[00:03:05] Lauren Templeton: 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.

[00:03:34] Lauren Templeton: Uncle John rode the highs and lows and saw the financial instability, and I think he really craved a stable and he 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.

[00:04:01] Lauren Templeton: I mean, you have to remember that during the Great Depression thousand banks failed, there was 23 percent 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.

[00:04:28] Lauren Templeton: Now, our generations have had a completely different experience. So we have lived through a time period where policies really rewarded borrowers and 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.

[00:04:53] Lauren Templeton: 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. one time my mother asked him, Why do you save so much? Why do you save 50 percent of everything you make?

[00:05:11] Lauren Templeton: And he said, Well, I saved 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, an industry, but he was well known for taking advantage of those events.

[00:05:35] Lauren Templeton: And he looked forward to them. He saved his money to put to work during those opportunities and saw them as a golden opportunity. 

[00:05:43] Kyle Grieve: 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.

[00:05:56] Kyle Grieve: But Sir John Templeton took the time to learn about other countries and saw the potential that was in them. So even today, many investors stick to their own country as a part of investing in what they truly know and understand best, which is understandable. But 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?

[00:06:15] Lauren Templeton: Well, a ton. He always did a ton of research. Firstly, home country bias is a real bias that investors have. 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?

[00:06:48] Lauren Templeton: 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 telephones.

[00:07:20] Lauren Templeton: No sports broadcasts, no antibiotics, no herbicides, no nylon, no frozen foods, no television, no transistors, no lasers, no genetic engineering, no nuclear energy, and no human made satellites. The uniform wage for unskilled workers was 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.

[00:07:53] Lauren Templeton: 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. In my lifetime, real consumption per person, worldwide, that is, the standard of living in real goods has more than quadrupled.

[00:08:15] Lauren Templeton: 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 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.

[00:08:40] Lauren Templeton: So Japan had really been dismissed as sort of industrial backwater. These were the exporters of trinkets to America. There 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 investments.

[00:09:13] Lauren Templeton: So whether that was Japan, Or it was the Asian Tigers post Asian financial crisis in the late nineties. He was always looking for that. So he did pioneer international 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.

[00:09:34] Lauren Templeton: 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 that I have just returned from a conference in Switzerland, a group of value investors.

[00:09:54] Lauren Templeton: 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. How hard is it to get management on the phone? In my experience, they often don’t speak English.

[00:10:14] Lauren Templeton: 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.

[00:10:35] Lauren Templeton: 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.

[00:10:59] Lauren Templeton: 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 travel to Japan, to meet with management, to analyze these companies. Today, it’s still difficult.

[00:11:20] Lauren Templeton: 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 fifties and sixties.

[00:11:40] Lauren Templeton: So he was an international investor. He always was investing outside of the United States. He wanted the largest university 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. 

[00:11:59] Kyle Grieve: 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.

[00:12:06] Kyle Grieve: So there was a short excerpt 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, 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.

[00:12:24] Kyle Grieve: But often the lack of quality and growth in these businesses justifies them trading at these very, low bargain prices. So I’m interested in knowing, was Sir John Templeton focused mostly on changing economic cycles to be the catalyst that would close the price and value gap, or was he looking for growth 

[00:12:39] Lauren Templeton: Yeah, a little bit of both.

[00:12:40] Lauren Templeton: 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, 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.

[00:13:06] Lauren Templeton: So when he said that investors are always asking the wrong question, the right question is, where is the outlook most miserable? 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.

[00:13:31] Lauren Templeton: So he also understood that some of his investments. Would not work out. So he thought his, he thought he was correct about 60 percent of the time, and he also knew that he would more than likely end up in some value traps using these deeply discounted methodologies. 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.

[00:14:04] Lauren Templeton: 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 selloffs, so a good example of that would be 1987, the crash in 87, he came into the office, went to work, his analyst came up to him, have you seen the markets?

[00:14:27] Lauren Templeton: And he left and went to go exercise and went for a walk, you know, in the surf and he came back 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 we’re in a bear market. The good news is it’s almost over.

[00:14:45] Lauren Templeton: 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 a hundred measuring sticks of value, and he was constantly evaluating the metrics he used when it came to investing.

[00:15:12] Lauren Templeton: I think of John Templeton as the Roger Federer of investing, you know, I, 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.

[00:15:39] Lauren Templeton: 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.

