Lauren Templeton (00:02:54):
So, during the 1920s, farming was not a very lucrative business, and I think on average, it would bring in about $200 per year. So farms often went bankrupt in the mid to late 1920s, and when they did go bankrupt, they would be auctioned off on the town square. So Sir John’s father, my great grandfather would witness these auctions from his law office, and if he saw that the auction produced no bidders, he would walk down the stairs, walk across the street and buy the farm for cents on the dollar.

Lauren Templeton (00:03:33):
By the mid 1920s, he had accumulated about six farms and 20 other homes. I think it was Sir John witnessing his father doing this over and over again, that really developed his investment philosophy. It’s always been one of the biggest ironies in the stock market, and it still exists today that when stocks go on sale or become discounted and valued, it produces even fewer buyers. But when stocks get more expensive, it brings in even more buyers. So Sir John had a great way of phrasing this. He said higher prices lead to higher prices, lower prices lead to still lower prices, to buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude, but yields the greatest investment returns, or something like that.

Lauren Templeton (00:04:35):
So that really, I feel like shaped him as a child, but not all the lessons learned from my great grandfather were great lessons. So he was very entrepreneurial and a hit at rich guy. He was involved in many businesses from his law practice. He also sold insurance. He owned a cotton gin. He did a variety of things, and one day he had been trading cotton futures on the New York Mercantile Exchange or either the New Orleans Cotton Exchange, and he actually came home to Sir John and my grandfather and said that they had struck it rich that the boys would never work a day in their life, their children would never work a day in their life, and obviously here I am working, so something went wrong.

Lauren Templeton (00:05:25):
He came in several weeks later and said they had lost it all and gone bust. Late in his life, his father borrowed from Sir John and my grandfather to support his habits. So I think witnessing this really taught John Templeton a lot about the ethereal nature of paper wealth created by the financial markets, and both John Templeton and my grandfather were avid savers. They were very, very thrifty, and this is something they have passed down to everyone in our family, and we take this to almost an art form. It becomes a game in our family who can acquire an asset for the best price, and there’s some really wonderful stories about Sir John and his thriftiness over the years.

Lauren Templeton (00:06:17):
One of my favorites is, he’d gone into South Korea on the hills of the Asian financial crisis. He did so via a mutual fund offering run by Paul Matthews. He invested in the Paul Matthews Korea fund, which had launched in 1997, and was the worst performing mutual fund on record that year. He invested then, and it was the top performing mutual fund on record by 1999, which says a lot, because it was beating even the high flying tech funds. I think he had like a 267% return in that fund over two years. So he invested in South Korea doing that, but then he also invested in some individual companies, and one of which was Kia Motors. He made a fortune on Kia Motors stock and he would not go buy himself a Kia automobile. He went to the dealership, he came back without a car and his assistant said, “Where’s your car?” He said, “Those are too expensive for me.”

Lauren Templeton (00:07:24):
So there he was a multi-billionaire who had made a fortune off of Kia Motors and he wasn’t going to buy a Kia automobile when he really needed a new automobile because he thought they were just too expensive. So that is something that he has passed along in our family, the propensity towards thrift, saving, finding a bargain, being a pervasive quality that I think most Templetons have, whether you’re buying a home, a stock, whatever, it’s very Templeton way to look for a bargain.

Trey Lockerbie (00:08:03):
Now this, I actually find very fascinating and it’s come up before in our show, the idea of thriftiness and the balance of that because a lot of people save up their whole lives and then they don’t enjoy it at the end of their life kind of thing. What the money is truly for. I’m curious about your philosophy around where thriftiness ends, meaning when it feels okay to use the money for purposes beyond maybe investing perhaps, or I know people who are very wealthy, but still take coupons to the grocery store. There’s a lot of energy and work that kind of goes into thriftiness. At some point I feel like is almost a negative return.

Lauren Templeton (00:08:41):
Yeah. What do they call it? Penny wise and pound foolish. It is a constant debate in my family, my parents are older, they’re in their 70s. They’re very much from uncle John’s school where they are really tight. They save everything, they drive old automobiles and wear old clothes and they don’t like to spend anything. I keep on encouraging both of my parents, what are you saving it for? I’m financially independent. You should enjoy this. Don’t worry about me. Go spend some money and they just don’t want to do it. So I don’t know, there definitely is a balance. I think when I would talk to John Templeton about saving, he always said he saved 50% of everything he made. I really think he saved much more than that, and I would say, “Why are you doing that?” And he said, “I’m saving for the opportunities that I know will present themselves.” That never stopped in his life.

Lauren Templeton (00:09:46):
So I guess it’s up to the individual, really what they value most. I think it’s worth spending money on travel, because it expands your mind, you learn so much about the world and experiences that no one can take away from you. Spending on education, things like that are areas where we definitely loosen the purse strings in our family because I think travel and education are very important.

Trey Lockerbie (00:10:14):
Do you think some of that philosophy comes through living through things like the great depression? It seems like that generation perhaps even more so than others.

Lauren Templeton (00:10:23):
For sure. People who live through the great depression, I think just have that built in to their nature. They can’t let go of that, and as that generation departs us, part of that thriftiness does too, and it will be a lesson that a new generation will learn. Maybe this one and become a nation of savers again.

