We Study Billionaires - The Investor’s Podcast Network - TIP594: Contrarian Investing & Sir John Templeton w/ Scott Phillips

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Scott Phillips to discuss how to invest during times of Max pessimism. Scott is married to and manages money with Lauren Templeton, who is Sir John Templeton's great niece. My co-host William Green in his book, Rich or Wiser Happier, referred to Sir John Templeton as probably the greatest international investor of the 20th century. Sir John's life was outlined in Chapter 2 of William's book, and it was titled The Williness

Starting point is 00:00:28 to Be Lonely, as Sir John was a greatest, as Sir John was a greatest international investor of the 20th century. as Sir John was an amazing independent thinker who wasn't afraid to stray away from the crowd and invest in markets where investors wouldn't even think for a second to touch. These markets were oftentimes the most distressed and offered the highest level of asymmetric returns. During this episode, Scott and I chat about what helped Sir John Templeton think independently and have the courage to stray from the crowd, what Sir John learned living through the Great Depression, how Scott's fund capitalized on the market panic of March 2020, areas of the market Scott deems to be significantly undervalued, why U.S. investors should consider

Starting point is 00:01:03 diversifying away from the dollar, Scott's current thoughts on investing in China, how Scott thinks about shorting market bubbles similar to surge on during the tech bubble, Scott's thoughts on continuing to be optimistic about the future during an era of doom and gloom headlines and so much more. This was a really fun chat and I really hope you enjoy today's episode with Scott Phillips. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Clay Fink, and like I said in the intro, I'm joined by Scott Phillips.

Starting point is 00:01:54 Scott, thank you for joining me on the show today. That's great to be here, Clay. Looking forward to the conversation. I wanted to start this discussion by talking about Sir John Templeton. For those in the audience who aren't aware, Scott's wife, who he manages money with, is Lauren Templeton, which is Sir John's great niece. And Scott has actually co-authored three books about Sir John, including Investing the Templeton Way and the Templeton Touch. And in preparation for this chat, I also revisited William Green's chapter in his book,

Starting point is 00:02:25 Rich or Wiser, Happier, that was on Sir John. it was Chapter 2, which was titled The Willingness to Be Lonely, and the subtitle states that I wanted to share here, to beat the market, you must be brave enough, independent enough, and strange enough to stray from the crowd. And William described Templeton as probably the greatest international investor of the 20th century. So I'm super excited to dive more into this and dive into some of Scott's knowledge and knowing Sir John. And in the book, William also talks about how humans, they have this natural tendency to, to stick with the crowd, selling stocks when people are panicking and buying stocks when there's that hype and euphoria.

Starting point is 00:03:05 And I just think of to my own experience, how much easier it feels to want to buy the stock that's recently gone up and then be a little bit more cautious with the stock that's gone down. So Scott, let's start it off by asking you, what do you think helped Sir John Templeton overcome this temptation of going with the crowd and his willingness to stray away from it and plays his own path. Sure. Clay, great question with lots of potential facets to explore here. I think that, you know, a big piece of it just goes back to his upbringing.

Starting point is 00:03:38 His parents were both extremely interesting people, great role model. So his father was the town lawyer, but he was kind of, it was referred to as a super entrepreneur. It's a very sharp and ambitious. In addition to being a lawyer, he had cotton gins. He had rental properties. he sold insurance. He was just very ambitious, high energy, and focused on making money. And then his mother, by contrast, was extremely well educated for a woman, you know, at the turn of the 20th century, the early 1900s. She was college educated. She studied Greek, Latin, and mathematics.

Starting point is 00:04:19 She didn't marry until she was older. She, too, was very enterprising, but in different ways, she was very altruistic. She supported local charities. And so he kind of had these two people in his life that I think instructed him at a behavioral level. But they did not provide any verbal instruction to him to the extent that, you know, most parents today tightly manage their kids, what they want their kids to think, what they want them to do, what their goals should be.

Starting point is 00:04:48 Sir John and his older brother, Harvey Jr., which is Lawrence grandfather, had really no direction. They were kind of turned loose, but they had these key role models in their lives. And so they're really just kind of left to their own devices. Anything they learned, they had to go learn themselves. So Sir John always remarked that if he asked his mother a question about something, she wouldn't provide a direct answer, but a week or so later, there would be a book left out on the coffee table. So he was, he and his brother were extremely independent, auto-dodacted.

Starting point is 00:05:17 They taught themselves all kinds of different things because they had to. So they saw these kind of superlative role models who were successful in the things they were doing, but they had to go figure it out for themselves. And I think that kind of paradigm that way of going about things was a huge influence on him as a human being. And the other thing was, you know, they lived in the country. It was a rural setting. So it wasn't like a city where you would observe convention and compare yourself and say, well, we don't do it that way or make comparisons and learn through all these kind of social, and social conventions, they just thought for themselves and did what they wanted to do for the most part. They made a lot of mistakes along the way, but just to give you an example of how extreme this was,

Starting point is 00:06:01 I mean, Sir John asked for a shotgun when he was eight. I think his mom resisted until he was 10, but he still got one. And she just thought that it was in God's hands. I mean, that was her philosophy that, like, he would figure it out, he would be safe, it would work out. And so he kind of had this internal mechanism, this drive to learn and to think independently without anyone ever really correcting it. And it's fascinating because it really manifested itself in really just excellence. And a number of different levels as a child.

Starting point is 00:06:35 He was a star student. He was a great athlete. He was well liked. But then moving alongside that, there were cultural influences too. So the big thing was, you know, at this time in America, there was a lot going on in terms of self-reliance, live in the American dream. You are your thoughts. The greatest importance in Winchester, Tennessee at that time was your character, who you were as a person. My word is my bond.

Starting point is 00:07:03 So that was your worth. And so that was also tied to, you know, your religion and church. And so there was kind of this, you know, higher calling or higher presence that was supporting all of that, this kind of upward pull. So he was, you know, just to review, he was very independent. He thought for himself. He didn't really care much about what other people thought about his actions. He thought they were right. And that's the other piece that I should mention.

Starting point is 00:07:32 He had a lot of self-confidence, not arrogance, but great self-confidence. He believed that what he was doing was correct. And by the time he, you know, got to Yale and went into business, that was his mindset. So that's the, those are the pieces that really kind of informed him as an investor later. But also the last piece that I'll mention is alongside those, you know, cultural independence, the positive thinking. Like I said, the Norman Vincent Peel, the Ralph Waldo Emerson, the self-reliance, all of that individualism, which is a huge part of American. and culture and thinking at the time, that gave him this huge sense of purpose and living a deliberate life and serving others. That was his ethos and that's what he wanted to do.

Starting point is 00:08:21 And he took that extremely seriously and organized his life around those facets. That was the driving force. And so for him, you know, to be successful and to help others with their wealth, it was who he was. That's who we saw himself. That's what he thought is talents. were oriented towards. That's what he saw his purpose was on earth. I mean, this is really heavy stuff. So he was just all in, completely dedicated, being successful as a money manager.

Starting point is 00:08:50 And it was the independent thinking and seeing how that worked in the markets that eventually culminated in a great track record every time because he was always just thinking for himself and going the other way when most people were doing the popular thing. Yeah, prior to this chat, I was just thinking about what was it about Sir John that really led to this amazing career that he had. And one of the themes, I think, that you mentioned there, was just his immense work ethic.

Starting point is 00:09:20 He had this underlying purpose that he sort of found through his upbringing and the direction his family gave him, as you mentioned. And to achieve extraordinary levels of success in the investment industry, you really have to have that sort of work ethic he had. And I remember you telling the story of he was just always looking for the next business. bargain, you know, always searching in various markets and where things were beaten up most. I wanted to turn to when he started college. He went to Yale in 1930. And I think part of that work ethic he developed, it kind of came for good reasons. This was the very start of the Great Depression. And I'm reminded of the book I read that covered, talked about the investment career of Benjamin Graham. And he just had a treacherous time investing through.

