Sir John Templeton's 5-Step Strategy For Financial Success

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Sir John Templeton’s 5-Step Strategy For Financial Success: How to Build Wealth With Risks, Bargains and Tax Deferral

By Dr. Mark Skousen, Chairman, Investment U
Monday, October 31, 2005: Issue #482

I’ve been a long-time fan of billionaire mutual fund magnate Sir John Templeton, a man I’ve met several times, including when I lived in the Bahamas in the 1980s.

Three weeks ago, I saw Sir John (he was knighted by Queen Elizabeth in 1992) on video at the London Money Show. He is 93 years old, but looked very alert, and although he spends more time on his religious and charitable work, he remains an avid investor.

I must admit, I was shocked by his answers to a series of questions

Terrorism? “Not a serious threat it’s unimportant.”
Wall Street scandals and Sarbanes-Oxley? “Not a major problem for business.”
Inflation? “Not to worry.” (And gold? “Not a bull market!”)
Future dollar crisis? “No way.”
Economic growth? “I see no interruption in our standard of living, which could be 100 times better by the end of this century.”

The only concern he expressed was about “creeping socialism” and government regulation of business around the world.

The Outlook Is Rosy from Sir John Templeton’s Vantage Point

As long as I’ve known John Templeton, he’s been an incurable optimist-9/11, the burgeoning deficits, and the latest inflation scares have not deterred him from a rosy future.

I tend to be an optimist myself, and I’m naturally bullish on America. (As J.P. Morgan always said, “The man who is a bear on the United States will eventually go bankrupt.”)

Still, we live in a series of short-term events that make up the long term. And it’s hard to ignore the recent problems we’ve faced as investors:

A stock market that has gone nowhere in the past five years
Record trade and spending deficits
Rising inflation and Fed rate hikes
Terrorist attacks and natural disasters

When will the sun come out again on Wall Street? While we wait patiently, here’s what Sir John Templeton can teach us from his vault of financial expertise and know-how

Sir John Templeton’s 5-Step Strategy: How to Build Wealth With Risks, Bargains and Tax Deferral

Here is Templeton’s five-step formula for financial independence, based on almost a century of experience.

Strategy # 1: Take Calculated Risks. John Templeton started off by taking significant risks in his business and investments. He was a serious poker player in college, and in 1939, he borrowed $10,000 from his boss to bet on 100 stocks listed on the NYSE selling for under a buck. A high percentage of these companies were close to bankruptcy, but Templeton reasoned that they would recover during a wartime economy. (It pays to have a correct “macro” view of the world.) In four years, he sold all the stocks, paid off the debt, and pocketed $40,000 in profit. He was on his way to success.

Strategy # 2: Save, Don’t Spend. Templeton started out poor, but through the principles of thrift and hard work, he was able to get ahead. When he married, he and his wife set a goal of saving 50% of their income. He avoided consumer debt – in fact, Templeton bought his first home with cash. He carried his “cheap” approach into later life. I met Sir John once in the Bahamas in his Rolls Royce, but he was quick to tell me that he bought it used!

He always works hard, putting in 60 hours a week. He would agree with J. Paul Getty, whose motto was, “Make your money first then think about spending it.”

Strategy # 3: Shop for Value Investments. Templeton follows the fundamental “bargain-hunting” approach to investing. “The long-range view requires patience.” His Templeton Growth Fund, which he ran for 50 years before turning it over to the Franklin Group, held stocks for an average six to seven years. He always searched for companies around the world that offered low prices and an excellent long-term outlook. “It’s not easy,” he states, “but if you’re going to buy the best bargains, look in more than one industry, and look in more than one nation.”

Under Templeton’s managing skills, the Templeton Growth Fund averaged a 14% annualized return over 50 years, far outperforming the stock market indexes.

Templeton rejects the “technical” method of trading stocks. “You must be a fundamentalist to be really successful in the market,” he says. I agree. The best technicians make the most profitable trades in companies with sound fundamentals in sales and earnings.

Strategy # 4: Take advantage of international free markets. Templeton believes a “free enterprise” approach is mandatory when investing overseas. “Avoid investing in those countries with a high level of socialism or government regulation of business,” he says. “Business growth depends on a strong free-enterprise system.” He told me that he is a follower of free-market economists Ludwig von Mises, Friedrich Hayek and Milton Friedman. “Governments should stop interfering with what people want to do.”

Templeton took a ’round-the-world tour in 1936, and he was stuck by the poverty in India and Hong Kong. When he returned 40 years later, he noted a sharp contrast. “The standard of living in Hong Kong has multiplied more than tenfold in 40 years,” he said, “while the standard of living in Calcutta has improved hardly at all. The major difference is between free enterprise and socialism. The Indian government regulates nearly everything, so there’s very little progress; whereas in Hong Kong, the government keeps its hands off.”

Note: Since Templeton wrote this in 1976, things are changing rapidly. India is finally pursuing market-friendly policies; consequently, those investing in India are seeing one of the hottest stock markets around these days.

Strategy # 5: Minimize your taxes. In the 1960s, John Templeton made a controversial decision. He decided to renounce his U.S. citizenship and move to the Bahamas, where there is no income tax or investment tax. He became a British citizen, and now a Bahamian citizen, and lives tax-free (the Bahamas gets its revenue from high import duties and corporate/trust fees).

Interestingly, his investment record improved markedly after he stopped worrying about the tax consequences of his investment decisions. As a result of tax-free compounding, Sir John Templeton is worth several billion dollars today, and is one of the wealthiest men alive.

However, Templeton does not recommend that American investors follow his lead and switch allegiance to a tax haven such as the Bahamas (it’s almost impossible for an American to become a Bahamian citizen today). But, Templeton strongly recommends that you should take full advantage of tax-deferral vehicles such as a corporate pension plan or an IRA, and incorporate your business.

Good trading, AEIOU,

Mark

Today’s Investment U Cribsheet

If you want to know more about free-market economists Ludwig von Mises, Friedrich Hayek, and Milton Friedman, see my new book, Vienna and Chicago, Friends or Foes? A Tale of Two Schools of Free-Market Economics.
Chess Winners! On Thursday, we’ll announce the first 10 Investment U readers who had the correct answer to the chess problem from last Monday’s issue: How Lin Yutang Can Make You a Better Investor