Trey Lockerbie (00:10:44):
The pendulum will swing. So even though Sir John’s success appears to be a direct result of his temperament, he was a highly educated and brilliant man. Through the time spent with him what were some of your observations of how his brain worked?

Lauren Templeton (00:10:59):
Well how his brain worked, I’m not sure. I will tell you that he was the most disciplined person that I have ever met. So he was very good at impulse control, and I do think there is a genetic component there. I don’t know if you’ve ever looked at the marshmallow test coming out of Stanford University in the 1970s, I actually made my kids take that test.

Trey Lockerbie (00:11:28):
The delayed gratification test. Yes.

Lauren Templeton (00:11:29):
Right. The ability to delay gratification and that’s highly correlated with success and a lot of other positive things. That’s all about really impulse control, and he had a lot of impulse control. He was very disciplined, but he also believed in mind control, positive thinking. He was very careful in the way he structured his life, his day, the way he built his habits. He would’ve loved the book, Atomic Habits. I think that’s something he would’ve responded to because he had built his life that way. He lived in a community in Nassau Bahamas called Lyford Cay. This is where he moved later in life, and he was definitely within a mile of his office. He had a tendency to go in seven days a week. He worked out at a certain hour every day. He just built a lot of discipline into his life and he did believe in thought control.

Lauren Templeton (00:12:32):
So he once told me that when he encountered a negative thought, he banished the thought into the nothingness that it was. So I think he was very careful with what he thought about, how he organized his day, because as an investor, it’s very hard to control your emotions. We are not hard wired to be good investors, and that comes from evolution. We are all descendants of human beings with acutely tuned amygdalas. That is why we are here today, and some of those traits don’t translate very well into good investment returns. So it’s hard to control your emotions and go against the crowd. Even though he had, I think a lot of impulse control, a lot of future mindedness, I would say. He still was careful to think about the way he structured his day and life so that he wouldn’t be subject to his emotions.

Lauren Templeton (00:13:43):
I one time asked him about managing the money in The Bahamas, and this is interesting to note because Warren Buffet managed his money in Omaha, Nebraska. I asked him about the idea of managing money in The Bahamas, and he said, “My returns actually improved when I moved here.” I said, “Well, why do you think that is?” He said, “Well, I’ve thought about it and I think it’s because I get the Wall Street Journal a few days later than everyone else.” You’re like, “Well, why would that be?” It’s because he was reading the Wall Street Journal for information. He was not picking it up and reacting to the news on the front page of the Wall Street Journal. So I think today with investors just really plagued with a ton of information, you have to be careful about what you read and also not to react to things, read it for information, don’t read it to react.

Trey Lockerbie (00:14:42):
I want to stick on this idea of habits and discipline a little bit longer. So I’m curious if you buy into this idea of decision fatigue or maybe your great uncle did as well, where you hear about a lot of successful people who wear the same clothes every day and they eat the same thing every day, and it’s almost because they feel like they have sort of a certain budget of brain cells, let’s say per day to make decisions with, and they don’t want to spend them on trivial things like eating or wearing clothes or what to wear.

Trey Lockerbie (00:15:11):
So I’m curious if you buy into that same kind of philosophy or if it’s something else, because I’m reminded of when your great uncle went on a walk, as he apparently did every day, it would seem, I think this was during the flash crash in the 1980s, and while the market was tanking, he was out on a walk like he did every day, and his team was very flustered by that making decisions in real time. So maybe how do we rectify those two ideas? Do they go together in any way in your mind?

Lauren Templeton (00:15:40):
I’d have to think about that. Decision fatigue makes sense to me. We know that individuals have a limited amount of willpower. For instance, I know that if I work out in the morning, I’m more likely to do it. If I wait until later in the day, I’m less likely to do it. I think there is a lot of good reason that you might want to structure your days that you’re making decisions earlier in the morning or placing trades earlier in the morning than later in the day. The story that you’re referring to actually was Black Monday, the 1987 crash when the market crashed and uncle John did, he would go walk in the ocean for about an hour every day, and on the day of the crash in 1987, he just got up and left the office and his analysts were like, “What is he doing?”

Lauren Templeton (00:16:35):
I think there was plenty of warning that Monday was probably going to be a really negative day in the market. The previous Friday had been a very messy day. So people anticipated that there would be a big selloff on Monday. Sir John had gone into the office over the weekend and contacted brokers to make sure they would be open for business and ready to take orders on Monday. He was already working on his purchase list over the weekend. When Black Monday came on in 1987, he was already working on his orders. He got up and went to exercise. His analysts were very upset. When he came back in, he was approached by a few of them. He told them, “Boys, sit down, I have good news and bad news. The bad news is we’re in a bear market. The good news is it’s almost over. Make sure you have your stock recommendations on my desk by 4:00 PM.”

Lauren Templeton (00:17:34):
I have had the privilege of speaking to one of the brokers that had an open line with him on Black Monday, and he kept a ledger of all of uncle John’s orders, went back and looked at the orders a few years later and the stocks were up 200%. I do think that the human brain has a limited capacity for decisions that’s worn down throughout the day, your will power reduces throughout the day, and I think there’s plenty of evidence to suggest that. So being careful about how you structure your day, how many decisions you make, what time of day you make the decisions. If you have to make a really hard decision, it’s probably best to make that in the morning when you have more willpower.

