“The following are Templeton's 15 practical, timeless investment rules, written in his own words.
1. Be Aware of the Real Return
"Invest for maximum total real return. This means return on invested dollars after taxes and inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped. It is vital that you protect purchasing power."
[To illustrate the real return, suppose an investor bought a stock for $5,000, sold for $10,000, paid a capital gain of 20 percent, and inflation during the time was 1 percent. In this example, the real return would be$3,900.
$5,000 gain
-1,000 capital gain tax
---------
$4,000 after taxes
- 100 for inflation (loss of purchasing power of total capital - $10,000)
--------
$3,900 real return]
2. Invest, Don't Speculate
"Invest-don't trade or speculate. The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short, or deal only in options, or trade in futures, the market will be your casino. And, like most gamblers, you may lose eventually-or frequently. You may find your profits consumed by commissions. You may find a market you expected to turn down turning up and up and up in defiance of all your careful calculations and short sales. Keep in mind the wise words of Lucien O. Hooper, a Wall Street legend: 'What always impresses me,' he wrote, 'is how much better the relaxed, long-term owners of stock are with their portfolios than the traders with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values, more patient and less emotional, pays smaller annual capital gains taxes, and does not incur unnecessary brokerage commissions. ",
3. Be Flexible
"Remain flexible and open-minded about different types of investments. There are times to buy blue-chip stocks, cyclical stocks, corporate bonds, convertible bonds, U.S. Treasury instruments, and other investments. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities. The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will prove temporary and when lost may not return for many years. Having said that, I should note, for most of the time, I have invested in common stocks because well-chosen stocks held for the long term have outperformed bonds and inflation in most decades with few exceptions, the most recent being the 1970s."
4. Buy Low: The Contrarian Approach
"Of course, you may say, buy low, that's obvious. Well it may be, but that isn't the way the market works. When prices are high, a lot of investors are buying. Prices are low when demand is low, investors have pulled back, people are discouraged and pessimistic. When almost everyone is pessimistic at the/same time, the entire market collapses. Most often, just stocks in particular fields sustain losses. For example, industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once. Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: 'Buy low, sell high,' but all too many of them bought high and sold low. And when do they buy? The usual answer: 'Why, after analysts agree on a favorable outlook.' This is foolish, but it is human nature.
"It is extremely difficult to go against the crowd-to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now. But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you, can't outperform the market if you buy the market. And chances are if you buy what everyone is buying, you will do so only after it is already overpriced. Heed the words of the great pioneer of stock analysis Benjamin Graham: 'Buy when most people including experts are overly pessimistic, and sell when they are actively optimistic.'''
[One example is Templeton's early investment in Japan, discussed previously. Inthe late 1960s, when many American investors still thought of Japanese goods as inferior and thought Japan's stock market was not a good investment, Templeton did his homework, recognized value, and profited. Even though other investors disagreed with him, Templeton acted on his convictions backed up by his research. Another example is Templeton's purchase of Ford. When other investors were selling and Ford was reporting huge losses, Templeton saw a buying opportunity and profited.]
5. Buy Quality
"When buying stocks, search for bargains among quality stocks. Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that's the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is being the low-cost producer in an industry. Quality is a well-capitalized company that is among the first into a new market. Quality is a well-known, trusted brand for a high-profit-margin consumer product. Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.
"Determining the quality of a stock is like reviewing a restaurant. You don't expect it to be 100 percent perfect, but before it gets three or four stars you want it to be superior."
[Templeton bought quality companies dominant in their industries. Among Japanese stocks were Hitachi and Nissan Motors, and in the United States, American Stores (now part of Albertsons), Travelers (now part of Citigroup), and Ford Motors.]
6. Practice Value Investing
"Buy value, not market trends or the economic outlook. A wise investor knows ~at the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market. The stock market and the economy do not always march in lockstep. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook."
