A Bull Market Winner, He Bets on Next Boom

Five years ago this month, the long climb of stock prices we call the bull market began. As measured by such indexes as the Standard & Poor’s 500 or the Dow Jones industrial average, stock prices have more than tripled since August, 1982.

But many investors stopped cheering long ago and started worrying about how and when the party would end. Would there be a crash? Was it time to sell?

There were and are no good answers, as you might expect, because nobody can truly predict the market. However, some professional money managers have lately begun to look through a relatively mild decline in stock prices to a new bull market beyond. And included among them is one of the most successful investors of the past half a century. “All bear markets are temporary,” says John Templeton, 74, the founder and chairman of the Templeton mutual funds group, “lasting 1 1/2 years on average.” So it is more productive to look ahead to the next market upswing.

Mountain of Money

Which is what Templeton is doing with great enthusiasm because he believes that stock prices in the next bull market will “rise far above what has been considered normal in the past.” He means that stock prices of more than 50 times the underlying corporate earnings, a ratio considered excessive today--when the average U.S. stock sells at 18 times earnings--would be acceptable. The effect would be an unprecedented stock market boom.

Templeton bases his prediction on the fact that a huge mountain of investment money--between $2 trillion and $3 trillion in the United States alone--has grown up during his career, in corporate and state pension funds and in individual savings for retirement.

Furthermore, the supply of stocks is shrinking. Because of leveraged buyouts, takeovers and corporations buying in their own shares, the number of shares has diminished by 10% since 1984. That means, say Templeton and others who have noted the trend, that there is too much money chasing too few stocks.

That idea has been heard before, notably in the late 1960s, just before the recession and bear market of 1969-70. The theory didn’t hold then. Why does Templeton think that it will in the future?

Because, he says, the world economy is going on a long-term boom. Templeton, a Tennessean who was a Rhodes scholar at Oxford in the 1930s, sees world production of goods and services quadrupling in the next 40 years, and corporate earnings accelerating. He sees living standards--and also the cost of living--doubling every 10 years.

This combination of rising prosperity and inflation, Templeton believes, favors common stocks--but not bonds and other fixed-income investments.

Global Investing Pioneer

Forty years is a long time, and Templeton is 74. What reason is there to pay attention to him? His record, mostly. Templeton is a man who has been right before. He got his start as a master investor in 1939, shortly after war broke out in Europe. Borrowing $10,000, Templeton bought $100 worth of every stock selling for one dollar or less, whether the company was bankrupt or not. And four years later he got $40,000 for his initial stake.

He went on to pioneer global investing.

As recounted in “The Money Masters,” by John Train, Templeton saw U.S. supermarkets such as Safeway anticipating 15% growth in sales and found a better investment in Ito Yokado, a grocery chain in Japan, where supermarkets were still a novelty and faced decades of faster growth.

Searching out bargains like that in the 1950s and ‘60s, long before it became customary for investment managers, enabled Templeton to build a mutual funds company that now manages $2 billion.

What is he buying and selling today? For the short term, he likes small U.S. banks that are selling at nine or 10 times earnings in a market where the average stock sells for double that.

The really big returns in the future, he believes, will be made in developing countries--where his top picks are the economies of Brazil and South Korea.

Templeton is negotiating to invest in both countries, which bar foreign stock purchases. In the meantime, his company has invested $30 million in Telefonos de Mexico, and in Cifra S.A., a Mexican retail conglomerate; in the Farmers Banks of Thailand, in the Philippine telephone company and others.

Isn’t currency devaluation a constant threat in such investments? Templeton laughs: “The currency may go down 200%, but the stock prices rise 800%, so there’s a profit.”

Finally, when is it time to sell? You mean, when is it time to switch, he says. “It’s impossible to sell without having your assets in some other form,” he explains. “Therefore, the time to sell is when you have found some other asset that you think is a 50% better value.” For most people these days, that might be a secure 6% to 7% in a money-market fund, certificate of deposit or Treasury bill. For Templeton it would more likely be the Mexican or Philippine telephone company.

That’s probably why Templeton has become enormously wealthy in the investment business, and most people haven’t.