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Interview with Sir John Templeton
by Eleanor Laise
1 April 2004 SmartMoney
Sir John Speaks --- He bought low during the Depression, sold high during
the Internet boom and made more than a few good calls in between; Sir John
Templeton, dean of contrarians, tells us where to invest now
Spend five minutes in Sir John Templeton's offices and you'll learn a
lot about the legendary value investor. It's not the imposing portrait,
the honorary degrees or even the certificate of knighthood. It's the
books. Crisis Investing shares shelf space with Eat Right for Your
Type. The Hand of God sits near Invest for Retirement and Natural
Capitalism. Several thick volumes occupy substantial real estate on the
top shelf. An investing bible? No -- it's the 1991 edition of the
London Central Yellow Pages.
A 1934 Yale graduate and Rhodes scholar, Templeton has a voracious
appetite for information. The small-town Tennessee native became known
as the Marco Polo of his Oxford class, thanks to a round-the-world
postgraduation jaunt. In his late 20s he opened his own
money-management firm and began to put international investing on the
map. His flagship Templeton Growth fund has posted a 13.8 percent
annualized return over 50 years, well ahead of the Standard & Poor's
500's 11.1 percent.
Templeton's track record is full of prescient moves. In 1978, when Ford
was near bankruptcy, he was a buyer. When everyone else piled into tech
in 2000, he was a seller.
Though he now lives in Lyford Cay, a decidedly well-heeled corner of
the Bahamas, Templeton maintains a surprisingly modest lifestyle. He
tools around at the wheel of a Lincoln Town Car. Orchids and
bougainvillea upstage his whitewashed home. It's the ideal setting for
a quiet retirement, but that's not Templeton's cup of tea. Since
Franklin Resources bought his funds in 1992 for $440 million, he has
devoted most of his time to philanthropy. The John Templeton Foundation
gives $40 million a year to projects that explore the intersection of
science and religion. Templeton's longtime philanthropic efforts earned
the naturalized British citizen a knighthood in 1987. In his spare
time, he hunts for global bargains, and at 91, he's clearly as curious
as ever. As SmartMoney sat down in his cluttered conference room, it
was Templeton who fired off the first question: "Have you written any
books I can read?" Well, no. But enough about us.
SmartMoney: How did a kid from rural Tennessee become a pioneer of
global value investing?
John Templeton: In Tennessee I didn't meet anybody who owned a share of
anything. At Yale there were hundreds of boys from wealthy families,
but not a single one who was investing outside one nation. I thought
that was just not sensible. Surely they'd get better results if they
searched everywhere rather than limiting their search to one country.
Then I investigated the investment counsel profession and couldn't find
any investment counselor who specialized in helping people invest
outside America. So I saw a wide-open opportunity.
Q: In 1939 you bought $100 worth of every New York Stock Exchange
listed stock that was trading under $1 per share. There were 104 names,
and 37 were already in bankruptcy. Why did you do it?
John Templeton: I was sitting in my office at 30 Rockefeller Plaza in
the news came out that Hitler had invaded Poland. It was obvious within
a few days that it was going to lead to the Second World War. During
war, everything that was in surplus, and therefore unprofitable,
becomes scarce and profitable. Three years later I had a profit on 100
out of the 104.
Q: What signs helped you see that the U.S. technology bubble was about
to burst back in 2000?
John Templeton: If you want to have a better performance than the crowd, you
things differently from the crowd. Four years ago the crowd was piling
into tech stocks. The prices went sky-high. I sold my clients'
technology stocks, and sold a lot of them short. I have put these
philosophies into a simple statement: Help people. When people are
desperately trying to sell, help them and buy. When people are
enthusiastically trying to buy, help them and sell.
Q: That's a good way to look at it.
John Templeton: That's mainly a joke.
