John Templeton’s triumphs in South Korean and Chinese shares

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In examining John Templeton’s Korea story we learn the importance of patiently accruing knowledge while waiting for the right opportunity.   As far back as 1983 Templeton declared that he thought South Korea would be the next ‘Japan’, but he did not invest his client’s money there because of the restrictions on capital removal from the country. In a talk at the Templeton funds meeting in 1991 he mentioned Korea as one of the less developed nations (alongside China, Brazil, Thailand and Turkey) with the most ‘exciting investment opportunities’.

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The restrictions on removing money from the country were relaxed in 1992, but it was not until after the 1997 Asian financial crisis that he really started to focus money in the country.

Characteristics for a good investment environment

South Korea had followed the same plan for economic development that Japan used: high savings rates, determined exporters and high education levels. This resulted in the highest average economic growth in the world between 1970 and 1997.

The Korean conglomerates, known as chaebols, took on grossly inflated levels of debt to permit ever more ambitious expansion.

The 1997 crisis hit hard – currency down, shares down and debt rising. When they failed to pay interest due some chaebol sought bankruptcy protection (e.g., Kia Motors, Haitai).  In return for financial aid the country, now in deep recession, agreed to further open its markets.

The January 2, 1998 edition of the Wall Street Journal reported Templeton buying Korean-focused vehicles (e.g. mutual funds).

He was quoted as saying ‘I think the Korean market is somewhere near the bottom….All my investment career, I have always tried to buy at the point of maximum pessimism….The pessimism in Korea has been so intense in recent months’.

He was betting that (a) Korea would not re-impose capital controls, and (b) the economy would return to its old growth rate.  Price-earnings ratios were around 10.

Recognise when some else has more expertise

He chose to avoid stock picking with Korea. Instead, he hired The Matthew Fund, run by people who had studied Templeton for many years and followed his approach, who had greater familiarity with specific stocks in Korea.

Note that he chose the Mat

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