Starting point is 00:10:08 the Great Depression. And it's a reminder of just how difficult of a period this was for everybody. And you've stated that Sir John, he was really shaped by these big events such as the Great Depression. So what do you think the Great Depression taught him other than this, you know, probably this work ethic that he developed early on in his life? Oh, there were a number of lessons that came out of those events, I think. First of all, kind of going back to 1930, 1931, you know, I always share. this story about how, you know, just prior to the sophomore year, his father pulled him aside and said, I can't even spend one more dollar towards your education. You know, I can't support you. And so he was fortunate that he had an uncle who was willing to fund him returning to Yale,

Starting point is 00:10:55 but once he got back to Yale, a sophomore year, he was on his own. And so what he did was he decided that he was going to make it work. And he worked harder in school. He got better grades. He obtained scholarships until he, you know, was able to get those scholarships. He was working part-time. And between the part-time work and the scholarships that covered about three quarters of what he needed to pay his tuition and room and board and food and support himself. In the last quarter, he made through playing poker with his classmates. And so, you know, that was kind of the, you know, legendary view of what his mind was like and what he can do, you know, in terms of working with numbers and probability and reading emotions across the table.

Starting point is 00:11:42 But what it really did, you know, taking a step back, it did really two important things came out of that first. And he said this. He learned that I learned that it was, it seemed like this huge tragedy at the time when my father couldn't support me anymore. But it was the best possible thing that could have happened. Because if that did not happen, I would not have worked as hard. I would have not have gotten to the top of my class.

Starting point is 00:12:07 and I would not obtain a road scholarship to go to Oxford. And then the other piece was because, you know, his father was very successful. He was also more volatile. Like he had ups and downs in his money-making, you know, ventures. And he wasn't necessarily a saver. And so both Sir John and his brother, Lauren's grandfather, they were deeply affected by that. They both became intensely frugal and thrifty.

Starting point is 00:12:35 And so I think between the experience of wanting financial stability by watching their fathers ups and downs, but then also watching what was going on in the Depression, both were big savers. And so when Sir John went through the Depression, whether it was at Yale or when he was beginning his career on Wall Street, he knew that he wanted to be this, you know, figure that could generate wealth for people. but he also knew that he needed the same, you know, exemplary habits within himself. And so it was a huge piece of who he was. And it was authentic all the way through. And you saw that in a lot of people that, you know, were affected or lived through the depression. They just have completely different attitudes towards scarcity, wastefulness, saving.

Starting point is 00:13:24 Sir John saved 50% of everything he made. And he didn't have to do that. I mean, even like, you know, when Lauren and I were working with him, he was still just extremely frugal and didn't waste anything. You know, Lauren and I both recall after the Asian financial crisis, he had bought Kia Motors and he had invested in the Matthews Fund as well with the Matthews Korea Fund and just made a large sum off of those investments and still refused even at the prodding of his assistant to go buy a Kia automobile. He said they were too expensive. Finally, she kind of tricked him into doing it, but that was always his attitude and that was baked into who he was. So those experiences from the Depression, you know, informed all of his behaviors going forward. So they were profound.

Starting point is 00:14:12 So both finding the positive within the negative and then kind of the financial practices of being a saver and preparing for new opportunities and not wasting anything. There was a great story of him, even, you know, prior to selling the Timbleton funds, where I think it was Marty Flanagan told this in the Timberton Touch, or maybe it was in another conversation, but he said he walked into the office when Saturday, and he just kept hearing this, bam, bam, this banging on the table. And he was looking around and he couldn't figure out what it was, and he walked in to Sir John's office where it was coming from,

Starting point is 00:14:46 and Sir John had gathered up unused scraps of paper and was stapling them into a new legal pad. He wouldn't waste anything. And so he was one of those people who just, led it to the fullest. He was completely authentic. What you saw is what you got. So it's impressive for sure. You made a really good point that really struck me there. It was, you know, talking about how frugal he was living through the Great Depression. And I recall in, you know, just reading more about him, even when he became like extraordinarily wealthy, he sort of still had that attitude of, you know, you shouldn't go out and spend all these frivolous things just because you can. And, you know, he ties that into his faith, you know, the underlying purpose that you talked about too.

Starting point is 00:15:31 And you have children of your own and you're sort of seeing Sir John and living in many ways the way he lived. I was curious if you find it to be a challenge nowadays in today's world. I think about how post-great financial crisis, the Federal Reserve, really stepped in and, you know, provided sort of a backstop to financial markets that they really didn't have during that time period of the Great Depression. and they kind of let, you know, free markets play their role. And then I also think about how, you know, where the Amazon economy, we can always just hop on our phones and just buy the easy, $20, $30 item. And it's just so easy to just, you know, buy things we might not need, but are just super convenient.

Starting point is 00:16:08 So do you find that to be a challenge to live out through your own life and then teaching your kids those values as well? Yeah, of course. You know, that, I mean, the things you just described are foreign even to my childhood. I mean, we didn't have these levels of instance. gratification and, you know, it is challenging. But I think, you know, the most important thing is giving them the independence to take risk and knowing the value of character and understanding the value of a dollar and where it comes from and what it took to earn it. You have to,

Starting point is 00:16:43 you just have to make those connections forcible. And it takes a lot of work because a lot of, the things going on. Our convenience is fly in the face of that, especially, you know, if they're on social media and looking at the messaging and just constantly being sold things. I mean, these kids, everything is an advertisement. Everything is, you know, geared to get their attention to distract them, to make them focus on something that, you know, it's probably not the best use of their time. They're not learning anything. And so the big thing I think that we've done as parents, you know, summer camp is a huge one. Both girls have gone, you know, to summer camp since they were probably eight years old for five weeks. And when you get there, the phones go away. They have no access to that.

Starting point is 00:17:31 And so you have to do, it kind of takes them back to what childhood was like for the rest of us, pre-internet, which was if you needed something to do, well, guess what? You had to figure it out. Like, you have to think and take risk and make choices. No one's going to sit there and spoon feed you your entire day and helicopter over you and make sure that all these outcomes are being generated. And it really has enhanced, I think, their willingness to try new things, their ability to interact socially. They value, I think, conversations more, whereas, you know, you encounter a lot of young people

Starting point is 00:18:07 today and everything is driven by the phone. I remember, I think it was a few Halloweens ago, my oldest daughter, had a bunch of friends come over after they were trick-or-treating. And here were 10 girls all in a room together. You would think you would hear all this, you know, tackling and talking. No, they're all quiet in our living room on their phones. None of them were talking together. They're all on their phones. It's the strangest thing.

Starting point is 00:18:33 And so I think, you know, from a parent standpoint, you have to find ways to offset that behavior because it's not. It's not productive. It's not the growth mindset, we should say. It's not going to help you, I think, in the long term. So, yeah, it's hard. That's what I'll say. It's very hard today. No question about it. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future. That's what the Oslo Fos. Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary

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Starting point is 00:22:57 All right. Back to the show. So it was in 1938. it was about a decade into the Great Depression. Sir John, he first got into the investment industry. And that's when markets were at their most bleak period in U.S. history. The Great Depression lasted around a decade. And it was the following year, he made the bold bet of buying 104 of the most beaten down companies in the U.S. And then once markets ended up rebounding in 1942, he ended up selling those positions, making 5X's money, and earning a positive return on 100 out of 104 companies.