Lauren Templeton (00:18:21):
There’s a lot to that. I never heard Sir John discuss that specifically, but he had a lot of techniques that he used to overcome behavioral biases. So a great technique that we used here in our company that he always talked about using, and it sounds so simple, but it is very powerful and it’s just palpable in the office when you use it, is creating a wish list of securities that you would like to own that are not currently attractively priced that you would like to own if they ever fell in price.

Lauren Templeton (00:19:04):
Now, during a market sell off, even seasoned investors get very nervous and there are all sorts of physiological reasons for that. When you look at your screen and see red, your amygdala has already increased your heart rate. You probably already have shortness of breath. You may even be perspiring, and all of these things contribute to your fight or flight response taking over, and this happens to even the most serious investors. But during these times, if you can pull out a list of securities from your desk drawer that you have researched in advance, when you are thinking rationally and you start placing orders, putting money to work during these really scary moments in the market, shifting your focus from how much money you have lost to the unbelievable opportunities ahead of you, it changes the vibe in your office immediately.

Lauren Templeton (00:20:06):
It goes from negative and scary to positive and future minded. So I highly encourage that tool and that’s just one of the small tools that I saw, Sir John use throughout his career to combat some of these biases. Another example would be he would place good to cancel orders under the market by let’s say, 20%, and he would just let him sit, and occasionally you would get filled on an order. We have used that here at the office a little bit, not much, but we have gotten filled on an order using that methodology before, it was years ago.

Trey Lockerbie (00:20:51):
Thinking about impulse control, I know that some people for that exact reason you’re describing there actually place orders on the weekend, or they place orders after hours just to help place one more guardrail for protecting their impulse control. So is that something you have seen your family do or practice or is it just so ingrained in your behavior at this point that you can control those reactions and it’s more of a muscle that’s been worked or refined over time.

Lauren Templeton (00:21:20):
First of all, we’re typically always using limit orders. I suppose, plenty of people in my family have put in orders over the weekend or after hours for sure. But I do think that’s really ingrained in everything we do. We put in limit orders below the market, if it gets filled, if it gets filled, if it doesn’t, it doesn’t, that’s our trading philosophy. But I’m sure Sir John would’ve done that.

Trey Lockerbie (00:21:45):
I think it’s a great practice. So going back to the story of him walking on the beach and coming back and having this almost oracle-esque foresight of what was about to happen next, it’s almost like he went to the crossroads and talked to someone and came back and had this wisdom. I’m wondering if that’s just a matter of having time alone with your own thoughts. We’re constantly inundated with information so much so that I’ve heard this philosophy of an information diet, if you will. So it’s this idea of being very mindful and disciplined in what information you’re bringing in and at what time, so to your point earlier about him reading the Wall Street Journal three days later, that’s a really interesting practice to do, even if you’re not living in The Bahamas, I would say.

Trey Lockerbie (00:22:26):
That’s bringing me to this idea of your great uncle being such an independent thinker to begin with and such a contrarian, and I’m curious if you ever saw him be a contrarian in ways, maybe outside of the market even, just while he was thinking about a certain subject or something, did you see him constantly taking other sides of an argument or-

Lauren Templeton (00:22:46):
No, for sure. In our family, this isn’t Sir John, but my grandfather, his brother, and they grew up in the same house. He had five children, my father was one of them and during their dinners, they were expected to debate a topic and switch sides halfway through the meal. That’s how they grew up, that was dinner every night. So there is some precedent for that in our family. Sir John was contrarian, it didn’t just apply to his investment philosophy. His foundation I think is very contrarian, he wanted to do something no one else was doing. I can remember when I was pursuing the CFA designation and he was one of the first charter holders. He asked me how many CFA charter holders are there now? I don’t remember the answer, but I gave him it at the time and he said, “Oh, well, why would you pursue that?”

Lauren Templeton (00:23:40):
So he was always looking to do things others weren’t, and that really led him to global markets and to be an international investor. So he attended Yale University, he graduated in 1934. He’s well known for paying part of his tuition with poker proceeds. He lost a lot. Well, his dad sent him a letter when he was at Yale University, and of course this is during the great depression and he said, “I can no longer afford to put one more dollar to your education.” So uncle John took to the poker tables, but one of his other observations from Yale were that his wealthier classmates and their families were only investing in US securities. He thought, why wouldn’t you look overseas where no one else is looking? Because you’ll be able to find more opportunities. If no one else is looking there, it must be full of opportunities and why wouldn’t you want the largest universe of stocks available to choose from?

Lauren Templeton (00:24:45):
So he is very contrarian and people always say, “Would he advise your children to go into investing?” I would never push my kids into this industry at all, and I think if they asked uncle John about whether he recommended them to go into an investment industry, I think he would say, “No, it’s too competitive.” So he was always looking to move into areas where there was low competition, and that’s a very contrarian mindset

Trey Lockerbie (00:25:15):
That global mindset or framework is like you said, very contrarian, and I believe he was, as you mentioned earlier, early to invest in South Korea. I believe he was one of the first to invest in Japan from the US as well. So a lot of people think that because he was investing globally, he would be this great macro thinker, but that might not have been the case.

