Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability. Then you own those shares forever. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

June 03, 2008

Sir John Templeton

To buy when others are despondently selling and sell when others are avidly buying requires the greatest fortitude and pays the greatest potential reward. - Sir John Marks Templeton

Sir John Marks Templeton is regarded by many as one of the greatest investors ever to live. In terms of fame among investors arguably only Buffett and Lynch surpass him. A devout Christian, he is often called "God's Venture Capitalist", and is without a doubt simultaneously one of Wall Streets finest fund managers, and one of Wall Street's greatest nuts, writing extensively in his own individual style trying to unite science and religion, to bring the same level of research and development to spirituality that technology and the mainstream sciences have enjoyed for so long.

Templeton's approach is bottom-up, he only analysed individual companies, not caring much for buying entire markets the way so-called top-down funds do. Templeton was a value investor who sought out cheap stocks all over the world. He and his analysts were among the first westerners to recognise the potential of Japan as an emerging market, in fact he was dealing in Japan long before the phrase "emerging market" was even coined.

Templeton liked maximum pessimism. "It's simple common logic", he once said, "that you can only buy at the lowest price when pessimism is highest." Templeton didn't just go for stable countries with a future, later on when the trend started for funds to invest in these countries Templeton still set himself apart from the crowd by finding value stocks in the "worst" countries. Whenever a political leader was assassinated, a war broke out, a plague occurred, a vote of no-confidence was held in the nation's parliament, Templeton was often first on the scene to buy the stocks that stampeding speculators were only too keen to sell at a bargain price.

Templeton bought solid companies, one might call them "blue chips" perhaps, but only when they trade at enormously inexpensive valuations. Although he insisted on quality, he never really insisted on great size, being perfectly happy to buy tiny companies that few people outside of local specialists had even heard of. There are about eleven major principals to Templeton's investment style:

  1. Transaction pattern: Templeton always bought companies that were being sold down with many more sellers lined up than buyers.
  2. Diversification: Templeton was never a focus investor, he insisted on very widely diversifying his portfolio, holding as many companies as he could find that met his criteria.
  3. Patience: Give a purchase time to work out. Templeton held stocks an average of four years, extending his holding period up to six years. If a stock had not started to reflect fair intrinsic value after six years Templeton would quietly drop it from his portfolio.
  4. Low Price/Earnings ratio (PER): The average PER of Templeton's portfolio is under one half that of the Morgan Stanley Capital International (MSCI) index (MSCI as of 24200 is at PE/F of 16.13). He likes his stocks cheap.
  5. Use longer term data: In Templeton's own words, "Instead of comparing the customary 12-month earnings figure, we prefer to use figures from the latest five years. This largely eliminates normal cyclical distortions. So we compute the aggregate price to average five-year earnings data and then determine whether the resulting price/earnings ratio is high or low by comparison to historical price to earnings ratios. This is one of the yardsticks by which we calculate that prices are above or below normal, and that stocks may be either bargains or overpriced."
  6. Operating profit margins: Healthy profit margins. He didn't buy "dogs", his stocks were cheap but they were never bad. When you are willing to look in far flung markets in the midst of national crisis you can find lots of companies like this every day of every year.
  7. Liquidating value: Companies should never be trading at much more than book value. Templeton did look at companies for their fire sale price, and used this as his ultimate downside risk.
  8. Growth rate: Some might find him hard to peg, but he was always a value investor. Nevertheless, Templeton did always insist on companies with an above average growth rate, in particular favouring companies that have been able to grow their earnings per share with great consistency. Templeton's minimum criteria was the potential for a company to grow its profits at 20%pa. This in itself would have been a severe filter that eliminated the majority of issues, when he combined it with an equally harsh value criterion, you can probably see why Templeton had to run all over the world to find such companies.
  9. Flexibility: Be prepared for the unexpected, be ready to change your strategy if necessary to adjust for new events, even if it means undoing a portfolio that has been painstakingly constructed over a long time. Templeton was happy enough to sit on mountains of cash if he felt there were not enough cheap companies to buy, and he was happy enough to buy bonds and real estate as well if he felt they were favourable. This probably has something to do with his fondness for diversification as well.
  10. Exit strategy: Templeton was quite ready to sell all stocks in his portfolio that ceased to be undervalued. As soon as they became fairly priced he would sell and put money into something very undervalued.
  11. Don't trust rules: Even today, with Templeton retired and living the life of a rich religious eccentric in the Bahamas (a tax haven), the Franklin-Templeton funds management group is still tinkering with his system and improving on it. Flexibility and possibly even a sense of humour are needed for investing in pessimistic markets.