Q: In 1992 you predicted that "the next 10 years will be the happiest
period, and the most progressive," with "rapidly increasing prosperity
for both Europe and America." Are you as optimistic about the next
John Templeton: Very few people realize how fortunate we are to live in the
glorious period in world history. There has been more progress in
prosperity than in any previous century. The Dow Jones Industrial
Average never went above 100 until a century ago. Now it's up to 10700,
a hundredfold increase in one century. Probably in the next century,
the increase will be equally great, if not greater. But I have to say
that we are starting from an unusually high price for shares, not just
in one industry, but in practically all industries and all nations.
Q: What is your view of current U.S. stock valuations?
John Templeton: Over the next five years, the chances are about 50/50 that
market will be lower. There is a risk that stock indexes will go down
by over 30 percent or they'll go up 30 percent. Share prices are
remarkably high right now. The Nasdaq Composite index is trading at 36
times next year's earnings and 95 times last year's earnings. That's
high. For most of my lifetime I found bargains one place or another
below 12 times earnings.
Q: How does this environment compare with the market of 1972, when the
Dow regained its late '60s highs of around 1000 but didn't break
through that level again until 1982?
John Templeton: That was a period of stock market optimism, which goes in
There are at least five of these cycles every century. The one in those
years you mentioned was a normal cycle. This one seems to be more
exaggerated. Prices in those years never went as high as they are now.
Q: Are there any sectors in the U.S. that look cheap?
John Templeton: No. I wish there were, but I can't find them. The answer is
safe. And playing safe means diversifying among nations, industries and
types of securities. At present I don't think anybody should have over
half their assets in common stock.
Q: And you believe that no one should have more than 50 percent of his
or her portfolio in a single country?
John Templeton: Yes. And no more than 25 percent in one industry.
Q: Do you think there is a real estate bubble in the U.S.?
John Templeton: Yes. Real estate is very different from the stock market
it's so local and separate in terms of type. But in many locations and
many types of real estate, prices are dangerously high right now. And
in real estate it's easier to say what's dangerously high. You just
look at what it costs to rebuild. Right here in the Bahamas, I have
recently seen people pay four or five times for a house what it would
cost to rebuild.
Q: Do U.S. bonds look more attractive than equities?
John Templeton: Compared to the cost of living [measured by inflation], you
still buy American bonds. But at present there are bonds of other
nations that seem safer. It's wise to invest in nations that do not
have an unfavorable balance of trade or a government deficit.
Q: Which countries seem the safest?
John Templeton: There are not many. There are almost 200 nations on earth
150 different currencies, and most of them have problems even greater
than America's. But Singapore, Hong Kong, South Korea, New Zealand,
Australia and Russia don't have big problems.
Q: A few years ago you were buying STRIPs, or Treasury bonds with the
coupons cut off. Do you still like them?
John Templeton: I bought STRIPs because the yield to maturity was about 10
better than what you could get on Treasury bonds. But I found I did
better by changing from U.S. Treasury STRIPs to STRIPs of nations with
stronger currencies, like the ones we just talked about.
Q: Where do you think the U.S. dollar will go from here?
John Templeton: The chances of the U.S. dollar going down in relation to the
are no more than 50/50. The euro has already gone up 47 percent in the
last two years. But the yen is up only 25 percent. Japan has put
hundreds of billions of dollars into buying American money. The
quantities are so great that that can't continue much longer. Japanese
money is likely to go up in the future.
Q: Are you concerned about inflation?
John Templeton: Long term, because we have more and more democracies in the
we're going to have more and more inflation. Politicians who are
willing to spend too much are the ones who get reelected. Look back at
history. Inflation has averaged about 2 percent a year. Probably, it
will average somewhat more than that in the next century. But from a
short-range standpoint, there does not yet seem to be a shortage of
almost any product. Until there's a shortage, you're not likely to see
Q: What do you see as the biggest threat to economic recovery in the
John Templeton: We don't need an economic recovery because we're already
at a very high level. The greatest threat to maintaining this level of
economic activity is debt. There's never been a time when people
worldwide, and especially in America, had such a high proportion of
debt. I think 20 percent of people who have mortgages on their homes
are likely to lose them in foreclosures. When a home goes into
bankruptcy, it's sold at auction. That pushes the price down and
affects the prices of other homes.
