Flexibility: It is important to remain flexible and open-minded about the different types of investments you might include in your portfolio. There is no one type of security that is always best.  There are good times to buy bonds and good times to buy blue-chip equities, or cyclical companies or other investments.
If a particular type of security is currently very popular with investors then it is usually a bad time to hold it.
And always keep the flexibility of mind to think that there are times to sit on cash.  Holding cash allows you to take advantage of investment opportunities.
If you have an area of investment, say oil shares, that has done well for you in recent years then it may be the time to ask whether this is a good place for you to be in the future. Look around and ask, “What is depressed in price today?  Oil shares may have been bargains two or three years ago, but they may not be now, and it would be foolish to stick with them.
Tip: Look for those securities that performed worst in the recent past and assess whether they are now bargains.
Patience
Buying shares with a long-range view in mind requires patience because it frequently takes the market quite a while to catch up and revalue what you’ve bought.  These shares can continue to be neglected for several years.
Benjamin Graham said that it would often take three or four years for Mr Market to appreciate the companies he bought into.
Warren Buffett and Charlie M……………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Warren Buffett, Charlie Munger, John Templeton and all the other great investors spend(t) a great deal of time trying to understand the social, economic and political dynamics of countries around the world. These must be considered by investors when estimating future earnings and the risk attached to those earnings – bargains cannot be identified without this.
All have observed first-hand throughout their lifetimes the power of allowing free-enterprise to release the entrepreneurial spirit and witnessed the stifling effect of extreme socialism and other forms of authoritarianism.
This can lead to nationalisation (or even confiscation) from which the investor is unlikely to receive fair value.  Controlled economies may also impose price controls and other distortions in the economy that dissuade entrepreneurs from creating wealth.
See the roots of historical shifts
Warren Buffett is a keen student of American entrepreneurial history and is forever quoting statistics on the phenomenal growth of living standards flowing from free enterprise combined with the need to support the less fortunate.
John Templeton looked for governments that set their economies on path toward capitalism and free markets.   After graduating from Oxford in 1936 he visited India and Hong Kong. Both were very poor, with people dying on the streets.
When he returned years later, he noticed a dramatic change in Hong, but not in Calcutta; a change he attributed to the difference between enterprise and socialism.  The government in India had a tendency to regulate everything so there was little progress; whereas in Hong Kong the government kept its distance, allowing businesses wide latitude.
The result was that the standard of living multiplied ten-fold over fort………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Warren Buffett says that you should be diversified, but not to “mediocrity”. To lower risk it is essential to split your fund between at least five companies and possibly as many as 20, or 25 if you are full-time professional investor. Beyond that you are diversifying outside of your best ideas, the true bargains. Also, it is very difficult to keep track of dozens of companies. You might end up with only superficial knowledge of each.
John Templeton would say that the only people who should not diversify are those who are right 100% of the time; few investors are right more than two-thirds of the time – he included himself in this assessment.
Templeton offered a guideline: every investor should have at least 10 shares. Even if you are extremely careful in your share selection you cannot predict the future.  A major oil spill, an unexpected technological advance by a competitor or a government dictat can remove half the value from the company.  In addition, you may not have spotted serious internal problems when you first undertook the analysis.
Thus you must diversify – by company, by industry, and by risk.
For the fund I’ll be running next year full-time (one open to small investors and institutions) I expect to diversify to at least 16 companies to avoid these Templeton dangers and to benefit from a wide range of great business models. But I’ll be surprised if the portfolio is split more than 25 ways – there just aren’t that many good ideas out there.
Be bottom-up
Buffett and Templeton are/were both bottom-up analysts, examining shares at a company level first. If that leads to a concentration in a particular country that year, then so be it.
This concentration may appear to
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

It is important that you do your own research, that you investigate before investing.  Understanding what makes a company successful is vital. How does the business work? What is its performance over time and how does that compare with competitors? What stimulates sales activity?  What pressures might prevent a growth in sales?
In answering these types of questions, you increase accuracy in judging why the company is currently out of favour and whether a poor situation is temporary, or the company will be consumed by it.
Both John Templeton and Warren Buffett spent a great deal of time studying an industry, the competitive position of the firm and personal qualities and competence of the management.
Home-in on the key value drivers for the industry, e.g., with miners it is reserves, with retailers it is profits and competitive strength.
When researching a company spend as much time researching its competitors as the company itself.   Indeed, the best information comes from competitors rather than directly from the company. Competitors put a great deal of effort into competing and thus develop a deep knowledge of the weakness and strengths of the opposition. Ask various company executives which company in their industry they would invest in, other than their own.  They are generally optimistic about the prospects for their own firm and so may give a less than frank assessment. But if you ask about a competitor within thirty seconds you’ll have a fulsome analysis.
An indicator that the firms in a particular industry are under-priced is an increase in merger and acquisition activity; if they are buying each other at bid premiums of 50% or more perhaps share prices are too low.
Also, companies buying
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