Starting point is 00:23:37 It's just so funny, rethinking that chapter in Williams book, he called the broker and told him to buy these 104 names, and they're kind of confused. Why the heck's this guy buying? Like, you know, half these companies are bankrupt. So we're not going to be buying those for you. But he said, no, no, no, no. Go ahead and just place that order. And that story really stuck with me. And, you know, just the sheer independent thinking in, you know, recognizing eventually things are going to turn, you know, when it feels like, of course, a decade into it feels like it's never going to recover. So in knowing Sir John and when you look back at his investment career and studying it, are there any other stories that have really stuck with you that maybe you could share with the audience or just

Starting point is 00:24:19 other lessons that really shine through in his career? Yeah, I think even just kind of taking a look it unpacking some of that initial trade in World War II is informative. I mean, first of all, he had the conviction to do something that most people thought was crazy. But it also, it was a very well-designed and thoroughly researched idea. Like, there was a lot of purpose behind every step in that transaction. First of all, he had the asymmetry you wanted as a value investor. He thought, well, if I lose $100 on this, it'll be offset by another position that'll go up, you know, 10x. But then also, So he had gone back and studied that the right thing to do from a bottom up standpoint was to buy the most distressed businesses because in previous wartime periods, the U.S.

Starting point is 00:25:10 government had taxed away excess profits from healthy companies. So he knew that the loss-making companies rising up to kind of a normal operating level will not have their excess profits taxed away, which would have been the case in healthy companies. So it was one of those instances where it made the most sense to go in. to the worst or the worst, the jump, not the high quality businesses. So that's very contrarian in and of itself, especially when you talk to investors today. Most investors, almost all investors are focused on quality. But then also, you know, he had this long-term view and this

Starting point is 00:25:42 willingness to hold on throughout all the bad news that continued to proliferate. But, you know, the thing with, you know, that investment and many of the ones afterwards, you see similar patterns at work. Now, I think what's interesting about his career, most people have heard of, you know, that trade around World War II. A lot of investors have read or heard about and shorting the dot-com bubble and the IPO lockup strategy. But really that six decades in between, a lot happened there too. And I think what's interesting to really think about is to really go back historically and contextualize what it was like to make those, all those investments, but also to realize that But, you know, what we're really looking at when we talk about a trade, it's like watching

Starting point is 00:26:28 the winning pass thrown in the Super Bowl and all the chips are stacked against the team. They throw the Hail Mary and win and everyone celebrates and admires it. But it overlooks all the practices and losses and injuries along the way in that career of that, you know, quarterback. And so you kind of have to understand, I think, at a more epistemic level, where that behavior comes from and it goes back to the purpose and the study and the unrelenting drive, the doctrine of the extra ounce that you reference. He always called it the doctrine of the extra ounce. You read one more research report. You take one more company visit and you put in one more

Starting point is 00:27:07 hour of work and that makes the difference in his mind between a great investor and a really fantastic one of the all time, great, you know, performers in any industry or business or, you know, endeavor, sports business. And so, you know, and I think, about like Japan, you know, when he invested in Japan in the late 1950s, he invested first in the late 1950s. Think about Japan in the late 1950s. They had just been through and lost World War II. Americans did not like Japan.

Starting point is 00:27:38 There was still a lot of bad feelings. There was a horrible war. A lot of people died and he was over there looking at investments. And so I think about like, you know, what he walked into, this kind of decimated economy. No one thought, no one would have thought this. was a good idea. No one. And I really contextualized it when I was working on the Tibbleton Touch, the revised edition. I spoke to a lot of people that knew him and worked with him or had capital from him along the way. And Jim Rogers was one of them. Jim Rogers, of course, co-founded the quantum

Starting point is 00:28:08 fund with George Soros. And he and Sir John developed a relationship over the years. They were friends. They both attended Yale. They're both from the South. They met each other at a event over at Oxford. And so they kept up a relationship over the years. And he just said, you know, Scott, you think about what it was like. If you were on Wall Street in the 1960s and you said, I got this great investment idea in Japan, he said, people would have laughed you out of the room. There was no room for any of that thinking. That would have been absurd. Like you were completely crazy. And so, you know, he did this. And then it wasn't until the really the 1970s that the Japanese market took off when the U.S. was in steep decline because of inflation.

Starting point is 00:28:52 And that's something that paid off 15, 20 years later. But when you think about what it took from a psychological standpoint, to even go investigate that, and then the legwork, once he got there as an analyst, was intense. I mean, it's hard enough looking at Japanese stocks today, but he went over there and there was barely any kind of market infrastructure. There were brokers, but he didn't speak the language. And you had to learn the accounting.

Starting point is 00:29:19 And he did all of that and saw that, you know, know, from a bottom-up basis, all these companies have not consolidated their subsidiaries onto their reported financials, and he understood that they were deeply undervalued based on their market quotations. And he was willing to invest and hold on to them in Japan eventually released their capital controls, and that made a big difference. But what he was really seeing was, it goes back to that depression experience at Yale. He went to the most negative situation he could discover, and he saw something positive in it. He saw their high savings rates. He saw their industrious attitudes. It reminded him of what Americans had been like

Starting point is 00:30:01 earlier in the 20th century when we had this huge kind of industrial boom. He saw the same things. And then he exploited that same paradigm over and over, you know, throughout his career. He saw this kind of this huge, you know, kind of an explosion of human innovation and the will to create and produce. So he exploited that on the heels of the age and financial crisis and China. You know, all these various markets had opened up. He saw that paradigm and he was willing to go in and do the work and make the investments. And he just exploited it over and over again. But yeah, I mean, there were just, there's so many things.

Starting point is 00:30:36 And then the big stories, I think that people don't really understand. It's just, you know, when you look at his career, most people just think of the Timbleton Growth Fund or the Timbleton Funds. But he actually had a registered investment advisory firm. He was an investment counselor. And he got into the mutual fund business in the, you know, the 1950s. But for most of his career, he was managing money through mutual funds and individual separate accounts. And this was, you know, over on Wall Street, had an office in 30 Rockefeller Center. And he was, it was not what people think of today when they look at his career.

Starting point is 00:31:15 So it was far more individualized. It wasn't scaled like a mutual fund company was, what people think of. And so that was kind of where he spent most of his career. And he was doing all of these innovative things in terms of investing. So he was investing overseas. He was a self-proclaimed quant at a time before they were computers. So he had a lot of analysts doing constant calculations on future earnings because he thought that his value added as a manager to.

Starting point is 00:31:45 to his client was through an unemotional, systematic, kind of scientific process of investing. And that too was very rare on Wall Street. He said that Ben Graham was really the first person that popularized that approach and gave the investment industry credibility. And he had taken Ben Graham's class, you know, post-college. You could audit it as a professional. And he was very influenced by that. But, you know, he sold that business in 1968.

Starting point is 00:32:18 And in his mind, he was basically done. Like, he was moving to the Bahamas. So by this point, the business was, I think, the 10th, one of the 10th largest investment firms in the country. So it had been wildly successful. And an insurance company, a life insurance company, came in and bought basically his business and all the various funds that he managed except for one. They did not buy the Timbleton Growth Fund. And so it was that one fund that he just said, okay, well, you know, it's Canadian domicile. I understand the tax treatment of U.S. investors.

Starting point is 00:32:51 There's not a lot of money in. There's like $8 million in capital. It's my money and some close, you know, friends. Someone in Growth Fund is the fund that everyone thinks of when they think of Sir John. That is the long 38-year track record that annualized right around 15% after fees. And that's just, you know, no one, it's unlikely. anyone will be able to replicate that over a 40-year period in a cash-based mutual fund. So the thing is, in his mind, he was basically done with his career. That was just something he was going to manage

Starting point is 00:33:21 on the side. And he was moving to the Bahamas to focus on his philanthropies. He had already decided to award the Templeton Prize. He was just going to study spirituality and pursue all of these other interests. He was kind of done with investing outside of just managing his own money. And it was John Galbraith, who ended up being, you know, the marketer of all the Templeton funds, he was the president of that life insurance company that he sold all of his funds to. And the life insurance company decided a year later they're going to move to Los Angeles from New York. John Galbraith said, I don't really want to do that. So he resigned, but sought Sir John, went and met with him down to the Bahamas.