There are a few other insights that Templeton applied to his investments:

  • The best investments are in sectors and stocks that are completely neglected, that other investors are just ignoring.
  • Inflation and socialism (or excessive regulation) are conditions to be avoided.
  • Newspapers are good investments in democratic countries because regulation is often seen as an impediment to freedom of the press!
  • Banks are natural candidates for regulation.
  • Supermarkets are a pretty good inflation hedge.
  • To find the most bargains, look all over the world. Templeton looked in small markets like Thailand, Australia, Peru and Malaysia.
  • Templeton studied the portfolios of his peers, he tracked about 20 managed funds. He also made extensive use of brokers for information, though only to establish facts, never to hear their recommendations.
  • Everything has its seasons, nothing lasts forever. The world changes its spots, and the investor must change with it. After his interest in small "special situations" and growth stocks, he went to Japan when he bought many stocks on a PER of 3 (the Japanese portion of his portfolio peaked at 60% in 1970, he started seriously selling out of Japan when PERs reached a market average of 30, though he remained with his bargain purchases for a long time) and other foreign countries, then later, big multinationals like Ford and Royal Dutch. When Templeton exited Japan he followed value elsewhere, this brought him to America, where he was able to buy many great American companies very cheaply. This also illustrates his "global" approach rather than an "international" approach, many international investors shun domestic stocks, Templeton doesn't care where he finds a company, so long as it is cheap.
  • Templeton regarded his role as a comparison shopper, searching the world for companies trading at the most miniscule fraction of their intrinsic value. Again in his own words: "I never ask if the market is going to go up or down next month, I know that there is nobody that can tell me that. Instead, I search, country by country for stocks, asking where is the one that's lowest in price relative to what our securities analysts estimate its worth to be. Usually a stock has to be a bargain or I won't buy it."

The five rules of the Templeton Way
  1. Importance of Price
    Purchase an investment only when you can pay less for it than it is worth today, and only if you believe that it will be worth more than tomorrow.

    The principle is the same as a thrifty shopper running around with a book of coupons to redeem. "I never ask if the market is going to go up or down next month, I know that there is nobody that can tell me that. Instead, I search, country by country for stocks, asking where is the one that's lowest in price relative to what our securities analysts estimate its worth to be. Usually a stock has to be a bargain or I won't buy it."

  2. Buy on Good News, Sell on Bad News
    Look for situations where short term factors temporarily affect a company's performance or investor's perception of the company.

    Many of Templeton's stocks were the victims of deep pessimism from the market. A good example would be when Templeton bought Union Carbide following their horrible accident in Bhopal. (I studied this in chemistry at uni, a disgruntled worker fiddled with the machines at Union Carbide's giant chemical plant in Bhopal, India. The result was an explosion and a cloud of toxic gas that spread over a densely populated area, killing thousands. It was one of the worst industrial "accidents" in history). Anyway, the stock took a dive from $50 to $32.75 as the consensus was that the company would fail under the weight of litigation. Templeton figured the insurance companies would foot a large part of the bill, and the company was very well run and manufactured a product that was needed. Just over a year later Templeton sold out to another company acquiring Union Carbide, for $69 a share.

  3. Broaden your Knowledge
    Where the possibility of a bargain appears present, the investor has the responsibility to acquire the expertise to evaluate the situation.

    Buffett recommends you stay within your circle of competence, Templeton tells you to widen your circle. Either way you should never go into any investment unless you understand the industry, the economy and the company intimately. Templeton had teams of analysts on the ground in various locations around the world, and made friends of his neighbors in Lyford Cay in the Bahamas, who were among the world's great capitalist leaders, heading major banks and industries throughout the world. (When you live in a tax-haven, you get these kinds of neighbors.) Templeton made sure that if he was thinking of buying banks in Portugal, he would get to know absolutely everything there was to know on the subject. This is one area where Templeton and Buffett part company drastically, Buffet stays right away from anything he doesn't understand, Templeton gets heavily involved in in-depth research to find out what he doesn't know.

