We Study Billionaires - The Investor’s Podcast Network - TIP612: Investing In Fear: Profiting From Maximum Pessimism w/ Lauren Templeton

Starting point is 00:00:00 You're listening to TIP. In today's episode, I'm talking to Lauren Templeton, the CEO of Templeton and Phillips Capital Management, and also the great niece of one of the most successful investors of all time, Sir John Templeton. Sir John Templeton had an incredible track record, compounding capital at 14.5% over 38 years between 1954 and 1992, turning a $10,000 investment into $1.7 million over that period. And throughout much of Lauren's life, Sir John Templeton mentored her on his ways of thrift, saving, thinking, investing, strategy, and frameworks. Templeton and Philip's capital management are focused on three investing philosophies

Starting point is 00:00:39 that were passed down the Lauren from her great uncle. One, focus on value. Two, contrarian behavior is key. And three, trouble is opportunity. Sir John Templeton was a pioneer of international investing, starting with his investments into Japan, when nobody else would touch a stock in that country with a 10-foot pole. He thought differently than other investors and his investment. one of the best examples out there of how rewarding it can be to think differently. One of Sir John

Starting point is 00:01:05 Templeton's biggest ideas was at times of maximum pessimism offered the best time to buy stocks. In today's episode, I'll talk with Lauren about the many investing in life lessons she learned from investing legend Sir John Templeton, how she sets up her daily life to stay disciplined and avoid biases, how to utilize the scientific method for investing purposes, how we can use lessons from history to improve our decision making today, the importance of utilizing multiple evaluation tools to find great investments, sectors that are facing maximal pessimism today that might be the future winners of tomorrow, and much, much more. This was an enlightening chat, and I hope you enjoy today's episode with Lauren Templeton. Celebrating 10 years and more than

Starting point is 00:01:47 150 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Greve. Welcome to the We Study Billionaires. I'm your host Kyle Greve and today we bring Lauren Templeton onto the show. Lauren, welcome to the podcast. Hi, Kyle. Thanks for having me.

Starting point is 00:02:23 So as many of the listeners probably know, Lauren comes from some of the finest invest in lineage out there. Her great uncle was Sir John Templeton. She's done an incredible job sharing stories from his life and how his investing philosophy has helped shape how she runs Templeton and Phillips Capital Management. Now, I know you get asked questions all the time about Sir John Templeton, so I'll try and come at this from what he's taught you from some different angles today.

Starting point is 00:02:45 But let's start off with his attraction to being thrifty. You wrote, quote, he never had a mortgage, never borrowed to buy a car, and always had enough savings to make it through a rough patch, unquote. It's funny because this is what hundreds of personal finance books have been written about, and here's Sir John Templeton doing it decades ago. So was his love of savings in an attempt to avoid the ups and downs that he observed his father going through as a child?

Starting point is 00:03:07 Yeah, I think in part it was. His father was a little bit financially unstable. And he also grew up during the Great Depression. But because his father did have these ups and downs, I mean, at one point, his father was trading cotton futures and came home and told John Templeton and my grandfather that he had hit it rich, that they would never have to work a day in their life, their children would never have to work. And then a short time after, he was almost bankrupt. So Uncle John rode the highs and lows and saw the financial instability. And I think he really craved as stable and he

Starting point is 00:03:44 wanted to be financially secure. My grandfather did too. But also, you know, he grew up really as a young adult. He went through the Great Depression. And so many people that survived the Great Depression or lived through the Great Depression became great savers. I mean, you have to remember that during the Great Depression, thousand banks failed. There was 23% unemployment. GDP declined 15%. Crop prices fell 60%. And international trade fell 50%. So it really impacted people that lived through the Great Depression. And most of the people that lived through that time period came out as great savers. Now, our generations have had a completely different experience. So we have lived through a time period where policies have really rewarded borrowers and

Starting point is 00:04:42 using debt and penalized savers. So we've had a completely different experience. But Uncle John's strategy of saving and thrift was both a defensive move and an offensive move. So on the defensive side, you know, he didn't want to get taken out of the game. He wanted to stay in the game. He'd seen his dad go through that. He wanted to live to see another day. That was the defensive nature. It was also very offensive. So one time my mother asked him, why do you save so much? Why do you save 50% of everything you make? And he said, well, I save to take advantage of the opportunities that I know are coming. So he was very well known for taking advantage of bouts of maximum pessimism in the market. So these were big crisis events, whether that would be in a particular country, a stock,

Starting point is 00:05:33 an industry, but he was well known for taking advantage of those events. And he looked forward to them. He saved his money to put to work during those opportunities. And he saw them as a golden opportunity. So Sir John Templeton was somewhat of a pioneer in investing in foreign countries when he started doing it. You noted that there was probably a degree of American exceptionalism that kept most investors in their home country. rather than searching abroad for great opportunities. But Sir John Templeton took the time to learn about other countries and saw the potential

Starting point is 00:06:02 that was in them. So even today, many investors stick to their own country as a part of investing and what they truly know and understand best, which is understandable. So I'm interested in knowing how much research and analysis would Sir John Templeton do on foreign countries before feeling comfortable enough to invest in them. Well, a ton. He always did a ton of research. Firstly, home country bias is a real bias that investors have.

