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Archive for the ‘John Templeton’ Category

Nose out of book

After several weeks immersed in completing the book I have been writing on the investment methods of Sir John Templeton, to be pubished in the spring next year, this week sees the return of this blog to active duty. The past three months in the financial markets have been amongst the strangest and most volatile I can remember for some while - certainly since the great crisis of 2008. Two main things (the Eurozone crisis/horror movie and an apparent slowdown in the recovery of the US economy) have dominated market sentiment throughout these months, leading to a huge amount of displacement activity by anxious investors, and a good deal of hyperbole amongst the commentariat.

Suffice it to say that the news on both counts appears to have improved in the last few days. Although the Eurozone crisis is clearly still a long way from being resolved, the US data does appear to point to things picking up on the other side of the Atlantic, which should silence the most extreme prophets of doom for a while, at least.  Having broken out of their trading range, it will be surprising if equity markets do not finish the year on a relatively strong note, perhaps even crawling their way back to the level at which they started the year. The prospect of new bouts of quantitative easing by the Federal Reserve and Bank of England have dampened yields on long term Government bond, but the sovereign debt of overborrowed developed countries continues to look a/the most vulnerable asset class on any but the shortest of time horizons. Read the rest of this entry »

Written by Jonathan Davis

October 31, 2011 at 4:04 PM

Integrity Is Everything In Money Management

Two years ago I wrote a column for the Financial Times  about the life and career of Sir John Templeton, the professional investor and philanthropist who had died a few weeks earlier. In the course of the piece I mentioned in passing a memo that he had written to colleagues at his investment advisory firm in the early 1950s on the subject of How To Keep A Client Happy.

The memo came to light in the course of my research into Templeton’s investment methods for a new book that continues its (painfully) slow path towards publication. Although Sir John was of course internationally well known for his value investing principles, nothing had quite prepared me for the level of interest that the throwaway reference to the subject of his memo provoked.

In fact no other column I have written has prompted as many responses, almost all of which amounted to the simple request “Can you tell me what the memo said?”  That in itself seemed to speak volumes about both the priorities and the current preoccupations of those in the fund and wealth management business at the time. The column appeared a couple of months before the Lehman bankruptcy tipped the world into a full-blown global financial meltdown.

As we know now, the financial crisis proved to be the trigger for one of the greatest migrations of client money that the asset management industry has experienced. Even those managers and advisers who had navigated the crisis reasonably successfully were punished by clients taking a walk. When investors demand liquidity at any price, as happened in 2008, history tells us that the virtuous and the wicked will both be punished alike. 

There is no question that Templeton, who beneath his saintly aura was a shrewd and hard-nosed businessman, knew this as well as anyone. In his memo, written in December 1953, he acknowledges that client retention is a difficult subject. Why? Because “the influences on the psychological attitudes, decisions and beliefs of human beings are 90% subconscious and only 10% logical”. This is an observation that has since of course been well documented in the literature of behavioural finance.

His 11-point check list of things which his colleagues should do to keep their clients happy is too long to reproduce in full here (though I would be happy to send a copy to paid up subscribers to Independent Investor). Suffice it to say that it mixes plain speaking and common sense with what those who only know Templeton by reputation from his later philanthropic activities may consider a surprising degree of pragmatic worldliness.

Top of his list is the fairly routine suggestion that his colleagues should have “a long personal talk” with every client at least once every six months about their portfolio, in order to emphasise that every stock in it was “the subject of continuous restudy and follow up” and “the best which could possibly be selected”. The deeper the apparent knowledge of the portfolio the adviser can display, the better.

The investor, Templeton goes on, wants to feel that his affairs are managed by “a group of wise and prudent men. No one of us would want to say this about ourselves. However each of us should seek opportunities to describe to the client the background and wisdom and success of each other man in the organisation. Some counsellors make a specially strong point of the fact that other sources of advice may be biased, whereas investment counsel works in the client’s interest only”.

Further down the check list Templeton comments that “it is human to be subconsciously influenced by appearances. Those banks which in inhabit marble palaces usually attract the most customers……The feeling of optimism and prosperity is contagious. The counsellor whose manner and words reflect uncertainty or disappointment will quickly give the same feeling to the client; and the counsellor whose manner and words reflect confidence and prosperity will quickly give the feeling of confidence to the client”.

The irony, it struck me as I read on, is that while himself a pillar of personal probity, with a loyal and satisfied fee-based clientele, in putting down these thoughts more than half a century ago Templeton was foreshadowing both good and bad aspects of the future growth of the private banking/wealth management business. (He himself was to sell his advisory business ten years later in order to concentrate on the more rewarding and less time-intensive business of managing funds).

