Investing the Templeton Way
As a little girl Lauren Templeton did not stick Barbie or even Michael Jackson posters on her bedroom walls. Instead, as a relation of one of America’s most venerable and experienced investors, Lauren says, she decorated her walls with certificates of stocks that she herself had purchased.
Business Editor Lindsey Turnbull attends a special presentation by Lauren Templeton organised by the CFA Society of the Cayman Islands held at Casanova Restaurant, and hears about the simple strategies which made Lauren’s ‘Uncle John’ Sir John Templeton, such a savvy investor. First in a series of articles.
Lauren Templeton is the founder and president of Lauren Templeton Capital Management, LLC, an alternative investment management firm located in Chattanooga, Tennessee. The company is the general partner to the Global Maximum Pessimism Fund. Lauren is a member of the John M. Templeton Foundation, established in 1987 by her great uncle and renowned international investor Sir John Templeton.
She is also the co-author of the renowned investment business book ‘Investing the Templeton Way’, the first insider look into Sir John’s investing strategies. As a result, Lauren speaks to audiences around the world about how she applies Sir John’s timeless methods for clients today.
Sir John Templeton seeded his niece’s first investment fund with US$30 million when she was just 24 years old around ten years ago.
“I was very young when I first started the fund,” she concedes, “but I had been very well groomed by my uncle.”
Lauren said in those early days the ‘training wheels’ were in force until she developed the emotional maturity to detach herself from the ups and downs of the financial markets.
“I would follow strict rules in those days until I grew a backbone,” she says.
Nowadays Lauren says she is fascinated by what she terms “behavioural finance” and says that her uncle was the “ultimate student” of the science.
“Textbooks continually quote him on the subject,” she confirms.
The definition of behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effects on the markets. It helps to explain how and why markets might be inefficient. Lauren says it helps to explain why individuals make irrational investing decisions.
“It’s human nature in finance,” she confirms. “Humans are hot-wired for the short-term attraction to investing. In particular we are wired to herd, with social exclusion akin to the feeling of physical pain.”
Thus exercising self control over emotion when investing is difficult particularly, as, she confirms, our resources for self control are limited and can be depleted (though can eventually be regenerated).
“We are programmed as humans to be poor investors,” Lauren says.
She then went on to highlight eight behavioural finance concepts in the context of Sir John’s investing technique.
Similar to how a house should be built upon a good, solid foundation, ideas and opinions ought also be based on relevant and correct facts in order to be considered valid.
However, this is not always so. The concept of anchoring draws on the tendency to attach or “anchor” our thoughts to a reference point – even though it may have no logical relevance to the decision made. Anchoring can be a source of frustration in the financial world, when investors base their decisions on irrelevant figures and statistics. For example, some investors invest in the stocks of companies that have fallen considerably in a very short amount of time. In this case, the investor is anchoring on a recent “high” that the stock has achieved and consequently believes that the drop in price provides an opportunity to buy the stock at a discount.
“Uncle John predicted that the Dow could hit one million, which, when anchored at the current level of 11,000 seems impossible,’ she says.
“However with a compound growth rate of a rate of 5.1 per cent this could well be a reasonable prediction.”
2. Mental accounting
Lauren highlighted the tendency by some people to separate their money into different accounts which can cloud the big picture for their overall investments.
“Some people save for college funds yet continue to pay 18 per cent interest on their credit cards! This behaviour is not logical,” she claims.
She continued that some people treat money differently depending on its source.
“People seem to be in a hurry to spend financial gifts, tax returns, bonuses, etc. This makes no sense. All money is fungible,” she adds.
Next month read about other irrational behavioural traits displayed by investors.