Investment fundamentals the Templeton Way

When interviewed a few years ago Sir John noted that there were now tens of thousands of professional investment analysts in the business compared with just a handful when he started looking at stocks in the late 1930s, and that this was a new factor influencing the investment world.

Yet it is remarkable how many professional investors still manage to buy high and sell low, the reverse of Sir John's first rule of only buying bargains. It is therefore worth briefly reviewing some of his other old tips which may have been forgotten today.

His second rule is: 'The Good News-Bad News Rule'. In short this is a contrarian approach to investing, buying on bad news and selling on an improvement. However, buying on the dips has almost become a rule for most investors, so maybe this should be seen as more of a guide to opportunistic investing in particular stocks with temporary problems.

Perfect knowledge

The third rule is to broaden your knowledge, and in the Internet age there is no excuse for a lack of study; indeed we have a situation of information overload. Here perhaps staying focused and spotting the wood for the trees is more important than ever, but equally being too narrow minded is no use either.

Interestingly, Sir John's fourth and fifth investment rules are really embellishments of rules one and three. He says you should use current or likely future earnings to establish whether a stock is a bargain or not, and work hard at your analysis as short cuts do not work.

Again the modern investor is amply provided with price-to-earnings data for stocks, and even the most basic Internet brokerage account will provide a wealth of such data at the touch of a fingertip. And ironically this makes it harder to find bargains than ever as everybody has this same information available.

Spotting anomalies

But market anomalies constantly occur. You could ask, for example, why are major oil company shares priced so low in terms of price-to-earnings when we all know that energy looks likely to stay expensive due to a global shortages of reserves? Maybe this in not the right entry point for oil stocks or this obvious opportunity is right in front us.

As for hard work as an investment rule, this is again a little out-of-date given the wealth of investment information available to anyone with an Internet connection.

What has not changed is the need to apply imagination and insight to the data. Indeed, given all the other analysts now in the business, this skill is probably at more of a premium than ever. Sir John concluded 20 years ago that you could not produce above average returns by following the crowd, and that has not changed.

See also: Buying a stock market bargain