  4. Quantification
    A bargain can be expressed in terms of its true current earnings (or likely future earnings) as compared to the cost of its shares or the price it could bring on the current open market.

    As a rule, instead of looking at one-year figures, Templeton prefers to analyse a company in terms of averages for the previous five years, thus eliminating much of the distortions caused by cyclical patterns, strange accounting practices and extraordinary events. He compares this to even longer term averages and decides if the 5-year PER is cheap compared to the long term PER for this stock, also Price/Cash Flow ratios and book values.

    For his top-down analysis of entire countries, he finds that the best measure of a cheap economy is to compare average Price/Book Value with historical norms, finding price to book to be a better measure than PER. More important than a historical book value study is to study replacement book value, estimating that the replacement age of all non-monetary investments for U.S. corporations is about 5 years. Based on this, Templeton's analysts construct historical indexes comparing the replacement book value compared to price, determining if a market is cheap or expensive by this index.

  5. Hard Work
    Investment is hard work, and short cuts produce second-class results.

    Just knowing that an industry has a bright future is irrelevant to whether or not you should buy a stock. Templeton reckons that only a minute proportion of investors know or care how to value a stock, and as they are unable to value the stock they are unable to make worthwhile estimates of how much the company is worth. You need to assess the company's competitors, you need to look at per share earnings, dividends, assets, sales. "You have to do all those things before you can make a sound judgment. ... Yet, most investors, including many Wall Street professionals, don't want to work that hard. They become excited about something and they buy it without fully understanding the situation.".

    Templeton states that investment is a battlefield, you are acting in direct competition with other investors. "But your can't buy a stock unless there's somebody wanting to sell it. And because you can't buy unless somebody sells, it's likely that a year later, or five years later, one of you will wish you hadn't done it... Because it is a contest, and is therefore different from almost every other business activity on Earth, you must not go with the majority. You can gain opportunities in investing only by doing something that the majority are against doing or something they don't know about."

Yardsticks of Value
The first thing you should know about Templeton is that he had no fixed method that he applied to all stocks. Instead he stuck to certain principals that he held as common to all investments, employed a swag of techniques to identify bargain issues and employed large teams of analysts to search through the world's markets. He found that every market was different and required specialisation, so from a top-down point of view he would find cheap countries and send in a team of analysts (making use also of Templeton's own network of contacts around the world to get quality local information).

Templeton has never publicly revealed any of the formulae that he used as an analyst, his fund managers still use these techniques whatever they may be and he is not keen to have the whole lot revealed to the world. On the other hand, he did stress that he never did use any particular method to the exclusion of others. He would use Price Earnings Ratios, book value, discounted cash flows, price to cash flow ratios and dividend yields. John Neff had his "total returns ratio" but if Templeton ever had any original proprietary formula that he used, he never publicly admitted to it.

In fact Templeton has stated quite clearly that in fact he did not use any particular method over any other. Flexibility and contrarianism is the defining characteristic of his style. He was prepared to use whatever worked and in particular to use methods or buy securities that were unfashionable. At no stage did he buy expensive growth stocks, but he often went into cheap ones, usually after some setback had decimated the stock price. Templeton had no formula that he applied, ultimately his "secret" was simply that he was determined to look where no one else was looking. "If you buy the same stocks everyone else is buying," he would often say, "you'll get the same results." Templeton used the full spectrum of value techniques and built up a detailed profile of each stock. He qualitatively understood the company, but would never buy based on a story of any kind. All of his purchases were made based on pure arithmetic, if the stock was cheap compared to book value, earnings, cash flow and sales, and was cheaper than something else in his portfolio, he would buy that stock and get rid of his more expensive ones.

He emphasised that the differences between investing in different markets made different measures of cheapness frequently irrelevant. You can't say that because the market PER of one country is lower than another that this country is cheap. What you have to do is figure out the historical norms for this country and see if it is cheap compared to its own history, or compare it to very similar economies. It is irrelevant to compare the PER of the USA to the PER of South Korea, the economies are too different to make this measure meaningful.