Starting point is 00:33:58 And he said, you know that one fine that you kept? I'd like to buy it from you. I remember it had a good track record. And Sir John truly said, I don't want to sell it. but I'll partner with you if you want to market it and we can split the profits. And John Gabbert diligently took that so-called mountain chart, which showed its tremendous performance around all the brokerages in the U.S. And that $8 million fund, you know, in the span of, let's see this.

Starting point is 00:34:24 So this is, you know, the late 1960s. So they rode, you know, the rise in the Japanese market through the 70s. And that $8 million fund became a $12 billion dollar mutual fund empire. by 1992. So I think the big lesson here is just this unrelenting persistence and patience and reinvestment. He said that every year he wanted to be a better investor than the year before. And it just shows that no matter how much skill you have, you got to stay in the game because there's circumstances too. And it's just kind of an amazing way to look at his career and think that, you know, he was basically, he said he never retire. He always wanted to work, but he was

Starting point is 00:35:05 more or less done with professional money management. And then all of those circumstances played out. And there he goes. He sold the Dumbledin funds for $992 million in 1992. It's all just kind of these circumstances. And I'd just love to think about that and how he just persisted, you know, throughout his entire career. And there's so much to learn just about patience and having that purpose and just this unrelenting passion to keep doing it. Did he ever meet Benjamin Graham? He did. He took the course from him post-grad. So he had already finished Yale in Oxford and was working on Wall Street. And the security analysis class was offered at night to working professionals. And Sir John took it. Most people, they know Sir John, just as the master of finding the biggest bargains and finding where the maximum pessimism is at, your firm Templeton and Phillips Capital Management, I'm reminded of you guys. how you wrote to your shareholders, how you took full advantage of the drop in March 2020.

Starting point is 00:36:11 That's the most recent example of, you know, finding these big bargains overall in the market. Your fund turned over two-thirds of its holdings in just a few weeks. And I read that and I was just pretty blown away by that level of turnover in such a short time frame. So I'm super curious to learn how that actually works in practice of, you know, taking advantage of that point of max pessimism in the midst of managing a fund? So it's, well, it's where we think we can add value as managers. I think that, you know, one of the most important things you can do as a manager is to recognize you're in a highly competitive ecosystem.

Starting point is 00:36:51 You are competing with hundreds of thousands, if not millions of other investors. And so you have to think about your role in that ecosystem and where you can add value. And so we like to say that they're basically three ways to generate excess returns in the markets as an investor, and better information, which is what most all of Wall Street is geared towards doing. And you could have a better financial model, those are the quants, or you could have better behavior, which comes through intemperment. And any one of those three, a combination of those three can provide an edge to you as an investor. And so what you have to do is make a decision, a deeply honest, introspective self-discussion, like what is realistic? Where can I, you know, add value? Am I going to go out and compete with a

Starting point is 00:37:43 multi-billion dollar hedge fund that has satellite imagery and unstructured data to get the next edge on customer accounts at shopping malls of Walmart or oil fields or cargo? You get the idea. Like, this is, these are intensely competitive forces at play. If you think that you're going to, you know, trade in and out of stocks or gain the next earnings, that's a difficult challenge. Similarly, on the quant side, you know, you've got your work cut out for you there too. And you really want to go compete with, you know, a team of PhDs from MIT who are working with cutting edge machine learning and AI technology to develop a better model. and mine leaves these little alpha inefficiencies in the market. That too is very difficult.

Starting point is 00:38:30 But I think that from a behavioral standpoint, you know, what we've kind of learned from Sir John is that, you know, you can still do this. Human nature is still at play in the markets. And so, you know, as a money manager, you have to make a decision that that's where, or at least in our case, that's where we can add value. We can do these things that from a distance people say, oh, yeah, we can, you know, I invest like Warren Buffett. I can go and, you know, buyer. I can do this, you know, like Sir John. But time and again, history shows people can't really do that. It's very hard.

Starting point is 00:39:05 And so when you tie up kind of your identity and your investment strategies and everything you want to do for your clients becomes that, where you're going to execute on it. Because then it becomes almost like, you know, an existential thing. It's like, wow, this is what I am. This is what I do. This is how I add value to people's lives. I try to create a peace of mind by doing these things. And so that's kind of the purpose-driven side of it. Now, from implementation standpoint, it actually, it just requires a lot of study and

Starting point is 00:39:34 patients more than anything. So going into 2020, we had, you know, and still to some degree or still been kind of alarmed about zero bound interest rates and the way capital was allocated over that 10-year period going into COVID. Of course, we didn't know that, you know, COVID would be what it was going to be. I don't think anyone did. No one predicted that. And that's an important lesson too. But we were prepared for whatever was going to come. So we had a list of companies that we thought would do well on a five to 10 year basis during a period of restricted capital, low credit expansion, because the environment of just, you know, debt being issued nonstop with almost no repercussions could not last

Starting point is 00:40:18 indefinitely. And so we had, you know, a list of companies that we thought that we would like to own in that environment. We saw that as a likely outcome from whatever happened, whatever broke that current paradigm, it ended up being COVID. We were prepared and knew what we wanted to buy. We knew the valuations that we wanted to buy them out. So, you know, one example was, it was very uncharacteristic, but, you know, again, being flexible and open-minded is a huge piece of Sir John's investment philosophy. You know, one of the stocks that took us a long time to understand, and I think we just actively ignored it for many years, was Amazon, because we didn't. That just seemed like a, you know, a growth stock. Its valuations didn't make any sense. But, you know, every time, you saw

Starting point is 00:41:02 that what they're really trying to do is just raise their level of reinvestment to as high level as possible without having to report gap earnings and not worrying about tax liability. It's just constantly reinvesting. And then, you know, once you know, once. we understood that, said, okay, well, that actually makes sense. But that was in 2016 or 2017. So we looked at the valuation and said, well, that's interesting, but no, we've been on. But, you know, we always kind of knew a price that we'd want to pay for it. And so when it hit nine times cash flow in March of 2020, we acted. And we knew that we have to do that if we're going to generate excess returns. Like, it's a matter of just living up to your word, keeping your

Starting point is 00:41:43 we're doing what you say you're going to do on behalf of your clients. And so we just had a whole list of stocks that we knew we were going to take that action. And when it presents itself, you do it. And I think the important lesson is whether it's COVID or 2008, 2009, or whatever happens in the future, you don't have to predict it. You just have to know how you're going to handle it. You have to upgrade your portfolio. You have to say, I can't time the market.

Starting point is 00:42:09 But I do know that I'm going to come out of this better than I went in. And if you have that attitude and have a process to drive that outcome, you're taking control of the situation. You're reframing it and you're turning what could be a deep negative into a positive. You're finding that positive in what is an overwhelmingly negative event. And, you know, the other big thing is that in a lot of people say, well, you know, how did you know to have so much cash or, you know, isn't that market timing? We did have cash because, but that's an organic process that comes out of not. not being able to find bargains. So cash will build up if we can't find the 50% discounts that we want. But for people that want to de-risk or raise cash in those environments, I think it's a big mistake.

Starting point is 00:42:55 I think that you've already demonstrated you're not a market timer. If you were, you would have been out of those stocks. So don't memorialize your mistakes and submit your position as a bad market timer. You have to take advantage of the new opportunities that have been created. And that was Sir John's mindset. And that's what we try to do. as investors. So for us, it's, it's, there are long periods of inactivity and studying and looking for things that are out of favor. But by far the best environment to invest is when you get those wholesale selloffs, when you get the for selling, the margin based selling. Because then, you know, to us, risk is overpaying for an asset. That's the value perspective. But when prices

Starting point is 00:43:35 decline that much, risk has gone down that much too. So it's almost like, you know, a lot of your potential mistakes are going to be covered up. by how low you're getting, you know, the stocks. So it's actually the lowest risk environment you could dream of to make an investment. And that's how you have to look at it. And most people, you know, in that moment would say, you're crazy. What are you doing? But it just makes total sense to us.