Starting point is 00:06:25 people have it today. And Uncle John did grow up in this environment of American exceptionalism. And I came prepared for this question. And I thought it was worth sharing with your listeners today, something that he wrote, which will really highlight for you the time period of Sir John Templeton's life. But he wrote, what is the shape of the future? As long as freedom lives, the future is glorious. When I was born in 1912 in Franklin County, Tennessee, the United States had no color film, no refrigerators, no radios, no transcontinental telephones, no fluorescent lights, no traffic lights, no talking pictures, no plastics, no human-made fibers, no airplanes, no photocopiers, no fax machines, No sports broadcast, no antibiotics, no herbicides, no nylon, no frozen foods, no television,

Starting point is 00:07:33 no transistors, no lasers, no genetic engineering, no nuclear energy, and no human-made satellites. The uniform wage for unskilled workers with 10 cents an hour. Now, the average for factory workers is $10 per hour. I'm not sure when he wrote this. I would have to look it up. But he said, even after adjusting for inflation, the increase is more than tenfold. The federal budget in nominal dollars is now almost 300 times as great as the peak of prosperity in 1929.

Starting point is 00:08:08 In my lifetime, real consumption per person worldwide, that is, the standard of living in real goods has more than quadrupled. So this paints the picture of his life. Like, this is what he saw during his life. And it really was this great period of American exceptionalism. And then, although he saw this in America and he's certainly invested in America, he also saw this repeated in other countries. So like a good example of this was his investment into Japan in the 1950s and 60s. So Japan had really been dismissed as sort of industrial backwater.

Starting point is 00:08:47 These were the exporters of trinkets to America. It was a lot of prejudice and hard feelings towards Japan post-World War II. But what he saw in Japan was what he saw in America growing up. And as a young person, he saw the industrious nature of the Japanese, the hard work, the work ethic, the high savings rate, all of these things. And he wanted to see that repeated in his investment. So whether that was Japan or it was the Asian Tigers post-Ageysm. financial crisis in the late 90s. He was always looking for that. So he did pioneer international

Starting point is 00:09:26 investing. He always said to me he wanted his universe of stocks to select from to be as large as possible. And that really only made sense. Why wouldn't you want the largest universe available? But he did believe in the doctrine of the extra ounce, meaning that he did a little more work than everyone else. And we were just talking before the podcast began. And that I've just returned from a conference in Switzerland, a group of value investors, and I listened to three days' worth of pitches, different investments. And one gentleman stood up and he talked about Japanese net nets. And the question from the audience was, well, tell me how difficult it is to analyze these companies.

Starting point is 00:10:11 How hard is it to get management on the phone? In my experience, they often don't speak English. You have to provide your own translator. you've got to make your way through financials that are not in English, read all the materials that aren't in English, and this conversation ensued about the difficulty of analyzing Japanese stocks. And John Templeton was doing that 70 years prior. To answer your question, he did do a ton of research.

Starting point is 00:10:37 He visited Japan himself in the 1950s. He somehow was able to establish a relationship with Japanese brokers then. He identified an accounting anomaly in Japanese stocks and that they were not accounting for all of the assets on their balance sheet. They were unconsolidated. They were not consolidating their subsidiaries. The earnings power of these companies was greatly underestimated. And to think about the amount of work that he had to do in the 1950s, to make it through all of that, to identify the accounting anomalies, to trap. to Japan, to meet with management, to analyze these companies. Today, it's still difficult.

Starting point is 00:11:23 It really is amazing every time I hear that. And I think about what he did 70 years ago before anybody else was doing it. And by the way, nobody wanted to touch Japan back then. It was so unpopular post-World War II. Everybody had dismissed it. And that's where he was putting his assets in the 50s and 60s. So he was an international investor. He always was investing outside of the United States, he wanted the largest universe of stocks available to select from. And he worked really hard on the research part. So he did a little bit more than everybody else. And he did some really hard things. So an area that I know that you learned a lot from Sir John was investing in the point of maximum pessimism, which you just brought up. So there was a short excerpt

Starting point is 00:12:10 from your book where he was saying how people always ask him where the outlook is greatest in the market. And he noted that this wasn't the right question. The right question was, is where is the outlook most miserable? So a problem that a lot of investors have is looking at businesses that are cheap on, say, price earnings or price to book ratio and then buying them. But often the lack of quality and growth in these businesses justifies them trading at these very, very low bargain prices.