Templeton applied value principals all around the world, but he recognised that you can't use the same tools everywhere without modification. Apart from major differences in the economies, there are also differences in accounting standards and disclosure requirements. What seems cheap may not be if you make the required adjustments to the company accounts to make them directly comparable against local accounting practices. There are also major differences created by different tax systems. For example in America they have cheap capital gains tax and no dividend imputation system. Here we have franked dividends and capital gains are more expensive than in America. You can't compare America's and Australia's indexes unless you make corrections for local practices. (See another article in this FAQ, "How indexes are misleading")

Templeton also loves to hunt in "information gaps". Rarely will you find hugely undervalued securities in widely followed industries. Templeton was one of the first major investors to get into a little known photographic stock called Haloid. Templeton heard about a new process developed by this company but few securities analysts bothered much with this lightly traded company. Templeton found the stock to be woefully undervalued and took advantage of the bargain. Later Templeton sold this company at a 1,000% gain. That company changed its name to Xerox Corporation, and they became one of the great growth stocks for their invention of the photocopier.

Portfolio Management
Templeton had an average holding time of about five years. This was not a deliberate policy, it was a simple artifact of his value method, and he only discovered this in hindsight by watching the statistics of his fund. What he did instead was to examine a universe of about 3,000 stocks and filter it ruthlessly to about 600 by applying a variety of value filters.

These 600 stocks are then sorted on the basis of relative undervaluation, with the 20% most undervalued stocks being examined for possible portfolio inclusion. About 10 to 12 times a year the 3,000 stocks are reexamined as is the 600 stock shortlist. The Templeton valuations are compared to changing market prices and a moving average system kicks out of the portfolio any stocks considered less undervalued than one awaiting entry into the portfolio.

To justify the replacement of a stock, Templeton has to feel that the new stock has at least a 50% superior profit potential to the one being sold. Templeton doesn't like excessive turnover, realising how expensive it is, but his system does not include any explicit instruction to sell after a particular time. If a stock has been held for one week or 20 years he says it makes little difference to him. A stock is put in the portfolio for being a bigger bargain than the one it replaced. I have read elsewhere that Templeton considers getting rid of a stock after 6 years if it hasn't done anything, but this doesn't seem to be what Templeton says in the script of an interview he gave to Norman Berryessa (page 156 of Global Investing The Templeton Way by Berryessa and Kirzner (1993).)

William Proctor wrote Templeton's authorised biography, "The Templeton Touch" in 1993. In it were summarised Templeton's guiding principals of investment selection. Some of them are statements, like #1, some exceedingly difficult to act on (#6), but #13 and #16 could form the basis of a masters thesis.

  1. For all long term investors, there is only one objective - "maximum total return after taxes."
  2. Achieving a good record takes much study and work, and is a lot harder than most people think.
  3. It is impossible to produce a superior performance unless you do something different from the majority.
  4. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
  5. To phrase "Maxim 4" differently, in the stock market the only way to get a bargain is to buy what most investors are selling.
  6. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude, even while offering the greatest reward.
  7. Bear markets have always been temporary. Share prices turn upward from one to twelve months before the bottom of the business cycle.
  8. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, won't return for many years.
  9. In the long run, the stock market indexes fluctuate around the long term upward trend of earnings per share.
  10. In free-enterprise nations, the earnings on stock market indexes fluctuate around the replacement book value of the shares of the index.
  11. If you buy the same securities as other people, you will have the same results as other people.
  12. The time to buy a stock is when the short-term owners of a stock have finished their selling and the time to sell a stock is often when short term owners have finished their buying.
  13. Share prices fluctuate much more widely than values. Therefore, index funds will never produce the best total return performance.
  14. Too many investors focus on "outlook" and "trend". Therefore, more profit is made by focusing on value.
  15. If you search worldwide, you will find more bargains and better bargains than by studying only one nation. Also, you gain the safety of diversification.
  16. The fluctuation of share prices is roughly proportional to the square root of the price.
  17. The time to sell an asset is when you have found a much better bargain to replace it.
  18. When any method for selecting stocks becomes popular, then switch to unpopular methods. As has been suggested in "Maxim 3", too many investors can spoil any share-selection method or any market timing formula.
  19. 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 changing from popular to unpopular the types of securities you favour and your methods of selection.
  20. The skill factor in selection is largest for the common-stock part of your investments.
  21. The best performance is produced by a person, not a committee.
  22. If you begin with a prayer, you can think more clearly and make fewer stupid mistakes.
But searching the Internet I keep finding another list of maxims credited to Templeton. The first one is a giveaway that it is still Templeton, but most of this other list are different to those above. At risk of becoming boring, here is another list of Templeton's guiding principals. They go well with most of what I wrote in the previous article about Templeton.
  1. If you begin with a prayer, you can think more clearly and make fewer mistakes.

