Lesson 5 of 7
Templeton and maximum pessimism
John Templeton bought where the outlook was most feared, worldwide. See why cheap and feared are two different questions, not one.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- John Templeton's practice was to buy where the outlook was most feared, not where it was most hopeful.
- Sentiment and price are two different questions: a stock can be feared and still expensive, or hoped for and still cheap.
- Maximum pessimism is clear only in hindsight: fear can deepen after you buy, and sometimes the fear is right.
Templeton's rule was to buy at the point of maximum pessimism and sell at the point of maximum optimism, applied across whichever country's market looked most feared at the time.
Sentiment and price are two different questions
RowsSentimentColumnsPrice
Hopeful, Below value
Hopeful and cheap
Hopeful, Above value
Hopeful and expensive
Fearful, Below value
Fearful and cheap
Fearful, Above value
Fearful and expensive
Buy at the point of maximum pessimism
Lauren Templeton and Scott Phillips describe a discipline of buying into the market or country that investors are most afraid of, on the reasoning that fear, not fact, sets the lowest prices. The method needs no forecast of a turn. It needs only a willingness to buy while the fear is still there, which is also the hardest part: the fear that makes a price low is the same fear that makes buying into it feel wrong at the time. Maximum pessimism is clear only in hindsight: fear can deepen further after a purchase, and it is sometimes right about a business that never recovers.
Sentiment is not the same axis as price
A stock can be feared and still expensive, if the fear has not yet reached the price. A stock can be hoped for and still cheap, if the price has not yet caught up to the optimism. The matrix above is the reason Templeton's rule names both: cheap alone is not his target, and fearful alone is not either. It is the corner where both point the same way.
Check yourself
Templeton's rule points to buying at what point?
- Whenever a stock hits its lowest price of the year, regardless of the mood around it
- The point of maximum pessimism, when fear is at its highest
- Whenever trading volume is unusually high
Show the answer
Answer: B.
Lauren Templeton and Scott Phillips describe buying where fear, not the underlying facts, has pushed the price lowest.In the worked example, what changed between the hopeful year and the fearful one?
- The company's earnings per share
- Only the multiple the market paid
- The number of shares outstanding
Show the answer
Answer: B.
Earnings held at $5 in both years. The multiple moved from 25x to 8x, and the price moved with it.A stock is widely feared but still trades above your estimate of value. Which cell is it in?
- Fearful and cheap
- Fearful and expensive
- Hopeful and cheap
Show the answer
Answer: B.
Fear alone is not Templeton's target; the price has to be below value too.Sources
- Lauren C. Templeton and Scott Phillips, Investing the Templeton Way, 2008: John Templeton's practice of buying at the point of maximum pessimism.
What this leaves out
- The $125 and $40 prices in the worked example are round invented numbers, not any filed company's history.
- Sentiment itself is not a figure this product measures. Nothing here scores how feared or hoped for a market currently is.
- Templeton's method was global. This product's scope is the US market only, so his worldwide version is described, not tested.
- Nothing here is advice about any security.