Introduction

Sir John Templeton was, by common repute, one of the most successful and best-known professional investors of the past 100 years, as well as an outstanding philanthropist, knighted by the queen of the United Kingdom in 1987 for his many years of charitable work. Forbes magazine dubbed him “the dean of global investing,” in recognition of the trail he blazed in seeking to invest across the world when others were too afraid to do so. Louis Rukeyser, host of Wall Street Week, a popular network television program, on which Templeton appeared many times, said that this “quiet, deeply religious man” was “one of the genuine heroes of Wall Street.” Prem Watsa, a Canadian fund manager, described Templeton more recently as a “wonderful man and, for all practical purposes, perhaps the greatest investor of all time.”1

The detailed research we publish in this book confirms that John Templeton was indeed one of very few professionals who can rightly claim, hand on heart, to have consistently obtained the Holy Grail of stock market investment—above average returns with below average risk. In his case this was a record that he sustained for the best part of half a century. His best-known mutual fund, the Templeton Growth Fund, never once in 38 years under his guidance failed to deliver a positive real (inflation-adjusted) return over any 60-month period. This is a record that only a handful of other professional investors can claim to have achieved over such a long period.

Four years after his death, Templeton’s name and investment philosophy live on around the world through a wide range of funds that either carry the Templeton name or claim to use his methods. Many billions of investors’ money is today managed on the basis of the simple but profound principles first laid down by a man who stands comparison with Warren Buffett, George Soros, Peter Lynch, and a handful of others as one of the all-time greats of the modern investment world. The reason for this enduring legacy is simple: His investment methods have stood the test of time. They work, and in this book, timed to coincide with the 100th anniversary of his birth, we set out to explain what those methods were, the truth about his track record as an investor (there are a number of surprising myths), and why and how his methods continue to be relevant today.

Given how many words have been written already on the subject, it is legitimate to inquire whether the world needs a further book on the Templeton approach to investment. We asked ourselves the same question when we originally considered embarking on this project. Amazon, the online bookseller, lists no fewer than 50 books, for example, about Templeton’s life, investment approach, and spiritual concerns. We came to the conclusion, however, that there is still room in the market for a single-volume, independent assessment of Templeton’s investment methods and philosophy, written from a professional rather than a religious, philanthropic, or family perspective; and with the future, not the past, in mind.

These are the main reasons why we believe that a single-volume study that seeks to encapsulate the essence of John Templeton’s investment wisdom is both fresh and timely:

1. A fresh perspective.

Some of the many books published about Templeton’s life and methods in the past have verged, we think it is fair to say, on hagiography. Many seem to have been written to advance his philanthropic and religious interests rather than primarily to enlighten investors. Others are either out of print, or sponsored works by close associates, published with the assistance of one of Sir John’s charitable foundations. This one, in contrast, aspires to be an independent and objective contemporary assessment by two investment professionals with many years of direct experience in the investment business. The 10 years that one of the authors (Sandy Nairn) spent working directly for Sir John have given us additional first hand insights into what his approach to investment means in practice.

2. Access to new material.

We are fortunate to have had access to a considerable amount of previously unpublished information. This includes copies of the letters that Sir John wrote to his investors and clients over the course of 50 years, as well as detailed data and analysis of his performance record that have not been professionally published before. In 1993 Mark Holowesko, then chief investment officer of Templeton’s fund management business, began the practice of circulating around the offices of the Franklin Templeton group copies of internal memos and letters the firm’s founder had written in the past. They proved popular with the firm’s employees and remain an invaluable source of insight into his thinking. We reproduce extracts, with our comments, in this book—some in the text, and others in the Appendix. As with the essays of Warren Buffett, the clarity and insights that characterize Templeton’s writings instruct as well today as they did at the date of origin.

3. Timeless lessons.

Sir John’s philosophy of investing, which is built around the presumption that investors must have the courage and patience to ride out economic and market cycles and stick to a rigid investment discipline, remains highly relevant today. Twice already this century, from 2000 to 2003, and again from 2007 to 2009, investors have experienced savage bear markets in which stock markets around the world have fallen, peak to trough, by around 50 percent. Many investors remain shell-shocked and disillusioned by the losses they have incurred as a result. Had they followed a disciplined Templeton approach, we can show that they would not have fared nearly as badly as many did. Nor, we can say with confidence, would they have become so disheartened. John Templeton was an optimist by temperament, but, like many great investors, saved his best investment performance for bear markets, underlining the fact that success in investment is just as much about avoiding losses and preserving what you have gained, as it is about picking winners.

4. Methods that work.

Sir John’s track record as an investor, as we have noted, is remarkable not just for the consistent returns that he produced for his clients and fund investors, but also for their below average risk. Ten thousand dollars invested in the Templeton Growth Fund, his first mutual fund, at its launch in 1954 would have grown to $1,736,100, 38 years later. The fund outperformed the equity market for four decades at a compounding rate of more than 3.7 percent per annum. In investment terms, where investment genius is typically measured in fractions of a percentage point of superiority against the market averages, this margin of outperformance constitutes a genuinely extraordinary track record.

