John Templeton on buying cheap, enthusiastic markets, exploiting cognitive error and thrift

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Sir John Templeton became a very wealthy investor.  He carried throughout his life sound principles formed in childhood and early adulthood

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Buying when others are ignoring the asset

Around the Winchester, Tennessee (pop. 2,000), where John Templeton was born in 1912 and his father was a lawyer and entrepreneur, farms would occasionally fail, become subject to foreclosure, and auctioned off. They were auctioned on the town square where Templeton’s father had a second- floor office.

From his window Harvey Templeton could follow the auctions, and if a farm did not attract a bid he would walk to the square, make an offer, and buy farms for a few cents on the dollar.

Just as with farm auctions, when it comes to the pricing of shares, we sometimes witness low prices and lack of buyer interest, generating even more disinterest, until there are few or no buyers.

On the other hand, shares that have already been bid up attract increasing interest from buyers – making them even more expensive.

Templeton’s childhood lesson that farms could be bought cheap simply because of the absence of other buyers and not because of an absence of sound value can easily be transferred to the financial markets.

Over-excitement in markets

The converse lesson – assets can become over-priced due to the over-excitement of the crowd – is illustrated by another anecdote from his childhood.  One summer evening he raced down the street to join a crowd gathered outside the front porch of a house.

Finally, the owner flicked a switch and the whole house was lit up.  The crowd that had gathered yelled and clapped with joy.  Electricity had arrived and there was much excitement about it.  However, Templeton was smart enough to realise that exciting technology does not equal exciting shares.  He figured the electricity companies were already over-hyped.  I’m sure you can think of a lot of over-hyped companies in 2021.

Cognitive and emotional error

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