“I never ask if the market is going to go up or down because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it’s worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.” ~ John Templeton
Sir John Templeton’s “16 rules for investment success” remain relevant in today’s volatile economic environment as they have for several decades.
Sir John Templeton was an investor and mutual fund pioneer who became a billionaire by pioneering the use of globally diversified mutual funds. He is known for searching far and wide for investments across countries and not restricting investments to UK or USA.
One of Templeton’s most noteworthy examples of investment success occurred when he bought stocks in 1939.
During the opening weeks of World War II and in response to the stock market crashing, Templeton bought 100 shares in stocks which were selling for $1 or less. Four out of the 104 companies in which he invested turned out worthless while he realized significant returns on the other companies.
John Templeton’s 16 rules for investment success include:
- Invest for maximum total real return. Templeton advises investors to be aware of how taxes and inflation erode returns and to avoid putting too much into fixed-income securities, which often fail to retain the purchasing power of the dollars spent to obtain them.
- Invest – don’t trade or speculate. Templeton warns that over-action and too much trading can eat into potential profits and eventually results in steady losses.
- Remain flexible and open-minded about types of investment. No one investment vehicle, whether it’s bonds, stocks, or futures, works best all the time. That being said, Templeton notes that the S&P 500 has “outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s.”
- Buy low. While this advice might seem obvious, it often means that you’ll have to go against the crowd. When equities are popular and in demand, their prices are generally higher. Opportunities to buy low usually only come when when people are pessimistic about the market’s performance.
- When buying stocks, search for bargains among quality stocks. Templeton advocates identifying sales leaders, technological leaders, and trusted brands when selecting stocks to ensure a company is well-positioned and well-rounded before purchasing its stock.
- Buy value, not market trends or the economic outlook. Templeton emphasizes that individual stocks determine the market and not the other way around. The market can disconnect with economic reality.
- Diversify. In stocks and bonds, as in much else, there is safety in numbers. There are several advantages to portfolio diversification: you’re less likely to endure a major loss due to a freak event that devastates one company, and you also have a larger selection of investment vehicles from which to choose.
- Do your homework or hire wise experts to help you. Sir John insists that you must be aware of what you’re buying. In the case of stocks, you are either buying earnings (if you expect growth) or assets (if you expect an acquisition).
- Aggressively monitor your investments. Templeton notes that “there are no stocks that you can buy and forget.” Markets are in a state of perpetual flux, and change instantaneously. If you’re not aware of the changes, you’re probably losing money.
- Don’t panic. Even if everyone around you is selling, sometimes the best idea is to take a breath and hold on to your portfolio. In the event of a sell-off, only divest if you have identified more attractive stocks to pick up.
- Learn from your mistakes. The stock market is a lot like university: it can cost a lot of money to learn a few lessons. So don’t make the same mistakes twice. Learn from them, and they’ll turn into profit-making opportunities the next time.
- Begin with a prayer. Templeton believes this helps a person clear his or her mind and make fewer errors during a trading session or in stock selection.
- Outperforming the market is a difficult task. This rules, in effect, is a reality check. The largest hedge funds produce some extremely volatile returns from year to year, and some have produced negative returns. And those are the experts!
- An investor who has all the answers doesn’t even understand all the questions. “Pride comes before the fall.” Likewise, overconfidence or certainty in one’s investment style or knowledge of the market will inevitably end in failure.
- There’s no free lunch. Never invest on sentiment, on a tip, or on an IPO just to ‘save’ commission.
- Do not be fearful or negative too often. While there have been plenty of bumps along the road, Templeton acknowledges that for “100 years optimists have carried the day in U.S. stocks.” In his opinion, globalization is bullish for equities, and he thinks stocks will continue to “go up…and up…and up.”
His lessons are the end result of a lifetime of knowledge, and include advice on stock selection, going against market sentiment, keeping your cool, and putting investing in perspective.
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