Source: Red and Green

John Templeton is a world-renowned investment guru. In 1999, Money magazine named Templeton “one of the greatest stock pickers of the 20th century.” In 2006, Templeton, along with Buffett, Peter Lynch, and Graham, won the “Top Ten Global Fund Managers of the 20th Century” by the “New York Times”. Forbes called Templeton the “father of global investment” and “one of the most successful fund managers in history.” It can be seen from this that Templeton has a high reputation and importance in the investment community.

The Templeton Growth Fund managed by Templeton was founded in November 1954. If you buy 10,000 US dollars at this time and when Templeton retires in 1992, this 10,000 US dollar can be added to 2 million US dollars in 38 years, with an annualized yield of 14.5%, outperforming the market by an average of 3.7% every year. The leading margin is one-third. The performance is excellent, which is rare in the industry. In 1992, when Templeton Retirement Transfer Fund, its asset management scale reached US$21.3 billion.

“Reverse Investing” is a book written by Lauren, the granddaughter of Templeton's brother. Templeton himself prefaced it, which shows his approval of the book. Moreover, this preface was written a year before his death, and can be said to be a summary of Templeton's investment strategy throughout his life.

Compared to investment gurus such as Graham and Lynch, Templeton also adheres to the principle of value investment, but he places special emphasis on “reverse investment”. He is particularly good at reverse investing, and is also particularly daring to invest in reverse when the market is extremely pessimistic. Reverse investing enabled Templeton to earn the first pot of gold in his life, and also enabled his fund performance to outperform the market by a large margin in 38 years, so I call Templeton the “god of reverse investing.”

According to the preface written by Templeton for this book, I have sorted out Templeton's investment strategy into five basic principles, namely reverse investment as the center and interrelated with the other four principles: value investment as the foundation of stock selection, diversification of investment to reduce portfolio risk, global investment to expand the opportunity pool, and extremely pessimistic investment as the ultimate in reverse investment.

I. Focus on reverse investment

Templeton believes that the only way to make a very cheap and cost-effective stock investment is to reverse invest and buy when everyone else is selling.

“There is only one reason why people in the market are willing to sell stocks at a very cheap price: because everyone else is selling. There's no other reason. To buy at a very cheap price, you have to find and invest in the unpopular stocks that people are generally most afraid and pessimistic about.”

It can be seen that reverse investing goes against our common sense of life. As Templeton said, “It can be said that no matter what they do, people are striving to go to places with the best future prospects. If you are looking for a job, you will go to an industry with good future prospects, and if you set up a business and build a factory, you will go to the region with the best development prospects. However, my opinion is that if you're choosing stocks to invest in, then you have to do the opposite — reverse investing and looking for cheap stocks among the unpopular stocks with the worst future prospects.”

Reverse investing is against our common sense of life, yet it is a key point that Templeton emphasized over and over again. The difficulty lies not in valuation analysis, but in having the courage to go against the public.

In his investment career of more than 70 years, Templeton has always followed this investment motto: “Buy when everyone else is frustrated and sell when everyone else is buying enthusiastically. This reverse investment requires you to be extremely strong to keep up, but in the end, it will bring you extremely rich long-term returns.”

It reminded me of a quote from Buffett's article in the New York Times during the 2008 financial crisis: “When I invest in stocks, I follow a simple principle — fear when others are greedy, greedy when others are afraid.”

Reverse investing is very profitable because it's hard to do, and very few people can do it.

II. Value investment is the foundation of stock selection

Many people in China like to elevate value investment to philosophy, Chinese studies, and even metaphysics; the more you talk about it, the more mysterious it becomes. But Templeton put value investing in a very simple and easy to understand way: value investing is buying cheap stocks. Templeton calls himself a cheap stock hunter: “There are many ways we can invest, but the most successful investment method I've used over the past 70 years is to buy cheap stocks and buy stocks whose market price is far below their intrinsic value.”

As I wrote this, I just thought of the “Buffett 2022 Letter to Shareholders” that I just translated. In the last sentence, Buffett also called himself a cheap stock hunter. Bargainhunters, in this book, refer to cheap stock hunters. This kind of translation is quite noble. The practical and popular saying is that people who are specifically looking for good, cheap, and bargain goods are not very cheap and are definitely not going to buy them.