Starting point is 00:12:32 So I'm interested in knowing, was Sir John Templeton focused mostly on changing economic cycles to be the catalyst that would close a price and value gap? Or was he looking for growth? Yeah, a little bit of both. I mean, first of all, I think sometimes listeners are confused when you hear this term maximum pessimism. So I think it's helpful to just state his quote,

Starting point is 00:12:51 which was bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell. So when he said that investors are always asking the wrong question, the right question is where is the outlook most miserable?

Starting point is 00:13:16 That's where he, that was his question to identify where to find the mispricings. And it is true. I mean, he wasn't simply looking for stocks that were statistically cheap. He really liked quality, but he didn't really want to pay for it. So he also understood that some of his investments would not work out. So he thought his, he thought he was correct about 60% of the time. And he also knew that he would more than likely end up in some value traps using these deeply discounted methodologies.

Starting point is 00:13:55 However, he thought the rest of the portfolio would go up exponentially. And that's how he thought about it. But his investment approach was very systematic. He used a very systematic approach to investing. And often his discounts, he was exploiting coincided with economic cycles or big events in the market, big market sell-off. So a good example of that would be 1987, the crash in 87. He came into the office, went to work, his analysts came up to him, have you seen the markets? And he left and went to go exercise and went for a walk, you know, in the surf. And he came back

Starting point is 00:14:34 to the office and the market was down so much. And the analysts were like, where did you go? And he said, you know, sit down now. I've got good news and bad news. The bad news is that we're in a bear market. The good news is it's almost over have your buy recommendations on my desk by the end of the day. So he did look forward to these bouts of maximum pessimism. And I do think he did like quality. He was just very careful what he paid for quality. So he was well known for saying there are over 100 measuring sticks of value. And he was constantly evaluating the metrics he used when it came to investing.

Starting point is 00:15:14 I think of John Templeton as the Roger Federer of investing. You know, my husband and I love to watch tennis, and Roger Federer has a great forehand, but he's also got a great backhand, and he's also got a good drop shot. And he can really run the court because he has all of these different tools in his box. And that's how Uncle John was.

Starting point is 00:15:41 His core philosophy stayed the same, but he was always looking at different metrics and evaluating different metrics that might improve his probability of success. And he realized that certain metrics work better during certain time periods. And he was always mixing it up. That's why I think of him more as Roger Federer. And I think of Warren Buffett is more as Nadal. They've got their stroke, and that's the one they're playing. and they're going to play it consistently over and over and over again.

Starting point is 00:16:14 I mean, Warren Buffett likes quality and that's what he's going to do. I think John Templeton mixed it up a little bit more and was always evolving. But he always stayed within his core philosophy, I would say. But he was always switching it up a bit. So a really good follow-up question to this one then that we just talked about you with the quality question. It was, so in 2005, during the run up to the housing bubble, he said, quote, not yet have I found any better method to prosper than to keep your net worth and shares in those corporations which have proven to have the widest profit margins and the most rapidly increasing profits, unquote. It was just kind of just a sign of the times that that was what he thought was optimal then, or did you feel like he maybe had a shift in or a, you know, a paradigm shift in how he looked at investing at that point? No, I don't think he was a paradigm shift. I mean, that phrase comes from, or that little bit that

Starting point is 00:17:13 you just read came from a fax that he sent me called Financial Chaos. And it's really interesting. You can Google it. Just put in John Templeton Financial Chaos memo and it will bring it up. I don't think it was an evolution at all. That whole memo is super interesting to read. And he made a lot of predictions in there. And they're mostly. have been right. So I see that very consistent with his methodology. 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

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Starting point is 00:21:50 Back to the show. So you mentioned that Sir John Templeton was a master at structuring his life end day to make sure that he could control his impulses. I'm interested in learning more about how he set up his day-to-day life to help him prevent himself from making impulse-related errors that most people make on a day-to-day basis. Sure. I mean, he was very, very disciplined. So he lived close to his office.

Starting point is 00:22:14 I think he went to his office every day. He probably read the Wall Street Journal late. He's well known for saying to me that his returns improved because he read the Wall Street Journal a few days late. So I'm sure that he received it in a more timely fashion as years went on. But he went to the office every day. He lived close to his home. He got up and exercised every day, left the office, went walking and surf. He paid a ton of attention to his physical state.

Starting point is 00:22:43 So to his diet, to his exercise, to his routine. He was a very routine person. And he really valued every second in his life. He did not want to waste a second. He's well known for saying, you know, the meeting starts at 1011 and it'll be over at 1017. I mean, just these really random times. And he wanted you to make good use of the time. So if you did not offer good information, the meeting was over.

Starting point is 00:23:10 He carried reading materials with him everywhere he went. So he made sure not to waste a single second. He also believed in thought control and controlling his thoughts. So if it was an unproductive thought, he used to say to me, I'll just banish it into the nothingness that it was. I mean, this is really incredible. He didn't want to waste anything. So he was so disciplined in the way he arranged his life and not a reactive person either.