Starting point is 00:43:57 But it's hard. And I really think that you have to go through one of those cycles and force yourself to do it and see the results to understand how to do it again. And 08 or 9 was that for us, for sure. It made a big impact on us. but as investors and returns and everything. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:47:30 fundrise.com slash income. This is a paid advertisement. All right. Back to the show. I'm curious more, too, on the implementation of it. You mentioned that you had some cash on hand. And the problem with these big market selloffs and the big for selling is that most assets are pretty well correlated. So in March 2020, for example, pretty much anything you owned outside of cash was declining in value as there's essentially a bid for dollars. That's why everything else is declining. And a lot of investors are fully invested. So, if they're trying to take advantage of these market gyrations, I would think the rationale would be, okay, company A is beaten down a whole lot more than company B that you already own. So maybe you sell some of company B and allocate it to the one that's a bigger bargain. So for you, was it mainly the cash being allocated or was there some reallocation in your portfolio as well? I guess I did mention the two-thirds of turnover. So I'm sure both played a role for you. Yeah. So we, you know, again, our process is

Starting point is 00:48:37 very bottom up in valuation driven. So we actually did have about a 20% cash balance going into March 2020. So the first move was to deploy that cash. And then the second move was to start replacing the preexisting portfolio. And Sir John's basic rule for that, which we follow is when you find a bargain that's 50% better, has 50% more upside than what you hold. It makes sense to switch. And that's something that, you know, he would have studied and kind of calculated on his own over many years. So we follow that and it tends to work pretty well. The mantra is to upgrade. You know, go fine, better growth, better quality. Whatever the market's offering, just try to upgrade your portfolio. But yeah, it was both. And if I was fully invested, I would be doing,

Starting point is 00:49:22 you know, the same thing. I would be turning over or looking to turn over, you know, what you already own, if they're better opportunities. And I was amazed that Sir John, he said a good bargain to him was something that was 80% below what he estimated to be the intrinsic value. And I remember the story. I think you told him one of your books of he bought like a sofa for practically like a 95% discount or something. And he was always looking for bargains. It wasn't just the investment world. So when you say an idea has to be 50% better. So the upside has to be 50% more. What sort of timeframe are you looking at that sort of upside? Is it a few years or is it 10 years or how long is that?

Starting point is 00:50:02 It's usually, you know, it depends on the amount of upside, but, you know, we're willing to give that scenario five years. You know, if it's a much deeper discount, we'll give it 10 years. You kind of, you know, measure out the IRR. So one good example, you can, when you get discounts that are deep enough, you kind of get indifferent towards the asset itself. So here's a good example, like going back to, let's see, this would have been in the period of right after the Eurodebt crisis and into the taper tantrum in the emerging market.

Starting point is 00:50:36 So kind of like 2011, 12, up until 2015. So around 2012, 2013, Arcelor Matal, the European steelmaker that emerged with the Indian steelmaker, was trading at less than a quarter of its book value. I think it got down to 10% of its book value. So when you model that out, there was 3% or 400% upside. So I'm pretty indifferent, whether it's five years or 10 years at that rate, that's a great return. We'll give it a long leash. And then moving alongside that, you know, during the taper tantrum, emerging markets fell out of favor.

Starting point is 00:51:09 And Alibaba had the great misfortune of IPOing at a ridiculously high price. I think it was the end of 14, early 15, and promptly went down 30, 40, maybe it was 50% over the course of the next six to nine months. And that, too, had a similar kind of return profile when you modeled out the goal. growth and saw the market potential and then the valuation and where it had collapsed, it was also kind of a two to 300 percent upside scenario. And so in either case, those assets to us from our perspective were almost interchangeable. And interestingly, they both, and we let's be clear, we make mistakes as investors too, but both of these worked out.

Starting point is 00:51:46 And I think actually, Arsenal and I told it a little bit better, you know, from a total return standpoint, the problem you're going to run into if your idea is to hold and and let things compound, you go into a cyclical kind of NAV-style investing relationship, big discount to NAV, like a steelmaker or something like that. You know, you're going to have to sell it eventually. With, you know, something more consumer-driven, with this kind of long growth runway,

Starting point is 00:52:12 you could potentially hold it for a very long time, assuming, you know, all things being equal, the risk or appropriate, the valuation stays low and off and so on. So we actually ended up holding Alibaba until, May of 2020. That's when we sold it. He replaced it with the U.S. stock. You know, and just thinking about the past markets in the past 15 years or so, I think about

Starting point is 00:52:35 some of the areas that investors have sort of straight away from or valuation disparities continue to stick around. I think about two areas that you've highlighted in your annual report is the small cap space and international markets. And I'm curious in looking back at Sir John's career, if there were a real, you're like periods where, you know, investors sort of doubted him where he's in a trade for maybe two, three, four years. It isn't really going anywhere. But eventually he's right about that trade where, you know, the patient's side of this is, I just think that's worth highlighting and mentioning again

Starting point is 00:53:10 because these bargain type ideas, you know, it takes some time for the market to agree with you sometimes. And you really have to test your conviction, test your thesis and continue to rethink whether you're really right about it because with the quality names that you said a lot of people can, you know, are sort of attracted to these days. It's what a lot of people talk about, including myself, admittedly, you know, those, you know, when investors are continuing to sort of pile into those, it continues to keep working and you get this reinforcing cycle where they ignore what they were initially pessimistic about and then they're continuing to add to, and then the momentum sort of plays into that as well. So did you see that in Sir John's career?

Starting point is 00:53:52 where, you know, he sort of went through these periods where maybe his returns weren't as good, but eventually he saw this drastic outperformance over a period later. Yeah, I mean, the basic reality is, and he said it, you want to have better performance in the crowd. You have to do things differently from the crowd. And so that means at a very basic level, at some point you've got a break with consensus and go into an asset that is not working that's discounted and maybe continue to be broken or neglected or unloved for a long period of time.

Starting point is 00:54:27 So, yeah, going back specifically to his career, I would say that when you look at his investments in Japan, obviously those are out of favor for 15 years or so before they really started working in the 1970s. But then even more interestingly, when they did start working, they worked for a very long time, 20 years culminated in a bubble that technically the Japanese market still, hasn't recovered from. But, you know, when you kind of trace that back and look at his portfolio

Starting point is 00:54:57 in the Timberton Growth Fund, he was rotating out of Japan and into the U.S. in the early 1980s because he said that in his view, the U.S. stocks were the cheapest they'd ever been in his lifetime, including the Depression. And so that takes enormous self-control and discipline to be sitting in a portfolio that's working extremely well and then see these, you know, these huge bargains in your view that no one else agrees with. That's why they're huge bargains. People think you're crazy if you go into them, but he did. And he rotated 62%, I believe, it was over 60% of the Timberton Growth Fund into U.S. stocks in the early 1980s. This is around the time when, you know, Volker was raising interest rates to kill inflation. Commodities were the big investment

Starting point is 00:55:47 deal in the U.S. The Death of Equity's headline on Newsweek had come out. He saw an opportunity there that was worth ditching all these other things that were working fantastically well and going into. And of course, as we know in hindsight, it was the start of, you know, fantastic, maybe one of the largest bull markets the U.S. has ever had going from 1982 to the year 2000. And so, yeah, he was willing to do that and sit there and just grin and bear it and say it's the right thing. And when it goes back to that confidence and independent thinking, we talked about earlier on the podcast, he just had the will and the conviction to do it because it was rational and he thought it was right and he thought it would work out. And he didn't care what you thought. If you wanted to leave or sell shares in his fund,

Starting point is 00:56:32 that's okay. So I think a good transition point here is to look at markets today. The U.S. has had a heck of a run over the past, you know, since the great financial crisis. So that obviously leads investors that are looking for more pessimistic situations to look at international markets, what you've written about in your annual report. And then I also mentioned the disparity in the small cap space. So what are you seeing in today's markets? Yeah. I mean, you hit the nail on the head. It's U.S. small caps and international stocks, I think, are both very intriguing. You know, U.S. small caps, if you look back over the history of the market, it's really unusual for large-cap stocks to lead the market and have the superior returns over time. It's always been small caps. It out-performed by the hefty margin.