    Templeton was, and is, a devout Christian. His foundation that he has set up is one of the leading Christian philanthropic groups and advances a number of Christian causes. Some may find this may be off-topic for an investment FAQ, but nevertheless it is Sir John Templeton's first rule.

  2. Outperforming the markets a difficult task.

    The Challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of professionals who manage the big institutions.

  3. Invest - don't trade or speculate.

    The stock market is not a casino but if you move in or outf stocks every time they move a point or two, the market will be your casino and you may lose eventually or frequently.

  4. Buy value, not market trends or economic outlook.

    Ultimately, it is the individual stocks that determine the market, not vice versa. Individual stocks can rise in a bear market and fall in in bull market. So buy individual stocks, not the market trend or economic outlook.

  5. When buying stocks search for bargains among quality stocks.

    Determining quality in stock is like reviewing a restaurant. You don't expect it to be 100% perfect, but before it gets three or four stars you want to be superior.

  6. Buy Low.

    So simple in concept. So difficult in execution.hen prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic. But, if you buy the same securities everyone else is buying, you will have the same results as everyone else. By definition, you cant outperform the market.

  7. There's no free lunch. Never invest on sentiment. Never invest solely on a tip.

    You would be surprised how many investors do exactly this. Unfortunately there is something compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.

  8. Do Your homework or hire wise experts to help you.

    People will tell you: investigate before you invest. Listen them. Study companies to learn what makes them successful.

  9. Diversify - by company, by industry.n stocks and bonds, there is safety in numbers.

    No matter how careful you are, you can neither predict or neither control the future. So you must diversify.

  10. Invest for maximum total return.

    This means the return after taxes and inflation. This is only rational objective for most long-term investors.

  11. Learn from your mistakes.

    The only way to avoid mistakes is not to invest- which is the biggest mistake of all. So forgive yourself for your errors and certainly don't try to recoup your losses by taking bigger risks. Instead turn each mistake into a leaning experience.

  12. Aggressively monitor your investments.

    Remember no investment is forever. Expect and react to change. And there are no stocks that you can buy and forget. Being relaxed doesn't mean being complacent.

  13. An investor who has all the answers doesn't even understand all the questions.

    A cocksure approach to investing will lead, probably sooner than later to disappointment if not outright disaster.

  14. Remain flexible and open minded about types of investment.

    There are times to buy blue chip stock, cyclical stocks, convertible bonds and there are times to sit on cash. The fact is there is no one kind of investment that is always best.

  15. Don't panic.

    Sometimes you won't have sold when everyone else is buying and you will be caught in a market crash. Don't rush to sell the next day. Instead study your portfolio. If you can't find more attractive stocks, hold on to what you have.

  16. Do not be fearful or negative too often.

    There will, of course, be corrections, perhaps even crashes. But over time our studies indicate, stocks go up. It always?buy low, sell high".




