Wisdom from today's most experienced investor - 01/17/03
I met with Sir John Templeton on his 90th birthday in November 2002. I mentioned the funds of funds that I manage. Performance by the funds' long/short managers has been poor since the bubble burst. They have gone from 120% long and 40% short in 1999, to 80% long and 40% short in late 2002, on average. They properly cut back their long exposure and their gross exposure, but didn't increase their short exposure. That kept them 40% net long the whole time. They have not been market neutral or net short, and hence have lost money as a group.
Our futures managers, by contrast, gained 16% in 2000, 19% in 2001, and 22% in 2002. I said that if current conditions are going to continue, I should move more money to the futures managers, and away from the long/short managers.
Specifically, I asked him the following question. What are the chances that the economy and U.S. stock market, during the next five years, are going to be like the last two years - and that the stock market may not be down 20% per year, but it will be down or up less than 20% five years from now? His reply: an 80% chance. Since nothing is 100% certain, this answer must mean that he is about as certain as he gets.
He left me with the following thought. In his 90 years, and his 60 years of investing, he had observed that few people foresee the extremes to which markets often go. He said that many times, he had watched markets triple or drop by one third, to the consternation of participants. Be prepared for these moves was his friendly advice.
How credible is his advice? Many people know of his fine record as an investor, his philanthopy and his integrity. Few know how good he has been at calling big moves in the stock market. Here are three other calls he has made.
In October 1987, the US stock market fell over 20% in a day. From its August high, it was down over 30%. That same week, John sent a fax to everyone involved in the Templeton Mutual Funds. He set forth ten reasons why the bear market was very likely already over. First as I recall was that bear markets had averaged declines in the mid-30% area, and the market was down almost that much already. You can imagine how helpful this was to shell-shocked investors, who were being told that such a large decline might herald a depression, etc etc. Here was John putting his reputation on the line. And if fact, while the market drifted down into December that year, people who held on or bought more shares benefitted enormously in coming years.
In the late 1970s, John became very bullish, as did Warren Buffett and other canny investors. Price to earnings multiples for S&P 500 stocks averaged less than 10% at the time. John gave a speech predicting that the Dow Jones Industrial Average would soar from less than 1,000 to over 3,000. He expected profits to double, and the p/e multiple to rise to its historical average of 15. In July 1982, he appeared on Wall Street Week. Rukeyser opened by pointing out that John had been bullish for awhile, but nothing had happened. "Are you wrong?" he asked. Here was the response, as best I can remember.
"Louis, I don't think so. I would go so far as to say that the Dow will hit a low this year that will never be seen again in the lifetime of any of our listeners." The Dow drifted down to 780 over the next two months, and has been higher ever since. Even the perma-bears are not able to forsee a decline from 10,000 to 780.
Before I got into the investment business, John had built an investment advisory business and made a reputation. I have read that he was forecasting a 40% drop in the Dow from its late-1960s level of 1,000. John put his money where his mouth was and sold his firm to an insurance company. It didn't want his little mutual fund, so he kept that and built it up to $20 billion as I recall before selling that business ten years ago at the age of 80. The Dow indeed fell 40%, to a little below 600 in 1974.
Perhaps now you understand why I was so interested in his market views, and why I wanted to pass them along to you.
With best wishes to my fellow investors, Douglas Sperry Makepeace