Starting point is 00:57:19 And really, when I think about, you know, like the last, gosh, 15 years or more, small caps have been very expensive. They've been at a big premium because that's where typically a lot of the growth is. But that's really changed in the last few years, especially through COVID. And there are kind of two things I think they're at play there. First of all, there's the conventional wisdom that small cap stocks will lead you into the recession, right? And then there'll be the first ones that lead you out too. So it's kind of this double play. And so I think there's a lot of anxiety in the market, as we know, about the prospects for a recession.

Starting point is 00:57:57 Everyone's been forecasting it for a long time. It hasn't happened. And we'll see. I think there are parts of the economy that you could argue are in recession. But nevertheless, that's certainly a big piece of why small caps are discounted because they're not likely to bottom before the recession. So people are just kind of sitting on their hands in that regard. But also, and I think this is more valid as an argument, it goes back to the misallocation of credit and debt over the last 10, 15, 20 years, maybe not 20 years. But since the great financial, financial crisis, the zero bound interest rate regime. You know, with small caps, they just don't,

Starting point is 00:58:35 they don't access capital markets the way large caps do. They hold bank debt typically. And a lot of it has floating interest rates attached to it. And a lot of these companies are, you know, have been kind of sustaining their capital allocation programs through more debt issuance or staying relevant in their industry by issuing more debt at those low rates. And so the problem is, you know, when you get into kind of a classic recession and credit really contract. It's already in the process of contracting, of course. Those companies will have financing problems. And so that is a more legitimate kind of Paul hanging over the small cap space, because a lot of them do legitimately have higher debt balances in floating rate debt that could be challenging to sustain or refinance over time.

Starting point is 00:59:23 But if you're willing to go in and take a more granular look and look at the individual names, there's a lot of interesting stuff there. So you can find stocks trading well below 10 times earnings, three, five times cash flow, five times EBITDA. These are pretty well-run companies. You know, they're not necessarily big growth stories. But, you know, at those valuations, you know, they could do well. So that's where we're spending, you know, the majority of our time, really from a research standpoint,

Starting point is 00:59:53 point is just getting that same wish list ready to go. And, you know, there are just tons of examples of just, you know, companies, pretty well-run companies trading at book value. But people don't want to pay attention to that because, you know, there's, you've got the AI momentum play and the magnificent seven. And it's just human nature. And then on the international side, oh gosh, you know, there's, it's been a disaster investing there for the last like 10 years. It's vastly underperform the U.S. market. The valuation levels are very low. And I think, you know, in both cases, whether it's U.S. small caps or the international space, you're looking at valuations relative to U.S. large cap stocks that are as low as discounted as they've been in the last 25 years.

Starting point is 01:00:36 So we're talking about some really low valuations and hurdles from an investment standpoint. But, you know, the arguments to take a closer look at international stocks are certainly compiling. You know, just look at what COVID's done to trade and the way trade is realigned. You know, China is no longer our largest trade partner, Mexico is. There are issues kind of all over from a supply chain standpoint. It's raised the cost of doing business. And so U.S. consumers are paying more. But at the same time, there are also important advantages,

Starting point is 01:01:12 which are the central banks in the emerging markets in particular, out of step, with the U.S. and developed markets, meaning they're already through their tightening phase. They're looking at cutting rates. And we're still tightening and combating inflation. So what that really means more than anything else is that the markets are separating. Like, if you're a stock picker, you're kind of reverting back to an environment that Sir John thrived in where a country-specific discount can emerge. And it's doing its own thing. And it's not tied to the U.S. Federal Reserve. You don't have to worry about all the gaming of when, you know, the rate cuts are going to appear and how that affects duration, plays, and equities and so on.

Starting point is 01:01:56 You know, you're kind of playing your own game and you don't have a lot of competition to look at those stocks. And so that's like the perfect environment to pick. You know, if you look at a market like the UK, it's been out of favor for, oh, wow, six or seven years. It started with Brexit. If anyone even remembers that, that was a disaster, you know, for UK Equities, everyone got too confused by what was going to happen in the trade alliances and the Euro. And then COVID hit, you know, another disaster, basically for every economy. And then the inflation came. So that market has just been left behind for five or six years or more.

Starting point is 01:02:30 So, you know, you could go look at the UK and find some great companies, reasonable multiples. So we haven't done any buying there lately, but, you know, last year during the, this is 2022, during the war in Ukraine, when that broke out, European equities generally. just they really got overly pessimistic. So we did, you know, buy some stocks at that point, both in the UK and mainland Europe. So there's a lot to look at and think about. And, you know, I'm not a, I wouldn't say, you know, we're doomsayers on the dollar. But they're real concerns about the budget deficits and the impact that's had on the stability of treasuries in the last year or two. You know, a lot of investors don't really see that. Foreign investors don't see that. is a safe space they once did, for lack of better words.

Starting point is 01:03:19 And you're seeing because of the trade realignments, a lot of countries are doing business in their local currencies, which means they're not going and buying dollars. So if we continue to run these large deficits, you could make the argument that you need some diversification away from the dollar. I wouldn't, you know, I don't think you need to go crazy, but it probably makes sense to have a little bit of diversification there. So that's just another argument on top of the already cheap stocks. And, you know, there's a lot to look at and think about.

Starting point is 01:03:49 And you don't hear a lot of people advocating that or doing that right now. It's picking up some steam, but it's still far off from where it can. It's funny you mention the UK. We have a investing community here where we talk about stocks quite often. And we have one member from the UK that he just loves the stuff. He just sifts through every single company he can and finding the best bargains. And he's like, you know, I'm open to finding the best. bargains I can wherever at in the world, but I'm finding a lot of them in the UK. And he shared a

Starting point is 01:04:20 similar sentiment to you to where 2020, especially is when he was finding a lot of great ideas. And I wanted to also ask you about China. I just checked Alibaba's stock price here in mid-December and it's hitting new lows on the year, around $70 a share. Is China something else, another country that you've been interested in, or is there geopolitical concerns that keep you out of that country? Yeah. So I mentioned earlier, Al-A-Baba, so we own that from, let's just say, roughly, mid-2015 to mid-2020. We haven't owned anything in China since.

Starting point is 01:04:59 And part of that was just the changing geopolitical environment. Like, I remember, you know, making that, Lauren and I, you know, discussing that decision. in mid-2020 because there were still, you know, cheap stocks in the U.S. during that time, market hadn't fully recovered. And but, you know, you had all the back and forth between Trump and she. And then you had the regulations coming in on the tech companies. And it was one of the situations where quantitatively we didn't need to sell Alibaba, but just sheer unease with the risk environment prompted it.

Starting point is 01:05:36 Now, I remember thinking, I've got to, you know, call our client. and say, you know, we're going to do this. There'll be some capital gains. I'm sorry for that, but we feel like we need to do it. It's one of the very few times we've ever written kind of our quantitative discipline from the sell standpoint. And so that worked out. But, I mean, the stock went up, you know, for several more months.

Starting point is 01:05:56 We certainly didn't time it well. But yeah, I think that, you know, looking at it today, it keeps hitting my screen. Alibaba trades at seven and a half times earnings. I mean, this is, it has my full attention. I'll say that. Where we go from here, I'm not sure. But I do take notice of investors saying China's uninvestable and these really, and I see where it's coming from.