The interview with Sir John Templeton

This interview was recently published by NewsMas and Financial Intelligence Report. Please see below for our comments.
Recently, NewsMax and Financial Intelligence Report publisher Christopher Ruddy visited with Sir John Templeton in Lyford Cay in the Bahamas - the place Sir John has called home for the past 32 years. His interview with Sir John follows:
At 92 years of age, Sir John Templeton is one of the world's most successful investors, a legend in his own time.
Money magazine calls him "arguably the greatest global stock picker of the century." Templeton's pioneering concept was to take the old adage "buy low, sell high" and apply it to global investing.
Templeton sought out the best opportunities anywhere in the world he could find them. When he began investing globally in the 1930s, Templeton was truly a pioneer. Many Americans thought it unwise to invest outside the United States and therefore forfeited a world of opportunities. John Templeton's results, however, are the stuff of legend.
When he sold his Templeton Funds in the early 1990s, they were worth an incredible $800 million. Templeton personally walked away with over $900 million. Sir John's all-consuming goal was to never just make money for himself, but to earn for others. As he told Philanthropy magazine:
"At Yale I was investigating what talents God gave me, and where I thought I could be most beneficial to people was to help them make fewer stupid mistakes in selecting their investments."
"At age 27, I formed my own investment firm, working with just five wealthy people. Eventually, when I sold out, we were helping over a million people with some part of their investments. And I felt that was a ministry, that I was doing a useful job, that I was not wasting the life God gave me. But all during that time, over 50 years, I felt that my benefit to people was not as great as if I were trying to help them get spiritual wealth."
Sir John now works full-time as a philanthropist. His John Templeton Foundation in Radnor, Pa., and his two offshore trusts have a total of $800 million dedicated to philanthropy.
The foundation - run by his son Dr. John Templeton, a retired medical doctor - is one of the few dedicated to discovering how religion can influence the physical world. Though he spends most of his time on his philanthropy, Sir John remains dedicated to his first vocation: the study of investments.
He cannot even utter the "R" word…retirement. In fact, he has thought of writing a book called "Never Retire."
"I have observed in 92 years that the people who are most diligent in working do live many years longer than those who are lazy," Sir John says.
A few years back, he told me he was exercising by walking against the ocean current every day for almost an hour. Today he has cut back his exercise, he says, to just 25 minutes a day.
He is not only physically active, but his mental examinations of the market are sharp.
And his timing has been impeccable. He sold short the dot-com and NASDAQ tech stocks at the very height of the '90s boom, making another small fortune.
During the past few years, Sir John has been very concerned about the lack of quality investments available in the market, and he has repeatedly warned of the possibility of a major collapse in housing prices - and even a '30s-style run on the stock markets.
Here are some of Sir John Templeton's current insights:
Do the Opposite of the Crowd
My job was being paid by wealthy families to help them choose stocks and bonds. And my results were much better when I was working from here than from Manhattan, Radio City and Rockefeller Center. I had good results in New York. But when I came here, I had better results. The secret, I think, is that in order to buy stocks at a bargain price, you have to do the opposite of the crowd. When you're going to the same meetings with the other people in Manhattan, it's hard to be different.
Finding a Spiritual Way
About 12 years ago, I sold out. I had been helping a few thousand wealthy families and I did a lot of thinking that if I could tell you the rest of my life, I might help a few thousand wealthy families to become somewhat wealthier. But by selling out to my strongest competitor [Franklin Resources], I can now devote 100% of my time to trying to help people grow in a spiritual way. And that's a wide-open field - very few people who have any substantial amount of money contribute to helping people grow spiritually.
The Study of Religion
We are tying to persuade people that no human has yet grasped 1% of what can be known about spiritual realities. So we are encouraging people to start using the same methods of science that have been so productive in other areas, in order to discover spiritual realities.
For example, to clarify, my grandfather was a medical doctor. But he had never heard of a germ. That was only 140 years ago. The medical doctors began to use that as a science, and now we know a thousand times as much about your body as my grandfather new as a medical doctor.
Or take the field of communications. As recently as when Abraham Lincoln was assassinated only 140 years ago, nobody in Europe heard about it for 17 days, because communications was so inadequate. Now we have this enormous communication system
around us all the time. There's 1,000 times as much communication as there was 140 years ago.
