I had a chance recently to talk Lauren Templeton, founder of Lauren Templeton Capital Management LLC and the niece of legendary investor Sir John Templeton. Like her uncle, she believes in buying at the point of maximum pessimism. A question I asked was: how does one tell when the point of maximum pessimism has arrived? She replied:
Uncle John always said when the last seller finished selling a stock then there would only be buyers left in the market, and the stock could only go up. Of course, there is no way to know this until after the fact.
Purchasing a stock only to see it continue to fall in price is a very common occurrence. We are not aware of any value investors who can avoid this altogether. Uncle John had an uncanny ability to locate and exploit points of maximum pessimism. He was also known to buy too early on occasion, so it is a problem that all value investors face.
One example came from his purchase of Ford Motor Co in November of 1978 at $4 per share. The stock continued to fall to $2 by 1982, but Sir John accumulated more shares along the way and by that point he had a large position in his funds. By 1988, Ford was trading at over $30 per share, so the basic lesson is to expect to be early as a value investor and also be prepared to build into a position over time should it continue to fall.
Basically, Sir John was willing to average in, but he kept some balance between cash balances and market exposure (leaned heavily towards market exposure) as long as he could find attractive bargains to purchase. He preferred to be in the market versus sitting on too much cash. The most extreme example I can think of him being out of the market was in 2000 when he only owned treasury strips from Canada, Australia and New Zealand and was also heavily short US tech stocks (see chapters 6 and 9 of Investing the Templeton Way).”
Regarding signals of maximum pessimism, he was very valuation driven, and that was most often the strongest common denominator among his investments. So among all variables, valuation was the most important signal.
Rest of the interview to come in future posts.