Starting point is 01:06:19 And I agree that, you know, if you don't know where you stand from a property right standpoint, that's a big deal. So, you know, I haven't forgotten what happened to the people invested in the education stocks a couple of years ago, wiped out overnight. I think they've come back now since. I read that somewhere. But anyhow, those are difficult matters. I mean, there is no plug in our DCF or a CEO disappearing in the middle of the night.

Starting point is 01:06:44 So, they're risk there. They're real risk. But at some point, valuations get so low that, yeah, they certainly get on your radar. And they're on our radar. I just, honestly, I don't know yet. But, yeah, the valuations are really low. China will continue to be a powerful economy. They've got some issues for sure with the property and the regulations.

Starting point is 01:07:02 But I think it's a dangerous, a dangerous idea to just write it off for good. You point to something really interesting there where, you know, we mentioned the quality aspect. And one piece that sort of reminds me of that approach is you sleep pretty well at night, owning a lot of these types of businesses. And I think that's what can keep a lot of people out of these more pessimistic areas in the market where there's these unknown unknowns, there's the geopolitical concerns. And, you know, there's just those risks that maybe you can't fully communicate, but you can feel them and you can sense them in the investing community.

Starting point is 01:07:37 So I think you're touching on something really important there where there's really this qualitative aspect where you need to pull in these sort of risks and factor them into the evaluations to where you know you're still getting a really good bargain, but you're still feel that confidence that you're pricing in a lot of that risk. Yeah. And I really, now that I'm thinking more about that Alibaba decision, a lot of it was tied around a fear over that VIEI structure, you know. at the end of the day, what do you really own when you own a tracking stock? If you own it through the ADR, you can go buy it on the Hong Kong Exchange. I think that's probably wise. I doubt that I think all that regulatory stuff is likely calm down. For now, I think China's going back the other way.

Starting point is 01:08:22 They've kind of realized that they've ever corrected and they need outside capital to come in, which is very helpful. But yeah, they're tricky questions. I mean, but when you've got a whole range of stocks to look at that appear discounted, you can kind of pick and choose how you want to engage and what kind of risk you want to take on. Sometimes those risks are just too hard or too uncertain. Or maybe you just buy a smaller position. That's the other way around it.

Starting point is 01:08:48 Decide you just can't stay away, just buy a 1% position or something that's not going to matter. You know, if it gets hammered, you'll be okay. You'll survive. And if it goes up exponentially, you'll benefit it. So, you know, there are lots of ways to approach that risk. But yeah, I think the chase for quality is probably, it's, if you're, feels crowded to me. We've done it too, but, you know, really when you think about the last time we bought a mass, it was kind of back in 2020 because I tell you, every time I read, you know,

Starting point is 01:09:19 a manager's comments or see them interviewed or see a podcast, it just feels like everybody's looking for you the exact same thing. They want the steady cash flows. They want the quality. They want, you know, the durability. And, you know, when you get too many people chasing the same thing, it's hard to find those opportunities. So, I mean, a lot of what we do around quality has to take place during big market dislocations, because it's the only time you can really get a bargain doing it. And Sir John always kind of cautioned us, you know, on these environments where, you know, he said just generally that when he started on Wall Street, they're only 12 analysts, 12. Now they're, what, over half a million CFAs. You know, he certainly thought that,

Starting point is 01:10:02 you know, the job of a professional and learning manager, It's far harder than when he first started out. So you really have to be diligent about looking at things that are out of favor and neglected. The great thing about small caps is you can find companies that don't even have analyst coverage. I mean, that's like a veritable playground, you know, for a real research analyst. I also wanted to mention that Sir John, he not only bought during this max pain, biggest bargain type scenarios, but he also wasn't afraid to short things. or bet against things that, you know, just had peak optimism.

Starting point is 01:10:39 You know, everyone was going crazy in terms of all the money they were making. And he is pretty well known for shorting the tech bubble in the late 90s. And I was quite surprised to read in your 2022 annual letter, how you, you know, talked about the parallels you saw in 2021 and 2022. The parallels to the tech bubble in the late 90s and the way Sir John short of them. And you mentioned the FTX ad in the Super Bowl, how that reminded you of the things that people saw in the late 90s. I think that FTX ad, I went back and watched it. It was, they were essentially saying, don't miss out. Don't miss out on this, you know, this new future we're

Starting point is 01:11:22 seeing. So talk to us about how this approach of seeing that optimism that people are pricing in is just totally irrational, how that plays into your value investing framework. It's another key input. for sure. You know, it really just goes back to, you know, both Lauren and I started our careers. Let's see, I got into the industry in November of 1998, and I worked on the South Side and a research department of an investment bank that was owned by, potentially owned by SunTrusts, called Robinson for now it's truest securities. And so the first things I saw were the internet bubble and how, you know, I worked on, I was a low man on the totem pole on a bank research team. And let me tell you whose phone didn't ring during the dot-com bubble, it was the bank research teams.

Starting point is 01:12:08 But, you know, the internet analysts and all these people were just, you know, having the time of their lives. And so I remember vividly just that environment. This is one of my first lessons. And what a fantastic lesson in human psychology to start at that time. And Lauren started a year later. She was a year behind me in college. And so it was probably about two years later that Sir John. mom was preparing to cede her. And so she was in constant contact with him. And I remember vividly,

Starting point is 01:12:43 my father-in-law was participating with Sir John in that short strategy. So they were shorting stocks that, you know, right before IPO lockup that they thought would decline. And he did it for a few months. And he said, you know, I'm not worth it. I can't, I can't handle the stress of this. it's too much. But obviously, you know, Sir John kept with it. And that trade went against him for a while, too. He was, he was early, but he held on. And I've heard that he shortened more that was kind of outside of our purview on the same basis. But everything about that, period, just I can see it like it happened last week. These images, just all of the experiences stick with you. And it kind of becomes a frame of reference. And I think that's the benefit of being in the

Starting point is 01:13:33 markets for a long time, you start to accumulate these experiences. And I remember, you know, I mentioned earlier kind of the fervor and excitement of being on the sell side during that period. Trading was exploding. All the deals were up. There were steak dinners. You know, you got bonuses in your paycheck. You didn't even know we're coming. And then I remember vividly, 2001 and 2002, and that environment turned into monthly layoffs, you know, across. the whole firm. So it was just kind of getting a master's class in market psychology and how these things go. Yeah, I remember the ads from the Super Bowl back in 2000 and the sock puppet and all of that stuff. And so it was just super familiar to me. And then, you know, in terms of, you know, what we

Starting point is 01:14:24 were shorting during that period. And again, shorting is not instant feature to what we do. But occasionally when we see things like Sir John, it makes sense to, you know, put in some downside protection. And if it goes well, maybe you'll, you'll even profit, you know, with excess returns. But, yeah, I mean, stocks back in 2000, the ones that, you know, Lauren was shorting when she started out, like five-time sales was an exorbitant valuation. And at the end of 2021, one, I think there were almost 800 stocks trading at 20 times sales. It was just, it was crazy. And, you know, it just didn't make sense.

Starting point is 01:15:05 And of course, no one, we couldn't predict, you know, what would make it stop. But when it did, it did. And what's interesting now, though, it's just how, you know, with the AI fervor, it's all kind of selectively come roaring back. The market, it just never ceases to surprise you for sure. But, you know, when you can draw on your experiences and they date that far back, it just reinforces your conviction because you've seen it before. And it's hard to figure out the particulars, but you can kind of see how things are going to end up.