Starting point is 00:23:39 I think he spent most of his time reading and trying to absorb that information and ask really intelligent questions. He was a lifelong learner. So he was constantly learning. It was this quest to know more. And, you know, his foundations have that the same quality. So he left his estate to three foundations, the John Templeton Foundation, Templeton World Charity Foundation, and Templeton Religion Trust. And I would say there's the spirit of intellectual humility in all three of those foundations where we're always trying to learn. He had to saying how little we know, how eager to learn. So he was just a very, very disciplined person. And we've set up our life the same way. Our office is on a mountain in Tennessee. Scott and I are definitely in the office seven days a week. He comes over

Starting point is 00:24:34 after dinner after we put the kids to bed. We're often popping in on the weekends, holding conference calls or meetings because we wanted to make it very convenient for us to come work. We're both very disciplined. You know, we get up in the morning and both of us exercise. We watch our diets. All of this plays an important role in decision making. He is a, my husband is a little more disciplined than I am. You know, when you're a mom, you have literally 10,000 thoughts in your head every At the conference I was at the past weekend, somebody asked me a question, like the moderator asked me a question. And I was like, I don't know.

Starting point is 00:25:14 I haven't been following the presentation. My daughter's trying to log on to Wi-Fi and doing 10,000 things at once. So I think women really struggle with that. But John Templeton lived a very disciplined, thoughtful lifestyle. We try to model our life off that as well. So you mentioned that Sir John Templeton was a follower of the scientific method. So I thought about a lot how this fits in with Peter Lynch's great quote, investing in stocks is an art, not a science, and people who have been trained to rigidly quantify everything

Starting point is 00:25:43 have a big disadvantage. So while I agree that investing can't be broken down into purely scientific terms, I think many attributes of the scientific method work incredibly well in investing. So I'm interested in knowing how did Sir John Templeton use a scientific method to succeed in investing? It was a good question. And I was lucky enough to have lunch with Peter Lynch this summer. It was a true highlight.

Starting point is 00:26:05 So I have to say, I had to put that one in there. It was amazing to sit down on Peter Lynch because I grew up in the 80s and he is a true hero to me. His book was one of the first books I ever read on investing, one up on Wall Street. But John Templeton believed deeply in the scientific method. And the way I think he used it when it came to investing is really just in trying new strategies. When I say new strategies, he did not ever. stray from his core principles or the investment philosophy that he believed in. But he was always trying new strategies.

Starting point is 00:26:43 So let me give you an example. He's well known for running the IPO lockup strategy during the tech bubble in the late 90s, early 2000s. That strategy, he would short stock seven days before the IPO lockup expiration. He would cover 10 days later. That strategy is aligned with his core principles that he believed in, but it was a different way to play it. Another strategy that I saw him use effectively was buying closed-in mutual funds, not levered, closed-in mutual funds, trading at a 30% discount to NAV during a market sell-off. That, again, is very aligned with his core principles that he believed in when it came to investing.

Starting point is 00:27:29 but it was a different application of that. When I say he used the scientific method, I was often receiving faxes or letters from him about some research project he had read about somewhere. Like a good example was Merrill Lynch put out a research report called Merrill Lynch Contenders and Defenders. And he looked at the research report and said, let's start a strategy using this.

Starting point is 00:27:53 Let's go along the contenders and short the defenders or however it was done. I can't even remember. Well, the strategy didn't work because we couldn't get locates on the shorts. So we were having to put on all the shorts synthetically. And that's quite expensive. And the expenses ate into the return. So it was not a successful strategy.

Starting point is 00:28:13 He shut it down and moved on. So I saw him do this over and over again where somebody would see an anomaly in the market. And again, it would be something that was very, you would hear it and you're like, oh, yeah, that's so John Templeton. Another example would be investing in companies prior to pursuing an ADR listing. So a company will come out and say publicly, you know, we're considering whatever level of ADR listing we're considering. And that generally coincides with a pop in the stock price because investors will anticipate better corporate governance, better liquidity, et cetera, when they go through this process

Starting point is 00:28:54 of pursuing an ADR listing. Well, that is so John Templeton. You hear that strategy, you're like, yeah, that's totally something he would invest in. So he was constantly trying out different strategies in different markets. And if it didn't work, he would just move on or find a way to improve it. And I think that's how he used the scientific method in his investment process. And that's what I mean when I say he was a tinkerer. Now, he was not ever in his office that I'm aware of, dabbling and technical and

Starting point is 00:29:25 analysis or something like that, everything was very core to these principles he had when it came with investing and very aligned with his core principles. He talks a lot in his philanthropic work about laws of life. So laws of life that are very core that apply to everyone. So these are things like honesty, faithfulness, hard work, diligence, etc. And I think he had that same strategy when it came to investing. So he definitely had a set of core principles. And that's how he viewed the investment world and landscape.