[00:16:02] Lauren Templeton: And I think of Warren Buffett as 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 again. I mean, Warren Buffett likes quality and this is, that’s what he’s going to do. I think John Templeton mixed it up a little bit more.

[00:16:19] Lauren Templeton: And, was always evolving, but he always stayed within his core philosophy, I would say, but he was always, switching it up a bit. 

[00:16:30] Kyle Grieve: So a really good follow up question to this one, then, that we just talked about you with, the quality question. It was, 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.

[00:16:51] Kyle Grieve: Unquote. It was just kind of just a sign of the times 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? 

[00:17:04] Lauren Templeton: No, I don’t think he, it wasn’t paradigm shift. I mean, that phrase comes from, or that little bit that you just read came from a fax that he sent me called financial chaos.

[00:17:16] Lauren Templeton: And it’s really interesting. You can Google it, just put in John Timbleton 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.

[00:17:38] Kyle Grieve: So you mentioned that Sir John Templeton was a master at structuring his life and 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, you know, impulse related errors that most people make on a day to day basis.

[00:17:54] Lauren Templeton: Sure. I mean, he was very disciplined. So he lived close to his office. 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. I’m sure that he received it in a more timely fashion as years went on.

[00:18:19] Lauren Templeton: 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 in the surf. He paid a ton of attention to his physical state. 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.

[00:18:41] Lauren Templeton: He did not want to waste a second. He’s well known for saying, you know, the meeting starts at 10 11 and it’ll be over at 10 17. 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. He carried reading materials with him everywhere he went, so he made sure not to waste a single second.

[00:19:04] Lauren Templeton: 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.

[00:19:24] Lauren Templeton: And not a reactive person either. 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.

[00:19:56] Lauren Templeton: And I would say there’s the spirit of intellectual humility in all three of those foundations, where we’re always trying to learn, get a saying, how little we know how eager to learn. so he was just a 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.

[00:20:21] Lauren Templeton: He comes over 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.

[00:20:42] Lauren Templeton: 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 second. 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.

[00:21:01] Lauren Templeton: 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. 

[00:21:18] Kyle Grieve: So you mentioned that Sir John Templeton was a follower of the scientific method.

[00:21:23] Kyle Grieve: 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 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.

[00:21:41] Kyle Grieve: So I’m interested in knowing how did Sir John Templeton use a scientific method to succeed in investing? 

[00:21:46] Lauren Templeton: That’s a good question. And I was lucky enough to have lunch with Peter Lynch this summer. It was a true highlight. So I have to say I had to put that one in there. It was amazing to sit down with Peter Lynch because I grew up in the 80’s and he is a true hero to me.

[00:22:01] Lauren Templeton: His book was one of the first books I ever read on investing, one up on Wall Street. But John Tyndleton believed deeply in the scientific method. And the way I think he used it when it came to investing is really just. And trying new strategies. When I say new strategies, I know he did not ever stray from his core principles or had the investment philosophy that he believed in, but he was always trying new strategies.

[00:22:31] Lauren Templeton: So let me give you an example. He’s well known for running the IPO lockup strategy during the tech bubble in the late 90’s, early 2000’s. 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.

[00:22:58] Lauren Templeton: Another strategy that I saw him use effectively was buying closed end mutual funds, not levered closed end mutual funds, trading at a 30 percent 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, but it was a different application of that.

[00:23:20] Lauren Templeton: 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.

[00:23:40] Lauren Templeton: You know, let’s go long 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.

[00:24:00] Lauren Templeton: 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.

[00:24:21] Lauren Templeton: 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 of pursuing an ADR listing.

[00:24:43] Lauren Templeton: 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.

[00:25:04] Lauren Templeton: 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 in technical analysis or something like that. Everything was very core to these principles he had when it came to investing. And very aligned with his core principles. And he talks a lot in his philanthropic work about laws of life.

[00:25:29] Lauren Templeton: So laws of life that are very core that apply to everyone. So these are things like honesty, faithfulness, hard work, diligence, et cetera. 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.

[00:25:54] Lauren Templeton: 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 have really been Graham. That a stock price does deviate from a company’s underlying value.

[00:26:14] Lauren Templeton: And that you can, the best time to buy a 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 discounted cash flow model. Maybe I’ll, try to determine value based on peg ratios.

[00:26:37] Lauren Templeton: So he was always moving those metrics around depending on the market environment. Very consistent with his core principles. I don’t even know what question you asked, but something like that. 

