Tuesday, October 23, 2007
John Templeton, founder of the Templeton Funds (now part of Franklin Templeton), will leave a giant legacy when he passes on to his reward. He is widely recognized as the father of international investing. He was investing in foreign lands before most US citizens were even investing in the US. He was an early apostle, as he put it, for "turning Americans into investors instead of savers." When he was advocating this only about 20% of Americans had any money in the stock market; today that figure is over 50%. He was born in Tennessee and he kept the commonsense of the Volunteer state while amassing a fortune helping people invest their money though the value investing principle of "Maximum Pessimism." He was a rock-bottom value investor. He wanted to invest in countries and companies where there was not only blood in the street, from an investment perspective, but it had dried. He wanted to buy just after the last person at the local stock exchange had turned out the lights. "Maximum Pessimism" to him meant that in a country or company all the bad news was completely out and known by everyone from school teachers to captains of industry, from alderman to the President of the country. He wanted abject pessimism. He would then begin to buy. Templeton believed that once "Maximum Pessimism" was reached the odds swung in his favor. It was at this point that the citizens, capitalists, and politicians were fully cognizant of the problem and each in his or her own way was pressed to do the right thing -- stop the bleeding. Crises result from bad decisions gone bad. Crises call out for leadership to solve the problem -- stop the bleeding. This "stopping of the bleeding" is difficult and requires that very proud men and women (usually men) to admit that they have failed. Most business leaders do not have the courage to do that the right thing when it makes them look bad . It is only when the markets turn against them that they are actually rewarded for admitting their failures. Stopping the bleeding is facing the fact that something is wrong, identifying what is wrong, and cutting it out. Consumers, bankers, and the government have been riding the magic carpet of debt. The recent subprime crisis has shown the magic carpet for what it is -- a rug. The leadership of companies that are the first to acknowledge that the magic carpet is a rug and value it appropriately will survive. Those who hold any illusion that the carpet has any powers of flight will find themselves without a job very soon. Thus far, I believe one of the first bankers to call the magic carpet a rug is Kenneth Lewis of Bank of America. My guess is that John Templeton would approve of Mr. Lewis' confession that the had learned about all he wanted to know about investment banking. I'm betting that Mr. Lewis will stop the bleeding in BAC's investment banking division, and in doing so, persuade deep value investors who are followers of John Templeton that "Maximum Pessimism" has been reached.