One of the most famous contrarian investors of all time was Sir John Templeton. Templeton was remembered for a number of famous quotes including:
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the ultimate greatest reward.”
In the book, The Power of Failure: 27 Ways to Turn Life’s Setbacks Into Success, Charles Manz wrote a great piece on some of Templeton’s contrarian investments:
Some of the notable examples of Templeton’s against-the-tide investments include Japan in the 1960s when people thought the Japanese market was a mess and it would be crazy to invest there, Ford Motor Company in the late 1970s when the future looked very bleak for the auto giant, and Peru in the mid-1980s when political tension gripped the country and money and the middle class were fleeing. He committed significant sums in each of these cases and just a few years later earned millions on these investments.
Templeton saw significant stock market drops, which sent others into panic selling, as golden opportunities to invest. The best time to buy is when everyone is selling, the price is low, and there is almost nowhere to go but up, was the logic he espoused. This perspective extends to many other difficulties beyond financial investing. When things have hit bottom in some aspect of our lives, we have an opportunity to rebuild, to try something new and fundamentally different, to make an investment when there is little left to lose and a lot to gain.
So how to you invest like Sir John Templeton in 2017?
Templeton was very gracious with sharing his investing strategy, he provided 16 Rules for Investment Success, the rules of which still apply in 2017:
1. Invest for Maximum Total Real Return
This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped.
2. Invest—Don’t Trade or Speculate
The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short…or deal only in options…or trade in futures…the market will be your casino. And, like most gamblers, you may lose eventually—or frequently.
3. Remain Flexible and Open-Minded about Types of Investment
There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities.
The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.
4. Buy Low
Of course, you say, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic.
5. When Buying Stocks, Search for Bargains Among Quality Stocks
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high profit-margin consumer product.
6. Buy Value, Not Market Trends or The Economic Outlook
A wise investor knows that the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market.
7. Diversify. In Stocks and Bonds, as in Much Else, There is Safety in Numbers
No matter how careful you are, you can neither predict nor control the future. A hurricane or earthquake, a strike at a supplier, an unexpected technological advance by a competitor, or a government-ordered product recall—any one of these can cost a company millions of dollars. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren’t apparent when you bought the stock.
8. Do Your Homework or Hire Wise Experts to Help You
People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful. Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. The earnings on stock market indexes—the fabled Dow Jones Industrials, for example—fluctuate around the replacement book value of the shares of the index. (That’s the money it would take to replace the assets of the companies making up the index at today’s costs.)
9. Aggressively Monitor Your Investments
Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent.
10. Don’t Panic
Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.
Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
11. Learn From Your Mistakes
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.
12. Begin With a Prayer
If you begin with a prayer, you can think more clearly and make fewer mistakes.
13. Outperforming the Market is a Difficult Task
The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.
14. An Investor Who Has All the Answers Doesn’t Even Understand All the Questions
A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.
15. There’s No Free Lunch
This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job, or built the first car you ever owned, or sponsored a favorite television show of long ago may be a fine company. But that doesn’t mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high.
16. Do Not Be Fearful or Negative Too Often
And now the last principle. Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies.
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