Lauren Templeton (00:25:35):
Yeah. So he clearly was reading about the economy. He read all the time. He was very, very well read, but he would go off and go on financial media, like Wall Street Week with Louis Rukeyser, and he would make these very big predictions about markets, specifically his investments into Japan and then 1950s, ’60s and early ’70s, his investments into the US and the ’80s, and I think people could misconstrue that as being a macro investor, but everything was very numbers driven for him. So he would make lists of ranking countries by PE ratio, ranking securities, all sorts of different ways, and one of my favorite memories of him is going down to Nassau and him asking me to go back to Atlanta with a list of stocks and rank them based on the peg ratio and come back to meet with him in about a month.

Lauren Templeton (00:26:31):
I said, “Well, have Bloomberg and Excel, so I’ll just do it right here in 10 seconds and show it to you.” I think his mind was blown because he always did that with pen and paper. He used value line a lot, but in the 1950s and 1960s, he was one of the very first investors to invest in Japan. I should say he graduated from Yale in 1934, and then he was the recipient of the Rhodes Scholarship and went on to Balliol College, and when he graduated from Balliol College in Oxford, he went on a world tour with a college friend and they visited 35 nations. They even went to the 1936 Olympics in Berlin, where they saw the building contingency of Nazis soldiers. He really came back with this bedrock of geopolitical knowledge.

Lauren Templeton (00:27:28):
Now, he had been studying Japan and he started putting his capital to work in Japan in the 1950s in the investor capital. In the 1960s, what he saw about the Japanese that he admired was that they were industrious, hardworking savers. Also, Japan was trading at about a 80% discount to the US at the time, and they were growing about 2.5 times faster than the US. So the growth rate was about 10%. Sir John being a great student that he was, he had identified an accounting anomaly. So the companies over in Japan were not consolidating the earnings of their subsidiaries. So although PEs were depressed in Japan, Sir John knew that the actual PEs, if they consolidated the earnings of the subsidiaries would be even lower.

Lauren Templeton (00:28:29):
So a good example of that would be Hitachi. So Hitachi would’ve presented as having a PE multiple of 16 times. If you have consolidated the subsidiaries of Hitachi, it would’ve really had a PE multiple of six times. So he identified this, put capital there quickly, rode those returns through the 1970s. When the US was really struggling in the ’70s. Of course, he got out of Japan into the US in the late ’70s, early ’80s, coinciding with what I call the death of equities, always loved that because Newsweek came out with a headline in 1979 called the death of equities. Anytime you see a headline like that you should as a value investor, be like, “Yep, this is the best opportunity ever.”

Lauren Templeton (00:29:25):
So he was moving capital in the US in the late ’70s and ’80s, but his contrarian spirit allowed him to look overseas. The numbers showed him to invest in Japan. It wasn’t a macro call. The numbers showed that, the numbers showed him to invest in the US in the late ’70s, early ’80s. The ’70s were an interesting decade. So they ended the same place they started, and in the late ’70s, early ’80s, you had just crazy inflation, interest rates were really high and unbridled enthusiasm for collectibles and all sorts of things.

Lauren Templeton (00:30:12):
Interestingly, in the great inflation in the 1970s, the only equity strategy that outperformed was dividend growth stocks, which is what we are focused on right now. But Sir John was very numbers driven, he was not macro. If he saw that there was a collection of low price companies in one country, it would lead him to do further analysis on the country to make sure the country had property rights, et cetera, and if it passed the test there, he might be quoted in the financial media as saying, I like South Korea, but it would really be the discounts and the companies that he was seeing. He was very quantitative.

Trey Lockerbie (00:31:00):
I love that you just used the word spirit as well, so you said he had a contrarian spirit. He also had a very philanthropic spirit it would seem so. One thing that made him so admirable and honorable is all the philanthropy work he did. So that kind of brings up the question of how John became Sir John, could you tell us how that happened?

Lauren Templeton (00:31:19):
He left the United States and moved to Nassau, Bahamas. The Bahamas were not independent at the time. So it was part of the British Commonwealth, and he had created the Templeton Prize in 1972. Mother Theresa was the first recipient in 1973. The Templeton Prize was created to honor progress in religion so to say. So he was very spiritually minded. He would often say, “When you go to the doctor, Lauren, they do not pull out a 2,000 year old textbook to diagnose you, but there has been no progress made on the spiritual front.” He believed that research and advances in science would discover new which shed light on our reality.

Lauren Templeton (00:32:19):
So he had created the Templeton Prize. Mother Theresa was the first recipient. Many people have gone on to win it. Frank Wilczek was just announced as our 52nd Templeton Laureate. He is a Nobel Prize winning physicist. So a lot of different people have won over the years, but in 1987, he was knighted for his philanthropic work by the Queen of England, and that’s how he became Sir John Templeton. He managed the Templeton Growth Fund until 1987. If you had invested $10,000 at its inception in 1954, and you had held that to 1987, you would’ve had over $2.2 million. It was an unbelievable track record. He sold the business in 1992, and then he spent the rest of his life dedicated to his three philanthropies, which are the John Templeton Foundation, Templeton World Charity Foundation and Templeton Religion Trust. Those three entities fund the Templeton Prize every year, but he was very philanthropic.

Lauren Templeton (00:33:34):
Again, that goes back to his childhood and his early days in Tennessee, his mother was a devout Presbyterian. There was a unity movement that came through Tennessee that highly influenced him. She was always funding missionary over in China. So I think he is quoted as saying that, he looked at his life and he figured he would be on earth just one time for a very short period of time, and he wanted to figure out what he could do to create a permanent impact, and he looked around nobody else was doing anything in religion and spirituality, and so I think his foundations are very contrarian as well.

