Listening to a Billionaire Investor

‘’A bull market is like sex. It feels best just before it ends’’ – Barton Biggs

Sir John Templeton made billions of dollars in the stock market and is credited as being one of the greatest investors of all time. Sounds like someone we should listen to then right?! When it comes to the stock market, most people make average returns. We can’t all be above average or it would no longer be the average! So if you want to be the best, sometimes you have to be willing to go against the crowd and do the opposite of what everyone else is doing.

 

emotion-chart-ritholtz

 

 

 

 

 

 

 

 

’A rising tide lifts all boats’’.

The above chart shows an average investor’s psychology. When the markets are up, we feel invincible. We decide that we are great investors! Ignoring the fact that we might be in a bull market (when all markets are up anyway!). When entering the thrill or euphoria end of the cycle, many people add to their positions. ‘’This stock is up 20% for the last 5 years, it’s a sure thing!’’

As markets fall (often MUCH faster than they rose), many people sell during the desperation and panic stages. The result is that we are adding to our positions when the markets are peaking and selling when they are bottoming out…

‘’Bear markets start on the time of pessimism. They rise on the time of scepticism. They mature on the time of optimism, and they end on the time of euphoria!’’ – John Templeton

For John Templeton, when everyone else thought the world was going to end, he thought it was the right time to invest.

When people thought ‘’These are the greatest times in history!’’ He knew it was time to sell.

In 1939, American was in a state of depression when Hitler’s troops marched into Poland, starting the Second World War. You can imagine confidence in the stock market was at rock bottom… and so were the prices. Templeton took his entire life savings and borrowed additional money to buy $100 of every stock valued at $1 or less on the New York Stock exchange. Templeton’s trade got him 104 companies, for a total investment of roughly $10,400. He made a profit on all but 4 of the companies. Four years later he sold these stocks for more than $40,000! This 400% return became the basis of an asset management empire and his own personal fortune.

If you had invested $100,000 with Templeton in 1940 and reinvested the distributions, by 1999 it would have grown to $55 million. That is 550 times more or a 55,000% return…

So when is it time to sell?

Templeton says ‘’sell an asset only when you think you have found a different asset that’s a 50% better bargain’’. Constantly for bargains and look at what you own now. If you find a new investment that is a 50% better bargain than something in your current portfolio, you sell the old one and buy the new one.

How has this impacted my own investment strategy?

Templeton’s investment strategy has acted as a cautionary note for me when the markets are up. Just because a position is up 30% in 6 months does not mean you should add to it as the price may be peaking. With the United States, Japan and now Europe using / having used quantitative easing (printing of money by governments) it’s no surprise that we have experienced bull markets over the last number of years. This coupled with low interest rates has meant that people have been forced to enter the markets to seek a higher return (current accounts and bonds offering low levels). And with low interest rates, the cost of borrowing is low. It is cheaper for people and companies to buy shares.

There is no way to know for sure where on the emotional rollercoaster we currently lie, but as markets have risen every year since the 2009 crash, I believe we are in the ‘’excitement’’ or ‘’thrill’’ stage. Meaning that I am only adding positions that I believe there is truly attractive value. Otherwise I am starting to build up a cash reserve so that I too can profit the next time pessimism hits, just like John Templeton did back in 1939!

‘’God expects us to grow spiritually. He gives us trials and tribulations just like exams in school. To help you grow into a greater soul that you would have otherwise. Life is a challenge. Life is an adventure. It’s a marvellous exciting adventure. We should all do the best we can as long as we are on this planet’’ – Sir John Templeton

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