Standard financial theory holds that such a sustained period of outperformance can only have been achieved by luck, or by the fund manager taking additional risk. Yet, as we will demonstrate, the fact is that the Templeton Growth Fund produced its exceptional performance with less, rather than more, risk than the average fund.

As a value investor, John Templeton’s approach to markets was rooted in the simple but powerful idea that buying assets for less than they are worth is the most certain and the least risky path to superior investment returns. We demonstrate with original research why these methods do indeed work; why they are so often misunderstood; and why so many investors in practice fail to take advantage of them.

5. Current opportunities.

We believe it is important for investors today to appreciate that the events of the past 10 years, that encompass the Internet bubble and its consequences, the tragic drama of 9/11, and the Iraq war, as well as the great global financial crisis of 2008 and its aftermath, reinforce the importance of some fundamental truths about investment. One is that there are always opportunities to make money, even when the outlook appears particularly gloomy. One of Sir John’s favorite maxims was that “the time to invest is at the point of maximum pessimism.” Despite, or perhaps because of, having lived through the Great Depression during his formative years, he himself, by virtue of his temperament and personal faith, retained an unshakeable faith in the capacity of mankind to rise above adversity, which he was confident would in due course be translated into attractive investment returns. In the final part of the book, we look at where some of the best long-term opportunities now appear to lie.

6. Morally defensible investing.

After the collapse of Enron, the uncovering of Bernie Madoff’s vast Ponzi scheme, and the excesses of bankers during the recent credit crisis, investors’ faith in the institutions that look after their money has been badly shaken. John Templeton’s life and career is a timely reminder that success on Wall Street, in the City of London, and in other financial centers can be achieved without sacrificing the old-fashioned virtues of courage, honesty, and integrity that now appear to be so regularly and so blatantly disregarded in the financial industry. Throughout his professional career, initially as an investment counselor and later as a fund manager, Templeton demanded and set the highest professional standards. As a matter of personal habit he was invariably punctual, courteous, and polite; and in a business career spanning more than 60 years, he took comfort in never having been sued, and in never, knowingly at least, having made an enemy.

7. An inspirational life.

It is important, finally, not to lose sight of the fact that John Templeton’s life and career are evidence of the importance of personal commitment and endurance in the face of adversity. The young man from Winchester, Tennessee had to overcome many obstacles and setbacks on the way to acquiring the exalted reputation and wealth of his later years. When he was an undergraduate, at the height of the Great Depression, his father told him that he could no longer afford to finance his university education. Templeton was forced to scratch around to find the means to pay his own way and complete his education. Twenty-three years later his first wife was tragically killed in a motor accident, leaving him for several years alone with three young children to bring up on his own. Although his greatest financial success came only after the age at which many people have retired, his story remains an inspiration to anyone who wants to believe that it is possible to become wealthy and lead a fulfilling life at the same time.

The year 2012 marks the 100th anniversary of Sir John Templeton’s birth. He was 42 years old when he launched the Templeton Growth Fund, his first mutual fund, and the vehicle that was eventually to make him both fabulously wealthy and internationally famous. When the fund was launched, he had already been an investment counselor for 16 years, one known to his clients as a shrewd and sensible adviser, but still relatively unknown to the wider investing public. Whereas today there are thousands of funds in which investors can choose to place their money, in 1954 the new fund was a genuine innovation, being one of the first of its kind to offer insular North American investors exposure to a diversified portfolio of non-U.S. stocks within a tax-efficient mutual fund structure.

Having sold his original investment advisory business in the early 1960s, Sir John was directly responsible for the management of the Templeton Growth Fund from its launch until he and his partners sold the Templeton fund management business to Franklin Resources in 1992, by which time its assets under management had grown to $21.3 billion. In 1987 he handed over day-to-day responsibility for stock selection to his assistant Mark Holowesko, but retained a watching brief over the portfolio. Twenty years after he sold and retired from the business that he had created, the Templeton Growth Fund and its many offshoots remain among the world’s largest equity funds.

The family of emerging market funds that John Templeton set up in 1987, in another of his far-sighted business decisions, alone accounted for $40 billion of assets under management in 2011. The track record of the funds’ management team, led by Dr. Mark Mobius, has demonstrated the efficacy of his mentor’s methods. In the 10 years to November 2011, the original Templeton emerging markets investment trust has outperformed its Morningstar benchmark by 4.3 percent per annum. The net asset value of the EP Global investment trust, managed by one of the authors, has similarly outperformed the MSCI World index by 3.3 percent per annum since its launch in December 2003.