Trey Lockerbie (00:34:20):
Fantastic. So now I want to transition a little bit and talk about you and how you followed in his footsteps and why that was and what led you to investing, and as I understand it, Sir John actually helped fund your first fund. So what were some of the parameters of the fund and how did the initial structure work?

Lauren Templeton (00:34:38):
I grew up investing. I started investing when I was eight years old. My dad let me pick one stock per month. When I was a child, the walls in my room were wallpapered in stock certificates. He told me bedtime stories about the magic of compounding. Every decision was a lesson and opportunity cost. Of course, I was born in the 1970s, I won’t tell you what year, but a lot of my childhood was spent in the 1980s. This is really when Sir John’s career, he was hitting his stride. He was on Forbes and Wall Street Week and Templeton Growth Fund and had this crazy track record. So it’s really hitting his stride there.

Lauren Templeton (00:35:20):
I knew him as a great uncle living in The Bahamas that would come home once a year and the town would throw a big parade and my parents would have a big party and my dad would walk around the house and wait patiently for his opportunity to pull John Templeton aside and ask for investment advice. That’s kind of how I grew up. Then when I was in high school, Sir John tried to get me to launch a mutual fund. I really thought you’re crazy. This old crazy guy wants me to a mutual fund, I was really engaged in investing as a child more so than any other child that I knew in my small town. But there might have been many others.

Lauren Templeton (00:36:08):
He wrote to me in 2001, actually he corresponded with people via fax. So I received a fax saying that he was seeding a fund for me to the tune of $30 million and I should go visit him in The Bahamas, and we should discuss it. Wow, what a fax to receive. I was employed with another hedge fund manager so that was really interesting conversation because it was like, “I think I may have just lost my job here, but I have this great opportunity.”

Lauren Templeton (00:36:40):
So I went to meet with him and he said, “Look, you need to start your track record early. You should start many products. You should go with one that has the best track record. We’re going to start here.” S my fund was seated with 30 million. Its mandate was to be dollar neutral, 25 longs, 25 shorts, just in the US, and the stocks were selected based on quantitative basis, low valuation stocks on the long side, high valuation stocks on the short side, they would be very systematically and routinely the portfolio would be turned over, I really didn’t have much discretion on the portfolio.

Lauren Templeton (00:37:24):
So he basically said, “This is the strategy executed for me, let’s see what the results are.” Then over time we started tinkering with that strategy, and by the time he passed, the guardrails were off. We were running a global fund, things had changed a lot. But I think he knew that a young person would have a very hard time controlling their emotions when it came to managing institutional capital. I think he would’ve been right. I can remember leaving work in my early 20s to go home and go to bed because I was so sick about a bad day in the market. Now it doesn’t influence me at all, but it did as a young person.

Lauren Templeton (00:38:11):
I launched that product in June of 2001 because it was dollar neutral. It ended up with a huge beta bias on the short side. September 11th happened and it ended up being a very profitable time for us because of the beta bias on the short side. We did learn a lot over that time period working together that shorting stocks on evaluation basis only is really hard to do. You typically need some type of catalyst, also 25 positions short book, it’s pretty concentrated. So now our short book, we have many more positions we do. We do not have a highlight concentrated short book, and we don’t short based on valuation alone, it is a component of our short strategy, but we really look for situations where you have high valuations and also perhaps some aggressive accounting policies mixed with that.

Lauren Templeton (00:39:21):
So we focus on accruals, working capital, and we think that usually those accruals have to adjust over 12 to 18 months. So that’s a pretty good catalyst when it comes to a stock. So if you build inventory, you’ve either got to sell it or write it down. These are just some examples of things that we look at, that we’ve improved our short strategy over the years working with him. But we are also still very quantitative. So we start with quantitative ranking screens. Using all the plan old valuation metrics that everybody else uses. Uncle John was well known for saying there are over 100 measuring sticks of value. You should constantly reevaluate the metrics you are using.

Lauren Templeton (00:40:13):
So in the past few years, free cash flow yield has been a metric that has worked really well. It’s outperformed PE ratios. Going forward, we are very focused on dividend growth, dividend yield because we’ve gone back and we’ve studied the 1970s, and again, that’s the only equity strategy that produced real returns during the inflationary environment of the 1970s.

Trey Lockerbie (00:40:38):
At least early on in the fund were all of the positions equally weighted, and has that also changed over time?

Lauren Templeton (00:40:44):
They were equally weighted in the early days. So you’re asking these questions, I’m remembering they were equally weighted, that has changed a bit over the years. A lot of things have, but again, I think letting the numbers show you where to invest is a very good place to start. Numbers can also mislead you, but if you’re just looking for a place to start focusing on the numbers, we’ll do a pretty good job, and also focusing on the numbers, if you’re a value investor’s very rational, and it’s going to put you in contrarian situations that you might not have sought out yourself. So that is our philosophy.

Lauren Templeton (00:41:27):
Now we start with the quantitative metrics. We like most value managers are using a discounted cash flow model on top of that or a dividend discount model depending on the industry, et cetera, and then we’ll do fundamental analysis on top of that. So yeah, it’s part art, part science, as you know, the more you do it, the easier it gets.

