Game Plan
Page 22
My introduction to Templeton came in 1983 when I read a book called The Templeton Touch by William Proctor. I was attracted to the book by its cover, which featured a chart of the Templeton Growth Fund. A $10,000 investment in 1955 (when the fund launched) grew to $364,495 by the end of 1982. Over the last sixteen years of that run, the Dow was down 20 percent.
I wanted to learn more. In fact, this book sparked my desire to become a professional investor. Two years later I started writing an investment newsletter with a model portfolio. That’s how I began working with Bob Duggan. Two years later my father, Kerry Freeman (a respected stockbroker and my original investing mentor), helped me get in touch with John Templeton. I interviewed him via fax for the August 1987 newsletter. The market had just attained a new all-time high, with the Dow Jones Industrial Average spiking to over 2,700, a huge gain from its low of 770 five years earlier. In our interview the great Templeton shared that a bear market could take stock prices down as much as 40 percent in a couple of months—an exceptionally bold statement. And he was absolutely right.
I met Templeton in person in December 1987, just before he was knighted by the queen of England. Our meeting came on the heels of the worst market crash since the Great Depression. The Dow was down about 35 percent from its August peak. Everyone was pessimistic. Thirty-three of the world’s most respected economists had just opined that the global economy was entering its worst period since the 1930s.13
John Templeton understood the challenges, yet he was focused not on the problems but on the solutions and opportunities. Even after fifty years as arguably the most successful investor in the world, this great man was preparing to protect and grow his clients’ portfolios. He had the energy and the optimism of a man who has seen it all. He invested in the Great Depression. He invested during a world war. He invested during the boom years of the 1950s and the go-go 1960s. He invested throughout the Cold War. He invested during the malaise of the 1970s—the oil embargo, stagflation, and the recession. He invested during the Reagan recovery. And that was just in the United States! Since Templeton’s operations were global, he had also seen the hyperinflation in Latin America, witnessed currencies collapse, and seen revolutions, depressions, and just about everything else. He often looked for a crisis rather than stability, aware that crisis brought opportunity. He was among the first Americans to invest in Japan, Korea, Africa, and Eastern Europe after World War II.
When I met Templeton, it was obvious that the crisis of a market crash in America hadn’t fazed him. And when I went to work for him a couple of years later, he taught me to remain unfazed as well.
There are important strategic lessons that I learned from Templeton. Indeed, they were drilled into me. They are more than homespun wisdom. They are true strategy, proved over a lifetime of investing in good times, bad times, and outright crises. The following are ten Templeton Maxims14 followed by my comments on how to apply them:
Number One: Invest for Real Returns
Maxim: The true objective for any long-term investor is maximum total real return after taxes. This is significant because the goal is REAL RETURNS, which account for the loss of purchasing power due to currency devaluation or inflation.
Game Plan Application: One of the first things you must do is to realize that inflation could climb to much higher than where it has been in the recent past. So the strategy that worked over the past thirty years (when price growth slowed dramatically) may not be appropriate going forward. If you don’t prepare for a potential change, you may get caught in the wrong strategy. Investors who expected the 1960s and 1970s to be similar to the 1940s and 1950s were shocked to discover that inflation in America could reach double digits (peaking near 15 percent in early 1980) and that the prime interest rate (charged to the best borrowers) could reach over 20 percent.15 Those unprepared for such dramatic changes suffered greatly.
Likewise, a proper strategy must account for changes in tax rates. The top income-tax rate started out a hundred years ago at 7 percent, jumped to 67 percent by 1917, peaked at 94 percent in 1945, and hit a low of 28 percent in 1988. When Templeton began investing in 1937, the top rate was 79 percent.16 So any strategy you develop must be able to generate real returns after the effects of inflation and taxes, since the rate of either can change dramatically.
Number Two: Keep an Open Mind
Maxim: Never adopt permanently any type of asset or any selection method. Try to stay flexible, open minded, and skeptical. Long-term top results are achieved only by changing from popular to unpopular types of securities and varying your methods of selection.
Game Plan Application: We don’t know what challenges will come our way. It could be deflation, it could be inflation. The currency could come under attack, but another currency might rise. The only way to be prepared for the risks is to be open minded enough to watch for them, even if they go against your preconceptions, and to be flexible enough to adjust.
Number Three: Never Follow the Crowd
Maxim: If you buy the same investments as other people, you will have the same results as other people. It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires fortitude but pays the greatest potential reward.
Game Plan Application: Economic warfare and financial terrorism will create panic. This can mean opportunity. In March 2009 everyone was panicked out of the stock market. Wise investors were able to buy when the Dow Jones Industrial Average bottomed out in 2009. Four years later it was over 15,000. Some investments increased more than tenfold.