Starting point is 00:30:07 There were lots of different manifestations of that as far as strategies that he would pursue in different market environments. But they were always very aligned with those core principles, if that makes sense. And the core principles are very been grand, that a stock price does deviate from a company's his underlying value and that you can, the best time to buy stock is when it's at a discount to its intrinsic value. Now, how are you going to determine intrinsic value? He would say different metrics for different times. Maybe it's a dividend discount model. Maybe it's a discount and cash flow model. Maybe I'll try to determine value based on peg ratios. So he was always moving those metrics around depending on the market environment, very consistent with his four principles.

Starting point is 00:30:57 I don't even know my question you asked, but something like that. So you mentioned asking Sir John Templeton about why his move to the Bahamas was such an advantage. And you actually mentioned this earlier, he said that I think it's because I get the Wall Street Journal a few days later than everybody else. I'm interested in knowing a little bit more on this advantage. Obviously, he received information a little bit later than other people. but how did he interpret that information to make it into an advantage? Because he still could have obviously, you know, reacted to it right away. So I'm interested in knowing more about that. I mean, he just wasn't a reactive person.

Starting point is 00:31:31 He was a very calm person. It's the same in our office. People come visit us and they're like, it's a library in here. It's so quiet. What are you guys doing? It's like, well, hopefully reading and researching, he would never react to news that was out there. So I also think that if you're in the Bahamas and you're not in,

Starting point is 00:31:50 one of the big financial centers, especially when he moved to the Bahamas in that 1960s. You're so removed. You're not taking the same meetings. You're not taking the same sales calls. You're not going to the same lunches everyone else's. You're not in Switzerland listening to the same stock picks than everybody else listens to that I just did last week. You're having a completely independent experience. It's a slower life. You can focus on reading and making good. long-term decisions. And when he said my performance was better because I received the Wall Street Journal a few days later, I do think he was talking about not reacting, but just removing yourself even physically from the crowd can be so important. It's very hard psychologically

Starting point is 00:32:40 for people to remove themselves from the crowd. Like for us, for instance, and that value investors are really focused on that point of acquiring a stock. So, right, acquiring a stock at a discount. And to us as a firm, we think there are three sources of alpha, better information, better model, or process, or better behavior. And our focus is on better behavior. So when people think about value investing, they think about going into these moments in maximum pessimism.

Starting point is 00:33:14 How do you have the conviction to put capital to work when the markets are really scary? And that is one part of it. But the other part of distancing yourself from the crowd and why it is maybe important to not live where everybody else lives and think independently is the FOMO part, the fear of missing out. So when everybody around you is making money at absurd valuations and stocks, it's really hard. I think that's the harder part. How do you distance yourself from the crowd? and sit there and be patient when it feels like physical punishment to do so. When everybody else around you is making money, that is definitely more challenging.

Starting point is 00:33:59 And I think perhaps there is some wisdom in physically distancing yourself from the crowd during those scenarios. So I know that you're a big fan of Charlie Munger. And I know also that inversion was one of the biggest lessons that Charlie imparted on you that I also have taken a lot from. So I'm interested in knowing if you can break down your use cases for inversion and, you know, any other interesting things about Charlie Munger that you'd like to share. Well, I do love Charlie Munger. I have a new bust of Charlie Munger in my office. It's out of the camera shot, but it's sitting over by our front door. And my daughter has a squishmillo of Charlie Munger on her bed.

Starting point is 00:34:38 So we picked that one up at Burture Hathaway last year. And I'm very, very sad that he passed this year. and it will be very interesting to go to the meeting this spring. He was an exceptional investor and somebody that most of us in the community admired. But he did talk a lot about inversion as being a mental model. And the way we would use inversion here at this company, and we did it quite successfully during the great financial crisis. So in 2008, 2009, we were reverse engineering DCFs to look at the assumptions in the DCF,

Starting point is 00:35:13 to try to understand what was being implied by the valuations. So that is a great example of how we would use it. Back then, I thought it was pretty novel what we were doing. And I do feel like more people take that approach now. It's not so novel to reverse engineer a DCF. But during the great financial crisis, we were really looking at share prices and solving for 10 years of fundamentals. and we were seeing that share prices were forecasting zero to negative growth and trough margins.

Starting point is 00:35:49 And a lot of the stocks we were looking at. So the way you would reverse engineer that is after you've gone through that process and reverse engineered the DCF, you would ask yourself the question and reframe the argument, do I really believe this company is never going to grow again? So that is the way inversion would work for us. but yeah, that's how we would use it here in our company and how we have used it in the past. Interesting. And so I'm sure you probably use other mental models.

