Templeton's Way with Money - Strategies and Philosophy of a Legendary Investor

John Templeton
1) User of market timing and undiscovered markets to buy Cheap Stocks. Global contrarian and focus on emerging markets (Japan) with good work ethic. Buy stocks for less than what they are worth, hold them as long as it takes for market to appreciate how undervalued they are. Know how to go analysis in depth and go against conventional wisdom.

2) Importance of building initial reputation of competence and branching out to advertise your latent skills. Although you are competent, if you don't advertise it sufficiently, you will not be profiting off your skills.

3) Templeton fund despite impressive long term returns, is nonetheless vulnerable to bear markets. In early to mid 1970s, value of fund fell in 3 out of 5 years. It can decrease by 9.9% in 1973 and further 12.1% in 1974. Loss is less severe due to defensive nature of rigorous value orientated approach in portfolio.

Fluctuation of share price is approximately square root of price. A 4 dollar stock (st electronics) can gain / lose up to 50% of its value (2 to 6 dollars).
A 9 dollar stock (Ocbc)  can gain lose up to 33% of its value (6 to 12 dollars)

4) Importance of working away from and ignoring the noise in the market.

5) To beat the market, you must not buy the same stock as most people. Recluse allows you to clear your head from market noise and buy things other are selling, and sell things other are buying. Spend less time on catching up with market news and more time on bottom up analysis /research reports.

6) Know how to focus on your views and ignore doom sayers and wannabes whom talk loud but know little. 

7) Methodology
1) Company current earnings, balance sheet, cash flow. Project the growth several years into the future.
2) Even if share does not meet conventional value criteria, such as high dividend yield or low historic earnings multiple, look at whether key performance parameter has potential to grow in near future. Know how to project the PE in 5 years time and not just look at historical PE.
3) Focus on savings and accumulation
4) Know how to break down complex things into simple issues
5) Buy stocks when they are on discount. Sell stocks if they are simply overvalued.
6) Pick people from different background and not just top business schools. Those people are conditioned to think in particular way and will delve into herd instinct and tunnel vision.
7) Stock price exhibit a relationship to current earnings (buy stocks with low cyclically adjusted P/e ratio)
8) Stock price exhibit a relationship to the current cost of replacing assets of corporation (tobin's q)
9) Upon a change in tax law or money supply, high grade preference shares sell lower in relation to dividends. Common stock should sell lower in relation to earnings and vice versa. (Federal reserve model)
10) Use dollar cost averaging to adjust client's stock market exposure for different levels of the stock market. Importance of discipline to follow through in the long run. Buy more when prices are low and less when prices are high. Use DCA to let clients sleep well at night and not worry about market timing.
11) Stock with very high dividend yields (valued by value investors) are not expected to outperform low yielding stocks with superior growth prospects. (Money is not reinvested in the company but paid out as dividends)(Stalwarts)(focus on capital gain instead of dividend yield)
12) Use short term speculators to provide liquidity to the market. The best stocks have market value lowest in relation to intrinsic value. Revalue the stock every 3 months. Buy and sell stocks whenever there is unreasonable valuation.
13) short term movements are unpredictable. Fundamentals take 3-5 years to price in. Market and stock over / undervaluation can take up to 3 years to take effect. Knowing the importance of keeping cash holdings when market is too expensive.
14) Value investor allows investors to buy better bargains and sell when its overpriced. Giving him peace of mind in times of great distress.
15) You will buy stocks that are unpopular. Unpopular stocks will be depressed greatly below intrinsic value. What is low can go lower and you cannot predict when the market will finally price in the fundamentals. Do a average down if fundamentals are still sound instead of market timing.  Downtrends can persist for at least a few weeks or even years.
16) Aversion of using leverage to amplify returns / losses. The market can stay irrational longer than you can stay liquid.
17) Never invest in countries that expropriate property, high tax rates, don't respect intellectual property rights
18) Avoid Companies that accumulate too much debt and heavy acquisition to improve self image.
19) Choose companies that has good credit history and ability to repay debts, don't use financial gymnastics and manipulate accounting statements, don't over rely on taking advantages of others.
20) Choose countries (Japan, Korea) that has ethical culture of hard work and personal responsibility
21) Take into account taxation, purchasing power of currency, cost of implementing investment strategy (trading expense, professional fees, management charges)
22) A company that has ability to generate consistent dividend is a symptom that the company is self sufficient and can improve profitability
23) Don't trade or speculate. Short run prices follow random walk. Poor evidence that it can consistent make money. Technical analysis (momentum trading) is analogous to autocorrelation, and you are taking too much risk for non consistent returns. Believing in there is a greater fool out there can self destruct.
24) Be hungry to learn and always search for new ideas. Simple correlations could signify that there are undiscovered reasons that may affect investment outlook of companies.
25) Buy stocks at discount. Avoid hot stocks as when every investment advice is calling a buy, most likely all the information is already priced in and it is no longer discounted. Contrarian strategy only works if valuations is low and sentiment is averse. Sentiment alone is not sufficient as a margin of safety.
26) Choose strong companies that has strong management, proven track record, investment in r and d, industry with continued growth potential, branding power, low cost production, competitive advantage, investment moats. Only buy at discount as future prospects may not be something sailing and you may still lose money
27) Bottom up analysis. Buy stocks not trends or market outlook. Bear makets don't coincide with recessions. Bull makets climb a wall of worry. One never knows when will share prices will finally price in fundamental change. Holding period of 4 to 5 years for share price to price in fundamentals. Dismiss economic forecasts and make your own individual judgement. Earnings never grow in a straight line in forecasts. 6 out of 10 correct investment decisions alone can beat the market.