Again, this is due to applying methods of science to discover new modes of communication. So what my foundation is focused on more than anything else is to encourage people to donate to scientific research to help discover aspects of spiritual reality.
Managing My Own Money
I've spent 45 years inviting wealthy families to pay me a fee to help them pick the right investments. We didn't have any salesmen, so it was a slow process to grow.
But we got up to the stage where we were helping with about $23 billion worth of other people's money. Twelve years ago, I sold that entire operation - including this building - to a strong competitor in California called Franklin Resources, which was on the NYSE. Now they're helping with $88 billion in assets.
I don't have any connection with that forever. So my main activity now is just managing my own money. Because I think I'm going to do more good by using my wealth to encourage others to use scientific methods to find the answers to spiritual questions.
Finding Stock Bargains Never More Difficult
I do think it's interesting that in all my 92 years, I've never seen a time when it was so hard to find a bargain. I aided wealthy families by helping them find stocks that were selling at a small fraction of what the company was worth. But now, it's very difficult to find companies where you can buy the stock at a fraction of its value.
In all my experience, I don't remember a time when you had to search so diligently to find anything that was a bargain.
Bargain Stock Pick: KIA Is a Future GM
You always find some bargains, but just less than usual.
The last one I bought for myself is a company called Kia Motors. I bought one of their automobiles and it gives me better value than any other car I have ever owned.
They are now growing better than any other major automobile company, selling a great majority of cars outside South Korea in America and Europe and so forth, but they manufacture them in India, China and South Korea.
And yet I bought that stock recently at less than five times earnings. I think there's a chance - maybe not a probability, but a chance - that KIA Motors will be larger than General Motors 30 years from now.
Assess the Risks
In judging the value of the company, you have to consider: What is the risk that somebody might do something stupid? I think there's less risk in South Korea than there would be in China. There are some stocks selling at bargain prices - but the risk is greater.
Are Any American Stocks Undervalued?
I haven't bought any recently. I'd like to. I just buy where the bargains are.
Another Bargain in China
I guess the second one I would suggest is something that I invested in a few months ago. It's called Value Partners and is managed by a Chinese man in Hong Kong. It's a large organization - I have about $100 million in it. It's about five times that big all together.
They specialize in finding ways to buy stocks that are not well known in China and the region, and they invest in about 100 different companies in that area. They invest mainly in things I've never heard of.
Problems with China
It's difficult. The best Chinese companies don't have a public market and are not listed in America. Those that are listed in America are no longer cheap.
All that's true. But still, the rate of growth is so strong in China that I recently guessed that within a short period of 20 years, the gross national product of China will be larger than America's.
With four times the U.S. population, that is definitely achievable within 20 years.
The Dot-Com Crash and the Crash of '29
In 1929, the Dow Jones Industrial went down to 1/9 of where it had been. In this recent decline, it only went down 30%. The NASDAQ went down by 50%.
I am worried about exuberance. Like you just said - you'd like to have a house at Lyford Cay, but you have to pay four times what it costs to build. It's not the values - the prices are high.
Will There Be Another Crash?
Yes, but I've never been able to tell you when. If you find a way, let me know.
Well, I wouldn't use the word "crash." There will be cycles. I do think economics has developed a lot since 1932, so you shouldn't ever expect American prices to go down almost 90%, but I do believe there will be cycles where American prices go down 50%.
Factors Undermining the Market:
American Debt Is Highest Ever
American debt is the highest the nation's ever had. The federal deficit, the federal debt are the largest in history. But that's just the beginning.
Also, the unfavorable trade balance is the largest the nation's ever had.
And the national deficit - the shortage of taxes collected over what's spent - is the largest in the nation's history.
Americans were famous 30 years ago for being so thrifty. They were saving over 20 cents out of every dollar they earned. Last year, Americans saved less than 2 cents on every dollar.
All those things add up to the fact that there is almost sure to be a period of pessimism - a bear market. Not a crash, but a bear market.
The old rule of thumb for brokers was: The bear is about half as long as the bull. If I had to say when this bull market started, I would say 1990. So it's 14 years old.
The immediate future is that there are more dangers than I've ever known before. It's just more dangerous.
More Factors: The Weakening
Dollar and What Are Good Currencies?
Let's not use the word "good." Let's say "less risky" currency. The less risky currencies are probably South Korea, Singapore, India and New Zealand.
