How to become an investment legend
A day after the anniversary of Sir John Templeton’s death, FE Trustnet reminds readers of his core principles for the contrarian investor.
By Mark Smith, Senior Reporter, FE Trustnet
Monday July 09, 2012
With markets teetering on the knife-edge between growth and collapse with the publication of each news story, there has rarely been a more challenging time for investors.
In this sort of environment a contrarian approach – buying assets nobody else wants and selling them when they regain their popularity – is seen by many as the best way to add real long-term value.
Sir John Templeton, a pioneer of global investment, was one of the most successful investors to adopt the strategy.
Here are five of his investment maxims:
1. For all long-term investors, there is only one objective: maximum total real return after taxes.
It is hard enough to make a decent return these days without handing a cut of profits to HMRC. ISAs are the most tax-efficient wraps but a decent IFA should also help out elsewhere.
Investors should also look out for charges before buying a fund. Asset managers are unlikely to lower their fees if investors don’t shun rip-off products.
2. Achieving a good record takes much study and work and is a lot harder than most people think.
What makes investing so difficult is that there are so many variables that can impact a company’s share price. All fund managers spend a lot of their time and resources thumbing through company accounts and back-dating complicated algorithms to make sure their investments are sound.
However, FE Alpha Manager Jan Luthman
says that even after all this, it is all too easy to forget some other, intangible factor.
"There is now more of a demand for emotional rather than factual content and this demand has been met with the various social networking sites that have materialised," he told FE Trustnet
back in January.
"Within five minutes of an explosion at a gold mine in South America, everybody knows about. As of yet I don’t think there has been enough said about the effect that ‘a smaller world’ could have on investment."
3. Never adopt permanently any type of asset or any selection method.
Try to stay flexible, open-minded and sceptical. Long-term top results are achieved only by switching between popular and unpopular securities and methods of selection.
Star manager Martin Gray
has been referred to as a perma-bear by industry journalists but this hasn't always been the case. He has been able to achieve consistent outperformance in his CF Miton Special Situations
funds by keeping a flexible approach.
Performance of manager versus peer group over 10yrs
Source: FE Analytics
The Special Situations portfolio currently has more than 35 per cent in cash but between 2003 and 2006, Gray was aggressively positioned and as a result had one of the best-performing funds in his sector.
4. It is impossible to produce a superior performance without doing something different from the majority.
It is best to buy in the time of maximum pessimism and best to sell in the time of maximum optimism. In the stock market the only way to get a bargain is to buy what most investors are selling.
This maxim has particular resonance in today’s market with most investors shunning European equities.
FE Alpha Managers Alexander Darwall
and Barry Norris
are specialists in the region and both insist that quality multi-national European businesses have never been cheaper.
5. To buy when others are despondently selling and to sell what others are greedily buying requires the greatest fortitude, even while offering the greatest reward.
Neil Woodford was heavily criticised for staying in defensives as markets rallied strongly through 2009 and 2010. He stuck to his guns though and when markets took a tumble in August 2011, he finished the year at the top of the pile.