Investing the Templeton Way: what is he backing now?

Posted on 04 June 2008 with no comments from readers

Sir John Templeton is a remarkable billionaire investor, and even at 95 years old he is still making calls that put the brightest young hedge fund managers to shame. But based on his brilliant past record we can only hazard a guess at what this legendary investor is up to now.

His niece Lauren C. Templeton and her husband Scott Phillips have just published a book explaining the best plays of his long career and his investment methods: ‘Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter’.

An early triumph was to buy stocks in anticipation of the US participation in the Second World with $10,000 in borrowed money which quadrupled as the economy geared up while avoiding the devastation released on Europe. And he repeated this perceptive approach with an early bet on Japanese recovery from the war.

However, Sir John’s recent investments while in his ninth decade are equally impressive. He shorted dot-com stocks in 1999 and made $90m. Then he bought US zero-coupon bonds to ride out the 2000-3 stock market crash, using two-times leverage and achieved an 87 per cent return.

The final chapter has him backing China Life Assurance and China Mobile for a 1,050 and 656 per cent return respectively – one hopes he sold out before the Chinese stock market plunged by half over the past six months. But the underperformance of Franklin Templeton Global Emerging Markets in this period due to its China exposure might suggest otherwise.

You have to wonder what he is doing now. Did Sir John short house building stocks? He certainly appreciated the dangers of that bubble well ahead of the pack, according to his biographers.

Is he invested in US stocks? It could be that the legendary value investor is now concerned about the outlook for profits with the economy close to or actually in recession and inflation putting pressure on costs.

One thing is for certain and that is his mind will still be focused on locating the ‘biggest bargains’. This is how he sees his whole investment career: a search for undervalued assets. It sounds so simple until you try to do it.

What is undervalued today and not overvalued? Falling real estate prices in many markets suggest global property is not a good buy. Stock market prices also hardly seem to discount the likely true impact of an inflationary profit squeeze on business, and perhaps only the real estate and financial firms are showing their real value. Sir John might be looking there but picking survivors might be difficult and dangerous.

With the benefit of hindsight his entire investment career seems to have been directed at taking what in retrospect look comparatively low-risk and obvious moves: shorting the dot-coms at the height of the frenzy, for instance; or buying corporate America just before the Second World War.

Bond prices are probably too low for him to be interested in them right now: they are just not a big enough bargain. No if I had to take a guess I would say Sir John is shorting the Dow Jones Index, or major US non-financial and non-housing stocks, in anticipation of a big fall in stock prices in the first half of next year.

Is it not obvious that US morale and markets will rally a little before the presidential election this fall, with a lot of hopeless optimism, and then delve into the pits of despair next year as the recession and financial crisis continues to lay the economy low with a squeeze on profits and stock market crash?

Alternatively Sir John could be a buyer of precious metals this summer in anticipation of the rampant inflation that the Federal Reserve’s current lose monetary policy will inevitably cause over the next few years.