Monday, May 21, 2012

Davis and Nairn, Templeton’s Way with Money

Sir John Templeton was one of the most successful fund managers of the twentieth century. At his peak, during the two decades after his move from New York to the Bahamas in the late 1960s, he outperformed the market by 6% per annum. Over his career he outperformed by 3.7% per annum.

In Templeton’s Way with Money: Strategies and Philosophy of a Legendary Investor (Wiley, 2012) Jonathan Davis and Alasdair Nairn chronicle the principles that informed Templeton’s investing style, relying extensively on Templeton’s letters to clients of his investing firm. In a fifty-page appendix they reproduce some of his observations on investing. The result is a compelling portrait of an innovative thinker, a disciplined investor, and a principled human being.

Templeton was a global investor long before it became fashionable to look beyond national borders for opportunities. And, though known as a value investor, his first and most famous fund (initially domiciled in Canada) was the Templeton Growth Fund. He looked for bargains, but “In his analysis of individual stocks, he recognized that there were various combinations of value and growth that could produce a company that was ‘cheap’ on a five-year forward earnings view. It could be a slow growing dividend-paying company whose shares were simply too low, or it could be a fast-growing company whose shares did not yet fully reflect that rate of future growth. ‘Never adopt permanently any type of asset or any selection method’ was one of his maxims. … investors need to ‘stay flexible, open-minded, and skeptical.’” (p. 110) Put another way, as Templeton wrote in one of his sixteen rules of investing, “Success is a process of continually seeking answers to new questions.” (p. 128)

As an example of Templeton’s flexibility the authors cite his decision in the spring of 2000 to personally invest more than $100 million in U.S. Treasuries funded by cheap borrowing in yen and to short technology stocks. “Both positions produced handsome rewards; shorting the technology stocks made a profit of $90 million and the Treasuries produced a gain of more than 80 percent over the subsequent three years.” (p. 110)

Templeton’s advice is by and large commonsensical but nonetheless devilishly difficult to follow. There are no shortcuts. For instance, he disputes the claim of modern portfolio theory that diversification is one of the few free lunches in investing: “Everyone should read about modern portfolio theory, but honestly they are not going to make much money with it. I’ve never seen anybody that came up with a really superior long term record using only modern portfolio management.” As the authors comment, “His point here was not that diversification was wrong, but that the notion that building portfolios on the basis of unreliable and irrelevant statistical inputs, such as historical volatility, was doomed to failure.” (p. 129)

Investing is hard, and it requires hard work. Trying to figure out what a company’s P/E will be in five years is not a task for the slacker. For most of his life Templeton himself worked twelve hours a day for at least six days a week and exhibited an “ability to focus single-mindedly on the task in hand.“ (p. 24) Successful investing also requires “the temperament and patience to wait for superior results to come through.” Templeton was fortunate in this regard; he was “blessed with a temperament in which patience, forbearance, and confidence in the face of adversity were constants.” (p. 165)

Templeton’s Way with Money is a tribute both to an investing legend and to enduring investment principles. It’s a welcome addition to the literature of finance.

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