Number Four: Everything Changes
Maxim: Bear markets have always been temporary, and so have bull markets. Share prices usually turn upward from one to twelve months before the bottom of the business cycle, and vice versa. If a particular industry or type of security becomes popular with investors, the popularity will always prove temporary and, when lost, may not return for many years.
Game Plan Application: We’ve already explained that the period from the 1930s through the 1950s began with depression and later saw modest growth and low inflation. The 1960s and 1970s had higher growth but ended with stagflation. The 1980s and 1990s were a time of higher growth and low inflation. No trend lasts forever. Things change, and you have to be ready to adapt. In a global economic war, we may see trends that seem permanent, but they could shift quickly. Imagine if another nation were to attack our market, causing it to fall sharply, and then our government took a series of steps to shore it up, causing it to rise dramatically. That’s the kind of story I tell in Secret Weapon: the Dow fell from 14,100 to 6,500 but was over 15,000 by early 2013.
Number Five: Avoid the Popular
Maxim: When any method for selecting investments becomes popular, switch to unpopular methods. Too many investors can spoil any selection method or any market-timing formula.
Game Plan Application: Even with a seemingly sound strategy, the crowd can mess things up. An example is the rise of gold from $800 per ounce to over $1,900 per ounce within a couple of years. Even though there were still good reasons to own gold, the price fell sharply. Yes, the Federal Reserve’s money printing ought to have supported gold. But so many people owned gold that there were few new buyers. The rise was too rapid, and gold had to cool off a bit. No matter how right your thesis, too much popularity will lead to at least a short-term pullback.
Number Six: Learn from Your Mistakes
Maxim: “This time is different” are among the most costly words in market history.
Game Plan Application: Some people will cite this maxim and argue that because the U.S. economy has always come through its difficulties before, it should always be the “go-to” location for your investments. A true follower of Templeton, however, will look at a much longer historical period. You might notice, for example, that every empire in history has eventually fallen from preeminence. You might also notice that no paper c
urrency has ever been permanently on top. Don’t put all your eggs in the American basket.
Number Seven: Buy during Times of Pessimism
Maxim: Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die of euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
Game Plan Application: There is every reason to expect panic and euphoria in coming years. Even with the risks of financial terrorism and economic warfare, there will be plenty of opportunities to buy and sell.
Number Eight: Hunt for Value and Bargains
Maxim: Too many investors focus on outlook and trend. More profit is made by focusing on value. In the stock market, the only way to get a bargain is to buy what most investors are selling.
Game Plan Application: When you focus on outlook and trend, you too often miss the “black swan” events that can wreak havoc on your investments. Terrorism, by definition, breeds fear, which causes panic. It is most successful when unexpected. “The trend is your friend” is a market adage that holds true until the trend changes.
Number Nine: Search Worldwide
Maxim: To avoid having all your eggs in one basket at the wrong time, diversify. If you search worldwide, you will find more and better bargains than by studying only one nation. You will also gain the advantage of diversification.
Game Plan Application: Possibly the best all-around approach to the risks we have identified is to be broadly diversified. You can’t put all your faith in a single type of asset, industry, country, or currency. While diversification won’t prevent some dramatic short-term losses, it will stabilize your portfolio over time.
Number Ten: No One Knows Everything
Maxim: An investor who has all the answers doesn’t even understand the questions.
Game Plan Application: Arrogance is the greatest enemy of investment success. You may be right for a season, but seasons always change. Having humility allows you to follow the other nine maxims and enjoy long-term success.
Amazingly, these ten simple maxims can lead you through virtually any economic crisis.
There is a lot to know and a lot to monitor on a regular basis. That’s why I encourage you to seek out professionals who not only understand how to invest but are also prepared to adapt to a complex environment. We have had it pretty easy in America for all of our lifetimes. Yes, we have gone through difficulties, but America has enjoyed economic dominance since World War II. That prosperity has not prepared us for what can take place over the next few decades. As we were wholly unprepared for 9/11 and the effects of physical terrorism on our shores, so we are mostly unprepared for the coming reality of financial terrorism.
I recommend that your strategy incorporate two critical elements. First, make a sensible disaster plan for your family. I’m not saying you have to plan for forty years of living in an underground bunker. But I am saying you should anticipate serious dislocations for at least a short time. This is above and beyond the “basic” set of needs that Dean Junkans advocates in The Anatomy of Investing.
