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 that made Lauren’s ‘Uncle John’ Sir John Templeton, such a savvy investor. Second in a two-part 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.
Lauren highlighted eight behavioural finance concepts in the context of Sir John’s investing technique.
3. Confirmation and hindsight bias
Some investors tend to look for support for their investment decisions after the event.
“It feels good to have confirmation that you acted correctly,” Lauren says, explaining that this action was termed ‘confirmation bias’. She said that her fund was able to work such behaviour to its advantage.
“When Toyota recalled its cars recently we decided to buy Toyota stock because we believe that people really love to drive Toyotas and we were careful not to let this cloud our judgment when investing,” she stated.
Hindsight bias was the behaviour many investors displayed after a big movement in the stock markets, such as after the tech bubble burst in the 1990s.
“People said that such an event was completely predictable when actually it was unpredictable,” she said.
Lauren wondered, if the tech bubble was so obvious, why her uncle was one of the few investors to short the market just beforehand.
“People thought that he was off his rocker!” she exclaims. “He was very good at spotting trends and he got even better with experience.”
“It is human nature to try and find order and explanations that certain events are obvious. We have to be careful, however, not to confuse genius with being bullish.”
4. Gambler’s fallacy
Gamblers, according to Lauren, believe that certain events will always follow other events. She highlighted the tendency of slot machine gamblers to shy away from machines that had recently paid out even though the probability that they would pay out again remained the same as other machines.
“We forget that we should sell losers and ride winners and instead we have the tendency to do the opposite,” she says.
5. Over confidence
In a survey Lauren said 74 per cent of 300 fund managers polled felt that they delivered an above average job performance, while the remaining 26 per cent thought that they delivered an average performance.
“Only 50 per cent could really be above average,” she stated, adding that John Templeton had an extremely humble approach to investing.
“He believed that investors ought to reflect on their investing methods when they are most successful to ensure that they don’t become over confident,” she confirmed.
6. Illusion of control
A behavioural trait among investors was to believe that they had control over uncontrollable events. Lauren said that lottery ticket sales increased when buyers were able to pick their own numbers, even though the laws of probability said that the statistics for winning were no higher if the numbers were hand picked or not.
“Investors are also biased in this way,” she added.
7. Over-reaction and availability bias
Lauren said that there was a propensity to over-react to movements in the markets, yet confirmed that emotions play an important role in investing because they provide the impetus to act, which would not be there without them.
“Studies have shown that brain-damaged patients who cannot experience emotion make horrible investors,” she stated. “They know what the right decision is but they are just not able to act upon this thought.”
Emotion is the investor’s friend, she said. “We need it; we cannot act without it, but we need to be able to control it.”
8. Herd behaviour
This type of behaviour was in Lauren’s mind the most important. She explained that investors had the inclination to mimic the actions of larger groups because of the social pressure to confirm.
“The common rationale is that a large group could not possibly be wrong,” she said, and added that this was a major trend when prices were on the increase.
“To sell when others buy and vice versa brings the greatest rewards,” she stated, confirming that she and her husband were purchasing stocks by the dozen from her hospital bed on a lap top just before she gave birth to her daughter just as the stock market collapsed in March 2009.
“You will obtain superior returns in this way,” she said.