One of the greatest ever investors, John Templeton generally focused on what a company could earn two to five years down the line. Warren Buffett intends to hold most of his portfolio constituents “forever”. On the other hand, the great majority of share traders look to the short term – what is going to happen to earnings next month or next year.
By looking to the medium-term and long-term you filter out short-term noise that is currently pre-occupying the market. Taking a longer view gives the bargain hunter a psychological edge, allowing the exploitation of temporary problems in business.
By asking about the company’s strategic position and the quality of management in terms of their focus on long-term shareholder value you gain a superior perspective relative to traders in the market.
The sorts of questions you are forced to answer include: What gives this company a competitive advantage?  Will they maintain their earnings power over a long period, in bad times as well as good?  Is the quality of the brand such as to provide durable pricing power?
Estimating value
In defining ‘value’ John Templeton said he tries to work out his best estimate of earnings in five years time.  He then would pay no more than five times this figure for the shares.  Buffett calculates intrinsic value by discounting future cash flows over the next few decades – he does this in a rough a ready way in his head without paper or calculator on the same principle that you don’t need to weigh people to know if they are grossly over-weight.
These great investors’ approaches have the advantage, when buying into companies reporting problems and therefore diminished share prices, of distinguishing between those with temporary, solvable, problems and those with a deep-seated strategic disadvantage or unattractive industry economics.
Investors versus speculators
Both Templeton and Buffett tell us to invest and not to speculate.  The stock………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

Rule: Buy when others are selling and sell when others are buying
One of John Templeton’s most famous mottos is ‘to buy when others are despondently selling and to sell when others are avidly buying’.  Such a policy requires a great deal of fortitude but it pays the greatest ultimate reward.
Another is to ‘buy is when there’s blood on the streets’.
Crisis leads to panic as sellers are driven by fear. Fears become exaggerated.  Difficulties in the economy often appear worse at the outset, but all crises subdue in time.  When the panic dissipates share prices rise.
Example
In August 1979 there were many reasons for pessimism: inflation, high interest rates, oil prices and fears over oil supply, Japanese competition.  On the cover of Business Week were the words, ‘The Death of Equities’.
Even pension funds reduced their equity holdings and bought inflation hedges such as gold and real estate.
But Templeton thought the US equity market to be incredibly cheap by historical standards – the average Dow PER was 6.8, the lowest on record, compared with the long-term average of around 14.  He invested heavily, apportioning 60% of his funds to the US.
Consistent endeavour
Templeton maintained a ‘wish list’ of well-run companies, with bright prospects and good managers, but with high share prices, thus he could not bring himself to buy them – he had to wait.
Then, when a major market decline occurred he could pick a few of these as the share prices fell into the bargain range.
Such an approach creates a bulwark against………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

First rule: Don’t follow the crowd: John Templeton developed a knack for looking at investments in a different way to other investors, whether in a different country, with a different time horizon, using a different valuation method, or with a different level of optimism or pessimism.
He would say that share picking is the only activity where you do not follow the advice of experts. If you had a medical problem and asked the advice of 10 doctors and they all agreed, you’d probably follow their advice. But if 10 professional share analysts say that this share is a good buy then you should not buy it.  
Anything great about the company is already in the share price. It is often wiser to do the opposite of what the experts say.
Finding that others disagree with your buy and sell decisions is something that goes with the territory for a bargain hunter.  If the consensus was favorable it would not be a bargain.  Bargain hunters are independent-minded and have faith in their own judgment.
Humans seem to be hard-wired to overreact to a situation and this is linked to an strong impulse to respond to the actions of the other buyers and sellers rather than apply sound reasoning.
Take advantage of people with less clear thinking, who are dumping stock or hyping stock on the basis of emotion.
This easy to say, difficult to practice:
‘Of course, you may say, buy low, that’s obvious. Well, it may be, but that isn’t the way the market works. When prices are high a lot of investors are buying. Prices are low when demand is low, investors have pulled back, people are discouraged and pessimistic. When almost everyone is pessimistic at the same time, the entire market collapses…investors are on the sidelines, sitting on their wallets. Yes, they tell you: ‘Buy low, sell high’, but all too many of them bought high and sold low. And when do they buy? The usual answer: ‘Why, after analysts agree on a favorable outlook.’  This is foolish, but it is human nature.’ (John Templeton)
How to think independently
To nurture separation from the crow………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
​

