As we learned in the third chapter of this book, Lauren Templeton’s been investing since she was just a little girl. Given that she is the great-niece of Sir John Templeton, value investing quite literally runs in her blood. Her firm, Lauren Templeton Capital Management, is based out of Chattanooga, Tennessee. I conducted this interview with Lauren on September 22, 2010, and it is published as transcribed.
Tell me a little bit about Lauren Templeton Capital Management. How is the firm structured and what are you trying to achieve?
We’re an asset management firm. We were founded in 2001. The firm is 100 percent owned by me, so it’s a female-owned firm. We began with one hedge fund product but we’ve since also moved into the long-only separately managed account business. We are a value investing boutique focused exclusively on global bargain hunting. And, naturally, we’re trying to build wealth for our investors and compound their money at the highest rate possible in the market given an acceptable level of risk.
How did you end up as a value investor? Did you explore other investment styles before “seeing the light”?
Well, as you might imagine, because I grew up in the Templeton family we are really a family of value investors. I started buying stocks when I was seven or eight years old. My dad would allow me to buy one share a month of any stock I wanted. He would buy it for me. And then he would take the stock certificate, because at the time they mailed you an actual certificate, and he would mat and frame the stock certificate and hang it on the walls of my room. So when I was a child, my room was literally wallpapered with stock certificates.
At first, like any child would, I bought very familiar companies—like Disney, Wal-Mart, the Gap. I really didn’t pay any attention to valuation. But it was very important to have these stock certificates hanging on the walls of my room because all of a sudden, I really did, as a child, think of myself as an owner of one of these companies. I can remember telling friends on the playground that, yes, I did own part of Disney. And they couldn’t believe it.
But it was that approach to looking at investing through the eyes of a business owner I think that naturally guides investors into value investing. To me, value investing is a lifestyle. In every other area of my life, I seek to find the best bargain in relation to something’s value—whether I’m buying a car or a house, and why wouldn’t I do the same in the stock market? I just grew up that way. My family was very thrifty. My dad was very thrifty. He owned a local hardware store and he and my mom saved 50 percent of everything they ever made. Uncle John [Templeton] says he did the same thing. Of course, they were saving for the opportunity to go out and buy shares of businesses that were listed on the stock exchange. If you’re buying a part of a business, you want to get the best bang for your buck and go where you find the best value.
So I would say I’ve always been a value investor. Now, of course, I’ve read about and studied other investment styles but none of them seemed to resonate with me. I think that value investing is investing in the stock market. Many of the other styles and strategies appear to me to be more speculative. I don’t approach the stock market as a casino. I don’t gamble in the stock market. I invest in businesses.
Warren Buffett’s been quoted as saying temperament—not intellect—is the most important quality an investor can have. How do you think your own temperament has played into your success as an investor?
I completely agree with him, first of all—it is temperament and not intellect. I think some people are born with a natural ability to be better investors than other people. However, I think all investors can improve [their temperaments]. I think what makes a good investor is the ability to control your emotions and some people are just better at that than other people, and there are a host of reasons why. There are so many cool research projects out right now in the field of neuroscience looking at the role of hormones like testosterone and estrogen and neurotransmitters like oxytocin that really affect our decision-making process and might contribute to an investor’s ability to control his or her emotions. Some people are just naturally better at that but I also think that everybody can learn to be better at controlling their emotions and at least be cognizant of human behavior.
I think that investors who can control their emotions are going to have better returns. Warren Buffett’s great at doing that. And in many ways, he does invest like a woman. He does his research, he’s cool, calm, and collected. A lot of men get on a testosterone high and take riskier and riskier bets. I think Warren Buffett is a student of human nature and he can control his emotions much better than the average person.
By studying and reading about human behavior, you can implement some tools to help your investing strategy. For instance, Uncle John always kept a wish list of securities in his desk drawer, and oftentimes, he would have good-til-cancelled limit orders out on these securities at well below market prices. Let’s say 30 percent below the market. So when the market would fall in value or there would be a major correction in the stock price and he knew that human nature would make it scary to step in and buy, because the trades were already out there, it’s kind of forcing yourself to do what you should do and buy a good company when the stock goes on sale.
I think my temperament has helped me because I’m a very good student of human nature. I’m very cognizant of my biases and I spend a lot of time thinking about how to compensate for them, whether that’s having limit orders in on certain securities well below the market or different rules or procedures we have here at the firm to assist me when I know I’m going to be in a stressful situation. I also think that I take more risk than most women do. So I think that has helped me in my investment career.
Your investment firm, and the book you and your husband wrote, are based on the investment style of your great-uncle Sir John Templeton, who was a renowned value investor himself. In what ways is his style of investing distinct from Buffett’s?
Both Uncle John and Warren Buffett studied under Benjamin Graham. So they’re both going to have that as a common denominator in their investment strategies. But the major difference between Sir John and Warren Buffett is the fact that Sir John pioneered global investing. So he’s known as a global investor, and although Warren Buffett has recently made some purchases outside of the United States, he’s largely known as a U.S. investor. I think that Uncle John had a competitive advantage over Warren Buffett in that he had a larger universe of stocks to study to find bargain opportunities.
Let me give you an example of why a larger universe of stocks is important. Uncle John was investing in Japan in the early 1960s at P/E ratios of 4x. So he was very early into Japan. U.S. investors started buying into Japan in the 1980s. Of course by that point stocks were overvalued in Japan, there was a huge bubble in Japan, headed toward a big stock market crash. Uncle John was already out of Japan by that time. He’d moved 60 percent of his assets into the United States, around 1981, 1982. At the same time, BusinessWeek was proclaiming the “Death of Equities” in the United States.