Trey Lockerbie (00:41:49):
There’s lots of different measures and things can change over time. I do think that it’s natural for investors at least maybe early on to seek the perfect calculation or the perfect way to structure a portfolio or the perfect X, Y, Z. These models you build, you got to kind of accept that maybe they’re only 60% accurate and that’s the best you’re going to do, and just accepting that, and I’ve heard you say that Sir John himself thought while he was one of the best stock figures of all time, he probably only had an edge of maybe 50% to 60% ultimately. So that’s as good as we’re going to get it seems.

Lauren Templeton (00:42:23):
Yeah. He had actually given it a lot of thought and he said, “I’ve given it a lot of thought, and I think that my decisions are correct 60% of the time.” He was known as one of the world’s greatest stock pickers. So I do think you have to get comfortable with that, that a good majority of your decisions are not going to work out, they’re going to be bad decisions and that’s okay. That’s also, I’m glad you brought that up because I do think this is very unique to John Templeton. He was never phased by losing money. So for instance, he was constantly starting new strategies and there was one strategy that we started together based off of a report that was put out. I think it was by Merrill Lynch analyst, and I think the report still exists. It’s called Contenders and Defenders.

Lauren Templeton (00:43:23):
He sent me the report and he said, “This is really great strategy, I think we should run it.” He had sent me an article on a strategy, I think by an analyst at Merrill Lynch called Contenders and Defenders, and he wanted to put some capital in the strategy and wanted me to execute the strategy for him. It was a great strategy on paper, it didn’t work out because to short all the securities that you needed to short, you had to do it synthetically and the cost just ate up your returns. So I launched this strategy for him. It did not produce good returns. I went to meet with him and it was very much like, “Okay, here are the numbers, it’s not producing good returns. Okay, let’s close it down and move on to the next strategy.”

Lauren Templeton (00:44:06):
He was never hung up on the fact that he had made a poor decision or that he had lost some money executing that decision. That experience happened to me if it happened to me once, it happened to me 20 times. He just, he wasn’t impacted by that. He took it that a large part of his decisions were going to be wrong and he would lose money some of the time, he was okay with that. So I think not all investors have that mentality, but it’s important to not strive for perfection because I don’t know a perfect investor out there.

Trey Lockerbie (00:44:42):
So your childhood was very atypical, and what a blessing by the way, to have your father teaching you or giving that education so early on. But I’ve heard Munger and Buffet say that there’s this element of you either have it or you don’t when it comes to what it takes to be a great investor. I think what they’re speaking to is you can read every book under the sun, but when the stock market turns red, as you put it earlier, that behavioral change is what I think people can either manage or they can’t, and given your upbringing, have you developed a similar temperament as your father and great uncle over time? Meaning is this something that can be learned and refined over time, or do you think there’s something maybe genetic or something else that just inherently you had that gives you sort of the fortitude to manage or to have what it takes to be a great investor?

Lauren Templeton (00:45:33):
I think both. I do really do think there’s a genetic component to delay gratification, impulse control. You know, you’re a dad, your kids come out how they come out, and I can remember before I had children, my husband and I have this big nature versus nurture debate, and then we had kids and he is like, “Oh, it’s nature.” But I do think there’s definitely a component of nurture there, but people are born the way they are born, and if you are not good at controlling your impulses, that would certainly be a challenge to becoming an investor.

Lauren Templeton (00:46:08):
It’s a hard question for me to answer because I will have spent my life in this bubble of men predominantly that I was modeling my behavior after and they already had the correct behavior. So I don’t know if it is nature, nurture. I think it’s a little bit of both. I do think that Buffett & Munger’s, you’re either born with it or you’re not. Yeah, if you’re going to be the top investor in the world, I think you’re either born with it or not, but I think people can improve and learn. We know that our brain is constantly reshaping through the process of plasticity and that if you reap the returns of putting money to work at these moments of maximum pessimism, as Sir John called it, that your brain will rewire itself and it will become easier and easier over time, and you will become where you anticipate these market selloffs and you see them as great opportunities and it will get easier. I think things like structuring your day and you’re building your habits around investing, I think are very important.

Lauren Templeton (00:47:22):
So I think it’s a bit of both, but I do think investors can definitely improve. You’re not kind of stuck with a lot you’re born with you can improve and become a better investor by being very thoughtful about it, and I’ll often tell investors that they have proven that just reading about your behavioral biases will improve your investment results. So I always say pick up one of James Montier’s books. I love his books, The Little Book on Behavioral Investing, start there. It’s like this big, you can read it in the carpool line. He has many other books as well, but it’s fascinating to read about behavioral finance and how your emotions play a part and everybody can get better at controlling them.

Trey Lockerbie (00:48:09):
Given what I know about you, I think there is some nature here involved, and you brought up kids earlier. As I understand it, you were trading stocks while giving birth your first kid. So not everyone would be doing that, I don’t think, maybe explain to us what was going on there.

Lauren Templeton (00:48:24):
So my first born was born on March 10th, 2009 I should say. The lows of the great financial crisis were reached on March 9th, 2009. So it’s a funny story. We were in the labor delivery room and we were buying stocks, my husband and I were together and the computers were out and we were trying to get these orders executed, and the nurse came in and she got really irritated. She looked at my husband and she was like, “Shut down your computer.” I looked at him and I was like, “Just get the orders filled.” But the reason it’s an important story is because people always ask, “How do you know when you’re at the low of the market? What is the point of maximum pessimism? How will we know?” The answer is no one knows.