Starting point is 01:15:36 So, like, I mean, even, and I think the big lesson that people need to realize, you know, if you're looking at Nvidia, what a great company. I mean, we don't own it. But, you know, they've done everything right. You know, they got into, you know, the gaming chips and now the AI chips. They've been a step ahead of the industry, fast sales growth, high margins. What more could you ask for in a company? But when you're trading at 30, 40 times sales, which I know they have been within the last 12 months,

Starting point is 01:16:06 it's very difficult to make money as an investor. So you just go back and you look at like Microsoft, another company that is just, they've done an extraordinary job as a company. Great company. Over the last 20 years, they've done a lot of things right. But if you had bought them in 1999, trading at 23-time sales, you would have been lost in the woods for 16 years. You didn't make money for 16 years, even though it was still a well-run company throughout that period. You know, they got into gaming.

Starting point is 01:16:37 They built out the cloud and fought off Google. They've done a lot of things right. But, you know, if you don't get the valuation right, bad things can happen. Let's put it that way. I wanted to mention a quote from Sir John here that you. put at that was in the forward to investing the Templeton way, which you and your wife, Lauren Templeton, wrote, he wrote at the very start of the forward, I am approaching my 95th birthday and believe that there has never been a better time to be alive. We should be deeply grateful

Starting point is 01:17:08 to be born in this age of unbelievable prosperity. Investors to this day ask me for investing advice or to express my concerns about the global economy. Throughout history, people have focused too little on the opportunities that problems present in investing and in life in general. The 21st century offers great hope and glorious promise, perhaps a new golden age of opportunity, end quote. And I found this aspect of Sir John to be a bit of fresh air for me personally. You know, in the financial world, it's the fear, the doom, the gloom. That's what dominates the headlines and it drives all the clicks. And, you know, it's so hard to get away from sometimes when you're on social media and whatnot. And,

Starting point is 01:17:49 And I'd love for you to speak more to this innate optimism that Sir John had because it's obviously a key part of investing well and part of his success. And, you know, it's just so easy to get caught up in these types of things that are happening. And a few that come to mind, you mentioned the U.S. dollar and, you know, the U.S. deficits that are happening currently. And, you know, you have debt problems globally even. And then in the U.S. you also have massive wealth inequality and ever increasing political divide. I could probably go on and on for the list of things that sort of dominate the headlines. So I'd love for you to talk more about, you know, the way Sir John would sort of see things today in terms of being optimistic about the future going forward.

Starting point is 01:18:33 You know, I think there are a number of thoughts come to mind. You know, one thing I'll say. And I mean, I can remember several times being in meetings with Sir John and Lauren. And he would just look at us and just say, I am so jealous of you. You are going to see so many things happen. And I wish I could see them and I wish I could experience them. You have no idea. And that was his attitude. And I think that there are a couple of things at play. First of all, his life, you know, span just about span the 20th century. So think of all the amazing things he saw with his own two eyes. And he went through all these cycles where, you know, the sky was following and there were routes in the market and calamities here and calamities there. But every time if you invested,

Starting point is 01:19:22 you do better over time. And then you just look at the standard of living. So, I mean, there was just incontrovertible evidence all around you of the benefits of capitalism, of scientific discovery, of empowering individuals to go and pursue life and create wealth. I just think he saw it on all those levels. As an investment, and just as a human being. And I think he stood in all that. And I also think there's something interesting that I think about the human mind, which is its frailty in just seeing the real effects of compound interest over time.

Starting point is 01:19:59 And compound interest, we can think of it mathematically, but we can also think of it in terms of human talent and discovery and scientific research and how these things build on each other over time. And you think about computing and Moore's Law and all the progress that came out of that. And I think just fundamentally, most people are too short term in nature and focus. And it's easy to get caught up in the negative headlines. They absolutely get our attention. But in reality, when you look at the standard of living, it's only going higher and higher and higher and higher.

Starting point is 01:20:32 So, I mean, now, you know, in Sir John, Gives used the example, and I'm sure Warren Buffett has too. Because I think he has the same kind of mindset around these things. someone in the lower income or more modest means of today's society was far better than the Rockefellers did back in their heyday. And so the standard of living and the things we have at our disposal, they just keep getting better and better and better. And as an investor, you can participate in that, of course. And that's what you should be focused on doing over the long term.

Starting point is 01:21:02 And so, yeah, he was an optimist. And I think you have to be an optimist to be a really good investor. Now, what's fascinating about him and his, you know, psychological makeup was he did have the rational thinking and temperament to short the dot-com bubble and do things, you know, that, well, we're pessimistic. You know, when he saw the unbridled optimism or euphoria, he could get on the other side of that too. But those were always short-term kind of trade-oriented things.

Starting point is 01:21:30 He was, without question, you know, a long-term optimist. It pays off. You know, if you're an investor, it doesn't make sense to be pessimistic all the time. It's like trying to short the market all the time. It's a dangerous idea. Yeah, there's this, I think you're pointing to something there where there's, you know, the human innovation, the technological advancements, you have all these sort of tailwinds at your back, but people, they oftentimes seem to focus on some of the headwinds that are coming our way. And you mentioned the short-termism. A lot of these headwinds are short-term.

Starting point is 01:22:03 and, you know, historically humans have tended to continue to progress and overcome whatever challenges that come their way. And I think back to Sir John again, you know, part of me is like, oh, of course he was an optimist when he saw like the U.S. and its huge rise post-Great Depression. But I think he still had that, you know, even throughout the Great Depression. He always sort of believed that this tailwind was behind us and eventually things would turn back the other direction. So yeah, it seems to be something that was, you know, sort of ingrained from them from a very early age. Absolutely. I mean, the generation that went through the Depression and then World War II, those were catastrophic circumstances. I mean, just horrible. It tested every,

Starting point is 01:22:48 every fiber of those, you know, people that went through that. And yet they emerged and came back and built this industrial boom that's never been rivaled since. You know, when you start from like 1950s as a starting point up to the current day, I mean, the American economic miracle is almost unfathomable, how much has been accomplished since then. And so it's really just a matter of empiricism, but, you know, believing in humans and our ability to persevere and overcome. Scott, thanks so much for joining me today.

Starting point is 01:23:22 What a fun discussion chatting a lot about. person. We can just learn so much from. There's plenty of books on Sir John. He wrote one. That's on my shelf. I'm blanking on the name of it. But it's such a good book just on not only investing, just like living a good life, you know, living in this honorable way and having that higher level purpose, just so many things to think about and take away from such an amazing person. So really enjoyed having you on the show. And it's really an honor to we had your wife Lauren on previously and I'll link that discussion in the show notes, and it's great to have you on as well. So before I close out the episode here, how about I just give you a final handoff to the audience if they'd like to

Starting point is 01:24:01 get in touch with you, learn more about your fund and any other resources you'd like to mention. Yeah, absolutely. No, I really appreciate the time with you too. Clay, it was a fun discussion. And I love talking about Sir John. He's a very large figure in my life and I'm forever indebted to him. Anything I can do to, you know, honor his legacy is I'm always more than happy. have the opportunity to do that. So yeah, but if you know, if you want to follow us or learn more about how we look at things or how we're trying to, you know, further that investment legacy as investors and what we do, you go to our website. We have a commentary that we put out periodically. Our website is templeton and Phillips.com. Sign up for the commentary. We've authored books. They're

Starting point is 01:24:47 available on Amazon. They're listed on that website. The other thing I'll say is we recently printed this, which is just a little pamphlet of Sir John's quotes. And I reference this all the time, certainly weekly, almost daily. And so Lauren and I have discussed it. And, you know, if you are interested in a copy of this and you are a U.S. resident, we're not going to necessarily send all these overseas. Just go to our website, find our email. Let's connect at Simpleton and Phillips. FullS.U., you'd like a copy and we'll send you one in the mail. send your address to. But yeah, it's been a lot of fun and I appreciate the opportunity to speak with you today. Awesome. Well, I'll be sure to link your website and all the books related to Sir John

Starting point is 01:25:33 in the show notes. There's at least a handful of them. So if the audience is interested in checking those out. So thanks again, Scott. Thank you, Clay. 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 Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP594: Contrarian Investing & Sir John Templeton w/ Scott Phillips

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