Browse
related articles
Many readers will not have heard of Sir John Templeton, yet he was the founder of the modern mutual fund, and American citizen who studied at Oxford University in the 1930s before heading to Wall Street and moved to the Bahamas in 1963.
Not only is he still there, but in his early 90s Sir John scored a notable stock market coup by shorting internet stocks in early 2000. He spotted that the IPO founders' lock-up periods meant that new shares would flood the market at that point. Some commentators say he cleaned up nearly $100m!
It was therefore interesting to read more about this remarkable billionaire investor whose fortune was initially made advising very ordinary people on how to invest in mutual funds.
Buy cheap
His first rule of investing, and Sir John has many clear rules that guide him, is: 'The Rule of the Importance of Price'. In the book this is explained: 'Purchase an investment only when you can pay less for it than it will be worth today, and only if you believe that it will be worth more tomorrow.'
Sir John explains how he got going as an investor in 1939, which was the only time he ever borrowed money to buy shares. He realised the outbreak of the Second World War would transform the business outlook for the US and therefore bought $100 of stock of every company listed on two major exchanges at less than $1 a share.
Within four years his borrowed $10,000 was worth four times as much and Sir John was in business. When the Second World War was over he bought up the stock of literally bombed out European companies and waited patiently for the US-led Marshall Plan to revive them.
He made another fortune, and the concept of investing internationally in a spread of companies popularised the global mutual fund with which his name became associated as a market leader. But the basic principle remained: buy a bargain and you can not go wrong.
In a 2004 interview, Sir John said he could see few bargains in the world of equities today, and that perception must be even truer in 2007, with the almost universal increases in global equity prices. But circumstances change, and the Templeton rule is to only buy bargains which means waiting for a new market opportunity.
Dot-com millionaire
In the year 2000, Sir John turned this on its head by spotting that what was trading very expensively - dot-com stocks - was about to become very cheap, and arranged a trade to profit hugely from that change. So you can make money anticipating a future bargain as well as spotting one today.
Why does it work? Why is paying low so important? Put simply your investment rate of return is a function of the original price, and the miracles of compounding growth work better if you start with the lowest price. That is all there is to it.
But overpay for an investment and the reverse is true, and you will never make an above-average rate of return. So take a tip from one of the world's oldest and greatest investors, Sir John Templeton, and only buy bargains.
See also:
Investment fundamentals the Templeton Way
Market turbulence is far from done
Saudi Arabian stocks interesting, but shun debt risk
Sub-prime mortgage crisis hits US shares
Japanese Yen still Outperforming Major currencies
Peter J. Cooper