Mark Morbius worked under Templeton for many years and is famous for managing emerging market funds. He recalled that Templeton's specific investment and stock selection against his subordinate fund managers can be described as completely relinquishing; the only thing that can be called a guide is only one sentence: “Always look for cheap stocks!”

An investment is a life, and life is an investment. I really like what was mentioned in the first chapter of this book. In his life, Templeton only buys bargains when shopping, and only buys cheap stocks when investing. The second chapter of this book uses the story of a kid who wants to sell his soda stand to explain the essence of value investing — buying stocks means buying a company. The key is to see if the price is much lower than the intrinsic value of the enterprise.

Buying only cheap stocks is the cornerstone of Templeton's reverse investment strategy. How can Templeton confirm that the stock price is cheap enough to be cost-effective? Chapters 3, 4, and 5 of this book respectively introduce Templeton's price-earnings ratio (P/E), price-earnings ratio to growth rate (PEG), and net price-to-market ratio (PB), and application examples.

3. Using diversified investment as a combination stabilizer

Reverse investment is sometimes misunderstood. Valuation of some individual stocks in value investing may be wrong, causing portfolio performance to fluctuate greatly and fluctuate greatly. Therefore, Templeton emphasized that reverse investment portfolios must be sufficiently diversified: “Diversification of investment should be the cornerstone of any investment plan.”

Speaking about the benefits of diversification, Templeton said, “The only people who shouldn't diversify their investments are people who see it right every time.” Templeton rationally admits that every investment he makes doesn't necessarily make money, so he hopes to spread the risk of investment failure to many individual stocks. Losses from individual stock selection mistakes have very little impact on the portfolio, thereby making portfolio performance more stable, so diversification of investment is a risk shock absorber and performance stabilizer for reverse investment.

This is also Graham's teaching; he always diversifies his investments into 200 stocks. While managing the Templeton Growth Fund, Templeton always diversified his investments into hundreds of stocks, and Lynch's late-stage portfolio had more than 1,000 stocks.

Many academic studies have shown that with sufficient diversification of investment, the portfolio yield is less volatile and the return is higher. Facts have proven that when choosing between stocks, many people still can't beat the index representing the entire stock market, because the index is equivalent to investing in all stocks in the market at the same time, so the risk of individual stocks is greatly reduced.

I'm not going to say more here; I'll just say the truth: Graham, Lynch, and Templeton all insist on diversifying their investments; you'd better not be overconfident.

The three major investment principles of Templeton mentioned above — reverse investment as the center, value investment as the foundation of stock selection, and diversification of investment as a combined risk stabilizer, are common practices of almost all investment masters, and global investment and extremely pessimistic investment are Templeton's signature signs. He expanded the scope of reverse investment stock selection to the extreme through global investment, and brought the reverse degree of reverse investment to the extreme through extremely pessimistic investment.

IV. Expanding the pool of opportunities through global investment

Templeton has two major brands. The first one is global investment.

Arguably, Templeton is the number one US fund manager to invest in the world. I'm not saying this. Peter Lynch wrote in chapter 6 of “Overcoming Wall Street”: “I officially invested in overseas stock markets other than the US in 1984.” “In addition to John Templeton, I am the first US fund manager to invest heavily in overseas stock markets other than the US. Templeton Growth Fund is the global version of the Magellan Fund I manage. However, I usually only invest 10% to 20% of my capital in overseas stock markets outside the US, while Templeton invests most of my capital in overseas stock markets outside the US.”

Templeton established the Templeton Growth Fund in Canada in 1954 to distribute it to clients in North America and invest globally. It is 30 years earlier than Lynch, and its position ratio is much larger than Lynch's. Therefore, Lynch also acknowledged that Templeton is the first global investment fund manager in the US.

Global investment has the dual benefit of increasing opportunities and reducing risk.

On the one hand, global investment has increased Templeton's reverse investment opportunity pool five or six times. After all, there are only 5,000 stocks in the US stock market, plus the European, Japanese, South Korean, Southeast Asian, and Chinese stock markets, which is more than 20,000 stocks. Templeton once said, “If you want to find extraordinary deals, you can't just look for them in the domestic stock market; you have to look everywhere. I have always believed in the idea of global investment. This has always been my creed.”