So because he had a larger inventory of stocks and the ability to invest in any country, he could move from Japan when Japan was getting overheated to the United States when stock valuations were very depressed. And he was capable of avoiding Japan’s bubble. I think it just makes more sense to increase your inventory or universe of stocks by looking overseas.
I think that Warren Buffett’s genius is in his investment vehicle. The way he structured Berkshire Hathaway is so smart. Uncle John managed a mutual fund, and managing a mutual fund is very difficult because the tendency of an investor is to withdraw capital at the worst time. So the mutual fund manager has to prepare for capital outflows when stocks are cheap and inflows when stocks are expensive.
We know Buffett considers management very important and values his relationships with people, whether he’s buying an entire company and leaving the current management intact, or buying a piece of a public company with a management team he admires. Two questions, then: Do you share this trait with him? And, if so, how do you suggest the average investor try to assess the management of companies he or she’s investing in?
We do share that trait with Warren Buffett. However, we assess a company’s management ability based on the numbers. So, studying their financial statements, we’re looking for companies that are growing faster than their industry, have higher operating margins than their industry, and higher returns on capital. Of course, when we study the company, we’re studying their compensation structure, we’re looking at accounting techniques to see if they’re being too aggressive with their accounting. A large part of that is simply that we’re a smaller firm and we can’t afford to go visit every single one of the management teams, but we do speak to them all before we invest. We get the best information, though, from their competitors. But yes, I think management is extremely important, but we judge that through a study of their financial statements.
You know, even Warren Buffett said, “You should invest in a business even a fool can run because some day a fool will.” Also, even though Warren Buffett places a huge degree of importance on management, he also looks at competitive advantage, economic moat, for instance. I think the average investor should look for companies that are growing faster than their industry, have higher operating margins than their industry, and higher returns on capital than their industry. And if they find a company that has those three qualities, they’ve located a good management team.
Buffett is legendary for the amount of reading he does and information he consumes. What do you read on a regular basis? What are your favorite books on investing?
On a daily basis, I read the Wall Street Journal. We always have the Economist lying around, all over our house, different editions of it, because it takes a long time to read it so I may still be working on an edition from back in July months later. On the weekends, we get Barron’s.
When I was a young person, one of the first books I read on investing was [James] O’Shaughnessy’s What Works on Wall Street and I really like that book. And I read Peter Lynch’s books and I enjoyed those. For someone who’s more serious about investing, I think The Intelligent Investor and Security Analysis by Benjamin Graham are must-reads. Common Stocks and Uncommon Profits by Philip Fisher is a really good book. Like everyone, we’re also reading a ton of data online. We have an online report that comes out on a quarterly basis called the Maximum Pessimism Report that we profile our contrarian investment strategies in and that’s been really well received. But I love to read other value managers’ newsletters. I like to read the quarterly reports from mutual funds that I own. Really, anytime that I can get my hands on another manager’s letters or information that I respect and agree with their strategy, that’s very helpful to me.
Buffett’s known for staying well within his circle of competence, leaving areas like technology companies largely alone. Do you share this investing trait with him?
Yes, very much so, especially as a value investor. As a value investor, if I can’t value it, I can’t invest in it. So that kept us out of a lot of financial stocks that were showing up in our screens during the financial crisis. We couldn’t get our arms around the balance sheets so we couldn’t invest in them. How do you value something if you really don’t have a transparent view of the balance sheet? Of course that keeps us out of biotech and industries like that where there’s just no good way for us to value the company. So if we can’t value it, we can’t invest in it.
You’re familiar with some of the research about the differences between men and women investors. To you, what’s the most interesting aspect of this research?
About two years ago I had the great privilege of participating in a discussion out in California, with about fifteen hedge fund managers. The purpose of the discussion was to discuss freedom and free enterprise, but the discussion was led by neuroeconomist Paul Zak from Claremont University. He’s produced some amazing research, which has some financial implications. It just made me so excited about the field of behavioral finance and neuroscience and the differences between men and women and that’s really what I’ve been studying for the past two years. So the books on my bedside table right now are all related to that field. It is really fascinating stuff. I guess I am drawn to it because there are few women in my profession and it is interesting to consider how gender influences my behavior. Also, behavioral finance and value investing are very compatible subjects.
What advice would you pass along to beginning investors?
Start early, start now.
So, start investing at eight years old?
Yes, actually! Compounding is magic. You’ll laugh at this, but it’s true. My dad told me bedtime stories about the magic of compounding. It is magical, but the magic ingredient is time, so start early. But also, start early because you’re going to make mistakes and that’s OK, too. But go ahead and make those mistakes.
And then my biggest piece of advice is invest, don’t speculate. Approach a purchase of a stock as buying a portion of a business. And if you look at it through the eyes of a business owner you’re going to make wiser investments. I wish, for that reason, that every time people bought stock they were still issued a stock certificate. Because something about that, as a child, holding that stock certificate in my hand and having something to put on my wall that represented the share that I owned, it really gave me a sense of ownership in that business. And now with everything electronic and no one has stock certificates anymore, it feels like something investors are more apt to go in and trade because they have less ownership of it. I really like stock certificates.
When I graduated from college, I borrowed a very small amount of money from my father to buy a stock that one of my friends had recommended to me. And I borrowed the money, I bought the stock, and it really crashed in value. I lost a ton of money. I called my dad up and said, “Oh, I’m so sorry, I’ve lost the money.” And he said, “Great! That’s exactly what I was hoping would happen! Now you know there are no hot tips in the stock market; this is not a game of gambling. You have to do your homework and make wise investments. This is the best lesson I could have ever taught you. I was hoping that stock would go down in value.” It really taught me a lot because I was really upset about it. It’s not a casino. If you treat it like a casino then those are going to be your results.