Lauren Templeton (00:49:16):
So we had been buying stocks every day since the fall of 2008, forcing ourselves to methodically go in and purchase securities. We did not know that March 9th was the low, but we knew that things were so inexpensive that we wanted to put every dollar we could get our hands on into the market, and that’s where we were and she was born on March 10th. I can remember going on CNBC after that and saying, “She’s ushering in the next big bull market,” and the people in Power Lunch were like, “Oh right.” And she was, so you don’t know when the bottom of the market will occur, but it’s a very rational behavior to buy more stock if you have cash available to do that as the market continues to sell off.

Trey Lockerbie (00:50:06):
You mentioned you and your husband work together, you also write together, you’ve written this amazing book called Investing the Templeton Way. I’m curious, even though you were brought up in all of this, writing a book is a beast of a project, requires a lot of research. So curious if there was something that came up through that research that you didn’t know before.

Lauren Templeton (00:50:25):
There were lots of stories that we heard from people that we interviewed that I didn’t know, anecdotes about John Templeton, and that was a blessing to hear those from other people, lots of cute stories. One of the things that really struck me in writing the book is how similar John Templeton is to my own father, just very similar. So that struck me, but all the anecdotes, it was fun. Actually the story of writing the book is a really interesting one. I was at an investing conference out in California and I was sitting by a fire pit next to a guy I didn’t know. So I started talking to him and it was Jack Schwager, he’s the author of Market Wizards, and Jack and I became friends.

Lauren Templeton (00:51:09):
So I had been talking to him a few years later and I was like, “I think somebody should write a book on John Templeton.” He said, “Well, that’s a great idea, let me introduce you to my agent.” So he introduced me to his agent and I pitched the book and he was like, “I think it’s an awful idea I don’t want to work with you.” I was like, “Gosh, that’s depressing.” But then a while later, Jack contacted me again. He said, “What happened with that book?” And I said, “Your agent didn’t like it.” He said, “Well, let me just introduce you to my publisher.”

Lauren Templeton (00:51:38):
So he introduced me to his publisher and they bought the book right away, right after that phone call and gave us something crazy, it was like six weeks to write it. My husband and I, we weren’t married yet. We were about to get married, and so we wrote the book on our honeymoon. We would write in the mornings and then we would swim in the afternoons, and we produced the book really quickly. We ended up going back to Jack’s agent to help us negotiate the contract with the publisher.

Lauren Templeton (00:52:10):
This is a funny story, but writing the book, Investing the Templeton way is about all of Sir John’s most profitable trades over his career. But what we wanted to do is really put those trades into historical context, because you hear about somebody making a great trade and you’re like, “Oh yeah, that’s so obvious.” But if you really understand the historical context, you can also understand how difficult it was to make the decision. That’s what we wanted to show investors, is how he made the decision and what was going on in the world that led him to make the decision so that investors could replicate that or recognize the patterns that John Templeton recognized.

Trey Lockerbie (00:53:00):
Well, one of my favorite quotes by Sir John is about investing when there is maximum pessimism as you put it. So I’m curious, given what the market is doing today, what industries let’s just say as Sir John would put it are the worst at the moment?

Lauren Templeton (00:53:18):
Well, there is maximum pessimism in tech right now, for sure. We’ve just seen absolute carnage in tech, but I was just on a panel in Virginia and I’m a value investor, and typically that does not lead you to tech stocks, but if you’re a very discerning investor, I think there is maximum pessimism in the tech sector right now. So the baby is clearly in some cases being thrown out with the bath water, and if you know what you’re doing, you can find some really good opportunities in technology right now. China, also there’s maximum pessimism in China. We have not allocated any capital to China. We exited China I think it was early 2020 over regulatory concerns before some of the regulatory moves in the nonprofit education sector, but clearly there’s pessimism there.

Lauren Templeton (00:54:21):
So I think whether it’s in industry a stock, a country, they’re always these opportunities for maximum pessimism. Of course, the best opportunities are when the entire market goes on sale, which we are here and we have been covering our short portfolio. I think the market might very well fall from here. I don’t know, but I’m more interested in buying stocks now than in selling stocks is what I could say.

Trey Lockerbie (00:54:54):
I was really curious about your short position given where we think the market may or may not go from here, and I’m curious, just in general, given that you said you’re a value investor. How do you reconcile being a value investor and shorting positions? Sometimes that seems like they don’t go together even though I know a lot of value investors that do short and practice that. How has the short side of your portfolio changed over time and how can investors think through shorting positions rather than just buying at lows?

Lauren Templeton (00:55:22):
To me, it makes so much sense to be long and short as a value investor. As I stated earlier, our short strategy has evolved tremendously since that initial strategy, I ran with John Templeton which was just quantitative, just shorting based on valuation and highly concentrated. So our strategy has evolved. We run many short positions. We do not short based on valuation alone. We look for some sort of catalyst, whether that be aggressive accounting techniques, we will go in and look at the SEC filings, in particular, we look for the S3 filings, which of course a company will issue when they’re typically considering doing a secondary issuance of shares. Insiders know when their companies are fairly valued or overvalued and have a tendency to issue shares at those times.

