EWZ), FXI, TUR
Sir John Templeton is one of the investment gurus of our time and is regarded as the founding father of overseas investing.  Templeton amassed a fortune by investing in overseas markets and his Templeton Mutual Funds (now Franklin Templeton Funds) produced an annualized return of 13.8% (compared to just 11.1% on the S&P), causing Money magazine to dub him “arguably the greatest global stock picker of the century.”

Templeton lived by a set of 16 rules.  If you want to have international investing success, you’d be smart to follow these rules, too.
 Over the next few days, I’ll recap Templeton’s 16 investment rules in a four-part series.  Here’s Part I, recapping Templeton’s Investment Rules No. 1 through No. 4:

No. 1:  Invest for maximum total ‘real’ return
This means the ROI after taxes and after inflation.  These fees add up. So smart investors plan ahead to protect their investments.  One of the biggest mistakes people make is putting too much money into fixed-income securities.  As we enter a new era of higher inflation and higher taxes, this advice is more important today than it’s ever been.

No. 2:  Invest – don’t trade or speculate
Don’t think of investing as short-term gambling. Rather, patiently invest for the long haul to avoid seeing your profits eaten up by broker commissions and other emotion-driven mistakes.

No. 3:  Remain flexible & open-minded about types of investments
Don’t get hung up on just stocks or bonds. Many different types of investment vehicles are available. And each could have a place in your portfolio given the right circumstances. Exchange-traded funds (ETFs) weren’t around in Templeton’s day. But these are great, low-cost ways of investing in overseas markets.

No. 4:  Buy low
Easier said than done. This is the fundamental part of Templeton’s investing success. He believed you should “invest at the point of maximum pessimism.” This is when an investment was dirt-cheap and no one wanted it.  When prices are high, a lot of investors buy a lot of stocks.  It’s very difficult to go against the crowd – to buy when everyone else is selling or has sold, to buy when things look the darkest and so many experts tell you that stocks are risky right now.  The pioneer of stock analysis, Benjamin Graham said, “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”  Bernard Baruch, was even more succinct: “Never follow the crowd.”

No. 5:  Search for bargains among ‘quality’ stocks
It’s not enough to just buy cheap stocks. You need to buy cheap quality stocks. According to Templeton, “Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well-known trusted brand for a high-profit-margin consumer product.”  Think Apple!

No. 6:  Buy value – not market trends or economic outlook
Templeton believed in the principles of value investing. This means always looking for stocks or ETFs that are “out of favor” with the market. A good way to spot value is to look for stocks — or stock markets — with low P/E ratios.  Individual stocks can rise in a bear market and fall in a bull market.  The stock market and the economy do not always march in lock step.  So buy individual stocks, not the market trend or economic outlook.

No. 7:  Always diversify
You’ve probably heard this before, but don’t put all your eggs in one basket.  Diversification is a smart strategy for every investor.  So you diversify – by industry, by risk and by country.  If you search worldwide, you’ll find more bargains – and possibly better bargains – than in any single nation.

No. 8:  Do your homework or hire wise experts to help you
Before you place a single dollar in the market, it’s absolutely necessary you investigate thoroughly. Make sure you understand the macro forces acting on your investments. Pour over company balance sheets. Read shareholder letters. Understand exactly what a company does and what’s made it so successful in the past. If you don’t understand what you’re investing in – don’t invest!  Remember, in most instances, you’re buying either earnings or assets.

No. 9:  Aggressively monitor your investments 
The big takeaway here is that no investment is forever. Economic circumstances change.  Business models change.  Bull markets turn to bear markets.  If you want to hold on to your money, you need to constantly evaluate your portfolio.  That’s not to say you should be trading in and out of the market on a hair trigger.  You just want to make sure you’re not complacent.
No. 10:  Don’t panic
Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash like we had in 2008.  During the course of your investing career, the market will correct.  Stocks will fall.  This doesn’t matter.  What counts is how you react. When everyone else is panicking, successful investors calmly look over their holdings and think: “I wanted to own this stock before it crashed.  Has anything changed now that it’s cheaper?”  If you’ve done your research, chances are nothing has changed.  Panicky markets just put the stock “on sale” – creating an even better buying opportunity.

No. 11:  Learn from your mistakes
Learning from your mistakes is the only way to become a better investor. Figure out what went wrong.  And learn from it.  Stay away from advisers who tell you “this time it’s different.”  These are the four most costly words in investing!  The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.
No. 12:  Begin with a prayer
The Presbyterian Church played an important role in Templeton’s life and career.  He believed that “if you begin with a prayer, you can think more clearly and make fewer mistakes.”  You don’t have to be a Christian to follow Templeton’s advice. You just have to find some calm in your day.  This will help you focus on what’s really important.

No. 13:  Outperforming the market is a difficult task
There are thousands of highly paid investing experts out there.  Each one is trying to beat the overall market.  But it’s mathematically impossible for everyone to outperform the market.  Remember, the unmanaged market indexes such as the S&P 500 don’t pay commissions to buy and sell stock.  They don’t pay salaries to securities analysts or portfolio managers.  And, unlike the unmanaged indexes, investment companies are never 100% invested, because they need to have cash on hand to redeem shares.  So, any investment company that consistently outperforms the market is actually doing a much better job than you might think.  And if it consistently outperforms the market, but does so by a significant degree, it is doing a superb job.

No. 14:  An investor who has all the answers doesn’t even understand the questions
There are no 100% certainties in the investing game.  Anyone who tries to tell you otherwise is deluded.  Successful investors constantly reevaluate their assumptions and seek answers to new questions.  Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.

No. 15:  There’s no free lunch
Templeton believed this was true in life as in investing.  He said you should never invest on sentiment, never invest in an initial public offering (NYSEARCA:IPO) to ‘save’ the commission.  That commission is built into the price of the stock – a reason why most new stocks decline in value after the offer.  However, this does not mean you should never by an IPO.  Never invest solely on a tip.  Nevertheless, too many investors do exactly this.

No. 16:  Do not be fearful or negative too often
Over the past 100 years, investment optimists have beaten investment pessimists by a wide margin.  That’s because the average bull market gain is much higher than the average bear market loss.  Optimism isn’t always easy.  But it can pay off big time.  Over time, stocks do go up…and up.

Hope you enjoyed the rules and incorporate them into your investment strategies.

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