Many clients of advisory firms will, alas, be familiar with “the marble palaces” and the displays of optimism that Templeton identified. Increasingly however what they struggle to find is a level of personal service and conflict-free fiduciary commitment that were once the hallmark of the best in an era when investment advice was regarded as a profession, not a business.

The feeder funds and intermediaries who channelled money to Bernie Madoff, one might say, learned many of the items on Templeton’s check list all too well. This only goes to underscore the fact that without a moral compass and professional integrity, not to mention suitably aligned incentives, in the wrong hands even the exemplary personal intentions of a John Templeton can all too easily mutate into something worse.

Written by Jonathan Davis

April 18, 2010 at 1:41 PM

John Templeton’s 2020 vision

The only sure way to make market forecasts that have any enduring value, I have learnt, is to follow the formula successfully deployed by Sir John Templeton. His technique was to look a fair way ahead and come up with a number that sounded impressively large – impressively large, that is, until you examined his assumptions and worked out what compound rate of return his forecast actually implied.

So for example with the Dow Jones Industrial Average at around 800 in 1980, having convinced himself that stocks were cheap, he boldly predicted that the market could reach 3,000 before the end of that decade, and could easily rise 20 fold by 2020. That sounded extraordinary at the time to a generation which had just survived the 1974-75 bear market.

Yet in practice, given his premise that inflation would continue to double the price level every ten years, the 3,000 figure represented a real compound rate of growth (after inflation) of 8% per annum. That was certainly some way above the long term average growth rate for US equities, as the historical average is a total return calculation.

But given that starting valuations in 1980 were already very depressed by historical standards, the headline-grabbing forecast was nothing like as wild as it might at first have appeared. For the Dow to reach 16,000 by 2020 from its current level of around 10,500, incidentally, it will need to rise at a compound rate of 4.5% per annum for the next ten years – so even though inflation has fallen dramatically in the interim, the original 1980 forecast is still by no means an unlikely target.

For good measure, although Templeton liked to give a specific end point to any forecast he made, he was too smart to commit himself more directly to when his target might be reached, leaving plenty of room for relapses and consolidations along the way. (A more cynical version of this approach to forecasting was summed up by the economist who said “if you have to forecast at all, forecast long and forecast often”).

What Templeton was however was a self-confessed optimist, who continued to believe right up until his death that, while the market would continue to suffer periodic setbacks of 30%-50%, those who predicted a new Great Depression were wrong. He had great faith in the hunger and resilience of the American people and in the capacity of humankind to make progress. Market setbacks were the price you paid for long term equity returns.

For example, in 1987, with what turned out to be uncanny prescience, Templeton said that he fully expected an imminent fall of 30%-50% in the market. It duly happened, but within weeks of Black Monday in October of that year he was reiterating his arguments about the Dow reaching 3,000, and celebrating the fact that investors had been given a second chance to get in on the ground floor of what he remained convinced would prove to be one of the greatest bull markets of all time.

The following year he became bolder still. His study of market history over many years had convinced him that bear markets rarely last longer than 15 months. If markets have not breached their previous low within 12 months, he argued, the odds are very high that they won’t go on to do so again. (If that assumption still holds, it makes it virtually certain that a new test of the March 2009 bear market lows is unlikely this time round).

Speaking in 1988, Templeton discounted the prevailing fears of doomsters of the day, arguing that all the major problems that preoccupied the markets at the time were already known and consequently priced in. “The fact that we have a terribly unbalanced federal budget” he told one interviewer “is already in share prices. The fact that we have a bad balance of payments in foreign trade is already reflected in share prices”.

It was wrong to assume that trade or budget deficits would lead to either depression or deflation. Anyone who studied financial history, he believed, would see that large budget and trade deficits only ever resulted in inflation. By the same token, like many of his generation, he was confident that politicians had learned the lessons of the Great Depression and would never allow the economy to slip into deflation.

Would he still think the same way today? He is not around to tell us, but close analysis of his thinking over many years suggests to me that notwithstanding the unprecedented scale of the global financial crisis, he would be on the bullish side of the consensus. Having clearly identified the severity of the looming housing market bubble five years ago, and seen the market tumble by 50% from its peak, I don’t think he would be betting against the resilience of the US economy now.

It is easy to be daunted by the enormity of the task that lies ahead. Where is the political will to eliminate the extraordinary pile of public sector debt that the crisis has engendered? Where will the jobs come from? How can future banking crises be averted if the banking lobby succeeds in blocking the reintroduction of a badly needed modern version of the Glass-Steagall Act?

We don’t know. Nothing can be ruled out absolutely. But without falling into the trap of making a specific year ahead forecast, the odds still surely favour the Dow making Templeton’s target of 16,000 before 2020 a very reasonable bet.

Written by Jonathan Davis

January 3, 2010 at 2:17 AM