After his retirement from the fund management business, Sir John devoted most of his time for the rest of his life to his philanthropic and religious work. His primary focus in the later years of his life became his Christian faith and the affairs of the Templeton Foundation, whose endowments he continued to watch over with an eagle eye. Funded by his considerable personal fortune, the foundation gives away more than $50 million per annum in grants, gifts, and other forms of financial assistance. It continues to fund an annual prize to reward those who have pioneered scientific research into spiritual phenomena. The Templeton Press has published scores of books and articles that emphasize the importance of spiritual development.

While his faith was a central part of his life, his religion plays only a tangential part in this book, which deliberately focuses solely on his investment career and beliefs. Right up until his death at the age of 95, Sir John continued to study investment trends and followed financial events around the world with an unswerving attention to detail. His eye for a bargain remained as keen as ever. During one of our conversations in the initial research for this book, we mentioned the fact that some privately owned businesses in the United Kingdom were then selling very cheaply, at two to three times earnings. “Gee,” he replied, quick as a flash, “I would be interested in hearing more about those. Can you send me some details?” He was 91 at the time.

At the same time, his sense of the many risks confronting the world remained acute. As early as 2003, for example, he was expressing his concern to us about the bubble that was developing in the property market on both sides of the Atlantic. This was fully four years before the subprime mortgage crisis was to send the housing market in the United States into a tailspin and the world financial system into its worst crisis for more than 70 years. This crisis was one that John Templeton publicly identified in advance, just as 20 years earlier he had correctly and publicly forecast both the onset of the great stock market boom of the 1980s and 1990s and the investment potential of emerging markets. Such global awareness was one of the key factors behind his impressive track record as an investment adviser and fund manager, and the reason that his public pronouncements were so widely followed for so many years.

The purpose of this book is to explain, as clearly as we can, the lessons and implications that we believe can be drawn from Sir John Templeton’s life, experience, and investment wisdom. As such it is not a biography; nor is it simply an analysis of what he said and did, although the book inevitably has elements of both. We would like to think of it more as a handbook for those who are interested in understanding and applying the philosophy of investment that John Templeton developed and practiced for so many years. Such an understanding is relevant to both private and professional investors, from whatever part of the globe they come. Because he spoke so much sense, and had an uncanny ability to express himself in simple language, it has proved impossible not to quote liberally from his own writings and observations.

The book is structured as follows. Chapter 1 reviews the story of John Templeton’s life and career. This has been told many times, but we are able to add some new detail, correct one or two myths, and draw on original interviews with a number of those who worked closely with him. Chapter 2 provides fresh insight into the way that Templeton, in the first stage of his professional career, operated as an investment counselor, quoting liberally from previously unpublished letters to clients and memoranda to his colleagues. In Chapter 3 we look in detail at the track record of the Templeton Growth fund, and attempt to answer the question: Just how good was he as a fund manager? We also analyze when and under which conditions his fund achieved its outperformance. Chapter 4 returns to the main themes of his investment philosophy, and how he applied them. We look at the difficulties and challenges of applying his investment philosophy and process in practice, contrasting the way that he went about his decision making with that adopted by most investors. In Chapter 5 we demonstrate, with the help of an exhaustive proprietary study of market behavior in 35 countries, why his particular analytical methods were (and remain) conducive to producing superior long-term returns. In Chapter 6 we summarize our conclusions and look back at recent market experience, attempting to interpret what has happened from a Templetonesque perspective. We conclude with an assessment of the investment opportunities and threats that face investors today. The Appendix contains a selection of memos written by John Templeton that we think will be of interest to the student of his methods and beliefs. Other memos from the same source, which we do not have space to include, can be found on the Independent Investor web site (www.independent-investor.com/templeton-memos).

The idea for this book was not his, and Sir John did not, sadly, live to review our manuscript. Although he gave the project his blessing and encouraged us to speak to his associates, this is not an officially authorized account of his life and methods. It may be worth emphasizing that we have neither sought, nor received, any financial support from either his family or his foundation. We are grateful, however, to the Executors of his Estate for permission to quote from his memoranda and letters, and to all those who agreed to speak to us about their experiences working with him. All matters of interpretation remain our responsibility. In particular, we would emphasize that in the final section of the book, where we examine the current outlook for investors from a Templeton perspective, the views are of necessity our own, rather than his or those of the Franklin Templeton group. For stylistic reasons, we have found it easier to refer throughout the book to our subject either as John Templeton or simply Templeton, and only exceptionally as Sir John, the honorary knighthood bestowed on him in his seventies. We are open to receiving comments and other source material from those who worked with this great investor during his life, and will endeavor to incorporate them in future editions.

Jonathan Davis

Alasdair Nairn

London and Edinburgh

December 2011

Notes

1. Interview with Prem Watsa, CFA Magazine, Sept–Oct 2011.