[00:26:49] Kyle Grieve: So you mentioned asking Sir John Templeton about why his move to the Bahamas was such an advantage. And you actually mentioned this earlier was he said that, I think it’s because the wall, I get the wall street journal a few days later than everybody else.

[00:27:01] Kyle Grieve: 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. I’m interested in knowing more about that.

[00:27:16] Lauren Templeton: I mean, he just wasn’t a reactive person. 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 one of the big financial centers, especially when he moved to the Bahamas in the 1960s, You’re so removed.

[00:27:45] Lauren Templeton: 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 is. You’re not in Switzerland listening to the same stock picks everybody else listens to that I just did last week. You’re having a completely independent experience. It’s a slower life.

[00:28:04] Lauren Templeton: 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 for people to remove themselves from the crowd.

[00:28:31] Lauren Templeton: Like for us, for instance, Value investors are really focused on that point of acquiring a stock. 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.

[00:28:56] Lauren Templeton: when people think about value investing, they think about going into these moments of maximum pessimism. 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.

[00:29:17] Lauren Templeton: 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?

[00:29:44] Lauren Templeton: That is definitely more challenging, and I think perhaps there is some wisdom in physically distancing yourself from the crowd during those scenarios. 

[00:29:54] Kyle Grieve: 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.

[00:30:04] Kyle Grieve: 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. 

[00:30:12] Lauren Templeton: 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 squishmallow of Charlie Munger on her bed, so we picked that one up at Berkshire Hathaway last year, and I’m 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.

[00:30:53] Lauren Templeton: So in 2008 2009 We were reverse engineering DCFs to look at the assumptions in the DCF to try to understand what was being applied, 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.

[00:31:17] Lauren Templeton: 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 in a lot of the stocks we were looking at.

[00:31:38] Lauren Templeton: 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 at our company and how we have used it in the past.

[00:32:04] Kyle Grieve: Interesting. And so I’m sure you probably use other mental models. So I’m always interested in learning how other professionals just kind of learn and implement them and try to, you know, really instill them into their, very essence. So I would love to know how you do that. 

[00:32:18] Lauren Templeton: I love to read about different mental models and think about.

[00:32:22] Lauren Templeton: how they could be applied to the investment process. I’m reading a really interesting book right now about that. And I 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, making sure that everything is totally aligned.

[00:32:49] Lauren Templeton: So for instance, when you think about one of your first questions was. About Uncle John’s thrift and saving and also looking 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.

[00:33:16] Lauren Templeton: So my husband and I believe that thrift and saving are important. We look for that in 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 the average John Templeton.

[00:33:41] Lauren Templeton: His principles were 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 almost a mental model.

[00:34:00] Lauren Templeton: 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? 

[00:34:19] Kyle Grieve: I know that you’re a big fan of James Montier.

[00:34:22] Kyle Grieve: 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.

[00:34:44] Lauren Templeton: 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, Oh, I have them all. Like, those are all mine. That’s 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.

[00:35:08] Lauren Templeton: 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 here in this office.

[00:35:30] Lauren Templeton: 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. Etc. But I do think there’s 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 distincting yourself from the crowd, maybe reading the Wall Street Journal a few days later.

[00:35:57] Lauren Templeton: 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 wishlist of securities in our desk drawer, and those are securities that we have.

[00:36:19] Lauren Templeton: And it’s not really in our desk drawer. It’s on a computer. So that’s an exaggeration when I say that, but these are companies that we have analyzed when we’re in a very rational state, we have come up with an estimate of intrinsic value. We have an idea of the price we would want to purchase that company, but it’s probably not trading at that value right now.

[00:36:42] Lauren Templeton: 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. 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.

[00:37:08] Lauren Templeton: 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 to myself, maybe I’m such a selfish person, I’m like, that’s me, it’s about me.

[00:37:26] Lauren Templeton: 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.

[00:37:50] Lauren Templeton: 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. The competition is intense. So do I, try to compete in the better information, better process area, but that’s some intense competition.

[00:38:21] Lauren Templeton: Do I really think I’m going to win the better information game down here in Lookout 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. I mean, John Templeton was a genius, and I do think he was a master of all three of those areas.

[00:38:49] Lauren Templeton: 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?

[00:39:08] Lauren Templeton: Twelve. One, two. I don’t actually know, I should have looked up for the podcast how many are out there today, 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.

