Sir John Templeton’s Investment rules 3 and 4


Investing is very difficult because most of us lack the discipline to do asset allocation SCIENTIFICALLY. On a random basis we do some asset allocation, but we are a victim of our habits. So if we are used to equity investing and we start enjoying that, we get carried away. Different times look good for different asset classes!! So there are times to buy blue chip stocks, mid cap, value, interest sensitive, cyclical stocks, corporate bonds, Treasury instruments, and so on. And there are times to sit on cash, because sometimes there are no mouth watering opportunities available. So cash enables you to take advantage of investment opportunities as and when they arise. In hunting parlance, time to stalk. According to investment theory there is no one investment that is always best. Popularity of a particular industry – craze so to say – has to be temporary, and it will soon go away. Fads are temporary.

Contrary to all that I said in the earlier para, I have always advised my clients to be close to 70% at least in equities. Look at history will show why. From January of 1946 through June of 1991, the Dow Jones Industrial Average rose by 11.4% average annually—including reinvestment of dividends but not counting taxes—compared with an average annual inflation rate of 4.4%. In the Indian context equities have returned about 19% p.a. from 1979 till today along with reinvestment of dividends – ignoring taxation of course. By not doing asset allocation, my clients would have done much better in a pure equity portfolio rather than in a mixed portfolio. I could be wrong – if you see the outperformance of Hdfc Prudence or Icici Dynamic over regular equity funds, but equity is where I like to stay. Apart from stalking time spent in cash aka Liquid fund.

In fact, the Equity outperformed inflation, Treasury bills, and corporate bonds in every decade….and I expect that to continue. Of course in the 70s the bond markets in the US outperformed the equity markets, and the US debt market has been on an amazing bull run. There is no portfolio performance without beating inflation.


Of course, the most logical thing to do – and theoretically that’s obvious. What is obvious DOES NOT GET DONE. It is not the way that the market works – equity, real estate, commodities! When prices are high, a lot of investors are buying a equities – directly or through mutual funds. Some kind of a panic buying – Oh my God, I have missed out on the party, let me get in!  Prices are low BECAUSE demand is low. Investors have pulled back, and are staying away. They are now tired, scared, and not willing to write a cheque.

Thanks to the media over reach, and man’s inability to assimilate lots of information, we behave irrationally. So when there is pessimism in one place, it spreads and when (almost) everyone is pessimistic at the same time (media spread), the entire market collapses. Most times it starts with one industry or one style going out of fashion. Industries such as auto, banking, pharma go through regular cycles.

A good time to invest? Yes of course, but they are sitting on the side. Their cheque books firmly in the locker. They are waiting for a consensus. They are not keen to buy an industry growing at 15% p.a. and available at a pe of 8. They all know the theory ‘buy low, sell high’. However, like some family past time they ‘buy high, and sell low’. We have not fully evolved from the hunting that we did about 10,000 years ago – we like to be in a crowd, and are mostly scared about creating our own path. We are afraid of the tiger or lion who may pounce on us.

It is not foolish, it is a behavior that we have to learn to control. It is a behavior bias that is hurting us. Our investing is made more difficult by the stupid media which carries headlines like “Tata Group loses Rs. 100 crores in market capitalisation in 5 days time” or something like this, pushing the cheque book inside deeper!

If you act like everybody else, you will get results like everybody else, right?

Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”

Easy to say, not simple to execute.


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One Response to “Sir John Templeton’s Investment rules 3 and 4”

  1. Nicely explained Subra sir.

    So there is Panic in the market, it has corrected decently, would you say its a good time to take out the cheque book?


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