7. Diversify
"Buy a number of stocks and bonds-there is safety in numbers. No matter how careful you are, no matter how much research you do, you can neither predict nor control the future. A hurricane or earthquake, an unexpected technological advance by a competitor, or a government ordered product recall-anyone of these can cost a company millions of dollars. Also, what looked like such a well-managed company may turn out to have serious internal problems that weren't apparent when you bought the stock. So you must diversify-by company, by industry, by risk, and by country. For example, if you search worldwide, you will find more bargains-and possibly better bargains-than in any single nation.”
8. Do Your Homework
"Do your own research or hire wise experts to help you. Investigate before you invest. Study companies to learn what makes them successful. Remember, in most instances you are buying either earnings or assets, or both."
9. Monitor Your Investments
"Aggressively monitor your investments. Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Remember, things change and no investment is forever."
10. Don't Panic
"Sometimes you won't have sold when everyone else is buying and you'll be caught in a market crash such as in 1987. There you are, facing a [large] loss in a single day.
"Don't rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn't own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can't find more attractive stocks, hold on to what you have."
[Based on Templeton's philosophy in the above scenario, before selling, investors should look at stock holdings in light of their buying criteria. Additionally, according to Templeton, the best time to sell is when an investor finds a stock worth 50 percent more than a current holding.]
11. Deal with Mistakes Effectively
"The only way to avoid mistakes is not to invest-which is the biggest mistake of all. So forgive yourself for your errors. Don't become discouraged and certainly don't try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future. The big difference between those who are successful and those who are not, is that successful people learn from their mistakes and the mistakes of others."
[Investing mistakes, like other mistakes in life, are inevitable. Templeton has said that one-third of his investments do not work out; however, the rest-two-thirds of his investments-have brought him excellent profits. The important consideration is to acknowledge mistakes and, when possible, use them as a learning tool.]
12. Prayer Helps
"If you begin with a prayer, you can think more clearly and make fewer mistakes. [Templeton started his shareholders' meetings with a prayer. He believes in daily prayer and gratitude, but emphasizes that he doesn't pray for investment advice.] Prayer stills the mind and gives clarity of thought, which may help to make better decisions."
13. Be Humble
"An investor who has all the answers doesn't even understand all the questions. A know-it-all approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if you can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments or an unchanging economic and political environment. Everything is in a constant state of change and the wise investor recognizes that success is a process of continually seeing answers to new questions."
14. There's No Free Lunch
"This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job or built the first car you ever owned, or sponsored a favorite television show of long ago, may be a fine company. But that doesn't mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high. Never invest in an initial public offering (IPO) to save the commission [commissions are lower since he wrote this but are still a factor in the costs of investing]. That commission is built into the price of the stock-a reason why a great many new stocks decline in value after the offering. This does not mean you should never buy an IPO. But don't buy it to save the commission. Never invest solely on a tip. Why, that's obvious, you might say. It is. But you would be surprised how many investors, people who are well educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit."
15. Have a Positive Attitude toward Investing
"Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark 1970s, many professional money managers and many individual investors made money in stocks, especially those of smaller companies. There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up and up and up. As national economies become more integrated and interdependent, as communication becomes easier and cheaper, business is likely to boom. Trade and travel will continue to grow. Wealth will increase and stock prices should rise accordingly. The financial future is bright and the basic rules of building wealth by investing in stocks hold true. . . it's still buy low, sell high."”
1. Be Aware of the Real Return
"Invest for maximum total real return. This means return on invested dollars after taxes and inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped. It is vital that you protect purchasing power."
[To illustrate the real return, suppose an investor bought a stock for $5,000, sold for $10,000, paid a capital gain of 20 percent, and inflation during the time was 1 percent. In this example, the real return would be$3,900.