[00:39:38] Lauren Templeton: That means that I have to pay attention to all of those biases that James Montier writes 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?

[00:40:05] Lauren Templeton: 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.

[00:40:26] Lauren Templeton: 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. 

[00:40:36] Kyle Grieve: So there was a great letter that you wrote with your husband, 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 trade through an economic cycle.

[00:40:49] Kyle Grieve: 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.

[00:41:05] Lauren Templeton: 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 there are 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?

[00:41:35] Lauren Templeton: 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. So I do think that the environment has, changed a bit, right? So we’re higher rates have lead, led us to a more normalized environment.

[00:41:57] Lauren Templeton: It is very important to pay attention to the health, the financial health of a company. We have seen bankruptcies increase. So in 2023 corporate bank bankruptcies tracked on Bloomberg increased 108 percent 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.

[00:42:22] Lauren Templeton: Most of our investors have already made all their capital. 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?

[00:42:45] Lauren Templeton: I mean, the 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. 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.

[00:43:10] Kyle Grieve: 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?

[00:43:32] Lauren Templeton: 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, that was in 1999, the group outperformed large, their large cap cohort by 7. 2 percent annualized over the following 10 year period.

[00:43:58] Lauren Templeton: 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. 

[00:44:16] Kyle Grieve: So, John Templeton told you that he thought he was right 60 percent of the time, which you mentioned a little bit earlier on the show.

[00:44:22] Kyle Grieve: And that was part of his edge. So obviously that’s a 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? 

[00:44:35] Lauren Templeton: 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.

[00:44:46] Lauren Templeton: 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 become more convinced of 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 Phillips Capital Management is probably higher than his.

[00:45:13] Lauren Templeton: 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?

[00:45:49] Lauren Templeton: I’m not sure. I think it was probably a bit of both. He did have. And he actually, you know, his process is very 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.

[00:46:14] Lauren Templeton: 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 nailed, like, the science part, I mean, the research. He had researched the company, done all of his analysis. He would have been very prepared on every single company he invested in.

[00:46:36] Lauren Templeton: 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, 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.

[00:46:58] Lauren Templeton: 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. 

[00:47:07] Kyle Grieve: 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 discussed this a little bit, but I’m interested in just knowing for yourself, how do you kind of toe the line between tinkering so much that your general investing philosophy becomes unrecognizable?

[00:47:24] Kyle Grieve: How do you really keep things kind of close to your core strategies? 

[00:47:28] Lauren Templeton: 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, and we are never in a portfolio, making changes on a daily basis or anything like that.

[00:47:48] Lauren Templeton: 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.

[00:48:21] Lauren Templeton: 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 out of the tech boom in the late 90s, early 2000s.

[00:48:45] Lauren Templeton: So a different application, but the same philosophy. That’s what I mean by tinkering. Again, he would say there are over a hundred metrics, a hundred value. A hundred measuring sticks of value, so my translation is there are a hundred metrics you can look at, or over a hundred metrics, and some are best used during other certain times than others, and that’s what he tinkered with.

[00:49:11] Kyle Grieve: 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?

[00:49:27] Lauren Templeton: 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 were a lot of them because they’re five minutes a piece, so you can go through a lot of presentations and three days when they’re five minutes long.

[00:49:49] Lauren Templeton: No one presented a single investment in China. 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. And I say dipped our toe back in. We have done just that. I mean, they’re very small positions.

[00:50:15] Lauren Templeton: But I absolutely think that is where there’s maximum pessimism. I think it really depends on your timeframe 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 at 7.

[00:50:40] Lauren Templeton: 2 times earnings, or I think Baidu’s probably a little, maybe close to 9 times earnings. I don’t really know right now, 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, those are, that’s where the outlook is most miserable.

[00:51:08] Kyle Grieve: Well, Lauren, thank you so much for coming onto the show. Where can the audience learn more about you, your fund and your book? 

[00:51:14] Lauren Templeton: 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, templetonandphillips.com. We’re pretty easy to find.

[00:51:26] Lauren Templeton: 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”. 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.

[00:51:48] Lauren Templeton: 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. 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.

[00:52:19] Lauren Templeton: At our email address letsconnect@templetonandphilips.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. 

[00:52:31] Kyle Grieve: Okay folks, that’s it for today’s episode. I hope you enjoyed the show, and I’ll see you back here very soon.

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