Starting point is 00:36:20 So I'm always interested in learning how other professionals just kind of learn and implement them and try to really instill them into their very essence. So I would love to know how you do that. I love to read about different mental models and think about how they could be applied to the investment. process. I'm reading a really interesting book right now about that and actually read it on the way back from Switzerland. But the way we think about models and things like that when it comes to the Templeton philosophy and how to apply those things is to really think about alignment,

Starting point is 00:36:58 making sure that everything is totally aligned. So, for instance, when you think about one of your first questions was about Uncle John's thrift and saving, and also looking at, you at his core principles that he used when it came to investing. What we want to do is when we identify a virtue that we think is important, thrift and saving. We want to see alignment across all of our investments. So my husband and I believe that thrift and saving are important. We look for that and the companies we invest in. And we want total alignment. So we think that is an important. virtue. We want our companies to have that virtue. And John Templeton was the same way. So he was the same person, whether he was an investor or just that average John Templeton. His principles were

Starting point is 00:37:55 very consistent. He was the same person that everybody thought he was. So he was a value investor when it came to stocks. He was a value investor when it came to homes. He was a value investor when it came to buying cars. And that's what Scott and I look for. And we think of that as a value investor is almost a mental model. Alignment, total alignment across what you do. So are your values and virtues reflected in the companies that you invest in? And I don't mean that from like an ESG standpoint. I just mean, you know, are these people good stewards of your wealth the way that you would be to your investors? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect.

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Starting point is 00:41:57 I love the most important lesson chapter in his book, the little book of behavioral investing. It's stated that everyone will hear about different. biases and easily attribute them to other people that they know. But the unfortunate part is that we are all guilty of committing these biases. So I'm interested in knowing what your framework is for reeling in your biases and trying to minimize the negative impacts on them on your investments and life in general. I do love James Montier and I love all of his books, but I've got to disagree with him on that. When I read about, I'm a hypochondriac. So when I read about biases, I'm like,

Starting point is 00:42:30 oh, I have them all. Like, those are all mine. That's not. That's not. me. I do that when, I mean, that's how I am. So I don't, I'm not one of those people that read about those biases and then attribute them to other people. I definitely attribute them all to myself. So I do think reading about these biases that investors have, I do think that makes you more cognizant of your own behavior and can help you have better behavior if you're cognizant of it. I mean, like confirmation bias, things like that. I'm very cognizant of that. I'm very cognizant of that. here in this office, we're always pushing on each other when it comes to confirmation bias. Scott pushes on me. I push on him. We're always looking to reverse the argument, et cetera. But I do think there's

Starting point is 00:43:18 some tricks that people can use to overcome some of these biases. Living not in a financial hub might be one of them, like actually physically distancing yourself from the crowd. Maybe reading the Wall Street Journal a few days later, that sounds like a joke. But it actually might be a tool. Don't turn on the news and react. Maybe don't watch CNBC, although we do have Bloomberg up all the time in the office and we're reading the news on all of our stocks. We certainly not reacting to it. We keep a wish list of securities in our desk drawer. And those are securities that we have. And it's not really in our desk door. It's on a computer. So that's an exaggeration when I say that. But these are companies that we have analyzed when

Starting point is 00:44:03 we're in a very rational state. We have come up with an estimate of intrinsic value. We have an idea of that price we want to purchase that company, but it's probably not trading at that value right now. And so during a crisis event, we'll pull out the list and go to work. And that really shifts some of these biases that or the inertia that you may have during a bear market. So there are lots of little tricks that you can implement to make the decision-making process. The more systematic you can be, the better, I think, to override these biases. But they're hard. So you just have to be aware of them and know it's a part of human nature to have them. And I think about them all the time. But I do read his books and I do not attribute them to other people. I attribute them all

Starting point is 00:44:57 to myself. Maybe I'm such a selfish person. I'm like, that's me. It's about. help me. But I think it's fascinating. You know, human nature doesn't change very much. And, you know, again, going back to the three sources of alpha, having better information, a better process, or better behavior. John Templeton was good at all three of those. I mean, I do think he had better information. I do think he had a better process. And he had better behavior. Now, the bad news, he was an exceptional investor. The bad news is for all of us is we're in a completely different environment than John Templeton operated in.

Starting point is 00:45:41 The competition is intense. So do I, I mean, I try to compete in the better information, better process area. But that's some intense competition. Do I really think I'm going to win the better information game down here and look out Mountain, Tennessee? No, I'm probably not. So what is my edge going to be as an investor? Well, I think the area that I compete best in is better behavior. That's the one thing I can really control.

Starting point is 00:46:19 I mean, John Templeton was a genius, and I do think he was a master of all three of those areas, better information, better process, better behavior. But his environment also enabled that. When he began work on Wall Street, there were, well, I'll ask you, how many analysts do you think were on Wall Street when Sir John was working on Wall Street early in his career? I don't know a couple thousand. 12. One, two. So I don't actually know, I should have looked up for the podcast, how many are out there today.

