The Fundamental Rules of Investment Success
John Templeton was born in the small town of Winchester, Tennessee in 1912. As a young man, he graduated first in his class from Yale University before earning a law degree as a Rhodes Scholar at Oxford University in England. Eventually he became a billionaire by popularizing globally-diversified mutual funds.
Templeton started his own mutual-fund company in 1954. He sold his firm to Franklin Resources in 1992, which became known as Franklin Templeton Investments after the merger. Despite his wealth, he was a life-long proponent of thrift.
I hadn't heard of Templeton until recently. He didn't live a flashy life, and he fell out of prominence long before I became interested in investing. The more I learn of him, however, the more his financial philosophy appeals to me. Like Warren Buffett, Templeton built his wealth by following investment fundamentals.
I recently stumbled upon an article that Templeton wrote in 1993. In “16 Rules for Investment Success” [PDF], he explains his approach to investing. Some of Templeton's advice includes:
- Invest — don't trade or speculate. “The stock market is not a casino, but if you move in and out of stocks every time they move a point or two…the market will be your casino.”
- Remain flexible and open-minded about types of investment. “There are times to buy blue chip stocks, cyclical stocks, corporate bonds, U.S. Treasury instruments, and so on. And there are times to sit on cash…The fact is there is no one kind of investment that is always best.”
- Buy low. “It is extremely difficult to go against the crowd — to buy when everyone else is selling or has sold, to buy when things look darkest…[but] chances are if you buy what everyone is buying you will do so only after it is already overpriced.”
- When buying stocks, search for bargains among quality stocks. “Determining quality in a stock is like reviewing a restaurant. You don't expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.”
- Diversify. “In stocks and bonds, as in much else, there is safety in numbers.”
- Do your homework or hire wise experts to help you. “People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.”
- Don't panic. “The time to sell is before the crash, not after.”
- Learn from your mistakes. “The only way to avoid mistakes is not to invest — which is the biggest mistake of all…The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.”
- An investor who has all the answers doesn't even understand all the questions. “A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognizes that success is a process of continually seeking answers to new questions.”
- Do not be fearful or negative too often. “Even in the dark '70s, many professional money managers — and many individual investors too — made money in stocks, especially those of smaller companies. There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up…and up.”
If Templeton's advice sounds basic, that's because it is. Not even the world's most successful investors possess some magic secret. They stick to the fundamentals. They buy low and sell high, and they hold stocks for the long run. They're not in the market for a quick buck. They're willing to get rich slowly.[Franklin Templeton: 16 rules for investment success (PDF)]