28) Special attention to cyclical companies (semiconductors, oil and gas, technology). Profit margin and sales is depending on cycles. You cannot use forecasting methods to predict the earnings.

29) Diversify as a risk management measure in case your analysis is wrong.
30) Buy and sell stocks based on the soundness of the analysis and not share price. Don't be caught up with buying at the bottom and selling at the top. Market sentiment changes rapidly and you cannot predict what will happen.
31) A lot  of forecasts can turn out to be wrong even by the brightest minds and strongest companies. Companies and countries evolve from large creditors to debtors. Economic wealth can shift to different countries.
32) Sell before a crash not afterwards. Never be influenced by market noise. Only sell stocks if there are other better ones. Hold on to what you have if there are no opportunities. Have time horizon of 5 years to buy cheap stocks and sell overvalued ones. Place latent orders at the broker to execute, when pricing action discounts stocks below fundamental value. There is no statistically significant relationship between one to two year forward earnings with future share price performance. There is strong and close correlation of share prices and forward earnings over 5 years. There is a strong correlation between total returns (dividend and capital gain) and 5 year forward pe ratio. However, a lot can change within 5 years and there is no guarantee of success. Hence the importance of diversification.

33) Don't hunt for scapegoats to take responsibility for mistakes. Take active methods to rationalise / wrote down every buy/sell/hold decision. Buy low sell high is easy to understand but immensely difficult to execute. Hard work for bottom up analysis and the stomach to stick to the soundness of your analysis is required.
34) It is increasingly hard to beat the market by amateur and professional investors in the long run due to availability of information in the market and investment knowledge and strategies. Most of the best funds and investors made their greatest gains before the 1970s and are only sitting on compounding effect and past success to bolster their records. It takes great courage to be different as most investors take information from other investors. You may get sacked based on short term 1-2 year poor returns, before the market price in the fundamentals in 3-5 years times. Contrarian investing will be fending a lot of criticism and attacks and short run poor performance before the fundamentals are priced in. Stocks often fall to 20% after initial investment.

35) Critique of modern portfolio theory to to use negative correlated investments to reduce risk and enjoy risk free return. Its basis is on building pofolios based on backtesting historical data, enter irrelevant statistical inputs like historical volatility. Financial correlations and variables are not consistent and diverge in times of market stress and not everyone can hold out in the long run.
36) Historically, people have found discoveries and new ways to improve on things and overcome adversity , but yet still always prone to worry. Humans always enjoy the fruits of labour yet irrationality remain gloomy about future prospects. If intellectual property rights are protected, it will encourage innovation and inspire people to do better.
37) Use different strategies to invest in different periods of markets trends and stocks. There is no one best method implementation method, but must be rooted to rigorous fundamental principles. Earnings and forecast of  5 year future earnings is his core to any approach. Any well published methodology will lead to stocks defiling that criteria being bought out and lose its discounted status.
38) market cycles recover and decline in extremely rapid and unpredictable ways. Value base on its cash flow, balance sheet, debt ratio and survivability, order ratios,

value pharmaceutical companies led by pe ratio, drugs pipeline, length of patents, political risk and patent protection, balance sheet, net cash, earning growth,

Value chemical stocks by overcapacity, cash flow, balance sheet,

Metals and commodities
Determine the connodity price in which the industry as a whole is able to replace it's assets (cost of replacement and survival) If commodity price falls below replacement expense,  industry is set to decline further. Once the weak are taken out, the survivals can take over the market and there will be capital shortages after a number of years, which boosts the profits and profit margin of the survivals.

39) Too many people depend on linear extrapolation to see the future although market moves in cycles. Once everyone declares this time it is different, it is time to move into alternative investment strategies.
40) When there are no more cheap stocks, sell the overvalued and accumulate cash. Buy and sell stocks based on intrinsic value and NOT share price

How to hook investors to stay on
i) Importance of convincing investors market fluctuations are opportunities instead of cause of concern.
ii) Assign brokers to have long personal talk with client about his portfolio at least twice a year.
iii) Build a great client experience and let him feel his portfolios is subject to continuous restudy and follow up.
iv) Give him a program and a direction to focus on instead of being engrossed with market noise and fluctuations.
v) If you cannot sell yourself, sell the competence of the internal teams and other people in the organisation.
vi) First impression is key. Appearances of every single detail matters. Spread the feeling of optimism and prosperity. Never reflect feelings of uncertainty and disappointment.
vii) Do personalised charts showing the client's portfolio based on market price, and separately percentage of capital originally listed in company. Capital and dividend gains.
viii) Consistent repetition of good track record is more more effective than hard selling.
viv) Do a cost benefit analysis to client to show him why he should be buying the stock that everyone else is selling.