Templeton's rules for investing success still look good today.
Sir John Templeton was an investor and pioneer of globally-diversified mutual funds, founding Templeton Investments.
The Templeton Growth Fund, launched in 1954, achieved annualised returns of 15 per cent a year until Templeton retired in 1992. That same year he sold his firm to the Franklin Group for US$440m and it became Franklin Templeton Investments.
He continued investing, famously shorting tech stocks in 2000 before they crashed. He died in July 2008 at the age of 95.
Surprisingly, he's much less famous than Warren Buffett, but if anything is a far more interesting character given his interest in spirituality and religion. Like Buffett he became a billionaire by focusing on investment fundamentals.
In 1993 Templeton wrote an article entitled "16 Rules for Investment Success" in which he explained his approach to investing. The full version can be found on the website of Franklin Templeton Investments. I've summarised these rules below:
Invest for maximum total real return
Any investment strategy must protect purchasing power by taking into account taxes and the level of inflation.
Invest -- don't trade or speculate
If you're constantly trading in and out of stocks not only will profits be eaten up by commission charges you'll also lose sight of the fundamental value of your holdings and become agitated by every market rumour. This will eventually lead to losses.
Remain flexible and open-minded about types of investment
Your choice of investment should be guided by the prevailing circumstances. Sometimes it is better to buy blue chips, sometimes cyclicals, sometimes it is best to be holding cash.
Buy low
Don't be one of the herd rushing in when a stock is fully priced, you're likely to be buying in at the top. Instead, buy when most people are pessimistic.
When buying stocks, search for bargains among quality stocks
Use a range of criteria to determine quality, everything from the worth of the management and its track record to the value of the brand and the company's level of capitalisation. The company you eventually buy won't be perfect but it should be demonstrably better than most of the rest.
Buy value, not market trends or the economic outlook
Choose a stock on the basis of its fundamentals: a poor quality stock can fall in a bull market just as a good quality one can go higher in a bear market.
Diversify
By broadening the scope of your search for investments -- across sectors, asset classes and countries -- you'll find more that are attractively priced.
Do your homework or hire wise experts to help you
Always do your research before investing and remember that you're often buying future earnings (in the case of growth companies) or assets (in the case of dogs that may be acquired or broken up).
Aggressively monitor your investments
The pace of change is so swift that you need to be ready to react to it.
Don't panic
If the market crashes don't sell out at the bottom. Instead, examine your portfolio and assess if you can find more attractive shares. If you can't, continue to hold.
Learn from your mistakes
We all make mistakes but the important thing is to learn from them and the mistakes of others.
Begin with a prayer
Meditation brings peace of mind, enabling you to think more clearly.
Outperforming the market is a difficult task
Your aim should be to outperform institutional investors. If you can do this you're doing very well.
An investor who has all the answers doesn't even understand all the questions
Hubris can ultimately lead to disaster. Even though you may have sound investing principles a wise investor recognises that there are a lot of unanswered questions produced by changing economic and political circumstances.
There's no free lunch
Don't let sentiment or presumed inside knowledge dull your critical faculties.
Do not be fearful or negative too often
Even in the worst of markets many investors make money. Moreover, research shows that stocks over the long term are a sound investment.
Templeton's advice, like Buffett's, is full of plain common sense that most of us tend to ignore when rushing lemming-like for a quick profit.
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