$5,000 gain
-1,000 capital gain tax
---------
$4,000 after taxes
- 100 for inflation (loss of purchasing power of total capital - $10,000)
--------
$3,900 real return]
2. Invest, Don't Speculate
"Invest-don't trade or speculate. The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short, or deal only in options, or trade in futures, the market will be your casino. And, like most gamblers, you may lose eventually-or frequently. You may find your profits consumed by commissions. You may find a market you expected to turn down turning up and up and up in defiance of all your careful calculations and short sales. Keep in mind the wise words of Lucien O. Hooper, a Wall Street legend: 'What always impresses me,' he wrote, 'is how much better the relaxed, long-term owners of stock are with their portfolios than the traders with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values, more patient and less emotional, pays smaller annual capital gains taxes, and does not incur unnecessary brokerage commissions. ",
3. Be Flexible
"Remain flexible and open-minded about different types of investments. There are times to buy blue-chip stocks, cyclical stocks, corporate bonds, convertible bonds, U.S. Treasury instruments, and other investments. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities. The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will prove temporary and when lost may not return for many years. Having said that, I should note, for most of the time, I have invested in common stocks because well-chosen stocks held for the long term have outperformed bonds and inflation in most decades with few exceptions, the most recent being the 1970s."
4. Buy Low: The Contrarian Approach
"Of course, you may say, buy low, that's obvious. Well it may be, but that isn't the way the market works. When prices are high, a lot of investors are buying. Prices are low when demand is low, investors have pulled back, people are discouraged and pessimistic. When almost everyone is pessimistic at the/same time, the entire market collapses. Most often, just stocks in particular fields sustain losses. For example, industries such as automaking and casualty insurance go through regular cycles. Sometimes stocks of companies like the thrift institutions or money-center banks fall out of favor all at once. Whatever the reason, investors are on the sidelines, sitting on their wallets. Yes, they tell you: 'Buy low, sell high,' but all too many of them bought high and sold low. And when do they buy? The usual answer: 'Why, after analysts agree on a favorable outlook.' This is foolish, but it is human nature.
"It is extremely difficult to go against the crowd-to buy when everyone else is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you that stocks in general, or in this particular industry, or even in this particular company, are risky right now. But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you, can't outperform the market if you buy the market. And chances are if you buy what everyone is buying, you will do so only after it is already overpriced. Heed the words of the great pioneer of stock analysis Benjamin Graham: 'Buy when most people including experts are overly pessimistic, and sell when they are actively optimistic.'''
[One example is Templeton's early investment in Japan, discussed previously. Inthe late 1960s, when many American investors still thought of Japanese goods as inferior and thought Japan's stock market was not a good investment, Templeton did his homework, recognized value, and profited. Even though other investors disagreed with him, Templeton acted on his convictions backed up by his research. Another example is Templeton's purchase of Ford. When other investors were selling and Ford was reporting huge losses, Templeton saw a buying opportunity and profited.]
5. Buy Quality
"When buying stocks, search for bargains among quality stocks. Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that's the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is being the low-cost producer in an industry. Quality is a well-capitalized company that is among the first into a new market. Quality is a well-known, trusted brand for a high-profit-margin consumer product. Naturally, you cannot consider these attributes of quality in isolation. A company may be the low-cost producer, for example, but it is not a quality stock if its product line is falling out of favor with customers. Likewise, being the technological leader in a technological field means little without adequate capitalization for expansion and marketing.
"Determining the quality of a stock is like reviewing a restaurant. You don't expect it to be 100 percent perfect, but before it gets three or four stars you want it to be superior."
[Templeton bought quality companies dominant in their industries. Among Japanese stocks were Hitachi and Nissan Motors, and in the United States, American Stores (now part of Albertsons), Travelers (now part of Citigroup), and Ford Motors.]
