I’ve just finished reading a great book titled – Sir John Templeton: From Wall Street to Humility Theology, by Robert Hermann which provides some great insights into the life and philosophies of the legendary value investor Sir John Templeton. There’s one passage in particular which encompasses Templeton’s strategy for finding undervalued bargains. The passage was taken from an article in Forbes titled – “The Principle of Maximum Pessimism”, January 1995. Here’s an excerpt from the book:
“People are always asking me where is the outlook good, but that’s the wrong question,” he responds. “The right question is: Where is the outlook the most miserable?”
Templeton calls this approach to investing “the principle of maximum pessimism.” Others might call it contrarianism. He explains it this way: “In almost every activity of normal life people try to go where the outlook is best. You look for a job in an industry with a good future, or build a factory where the prospects are best. But my contention is if you’re selecting publicly traded investment, you have to do the opposite.
You’re trying to buy a share at the lowest possible price in relation to what that corporation is worth. And there’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.”
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