Starting point is 00:46:50 but it has to be well into the thousands. I mean, maybe a million. I don't know. There's so many analysts out there. It's just a different environment that we're all competing in. And so when I look at those three sources of Alpha, I think, well, the one that I can really compete well in is better behavior. That means that I have to pay attention to all of those biases that James Montier writes

Starting point is 00:47:20 so eloquently about. And I have to be aware of how I make decisions. I have to structure my life in such a way that is conducive to rational thought and rational decisions. I can't be reactive. So what can I do to reduce the urge to be reactive? Luckily, I am actually not a very reactive person. I'm kind of a slow processor when it comes to information. I like to think about things. So that's not in my nature. But what is in my nature is the fear of missing out. And so that is very, that's a different, that's a different game. I have to think very hard about how to not follow the crowd into those situations. And we've done it, but it's just more a challenge for my personality type. So there was a great letter that you wrote with your husband,

Starting point is 00:48:14 Huscott in 2021 titled Self-Reliance. So in it, you stated that you were searching for businesses that had self-reliance and the ability to sustain that trait through an economic cycle. This acted as kind of a guardrail against the future need to rely on the kindness of strangers for funding purposes. So I'm interested in knowing if this is a concept that you are still using today and if it's changed since then, given the, you know, obviously massively changing macro environment.

Starting point is 00:48:40 Yeah, it's definitely a concept. we use today. Has it changed? Not really. I mean, what has changed is the interest rate environment, right? So they're higher rates and more people are looking at it. Yeah, that has changed, that more people are looking at that sustainability feature. Can companies fund themselves with their own cash flows? Or are they going to be reliant on the kindness of strangers? Those are situations that Scott and I want to avoid. We don't want to invest in businesses that are reliant on the kindness of strangers. So we want really well-capitalized businesses.

Starting point is 00:49:21 So I do think that the environment has changed a bit, right? So higher rates have led us to a more normalized environment. It is very important to pay attention to the health, the financial health of a company. We have seen bankruptcies increased. So in 2023, corporate bankruptcies tracked on Bloomberg increased 108% from 2022. So we're seeing a more normalization there, but we've had our eyes on that. I mean, that is core to what we do. Most of our investors have already made all their capital.

Starting point is 00:50:02 They don't want to lose it. We want to invest in quality businesses that can finance themselves, that aren't reliant on the kindness of strangers. And recently, we think there is some maximum pessimism in small cap stocks in the U.S. And some of it is rightly deserved, right? I mean, that small caps have been punished with this fear of recession. Everybody's worried about the balance sheet risk that comes with small cap stocks. But there are some quality companies in that group.

Starting point is 00:50:34 So the baby has been thrown out with the bathwater a bit. and you can find some well-capitalized, small-cap companies that are not reliant on the kindness of strangers. So I always appreciate looking at history for clues that can provide success in the future. So you mentioned in 2022 that you were looking at dividend-paying stocks as they produce real returns during times of high inflation. You looked at the history of the 70s for this specific observation. So I'm interested in knowing what are some other top lessons that you've learned from looking at this period and other periods of history that help shape your investing strategy today? Yeah, really, I mean, we can go back to that small cap stocks conversation. So based on the last time in the United States, small cap stocks traded at a discount this wide to what we're seeing right now.

Starting point is 00:51:21 That was in 1999. The group outperformed their large cap cohort by 7.2% annualized over the following tenure period. I do think Scott and I are students of history. We do go back and look at different periods in the market, what worked, what didn't work. And so right now we have focused a large part of our research and identifying attractive opportunities in the small cap space. So John Templeton told you that he thought he was right 60% of time, which you mentioned a little bit earlier on the show.

Starting point is 00:51:58 And that was part of his edge. So obviously, that's an amazing number. So I'm interested in knowing, have you been able to match that lofty number? and how do you minimize the impacts when your thesis doesn't pan out and, you know, you're wrong? I'm never going to compare myself to John Templeton. I mean, he was such a great investor. And, you know, I have been studying his career now for 25 years. And every time I go back and read something about him or read one of his letters, I mean, every year I think, oh, my gosh, he was so good. Like, every year, I've become more convinced of,

Starting point is 00:52:35 his genius, like just more impressed by it. So I would never compare myself to him. But just looking at our returns, I actually think our batting average here at Templeton and Phillips Capital Management is probably higher than his. Okay. But our slugging average? No. So it would be much worse. So that's how much things go up, right? He was just really amazing at identifying. these stocks, these hundred baggers. So again, was that his genius? Was that the doctrine of the extra ounce, the extra report he read? Was that the environment that he worked in where there was just less competition and there were more of those investment opportunities? I'm not sure. I think it was probably a bit of both. He did have, and he actually, you know, his process was very

Starting point is 00:53:34 quantitative. And we talk about being quantitative and systematic and we really want to reduce systematic errors and all of that in our research as he did. But he did have a really great intuition. And that's a part of it too. I mean, going back to Peter Lynch, investing is part art and part science. I think Uncle John would agree. I mean, he had the science part now, like the science part, I mean the research. He had researched the company, done all of of his analysis, he would have been very, very prepared on every single company he invested in. But he also had this intuition, and part of that comes from being a student of history, because history does have a tendency to, I mean, not repeat, but rhyme.