6. Practice Value Investing
"Buy value, not market trends or the economic outlook. A wise investor knows ~at the stock market is really a market of stocks. While individual stocks may be pulled along momentarily by a strong bull market, ultimately it is the individual stocks that determine the market, not vice versa. All too many investors focus on the market trend or economic outlook. But individual stocks can rise in a bear market and fall in a bull market. The stock market and the economy do not always march in lockstep. Bear markets do not always coincide with recessions, and an overall decline in corporate earnings does not always cause a simultaneous decline in stock prices. So buy individual stocks, not the market trend or economic outlook."
7. Diversify
"Buy a number of stocks and bonds-there is safety in numbers. No matter how careful you are, no matter how much research you do, you can neither predict nor control the future. A hurricane or earthquake, an unexpected technological advance by a competitor, or a government ordered product recall-anyone of these can cost a company millions of dollars. Also, what looked like such a well-managed company may turn out to have serious internal problems that weren't apparent when you bought the stock. So you must diversify-by company, by industry, by risk, and by country. For example, if you search worldwide, you will find more bargains-and possibly better bargains-than in any single nation.”
8. Do Your Homework
"Do your own research or hire wise experts to help you. Investigate before you invest. Study companies to learn what makes them successful. Remember, in most instances you are buying either earnings or assets, or both."
9. Monitor Your Investments
"Aggressively monitor your investments. Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Remember, things change and no investment is forever."
10. Don't Panic
"Sometimes you won't have sold when everyone else is buying and you'll be caught in a market crash such as in 1987. There you are, facing a [large] loss in a single day.
"Don't rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn't own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can't find more attractive stocks, hold on to what you have."
[Based on Templeton's philosophy in the above scenario, before selling, investors should look at stock holdings in light of their buying criteria. Additionally, according to Templeton, the best time to sell is when an investor finds a stock worth 50 percent more than a current holding.]
11. Deal with Mistakes Effectively
"The only way to avoid mistakes is not to invest-which is the biggest mistake of all. So forgive yourself for your errors. Don't become discouraged and certainly don't try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future. The big difference between those who are successful and those who are not, is that successful people learn from their mistakes and the mistakes of others."
[Investing mistakes, like other mistakes in life, are inevitable. Templeton has said that one-third of his investments do not work out; however, the rest-two-thirds of his investments-have brought him excellent profits. The important consideration is to acknowledge mistakes and, when possible, use them as a learning tool.]
12. Prayer Helps
"If you begin with a prayer, you can think more clearly and make fewer mistakes. [Templeton started his shareholders' meetings with a prayer. He believes in daily prayer and gratitude, but emphasizes that he doesn't pray for investment advice.] Prayer stills the mind and gives clarity of thought, which may help to make better decisions."
13. Be Humble
"An investor who has all the answers doesn't even understand all the questions. A know-it-all approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if you can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments or an unchanging economic and political environment. Everything is in a constant state of change and the wise investor recognizes that success is a process of continually seeing answers to new questions."
14. There's No Free Lunch
"This principle covers an endless list of admonitions. Never invest on sentiment. The company that gave you your first job or built the first car you ever owned, or sponsored a favorite television show of long ago, may be a fine company. But that doesn't mean its stock is a fine investment. Even if the corporation is truly excellent, prices of its shares may be too high. Never invest in an initial public offering (IPO) to save the commission [commissions are lower since he wrote this but are still a factor in the costs of investing]. That commission is built into the price of the stock-a reason why a great many new stocks decline in value after the offering. This does not mean you should never buy an IPO. But don't buy it to save the commission. Never invest solely on a tip. Why, that's obvious, you might say. It is. But you would be surprised how many investors, people who are well educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit."
15. Have a Positive Attitude toward Investing
"Do not be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark 1970s, many professional money managers and many individual investors made money in stocks, especially those of smaller companies. There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up and up and up. As national economies become more integrated and interdependent, as communication becomes easier and cheaper, business is likely to boom. Trade and travel will continue to grow. Wealth will increase and stock prices should rise accordingly. The financial future is bright and the basic rules of building wealth by investing in stocks hold true. . . it's still buy low, sell high."”