A couple of years ago, I bought Canadian strip bonds.
I haven't sold them yet, but I've stopped buying them, because they are up 25% from when I first got them.
And just within the last week, I made what is called a "straddle" - I sold short $25 million worth of Japanese money and bought long $25 million worth of South Korean money.
Why Currencies Are In Danger
The psychology all over the world is that people will not re-elect leaders who want them to be thrifty. The voters will elect the government that spends more money. And consequently, all money is risky. So I'm just taking the currency I think is especially risky and putting it into one that's less of a gamble.
In the United States, President Bush was the better of the two choices. Offhand, I can't say that there's a single nation where you can depend on the voters to want to be thrifty.
There is tremendous risk in Russia. But inflation is not a problem in Russia so much as it is elsewhere.
One emerging country is Singapore, which doesn't have a real democracy. So the government can afford to have a balanced budget.
The nation of Brazil has share prices that are quite low in relation to earnings. So I wouldn't rule out investing in Brazil. Although there's a lot of risk that goes with it, it always pays to buy bargains. Brazil is at bargain prices.
Bearish on Gold
Gold is too popular, and prices have already gone up. I remember when a British pound would buy an ounce of gold.
There's been a tremendous inflation in gold prices.
On Warren Buffett
I'm a great admirer of Warren Buffett. But he has been focused primarily on U.S investments. That is strange. To that extent, I think he's short-sighted - or small-sighted. Small-sighted, I think. If he had spent more time in foreign nations, he would be better off.
Housing Prices
Now the U.S. has this extraordinary thing - I think in some places we see 50% to 100% gains on the housing market. Other places across the country might be up 25% to 30% in just a matter of three to four years. Incredible gains.
When you invest in stocks, you get the same value all over. The same stock sells at the same value, no matter what nation you're in. But that's impossible in real estate. Real estate value depends on locality. If you're going to be a real estate investor, focus on location, location, location.
So when you're trying to invest in real estate, you have to do a lot of serious research on whether this location is likely to be popular in the long run.
That's why I wound up believing beachfront property is a good investment. I don't think there's ever going to be any more beachfront than there is now. Now people are getting bigger and the amount of money is getting bigger. So beachfront is pretty sure to go up in value.
Owning a home on the ocean is better than owning one that's not on the water.
But there are large tracts of oceanfront property still available in South and Central America in countries where there is a rule of law. You used to be able to buy land at very low prices. But still there are some good deals.
A 50% drop off in prices is quite possible.
I've never, never ever had a mortgage on any house. I learned that long before you were born. When I was a child in Tennessee, I watched so many people lose their farms because they had tiny mortgages, but they got to the end of their years, when it was impossible to earn a profit on the farm. They couldn't meet their payments and their mortgage was sold at auction in the courthouse.
I don't rule out borrowing money. But I think it's risky.
Positive Mental Attitude
Positive mental attitude helps in every way. It helps you physically, mentally, financially - in every way. In fact, I think you ought to focus on that, write articles on it.
As I said - when Abraham Lincoln was assassinated, nobody in Europe heard about it for 17 days. So there were more bad things happening 140 years ago than there are now. But today, communication is so enormous that we're flooded with news and there's a fault in human nature, even with you. If you're passing a newsstand and a stack of newspapers,one of which says 100,000 airplanes landed safely today and one that says one airplane crashed, you'll buy the newspaper that says the one airplane crashed.
Terrorism warps your thinking. It makes people think that there are a lot more troubles than there are. But there are less troubles than ever, and we don't realize, because we read about all the problems.
Pharmaceutical Stocks
I think they will continue to grow, but they're not cheap. They're one of the highest groups of stock.
Baby Boomers Retiring
This is enormous. But the adjustment is so easy. You just don't start pensions until 10 years later. That solves it all. It will happen. Nation after nation - not only America, but other countries - will just have to declare that pensions are going to start 10 years later.
I think it's inevitable. I don't know when, but within the next 20 years, almost every nation will have to change the law to say you can't get your pension as soon as you retire.
The Coming Health Crisis
I don't have answers to everything. I have thought about your big question here. And I think the answer is to say that no health insurance should cover the total cost of insurance. Health insurance should cover maybe 2/3, but not all. That would give people an incentive not to use health insurance excessively.

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