Starting point is 00:54:23 Everybody says that, but it's true. You can see these things over and over again. So I think part of his intuition came from there, but he had a really good slugging average. I'm not the best at sports analogies, but yeah, that's what I'd say. We have a better batting average, but he killed us on the slugging average. So you mentioned that Sir John Templeton liked to tinker and that you would also obviously help him with that tinkering when he was around. So I'm interested in knowing, you kind of discuss this a little bit, but I'm interested

Starting point is 00:54:53 in just knowing for yourself, how do you kind of tow the line between tinkering so much that your general investing philosophy becomes unrecognizable? How do you really keep things kind of close to your, you know, core strategies? Well, you don't change your core philosophy at all. I mean, the tinkering he did wasn't like that. His core philosophy always stayed the same. And he was never in a portfolio. We are never in a portfolio making changes on a daily basis or anything like that.

Starting point is 00:55:23 Tinkering might be something as simple as, okay, you know, we're going to do this ranking on peg ratios. Maybe instead of ranking on peg ratios, we're going to look at this other metric and we're going to go back to the 1970s and see how this metric performed then. And perhaps we should shift our emphasis to this metric to identify the bottom decile of stocks to put in our universe to make a stock selection from. So, I mean, tinkering would have been along those lines or some of the strategies I talked about earlier in the podcast where they were very core Templeton strategies. I mean, the investment philosophy was still there, but just implemented in a different way, like shorting the tech stocks coming

Starting point is 00:56:16 out of the tech boom in the late 90s, early 2000s. So a different application, but the same philosophy. That's what I mean by tinkering. Again, he would say there are over 100 metrics, 100 value, a hundred measuring sticks of value. So my translation is there are a hundred metrics you can look at or over 100 metrics. And some are best used during certain times than others. And that's what he tinkered with. So as we've already discussed, you're a big fan of maximum pessimism. And you've already disclosed that small caps are kind of that area where you're seeing maximum pessimism now. but is there any other areas that you can share that you think are showing maximum pessimism today that you think is unfounded?

Starting point is 00:57:02 Well, unfounded is the hard part of that question, right? There are some areas, again, having just returned from Switzerland and listening to three days of stock presentations, and there are a lot of them because they're five minutes apiece. So you can go through a lot of presentations in three days when they're five minutes long. no one presented a single investment in China. So I absolutely think there's maximum pessimism in China. Absolutely. Now, we have dipped our toe back in here, and we have two small positions in China currently.

Starting point is 00:57:44 And I say dipped our toe back in. We have done just that. I mean, they're very small positions. But I absolutely think that is where there's maximum. pessimism. So I think it really depends on your time frame as an investor. You know, if you're a really long-term investor, there are certainly compelling valuations in China right now. I mean, you can just look at some of the better known stocks like Alibaba trading in 7.2 times earnings or I think Badoos probably a little maybe close to nine times earnings. I don't really know right now,

Starting point is 00:58:23 but something around that range. I mean, is that pricing in the risk? I think it is. And no one wants to go near it. Nobody wants to touch it. And so when I hear situations like that, yeah, that's where the outlook is most miserable. Well, Lauren, thank you so much for coming on to the show. Where can the audience learn more about you, your fund, and your book?

Starting point is 00:58:50 Oh, just Google me. I mean, you can buy the book on Amazon. We have a podcast. So we're available on all of those places. We have a website, templeton and Phillips.com. We're pretty easy to find. And, oh, my husband offered this on a past podcast that he was on. But we have a little booklet called The Words of Wisdom by John Templeton.

Starting point is 00:59:13 It's a small booklet. We have published. It's full of all of his quotes. And it actually is a really handy thing to keep on your desk. There are some good ones in there. It takes like, I don't know, five minutes to make your way through the whole book. But these are good things to remember during bouts of maximum pessimism. I'm willing to send this to anyone for free who writes in and requests a copy.

Starting point is 00:59:39 I would rather send it to United States-based investors, but you can always put in a request if you're overseas. And depending on how hard it is for me to send it to you, you may get it or you may not. but we're happy to receive those requests at our web address, at our email address. Let's Connect at Templeton and Phillips.com. And we mail these out every Friday. So we put you on a list and stick them in the mail on Friday. And happy to send those out free of charge. Okay, folks, that's it for today's episode.

Starting point is 01:00:09 I hope you enjoyed the show and I'll see you back here very soon. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app. and never miss out on episodes. 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.

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We Study Billionaires - The Investor’s Podcast Network - TIP612: Investing In Fear: Profiting From Maximum Pessimism w/ Lauren Templeton

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