In examining John Templeton’s Korea story we learn the importance of patiently accruing knowledge while waiting for the right opportunity.   As far back as 1983 Templeton declared that he thought South Korea would be the next ‘Japan’, but he did not invest his client’s money there because of the restrictions on capital removal from the country. In a talk at the Templeton funds meeting in 1991 he mentioned Korea as one of the less developed nations (alongside China, Brazil, Thailand and Turkey) with the most ‘exciting investment opportunities’.
The restrictions on removing money from the country were relaxed in 1992, but it was not until after the 1997 Asian financial crisis that he really started to focus money in the country.
Characteristics for a good investment environment
South Korea had followed the same plan for economic development that Japan used: high savings rates, determined exporters and high education levels. This resulted in the highest average economic growth in the world between 1970 and 1997.
The Korean conglomerates, known as chaebols, took on grossly inflated levels of debt to permit ever more ambitious expansion.
The 1997 crisis hit hard – currency down, shares down and debt rising. When they failed to pay interest due some chaebol sought bankruptcy protection (e.g., Kia Motors, Haitai).  In return for financial aid the country, now in deep recession, agreed to further open its markets.
The January 2, 1998 edition of the Wall Street Journal reported Templeton buying Korean-focused vehicles (e.g. mutual funds).
He was quoted as saying ‘I think the Korean market is somewhere near the bottom....All my investment career, I have always tried to buy at the point of maximum pessimism....The pessimism in Korea has been so intense in recent months’.
He was betting that (a) Korea would not re-impose capital controls, and (b) the economy would return to its old growth rate.  Price-earnings ratios were around 10.
Recognise when some else has more expertise
He chose to avoid stock picking with Korea. Instead, he hired The Matthew Fund, run by people who had studied Templeton for many years and followed his approach, who had greater familiarity with specific stocks in Korea.
Note that he chose the Mat
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

In the 1950s and 1960s Japan was perceived by American and other investors as a loser of wars, an industrial backwater and a small market.  Clearly its reputation was low, making trivial low-cost products; made in Japan meant low quality.  People dismissed the Japanese as never having the potential to lead on research or quality.
Templeton had studied the Japanese character and business practices since the 1940s. He knew far more than most. His observations were that the Japanese people were tremendously hard working and they saved to invest in future prosperity.
Out of every yen earned one-quarter was saved, compared with the typical US saving rate of around 5%.  Japanese thrift enabled them to invest in more plant and machinery.
There was also a sense of solidarity between companies and their employees; they considered it a privilege to work for a fine company. And they admired business leaders.
In the decade following the devastation of the Second World War Japan had already become an industrial producer on a big scale, focusing particularly on heavy equipment and machinery.
Starting in the early 1950s Templeton invested much of his personal savings in the country but was unable to put client funds into Japanese shares because of the strict exchange controls restricting withdrawal of money from the country: you could put money in, but you could not take it out. Templeton thought that the government would continue to liberalise the economy and eventually allow foreign investment to flow. When he was proved right in 1968, he was ready, and immediately invested client funds.
Japanese shares were trading at an average of only four times Templeton’s estimate of annual earnings, whereas US stocks were trading at 19.5 times.
Other investors were put off by extreme price fluctuations and a lack of information on the underlying companies.  They clung tenaciously to their generally downbeat view of Japan.
But Templeton found so many bargains that the Templeton Growth Fund, TGF, never paid more than three times earnings, even for the best companies.
Soon 50% of TGF was in Japanese shares. He was criticised for (a) buying in Japan, and (b) devoting such a high proportion of the fund to Japan. His reply to which was that was where the bargains were to be found.
Principle: follow the bargains not the crowd
Accounting and legal complexity present an opportunity
Other investors avoided Japanese shares because of the complexity of the accounting and legal rules.
Japanese companies did not report consolidated income numbers. So, if a subsidiary earns $1,000,000, but hands over only $150,000 to the parent company, the unaware investor may think that the company parent has an interest in only $150,000 of its subsidiary’s earnings.
In reality, if it owns 60 per cent of the subsidiary, it has an interest of $600,000. Templeton looked for the companies with the widest gap between the parent company reported earnings and the consolidated earnings.
Principle: it pays to read the notes to the accounts when estimating intrinsic value
Hitachi owned a number of subsi​………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
 

In 1940 John Templeton bought for $5,000 an investment counselling firm with only eight clients owned by George Towne, an elderly man. With a name change to Towne, Templeton and Dobbrow and the purchase of second-hand typewriters and a second-hand library of research material and books (thrift at all times!), Templeton had arrived as an independent investment counsellor, aged 28. He could not afford to pay himself a salary for two years, and had to rely on savings to see him through.
He was a conscientious manager, seeing his role as that of someone who could, through sound investment, allow his clients to retire comfortably or send children to college.  His clients received an investment programme individualised for their specific needs.
He decided how to split a client’s money between bonds, equities and property. He also helped with estate and financial planning, offering a service to reduce income and estate taxes. He always regarded serving people as a pleasure – a greater pleasure than spending thousands of dollars.
One of his personal mottoes: ‘OPM is sacred’. OPM is other people’s money.
While cutting unnecessary cost he did not skimp on hiring the best talent.  He believed that you get a better bargain in the marketplace for executives and employees if you pay about 20% more than the salaries available elsewhere.  An excellent employee is worth more than two mediocre employees.
There is a major difficulty in scaling-up an investment-counselling business.  Each account has a unique set of objectives and circumstances relating to risk tolerance, taxes and timing.  Clients are on the telephone regularly and have a claim on the manager’s time.
It became increasingly apparent that a more rational, time-effective approach to managing money for other people was to set up mutual funds. He saw in this type of business a way of helping families of different income levels save money and accumulate wealth and security.
Templeton Growth Fund
Templeton, with a few colleagues, set u
………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1