Here are supplies you should consider for a two-week power outage. If the situation were worse, you would of course need more:
•Two weeks’ supply of water—one gallon per day per person
•Non-cooked food: crackers, peanut butter, fresh fruit, canned juice, trail mix, dry cereal, pretzels, nuts, dried fruits, tuna17
•Other foods (quantities are per person): two bottles of juice, two canned goods, peanut butter, jelly, honey, mustard, ketchup, barbeque sauce, spices, cooking oil, flour, powdered milk, powdered potatoes
•Portable propane heater
•Sanitation: heavy-duty garbage bags and kitty litter (place a bag either in your drained toilet or in a bucket)
•Lighting: garden stake solar lights, candles, kerosene lamps, flashlights, hand-cranked camping lantern, matches
•Tools and supplies: lighter or waterproof matches, batteries, manual can opener, pliers, screwdriver, wrench, hammer, duct tape
•First-aid kit: bandages, antibiotic ointments and sprays, pain relief capsules, cold medicine, cough syrup, anti-nausea pills, allergy medication, and anti-diarrheal medications18
Second, make a diligent search for a trained investment professional who understands how to develop a proper strategy according to sound investment philosophies like those of John Templeton, Dean Junkans, Erik Davidson, David Chilton, Bob Duggan, Manisha Thakor, or Charles Ellis.
Unfortunately, few investment pros have gone beyond traditional financial training to study the kind of risks we now face. That’s why my colleagues and I established the National Security Investment Consultant Institute.19 The NSIC started at the Keating Center at Oklahoma Wesleyan University. The center’s namesake, Frank Keating, served in the Reagan administration’s Treasury and Justice Departments. He later became the governor of Oklahoma and now heads the American Bankers Association. The NSIC Institute trains investment professionals to recognize economic warfare threats and prepare strategies to combat the problem. Clients interested in protecting their investments as well as finding ways to promote America’s national security interests through their investments will gravitate toward advisors who have earned the NSIC credential.
Over time, as more advisors receive NSIC training, the collective client assets available to invest in America’s security will grow large enough to make a difference. Imagine if a pool of capital in the tens or hundreds of billions were unleashed to promote American energy independence, for example? Without government funding, these advisors and clients could help our country on an enormous scale.
There is an absolute correlation between our economic strength and our ability to defend our nation. It’s time to recognize that our enemies’ threat doctrine is targeted against our economy, and to respond. Enemies of the United States have targeted our financial markets and economic infrastructure, and a new generation of leaders will be required to protect them.
CHAPTER TWELVE
There Is Hope
The amazing thing about the current global economic war is that the United States of America is still ideally positioned to win. If we act properly, it’s not too late to usher in a period of global peace and prosperity. It’s not too late, even though we have accumulated the largest budget deficits and national debt in history. Even though we have over-shackled our people with crippling rules and regulations. Even though we have nearly abandoned all the things that made America great in the first place. It’s still not too late. But it is close.
There are dozens of reasons to believe that the American experiment will end in failure. We have plenty of internal problems—out-of-control spending, paralyzing political agendas, a government that operates more like a confidence game, an apathetic population, and a system that rewards failure and punishes success. In many ways, we are our own worst enemies.
Externally, we have enemies who want to see America go away. Some of them are parasites on our prosperity and intend to bleed us dry over the long term. Others hate us ideologically. Some simply resent our success. Whatever their motivation, they are intent on our destruction.
In your heart you know this country faces enormous perils.
So how can I say there is hope? Because America continues to have unique and powerful advantages. Despite what the doomsayers say, the worst doesn’t always happen. This is something you have to remember. While the case for collapse seems compelling, history is replete with examples where certain doom failed to materialize.1
The good news is that the doomsday doesn’t have to happen now, even though we are in a global economic war. Our natural advantages can carry us through to victory. Unfortunately, we have let our advantages make us arrogant, and our arrogance has made us vulnerable. There are eight steps we must take to restore our greatness. The first is to admit we have a problem.
Step One: Recognize the Global War Under Way
I’ve been to Washington, D.C., dozens of ti
mes over the past five years, meeting with current and former senior officials in the Pentagon, CIA, FBI, Defense Intelligence Agency, Senate Intelligence Committee, House Intelligence Committee, House Armed Services Committee, Defense Advanced Research Projects Agency, Securities and Exchange Commission, and Federal Reserve. I have met with multiple congressmen and senators and members of their staffs. Very few of those leaders understand the challenges we are facing in this global economic war.
Officials in defense and intelligence have little training in economics. Even those who appreciate our economic problems don’t understand that our enemies could use economic weapons to damage us. Juan Zarate, former assistant secretary of the Treasury for terrorist financing and financial crimes, explained the problem in his book Treasury’s War: The Unleashing of a New Era of Financial Warfare: “The United States faces direct challenges to its economic predominance and financial influence, and is unprepared to defend itself from the looming external threats and internal vulnerabilities. . . . The United States needs to redesign how it thinks about, treats, and addresses national economic security to prepare for the coming financial wars. . . . The financial wars are coming. It is time to redesign a national economic security model to prepare for them. If we fail to do so, the United States risks being left vulnerable and left behind as other competitors race toward the future.”2