How to invest like Sir John Templeton

A good way to become a better investor is to learn from the best. Sir John Templeton (who died aged 95 in 2008) set up the Templeton Growth Fund in 1954. Until 1992, it returned nearly 16% a year on average. That made it the top-performing growth fund in the second half of the 20th century: £100,000 invested in 1952 would have become £55m by 1999.

His 16 investment principles are a blueprint for any bargain-hunter. I’ve boiled them down here, and picked a market I think he’d have liked today.

Don’t let your emotions ruin you

Templeton recommended praying as a way to stay centred. That might not appeal to everyone, but the underlying point is valid. You have to approach investing calmly. Don’t allow yourself to be distracted by the constant flow of news and the siren call of brokers who want you to trade – you’ll only increase your costs and damage your overall returns.

And never panic. If the market crashes, don’t rush to dump everything. The only reason to sell is if better opportunities have arisen elsewhere, not because you feel unnerved by a jittery market.

At the other end of the emotional spectrum, overconfidence is also a threat. You might believe you are an above-average investor, but so do most people. You have to measure your performance more objectively. When you invest, write down your reasons for doing so and review them later. Never double up on a bad investment in the hope of recouping losses – that’s just gambling.

It’s risky to take no risk

If you take no risks, you might sleep well, but you’ll never make decent money. And inflation is its own risk. At a rate of even 4% a year, it will reduce the buying power of £100,000 to £68,000 in just ten years. To grow your money, you need to beat inflation and add a bit on top. This is why (unless you’re already wealthy) you can’t afford to rest easy in low-risk cash and fixed-income government bonds forever.

But that doesn’t mean you should just throw caution to the winds. You must diversify your portfolio. Don’t become wedded to a single asset class. There are times when it’s a good idea to sit on cash, and there are times when you must buy riskier assets such as shares. Always spread your risk – don’t overinvest in one firm or sector and invest globally, not just in your home market.

Be contrarian

“You can’t outperform the market if you buy the market”, so you need to have the confidence to buy unpopular assets. The best time to buy is at the point of maximum pessimism. How can you tell when it’s been reached? It’s impossible to be sure, but it isn’t only when prices are low, it’s when volumes are low too – when everyone has been scared out of the market. As for avoiding bubbles, remember the mantra: “it’s never different this time”. Boom and bust have never been abolished and never will be. The same goes for stockmarket cycles.

Investing takes effort and time

As a small investor you have some big advantages over institutions: you can hunt for bargains free of any constraints, and you can invest in any sector you like. That means there will always be opportunities amid wider trends. Aim to find good firms at low prices.

On the quality side, look for management teams with strong track records who are early entrants into a market. This means you must study your target firms and understand why they are successful. Blindly trusting share tips or snapping up hot initial public offerings without double-checking the data is simply dart-throwing. If you can’t be bothered getting to grips with how a firm works, then either find a fund manager who can beat the market (the hard option) or resign yourself to tracking the market with an exchange-traded fund (ETF).

Monitor your portfolio regularly. The winners and losers – even among the biggest companies – change surprisingly rapidly. From 1978 to 1990 a third of the constituents of the Dow Jones 30 changed. Thirty of the companies that were in the Fortune 100 in 1983 had dropped off the list by 1990 because they were taken over, went bust, shrank or went private. So rebalance your portfolio once a year to ensure you don’t get overexposed to any single stock, sector or asset class.

Where would he be looking now?

Sir John Templeton famously gambled on Peru in the 1980s when other investors had written it off and America had in effect pulled out following a coup by the Shining Path guerilla group. So he wasn’t afraid to investigate even the most adventurous investment opportunities. That’s why I think he’d be looking at Africa if he were still around today.

Once again, he’d ignore the often grim headlines in favour of the economic facts. Six of the world’s top ten fastest-growing economies over the last decade are in Africa, according to Standard Chartered bank. Sub-Saharan Africa’s collective gross domestic product last year was $1.7trn, almost 90% of India’s GDP. The region’s GDP is expected to grow by 8.4% a year over the next decade to $2.4trn, with its consumer spending forecast to grow to over $1trn by 2020 from just $600m in 2010.

There are risks – Africa is still very dependent on the performance of the cyclical commodities market with side opportunities in telecoms and consumer products. Regulation is poor and currency risks high. So it’s not for widows and orphans. But if you’re tempted, one way in for now is via solid Western firms that are building an African presence. DB-X Trackers offers an ETF (LSE: XMAF), which follows the MSCI EFM Africa Top 50 index and has a total expense ratio of 0.65%. It’s up 13% this year.