Hailed as "arguably the greatest global stock-picker of the century" by Money magazine in 1999, Sir John Templeton, founder of the John Templeton Foundation, could teach us a thing or two about creating wealth from equities. Here are ten of his most well-documented investment maxims:
Invest for Real Returns
When measuring investment performance, make sure that you account for taxes and transaction costs that you’ll be incurring along the way. Generating a portfolio return of 15% by making speculative trades – and paying 30% in taxes – is worse than earning 12% by investing into a portfolio of value stocks and holding onto them for a year.
Keep an Open Mind
Don’t set your investment policies and strategies in stone. The world is changing and markets are continually evolving. The worst possible blunder in investing is to become a perma-bull or a perma-bear, fixing your worldview based on past experiences. Stay flexible in your approach and be on the lookout for new opportunities, even outside your comfort zone.
Never Follow the Crowd
Master investors like Templeton knew the importance of ‘going against the grain’ when it comes to investing. Outperformance or ‘alpha’ is impossible if you do what everyone else is doing. In that aspect, individual investors actually have an edge over the pros, as they have no career risk riding on an investment decision or two gone awry. You’ll never be able to beat the investing crowd by following them.
Bull Markets give way to Bear Markets, Bear Markets recover and gather momentum again. Asset prices collapse and then stabilize, only to collapse again. Some sectors shine for a few years, only to dull out – take real estate companies in the previous decade, for instance. Understanding – and accepting – the impermanence of the securities market will allow you to take more fluid investment decisions without anchoring yourself to your beliefs or staying put in a failing sector due to the inability to firmly write off sunk costs.
Avoid the Popular
When any one paradigm or methodology becomes too popular, it’s time to step back and re-evaluate whether it still makes sense. Templeton understood that when it comes to the securities markets, popular equals dangerous. Think of all the recent write-downs in the Indian e-commerce sector – which was wildly popular just a few quarters ago, and now has its back against the wall.
Learn from Your Mistakes
Templeton had once said that the four most dangerous words in investing are “this time it’s different”. Investing mistakes are okay, provided you learn from them. For instance, investing after markets have gone up, picking hot stocks based on tips, over-concentrating investments into one sector or stock, or forgetting all about asset allocation in euphoric times – these are all too common mistakes that get repeated time and again. If you’re a serious investor, it would be prudent to keep a journal of your investment decisions and their payoffs, to prevent you from suffering from the short-term memory that is so very characteristic of the financial markets.
Buy During Times of Pessimism
Admittedly, this is a difficult one to implement, although it often seems to have been the obvious choice in hindsight. When there’s blood on Dalal Street, it takes real gumption to stick your neck out and buy stocks. However, it’s times of pessimism that also offer the maximum opportunity for wealth creation. The best approach would be to gradually accumulate stocks during bear markets in a disciplined way, rather than trying to ‘bottom fish’.
Hunt for Value and Bargains
Templeton advised clients to look beyond trends and short-term market outlook, and seek out value instead. Indeed, it is only through the unlocking of deep value can one achieve super normal returns from securities, and this can only be achieved by choosing to buy what most investors are selling, or have not fully recognized as yet.
Templeton understood that casting a wider net than most, even across countries, could go a long way in ensuring diversification. No wonder then that even today, we’ve got Templeton Emerging Markets chief Mark Mobius jetting around countries hunting for investment bargains. Risks intrinsic to one country could often cancel the risks of another.
Remember that no-one knows everything
Learn to turn a deaf ear to all those crystal-ball toting market pundits who claim to know everything about the future of the markets. Truth be told, no one knows everything, and even those who have been spectacularly right about a future trend or two at a given point in time, could just as easily wind up being very wrong about the next big trend. Avoid the siren song of stories and “geeks bearing formulas”, as another highly successful investor Warren Buffet had once jocularly said.
"This article was contributed by Guest author, Aniruddha Bose, Editorial Consultant with BW Businessworld and was posted on www.businessworld.in.”
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