Lauren Templeton (00:56:25):
So we use that as a fertile hunting ground for short ideas. So over the past, since early, probably April, 2021, we also started shorting the Ark Innovation Fund. We thought that was a pretty good proxy for everything we were seeing in the market. In early 2021, we could identify well over 700 stocks in the US trading for price to sell at over 20 times, and that was just mind boggling for us. I don’t remember where it was at its height, maybe like 787 stocks or something like that, and then it fell to 718. I’m not sure where it is today, but 20 times sales that is shocking.

Lauren Templeton (00:57:16):
During the dot-com bubble of late ’90s, early 2000s, there were about 200 companies trading at a price to sales ratio of over 10 times. So you have over 700 in the US trading at price to sales multiples of over 700 times in early 2021, and that was really eyeopening for us. We thought there’s no way that these businesses can sustain these valuations. So we really got very aggressive with our short portfolio then, and of course, with the change in monetary policy that has worked out very well for us. But yeah, so the short strategy has changed a lot over the years, I think that’s where we really put our mark on the strategy so to say.

Lauren Templeton (00:58:10):
So many of the things we do are right out of Sir John Templeton’s playbook, but the modifications to the short strategy I really credit my husband, Scott Phillips for coming up with, he’s always studying at. Speaking of short strategies, there is a very interesting short strategy that John Templeton ran during the dot-com bubble in late ’90s, early 2000s that investors might want to be cognizant of in today’s market, but he ran something called the IPO lockup strategy where he was shorting shares about seven days prior to IPO lockup, expiration, and covering 11 days later.

Lauren Templeton (00:58:49):
Now, in today’s market companies have gotten very wise about how they structure these share lockup expirations. They don’t all occur at once. They spread them out to make sure that there’s not that big of an impact on the stock, but that’s why one of our short techniques is to focus on those S3 filings.

Trey Lockerbie (00:59:13):
The seven days before 11 days after, that rule is that pulled out of thin air? Is there something behind those numbers or is it just say, “Hey, this is our format, and we’re sticking to it.”

Lauren Templeton (00:59:24):
Well, knowing him, there was definitely something behind the numbers. I don’t recall at the moment what the magic was, but he would’ve done analysis and calculation, and definitely there was a reason there, but I think he shorted 84 companies during that time period, he put 2.2 million in each position. He did really well. He recommended that strategy to my dad and my father is an exceptional investor too, dad’s done really well. He’s not a billionaire, but he tried to execute the strategy. He covered the shorts. He said, “It’s just not for me. I’m not wired for this.” If you’ll remember during that time period, it would’ve been like standing in front of a train coming straight towards you on the tracks. It’s really, it would’ve been hard to stay in those positions, but it worked out really well for him. He had strong conviction that the market would correct, and he could stay solvent.

Trey Lockerbie (01:00:24):
Well, in one of your most recent newsletters, you wrote quote, “It seems like that peak credit conditions are behind us, default will eventually rise and hopefully distress invest scenarios will appear again after a long hiatus.” Are we entering into a generational buying opportunity in your opinion?

Lauren Templeton (01:00:45):
I don’t know is the answer. We’re not there yet is what I would say. If we do see rising defaults, and I think you will see a new investment regime take over more, the Ben and Graham style of investing, and of course that will be very new for many of the newer entrance into the market. That will be a different type of market for them to experience. I think then you might be able to say, “Yes, this is a generational buying opportunity.” I don’t think we’re there yet, but could be coming up soon.

Trey Lockerbie (01:01:21):
Well, as you kind of in the newsletter, you say best to dust off your wish list. So I think that’s great advice to end on for everybody. But Lauren, this has been a real pleasure. I’ve really enjoyed our conversation, learning more about your great uncle and even your father and you yourself and all the success you’ve had, it’s just remarkable. It’s almost like a case study that I feel like that should be studied in every university.

Lauren Templeton (01:01:42):
I don’t know about that.

Trey Lockerbie (01:01:44):
Well, anyway, I really appreciate the time, and before I let you go, I want to give you an opportunity just to hand off to our audience where they can learn more about you and your books and your newsletters and your funds and everything you want to share there.

Lauren Templeton (01:01:56):
Oh, thank you so much. So we do have a website templetonandphillips.com. It’s not a great website, but it is there. There’s a section of the website called commentary. So you can go there and sign up to receive our commentaries for free. It’s called the Maximum Pessimism Report and it’s produced periodically. We only produce a report if we feel like we have valuable information and actionable information to share with shareholders. So we’re pretty careful about that. Sometimes I’m active on Twitter @LCTempleton. You can connect with me on LinkedIn, I’m always happy to hear from investors and correspond with friends from around the world that have a shared interest in value investing, I’d be happy to connect.

Trey Lockerbie (01:02:42):
I’m actually to that point, a huge fan of non fancy websites, Berkshire Hathaway is my favorite, and so it can’t be that bad, but I personally love that. Lauren, thank you so much again, I’d love to do this again some other time, but appreciate the time you gave today.

Lauren Templeton (01:02:56):
Thank you, Trey. I really appreciate it.

Trey Lockerbie (01:02:59):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app and please leave us a review if you’d be so kind, it really helps the show. Feel free to reach out to me directly @Trey Lockerbie, be on Twitter, and if you’re really looking to up your investment game, go to theinvestorspodcast.com or simply Google TIP Finance to find all the resources we built for you there. With that, we’ll see you again next time.

Outro (01:03:21):
Thank you for listening to TIP. Make sure to subscribe to millennial investing by The Investors’ Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.