Financial Crisis or Financial Opportunity?
Find out what the
“greatest global stock picker of the century”
might say about today’s market

Sir John Templeton was no stranger to bleak economic news. In fact, in times of maximum pessimism he found opportunities that would earn him his reputation as the “greatest global stock picker of the century” (Money Magazine, Jan. 1999). From the prospect of looming world war in the 1930s to the crashing markets of 1987 and even into the twenty-first century’s tech and housing bubbles, he found ways to maintain his indomitable sense of optimism and even thrive in these difficult times. He passed away earlier this year at the age of 95, but today’s crisis would not have been a surprise to him, nor would he have seen it as anything short of yet another opportunity.

What Would Sir John Say?
Written by Gary Moore

The period from the collapse of the Berlin Wall in 1989 to our credit crisis of 2009 has been one of watching Sir John’s evolving predictions---from anticipating “the twenty most prosperous years in history” to “financial chaos,” as he predicted in 2005--come true. Clearly, he was a prophet among us.

Unfortunately, as the Bible relates about old Ezekiel (Chapter 33, verse 31), people always “crowd in” to listen to men like Sir John but few do even a “single thing” they say as they only realize they were listening to a prophet “after all your words come true” (verse 33), which is too late to do them any good. After thirty years on Wall Street, I’ve grown to understand that’s usually due to there being so many “false prophets” around, wildly making predictions about that of which they know little and often saying the opposite of what true prophets are saying. I’ve also realized the most financially impoverishing ones are religious leaders who know little about economics but assure us they are speaking for God. The unsophisticated usually take them far more seriously than the secular prophets of Wall Street, who are always taken with a grain of salt.

Anyway, it’s pretty easy to know what Sir John said during that period as, unlike those talking heads who rarely want only the few correct predictions scrutinized, John liked to put his in print. It is far more difficult to know what he might say today. But the place to begin might be with his favorite saying about the markets: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” So Sir John was not only selling but actually shorting, or expecting to profit by anticipating a decline in prices, during both the euphoria of 1999 and 2006.

Yet I expect he might have been selectively buying a few quality stocks last November. The media, who Sir John considered a very reliable contrary indicator, was full of talk about another Great Depression, even though a recession had not been officially acknowledged. Even Jim Cramer, whose slogan is “there’s always a bull market somewhere,” couldn’t find one and told investors who might need their money within five years--and most investors would during a depression--that they should sell their stocks. So for one of the few periods in history, investors were pulling more out of equity mutual funds than they were investing, which is another reliable contrary indicator. It is during such periods of gloom that Sir John grew most happy as he knew there would be bargains out there. When I wrote my first book about Sir John, his successor as chief investment officer at the Templeton funds told me the crash of 1987 was the happiest he had seen Sir John. If you do not understand contrary thinking, you’ll never understand Sir John!

Yet one of the most valuable things I learned from John is that there are always other people who are as smart, if not smarter, than you are. John went to great lengths to find those rare individuals and listen to them. So when I stopped pestering Sir John about markets several years ago out of respect for his limited time on earth, I began listening to another “grumpy old man” by the name of Jeremy Grantham, founder of the GMO funds. He sounded remarkably like Sir John, and even Old Testament prophets, anticipating huge economic problems due to speculation and debt. Mr. Grantham is also known for his insights into global investing. That indicates he, like Sir John, likes to see the biggest picture possible, which is why the prophets always went to mountain-tops.

Mr. Grantham saw things clearly. He told Barron’s magazine in February 2006 that “housing is a classic bubble” and “this feels like the end of a cycle.” The S&P 500 index peaked around 1500 in 2007 but Mr. Grantham maintained “fair value” was in the one thousand range. He also cautioned that during bear markets, markets often fall further than fair value, suggesting it might fall to the 800 range. And that’s almost exactly where the S&P 500 bottomed in November, and Mr. Grantham began buying some stocks.

Should you? I have no idea. But as for me, I’ll forever treasure the moral and financial principles Sir John taught us. But as I’m not an economist or stock analyst, I’ll continue to update those principles by reading Mr. Grantham’s current thinking at www.gmo.com. Blessings.

What Would Sir John Say? Part 2

In my previous column, I related that Sir John’s predictions had evolved from one of great optimism during the pessimistic years around 1990, when the Dow Jones Industrial Average was around the 2500 level, to periods of pessimism around 2000 and 2007 when the Dow was around the 14,000 level. Yet I also intimated that I thought he might have been buying a few carefully selected stocks during the panic of 2008 when the Dow dropped to around 8,000. I should explain why.

In early 1999, Sir John asked me to co-author an article about why the Dow might probably rise to the one million level during the next century. The article was intended for his friends at Equities magazine, which had interviewed John annually for quite some time. To be quite honest, my initial reaction was to question John’s judgment this time! After all, he had also predicted the Dow would be flat during the coming decade. But I’d learned over the years, often the expensive way, not to question John’s financial insights. So I pulled out a financial calculator and discovered the Dow would only have to rise less than 5% annually for the Dow to reach one million. In essence, it was difficult for even me to believe the Dow might rise at one-half the rate it had during the twentieth century. Yet at the time, everyone around me believed a computer bug would end Western civilization! Many even believed the Second Coming was imminent.

As we talked and worked on the article, I realized John was actually saying that if investors wanted the kind of growth America had experienced last century, they would have to invest in emerging markets, which is what America was a hundred years ago. One of John’s core beliefs was growth tends to be much quicker from lower levels. As a maturing economy, America was more likely to resemble John’s beloved Great Britain during the pre-Thatcher years. In essence, John thought America would likely have more government with more regulation and social programs and therefore slower growth.

Equities only summarized that article as it again printed an extensive interview with him, probably as John predicted a 40% decline in the market before the advance to the one million level would begin. After that decline occurred during 2001 and 2002, John did indeed buy some stocks in developing markets, profiting quite nicely, before turning decidedly bearish in late-2005.  

Now that the markets have fallen to their levels of late 2002, would Sir John again tell you to invest in developing markets? I think he might. Yet he would also remind you that even America experienced a Great Depression, many recessions, two world wars and several lesser ones, inflation, presidential assassinations, oil embargos and so on during the last century. He’d also tell you that at one of the very best times to buy his mutual funds during the early nineties, his old friends at Forbes magazine did a cover story about how he had “fallen off the mountain.” His next year was one of his best ever. And even his friends at the Morningstar mutual fund service wrote a review at the end of the century about how “Templeton has lost its luster.” At a time everyone was speculating in expensive technology and worthless Internet stocks, the Templeton funds were completely avoiding them. So Morningstar wrote: “the family’s commitment to bargain hunting is at the root of its problems…they tend to be more penurious and less flexible than their rivals.”

In essence, like Forbes, Morningstar made a very expensive mistake by counseling it was unfortunate the Templeton philosophy and discipline did not chase every new fad on Wall Street. Perhaps that is a mistake for publications that gauge success by monthly sales. But Sir John had a more eternal perspective, one that was far more rewarding for investors. So we will long remember him fondly, even lovingly, while we have long ago forgotten those men who authored those articles. It would be a most appropriate memorial to John if this century is not only one in which the Dow rises to one million but the one during which we finally learn that much more valuable lesson about true success.

Gary Moore

Gary Moore was senior vice president of investments with Paine Webber before founding Gary Moore and Company: Counsel to Ethical and Spiritual Investors, which provides investment counsel to banks, churches, and individuals. He is the author of several best selling books and currently lives in Sarasota, Florida, with his wife, Sherry and son, Garrett.