John Templeton made his first stock investment on the eve of World War II in 1939. He thought the Germany invasion of Poland would bring the U.S. out of depression. John went to his broker and bought a hundred shares of every stock that was less than $1 using $10,000 ($176k in 2017 dollars) of borrowed money. Four years later he sold the stock for $40,000 ($565K in 2017 dollars).
How did John Templeton quadruple his money?
|Florida Mansion similar to Templeton's Mansion in the Bahamas|
Buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest reward.
This applies to not only stock market cycles but to particular industries and types of stock. We determined this by looking at what is selling at a depressed price if a stock is selling for a quarter or half of that it is worth then it is a bargain and in most cases unpopular with most investors.
Where is one stock example of Templeton's investment?
had a big position in Royal Dutch in his mutual funds, but everyone at the time was expecting oil prices to go down. The present price it was selling at 4 times current earnings (in the long run it will earn more), half of what it can liquidate for, only 3 times present annual cash flow, and pays a good dividend. The low point is when most investors are expecting bad news and not when the bad news comes out.
Yes, it could get lower. But if you are a long term holder, you can wait out the downturn and eventually it will go back to intrinsic value.
You'll make mistakes in determining the value of the company. But over the long run, you'll make less mistakes and the winners will take care of the lowers. John Templeton at one point was buying Japanese companies at 3 times earnings and 2 times earnings.
If you invested in Warren Buffett's fund with $10,000 in 1965 ($78k in 2017 dollars) you would have $1,000,000 in 1985 ($2.2M in 2017 dollars). He learned his strategy from Ben Graham at Columbia University. In 1985, his net worth was $500M. When asked how he did it, he made his investment style really easy to understand.
How did Warren Buffett earn his wealth?
If you buy things for far less than what they are worth and buy a basketful of them you essentially can't lose money.
What you need is to have good temperament. You need to derive neither great pleasure with or without the crowd. Basically, you aren't right or wrong just because a thousand people disagree or agree with you. The real test to whether or not you are a value investor
is that it shouldn't matter to you if the stock market is open tomorrow or not. The stock market just tells you the price of the stock.
What do you need to do first to enact the value investment strategy?
Figure out your area of competency of valuing companies
and then find out what is selling cheaper than its value. You don't need to make money on every game because there are no called strikes in the business.
The market can "throw you a pitch" of GOOG at $1,000 or TSLA at $200 and you can choose to swing or not. You just wait for the perfect pitch or something you finally understand and then swing. "Sometimes you might not swing for 2 years", says Buffett.
Labels: Value Investing