John Templeton: Buying When Everyone Else Is Terrified

John Templeton made his name by buying at what he called the point of maximum pessimism. When other investors could see only bad news, he saw low prices. He applied the idea for seven decades and across the whole world.

The 1939 trade

In 1939, as war began in Europe, Templeton borrowed about $10,000. He told his broker to buy 100 shares of every stock on the New York exchanges trading below one dollar. That came to 104 companies, 34 of them in bankruptcy.

His reasoning was that war would revive demand across American industry, and the weakest firms had the most to gain. Four years later he sold the basket for roughly four times his outlay. Only a few of the companies proved worthless.

Two features are worth noting. He bought a wide basket, so no single failure could hurt him. And he acted on a clear thesis, not on cheapness alone.

Maximum pessimism

Templeton described the life of a bull market in four stages. It is born on pessimism, grows on scepticism, matures on optimism and dies on euphoria. The best time to buy is the first stage and the best time to sell is the last.

This is easy to say and painful to do. At the point of maximum pessimism, the reasons to sell are real, widely known and frightening. That is exactly why the price is low.

Looking where others would not

Templeton launched the Templeton Growth Fund in 1954 and became a pioneer of global investing. American investors at the time rarely looked abroad. He asked a simple question: where in the world are shares cheapest relative to their worth?

In the 1960s the answer was Japan. Japanese companies were growing quickly and traded on very low multiples, and foreign investors distrusted them. Templeton put a large share of his fund there and began selling as the country became fashionable, years before its bubble burst.

He sold into euphoria too

The same logic ran in reverse. In early 2000 Templeton, then in his late eighties, bet against a group of technology stocks. He timed the shorts for just before company insiders were free to sell their shares. He reportedly made tens of millions of dollars in months.

The habits behind the courage

Templeton's nerve had practical supports:

• He kept a wish list. He researched companies in advance and set the prices at which he would buy, so a panic required action, not thought.
• He lived away from the crowd. He ran his fund from the Bahamas and said distance from Wall Street improved his results.
• He avoided personal debt. After 1939 he rarely borrowed, so he was never a forced seller.
• He diversified. He expected to be wrong about a third of the time.

What to take from it

• Prepare a list of what you want to own, and at what price, before the panic.
• Ask where pessimism is greatest, including outside your home market.
• Buy baskets when you cannot tell which company survives.
• Keep yourself free of debt so that you can act when others cannot.

Part 11 of 15 in the series Lessons From the Masters. Next: What Retail Traders Can Learn From Renaissance Technologies.

Independent educational commentary, not investment advice. References to people and firms do not imply affiliation or endorsement. The picture is an illustration, not a photograph. Past results say nothing about future ones. Trading leveraged products carries a high risk of loss.