On the other hand, global investment portfolios are more diversified, which can reduce risk and increase returns. Templeton said, “Throughout my entire investment career over 70 years, I have been searching for the cheapest stocks in stock markets around the world. Research shows that in the long run, compared to simply diversifying stock portfolios in a single country's stock market, analyzing and investing in stock portfolios in global stock markets will have higher return on investment and lower volatility.”

5. Investing from an extremely pessimistic perspective is the ultimate in reverse investment

When is the stock market cheapest? When everyone in the market sells shares.

When is everyone rushing to sell stocks in the market? Market sentiment reached its peak of pessimism.

Templeton called it an extremely pessimistic view: “Invest and buy when the market reaches an extremely pessimistic view. This is a basic principle I have used in my 70+ year investing career. In other words, when the market is most pessimistic, it's when you should be most optimistic. This book explains in detail what methods I have used in my 70-year investment career to confirm that market sentiment has reached an extremely sad opinion. These methods apply to individual stocks, industry sectors, and the entire stock market of a country.”

Extremely pessimistic investing is the ultimate in reverse investing, because extreme pessimism will cause panic selling, causing stock prices to be extremely undervalued. Bold purchases are naturally extremely cheap at this time. If you can hold it for a long time, future profits will naturally be extremely high.

In his 70-year investment career, Templeton has not once, but many times, invested in reverse from an extremely pessimistic point of view. There are three cases described in this book. As soon as you read it, you know that this is not an ordinary extremely sad opinion.

Templeton's first extremely pessimistic investment case earned him his first pot of gold. The second chapter of this book describes it in detail. From March 1937 to March 1938, concerns about World War II caused the US stock market to fall: in just 12 months, the stock market fell 49%! Concerned about the world war, the stock market plummeted by half, and the market reached an extremely sad view.

In 1939, Templeton borrowed 10,000 US dollars from his previous boss and bought all stocks priced under $1 on two US exchanges, buying a total of 104. Later, he held these stocks for an average of 4 years, and lost money on only 4 stocks. Overall profit increased 3 times, and 10,000 US dollars became 40,000 US dollars. This was equivalent to the salary of a white-collar worker in New York for 10 years at the time, and was able to buy a single-family villa.

Templeton's second extremely sad investment case was written in chapter 5. The cover title of the August 1979 issue of the US “Businessweek” was “Stocks Are Dead.” The Dow Jones index fluctuated around 800 points in 1982, but Templeton publicly stated on a TV program that American investors are standing in the face of a big bull market, and the Dow Jones index will rise to 3,000 points in the next ten years. In other words, he predicted that the market in the next 10 years would be 4 times that of 1982. As a result, in 1991, Templeton's “10-year quadruple” prediction came true.

Templeton's third extremely pessimistic investment case appeared in Chapter 7. After the “9/11” incident in 2001, the aviation industry was severely impacted, but he bought airline stocks in reverse. This reminds me that Buffett bought a lot of bank stocks during the most pessimistic time of the financial crisis.

If you can achieve great success, you can be called a master, and to achieve great success, you must have great courage. Buying when market pessimism reaches its peak is the ultimate value investment and the ultimate reverse investment. Extremely pessimistic investing is Templeton's biggest signature and greatest trick, and he has had great success by being extremely pessimistic and brave in reverse investing many times, which is why I call Templeton the “god of reverse investing.”

In recent years, the global COVID-19 epidemic has been raging, and “black swan” incidents such as politics and wars have continued to occur, and market sentiment is quite pessimistic. Crisis crisis, danger is organic. Reverse investing is almost as simple as buying. With extreme pessimism, buying can even go back and forth. After a long period of suffering and testing, it is extremely difficult, so only successful reverse investment can have a high long-term profit.

Let's once again recite the most widely circulated reverse investment quote from Templeton, the “god of reverse investing” in the world:

The bull market was born out of pessimism, grew out of doubt, grew out of optimism, and died out of fanaticism. The time when the market is most pessimistic is the best time for you to buy, and the time when the market is most optimistic is the best time for you to sell.

Editor/jayden