Wednesday, April 6, 2011

An Age of Genius

Sir John Templeton was one of the last century’s greatest investors who, like most people who exhibit unusual skill in the financial markets, had an appropriate view of the balance between investing fundamentals and investor psychology. At one level Templeton's approach to investing was simple and familiar: go against the flow and seek out opportunity where no one else dares to look. As usual, the problem with such advice is that it’s very easy to give and very hard to take.

But Sir Templeton could go against the flow and make money. Here are some examples:

The DotCom boom
In year 1998 to 2001, everyone knew that the dot com stocks were price at absurd levels. But, no one could short them since there was no opportunity to do so. Sir Templeton figured that the entire dotcom experience was based on momentum. He also figured that the company owners would know this but would be unable to sell for a six month lock-in period after IPO. Ergo, they would sell out as soon as this period finished and effectively reverse the momentum.

He identified and shorted 85 different stocks in the run up to their founder's lockouts ending and walked away with a million bucks for every year of his life.

Templeton's philosophy was captured in 'the ten maxims'

Some of his quotes were:
“When any method for selecting stocks becomes popular, you need to switch to unpopular methods"

" It is impossible to produce superior performance unless you do something different from the majority."

The Templeton Moment

Of course, perhaps the most permanent reminder of Templeton’s philosophy is the so-called “Templeton moment”: the point of maximum pessimism:

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the right time to sell”.


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