In the world of investing, perceptions often differ from reality. This article delves into the lessons drawn from historical market sentiments, particularly through the eyes of famed investor John Templeton.
In 1939, a decade into the Great Depression and amidst the devastation of World War II, investor confidence plunged to new lows. Daily newspaper headlines echoed a somber sentiment, indicating that the end was near for many.
The New York Times front page on September 1, 1939, dramatically captured this turmoil with the following headline:
GERMAN ARMY ATTACKS POLAND;
CITIES BOMBED, PORT BLOCKADED;
DANZIG IS ACCEPTED INTO REICH
Against this bleak backdrop, the potential for wealth creation seemed virtually nonexistent. The unemployment rate in 1939 stood at a staggering 17.2 percent, and rampant bank runs had eroded public trust in financial institutions. For many, the safest bet appeared to be hiding cash under the mattress.
However, not everyone shared this perspective.
A young man named John Templeton from Winchester, Tennessee, opted for a more daring approach, one that demonstrated both his conviction and foresight.
Templeton graduated from Yale in 1934 and received a Rhodes Scholarship to Oxford. After studying law in England, he embarked on an expansive journey through 35 countries over seven months. This expedition revealed to him the vast investment opportunities that lay beyond the borders of the United States.
He entered the realm of Wall Street in 1937, at the age of 25, and by 1939, he was prepared to implement the investment strategy he had meticulously crafted. This strategy was notably risky and contrarian.
Contrarian to the Core
With a bold move, Templeton borrowed $10,000 (equivalent to approximately $192,282 today) and purchased shares of 104 companies, all trading at $1 per share or less. His instinct told him that despite the prevailing negativity, the onset of war would eventually stimulate the economy.
He recognized that not every stock would pan out—37 of them were already in bankruptcy. However, by diversifying across such a wide array of companies, he believed he could mitigate the risks of total loss. How did this strategy ultimately fare?
Templeton held onto these stocks for an average of four years and, in the end, turned his initial $10,000 investment into $40,000.
His stocks yielded above-average returns largely because they were predominantly from troubled companies. Templeton understood, with remarkable clarity, that for financial assets to be available at enticing bargain prices, there often had to be underlying issues.
The guidance to “buy low and sell high” seems straightforward, yet in practice, it can be profoundly unsettling. The psychology surrounding stock purchases often behaves contrary to that of other acquisitions.
Most individuals can easily identify a good deal on clothing or electronics, yet when it comes to stocks, they frequently end up buying high and selling low, driven by fear and greed.
By 1940, Templeton had acquired a small investment firm, which laid the groundwork for his future investment management business. In 1954, he launched the Templeton Growth Fund, which consistently outperformed the S&P 500 until his sale of it to Franklin Resources in 1992.
Investing $10,000 in the Templeton Growth Fund in 1954 would have grown to nearly $2 million, assuming dividends were reinvested, by 1992. This translates to a remarkable 14.5 percent annualized return, compared to the S&P 500’s 11.6 percent during the same period.
This three percent difference over 38 years accumulated into a significant disparity in overall returns.
“Where is the Outlook Most Miserable?”
Templeton’s impressive investment success was marked by his contrarian strategy and inherent volatility. Central to his investment philosophy was the belief in acquiring quality stocks at bargain prices during periods of “maximum pessimism.”
He consistently applied this approach across various countries, industries, and companies. In a 1988 interview with Forbes, he noted:
“People are always asking me where the outlook is good, but that’s the wrong question. The right question is, ‘Where is the outlook most miserable?’”
Though Templeton passed away in 2008, his insights remain relevant today. With the S&P 500 once again at unprecedented highs, his words resonate with renewed significance.
“To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”
This principle is straightforward, yet challenging to apply. At present, many U.S. stocks appear dramatically overvalued by standard metrics, yet few are willing to part with them.
Like Templeton, we advocate for asset diversification. We’ve structured the Wealth Prism Letter portfolio with this principle in mind and remain vigilant for contrarian opportunities.
The current U.S. stock and credit markets represent one of the largest bubbles most of us will encounter in our lifetimes, having been distorted by unprecedented fiscal and monetary measures.
Many who consider themselves diversified through an S&P 500 index investment or similar broad market benchmarks may face a rude awakening. Passive investors often overlook that these indexes weight components by size, leading to an increasingly top-heavy structure as a select few stocks dominate the market.
For instance, ten years ago, the top five U.S. stocks constituted just over 10 percent of the S&P 500. By July 2021, that figure had risen to 20.3 percent, with the top 10 making up 27.7 percent of the index’s market capitalization.
This concentration means many passive investors are inadvertently tied to a handful of companies. When the inevitable market downturn occurs, they will discover that these passive indexes do not provide the diversification they often promise.
True diversification, as Templeton demonstrated, requires diligent effort: research, analysis, and genuine self-reflection. It necessitates a contrarian attitude and the willingness to venture into areas with the least favorable outlooks. Additionally, it demands the patience and resolve to uphold one’s convictions.
In conclusion, the tenets of contrarian investing—pioneered by Templeton—remain pertinent today, urging investors to seek opportunity where others see despair. As we navigate this complex financial landscape, let us remember that true success often lies just beyond the shadows of pessimism.
Sincerely,
MN Gordon
for Economic Prism
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