Having a strategy helps an investor stay on course and avoid sharp swings between optimism and pessimism, and today I’d like to make a case for investing as a “rational optimist.”
While no one can predict the future, the Cabot Explorer tries to identify profitable global growth trends before the maddening crowd. The first movers have the edge but companies that come later with scale and capital can also vault to the head of these channels of growth.
We do our best to recommend companies at a value entry point but with some momentum.
The adage, “The trend is your friend” is a good one to keep in mind.
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But sometimes markets overreact, and quality companies can suddenly be trading at “value” prices. And while it’s true that the greatest investment ideas come at the extremes of deep value and high growth, it’s usually smarter and safer to play the middle of the field for the bulk of your stock portfolio.
I don’t buy low, I don’t sell high, I play the middle 60%.
- JP Morgan
We also work hard to avoid investing in trends and companies that are running out of steam or facing strong headwinds that will likely slow growth and profitability.
In international and especially emerging markets, political change can be an important factor in successful investing. Great bull markets often start with economic, free market and political reforms and investors can make a killing if they come to the party early. Sir James Goldsmith was a master of this having an unusual sense of when the tide was turning.
The job of an investment company is to decide to invest in the right thing in the right place at the right time. But the right thing is the least important. If you picked the very best share in St. Petersburg in 1917 you could be the greatest genius in the world and still go bust … You have to be able to see the swings in the market.
- Sir James Goldsmith
This brings me to a legendary investor who has had a big influence on my thinking – Sir John Templeton. Goldsmith was more of a buccaneer trader while Templeton combined a global outlook and a value-oriented contrarian streak.
Born in 1912, Templeton grew up in the tiny town of Winchester, Tennessee. He graduated from Yale in 1934 near the top of his class and won a Rhodes Scholarship to Oxford.
After visiting 35 countries in seven months, his investment career on Wall Street began during the depths of the Great Depression. In 1939, as WWII was breaking out, Templeton borrowed $10,000 to buy shares of 104 European companies trading at $1 per share or less.
This global gambit paid off.
In 1954, he launched the Templeton Growth Fund when investing in international stocks was considered exotic. In the 1960s, Templeton held more than 60% of the Templeton Growth Fund’s assets in Japan.
Templeton’s investment philosophy was simple. Buy superior stocks at cheap price points of “maximum pessimism.”
The Rational Optimist
Author Matt Ridley refers to this thinking as “rational optimism” in his book The Rational Optimist.
As Templeton noted in a Forbes interview in 1995:
People are always asking me where the outlook is good, but that’s the wrong question. The right question is “Where is the outlook most miserable?”
In other words, the rational optimist seeks situations with outsized upside potential and lower downside risk. Today, he might be looking at China and other emerging markets.
Sir John eventually sold his Templeton Investments to Franklin Resources (BEN) for $913 million in 1992. This premier asset management company is facing some legal issues, which has sliced 30% off its share price so far this year.
Would Templeton be a buyer? Should we be buying the stock?
Join the Cabot Explorer today to find out.
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