Q: Does the U.S. government's debt level worry you?
John Templeton: Oh, yes. There has never been any government anywhere in the
that has such a big deficit in the federal budget. And there's never
been a nation in history that had such an adverse balance of trade.
However, if you look at those debts and balance of trade as a
percentage of gross national product, they're bad, but not
Q: What does that mean for investors?
John Templeton: It's one more reason why this is a dangerous time to own
Q: Even foreign equities?
John Templeton: Yes. In my long history I could always find some nation
were desperately trying to sell. Now I can't find a place where people
are trying desperately to get out of equities.
Q: So what do you think about the rush to invest in China?
John Templeton: The cycles will be much wider and more frequent in China
the lack of information. Having said that, if you're investing, you
should put a fairly large part of your total assets in China because
within as short a period as 30 years, China is likely to have the
largest gross national product any nation has ever had.
Q: Is India as great an opportunity as China?
John Templeton: Yes. You could say almost the same thing about India, except
terms of speed. The improvement in India is wonderful but not as fast.
But the Indian market is up more than 80 percent in 12 months. That's a
danger signal. It means you're going to take a lot of risk that you
wouldn't have taken a year before.
Q: What's the world's best stock market now?
John Templeton: The best answer is none. There are so many securities
working on that question that the prices in different markets are less
out of line than normal.
Q: So an influx of information has made life difficult for global value
John Templeton: When I became an investment counselor, there were only 17
analysts on earth. Now, in America alone, there are more than 32,000,
and they do have an effect on prices by doing research on where to find
Q: If you were starting out in the investing world today, what would
John Templeton: Play safe. If you don't have your money in equities, it's
difficult to find a place to put it. Gold has already gone up. . . .
People also tend to think it's safe to put your money in the bank. When
I was studying in the U.K., people swore that it was safe to put your
money in pounds sterling. But within a few years, sterling went down
from $5 a pound to $1.50 a pound because of the war. If gold and bank
accounts are no longer safe, where can you put it? Diversify. Don't put
too much in any one thing.
Q: What have you been buying lately?
John Templeton: I believe there are fewer opportunities than I've ever seen
years. In the last year I've been using market-neutral hedge funds,
whose policy is to have always the same quantity of longs and shorts. I
have invested lately in two funds that are managed by people who worked
for me when I was in the investment business: Jane Siebels-Kilnes'
Siebels Multi-Fund and Mark Holowesko's Holowesko Global fund. They
aren't registered with the SEC, however, so American stockbrokers can't
Q: After the corporate scandals of recent years, how can we restore
trust in the markets?
John Templeton: The answer is comparison. When you're worried about those
stop and think, what nation would you feel safer in? At what time in
world history could you feel safer? I don't think you'll find any time
when the degree of information, the degree of honesty, is higher than
it is today.
Q: You don't think there's anything the government should do to restore
John Templeton: Yes. Keep their hands off. It has been proven over and over
best regulation is free competition. Those that are not doing a good
job for the public get squeezed out. I can't think of any nation where
the quantity of regulation is already not too high.
Q: A couple of days ago, Franklin Resources, the firm that bought your
funds, was accused of participating in market-timing arrangements.
What's your take on the fund scandal?
John Templeton: Everything I've just said applies double to that. Can you
any industry or any nation where there are fewer questionable practices
than there are in American mutual funds? I can't. If all the claims in
the news were added up, what would it cost a mutual fund owner? One
Q: You've lived here in the Bahamas for 31 years . . .
John Templeton: Yes. I've found my results for investment clients were far
here than when I had my office in 30 Rockefeller Plaza. When you're in
Manhattan, it's much more difficult to go opposite to the crowd.
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