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Rule: Buy when others are selling and sell when others are buying
One of John Templeton’s most famous mottos is ‘to buy when others are despondently selling and to sell when others are avidly buying’. Such a policy requires a great deal of fortitude but it pays the greatest ultimate reward.
Another is to ‘buy is when there’s blood on the streets’.
Crisis leads to panic as sellers are driven by fear. Fears become exaggerated. Difficulties in the economy often appear worse at the outset, but all crises subdue in time. When the panic dissipates share prices rise.
Example
In August 1979 there were many reasons for pessimism: inflation, high interest rates, oil prices and fears over oil supply, Japanese competition. On the cover of Business Week were the words, ‘The Death of Equities’.
Even pension funds reduced their equity holdings and bought inflation hedges such as gold and real estate.
But Templeton thought the US equity market to be incredibly cheap by historical standards – the average Dow PER was 6.8, the lowest on record, compared with the long-term average of around 14. He invested heavily, apportioning 60% of his funds to the US.
Consistent endeavour
Templeton maintained a ‘wish list’ of well-run companies, with bright prospects and good managers, but with high share prices, thus he could not bring himself to buy them – he had to wait.
Then, when a major market decline occurred he could pick a few of these as the share prices fell into the bargain range.
Such an approach creates a bulwark against
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