“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”–Sir John Templeton
Last summer I was curious to learn more about world-renowned investor Sir John Templeton. I wanted to read a biography like I did for Warren Buffett, but finding none that appealed, I chose “Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter,” written by Templeton’s grand-niece and her husband (Lauren C. Templeton and Scott Phillips).
“The Templeton Way” cogently delivers a primer on Templeton’s “contrarian” approach, which perhaps is epitomized by the fact that, right in the middle of the depression, Templeton borrowed $10,000 to invest in companies that were valued below $1 (and ended up making four times his investment). Templeton repeatedly made such contrarian movies, including investing in Japan when nobody else was, and getting out before the Japanese stock market crashed in the 1990s. Much like Warren Buffett–who counseled to “be fearful when others are greedy, and greedy when others are fearful”–Templeton distinguished himself by having the rare ability to see opportunities that other people missed. This occurred, that I can tell, because Templeton’s entire approach was the opposite of following the herd.
Going through the book again, I especially love the advice on investing in a crisis. The writers explain how, when things in the market go bad, one should use “the same strategies that a bargain hunter employs on a daily basis in common market conditions” (172). Specifically,
First, the bargain hunter searches for stocks that have fallen in price and are priced too low relative to their intrinsic value. Typically, the best opportunities to capture these bargains come during periods of highly volatile stock prices. Second, the bargain hunter searches for situations in which a large misconception has driven stock prices down, such as the arrival of near-term difficulties for a business that are temporary in nature and should correct over time. In other words, bargain hunters look for stocks that have become mispriced as a result of temporary changes in the near-term perspectives of sellers. Third, the bargain hunter always investigates stocks when the outlook is worst according to the market, not best.Investing the Templeton Way, 172
Do you think any of this might apply to today’s market conditions? Does a bear dookie in the woods? Let’s pull this advice apart a bit and see. The first part is to locate stocks (or for me, index funds) that have fallen below what we believe are their intrinsic value. In other words, stocks that people are selling lower than they are worth. It seems pretty obvious to me that this has been happening recently, as stocks across the board have taken a severe beating not because they are less valuable, but because people are freaking out over the dual threat of a health scare and the prospect of economic collapse.
The second part of the advice is to look for misconceptions that drive down prices. In other words, are there short-term, temporary conditions that make certain stocks undesirable and thus cause people to sell in droves? I would say so! While health and economic conerns are real, I assume they are not permanent. Could it be that some people, in their panic, are using a final solution (selling) to fix a temporary problem?
The third part of is to look at buying when the outlook is most pessimistic (as in the quote at the top). You don’t have to look that far right now to see market pessimism (and overall pessimism, for that matter)! I’m not sure we have reached maximum pessimism yet, I guess time will tell. This is the most pessimistic I have seen the market since I’ve been an investor! Needless to say, the supreme optimism of the 11-Year Bull Market (r.i.p.) has quickly collapsed and given way to something much more pessimistic. So I’d say the third part is definitely true now.
The point is, that crises creates opportunity. As the writers state:
[P]anics and crises create by far the best opportunities to pick up bargains, which drop into your lap if you have the ability to stay seated while everyone else dashes out the door.173
If you have the psychological ability to add to your investments during future panics, you already have distinguished yourself as a superior investor. If you can find the resolve to buy when the situation looks most bleak, you will have the upper hand in the stock market.176
This book, like William Bernstein’s “Four Pillars of Investing,” helped me see how much of an opportunity a market crash really is. The bottom line is that, the truest test of one’s investing mettle may come when things look the worst:
Leaders are defined by their actions when the chips are down, not when everything is going smoothly…Similarly, the most successful investors are defined by their actions in a bear market, not a bull market.182-3