Business

A bubble set to burst

The clean of value investors sees no good value at the moment

September 11 2000
Business

A bubble set to burst

The clean of value investors sees no good value at the moment

September 11 2000

A bubble set to burst

The clean of value investors sees no good value at the moment

Sir John Templeton, the founder of the Templeton family of mutual funds, was one of the first fund managers to recognize the value of global investing. The Tennessee-born longtime resident ofthe Bahamas sold his funds to San Mateo, Calif.-based Franklin Resources Inc. in 1992 and now pursues his interest in philanthropy and spiritual issues through the John Templeton Foundation. But at 87, he still follows global markets closely. In Nassau recently, he discussed the current dangers he sees with Eric Kirzner, a finance professor at Toronto’s Rotman School of Management and a Macleans contributor. Excerpts:

Macleans: In 1997, you said no one should invest in the country in which they lived. Do you still believe that? Templeton: No. I exaggerated back then. What I meant to say was no one should have more than 50 per cent of their assets in the country in which they live. It’s just not logical to think that all the best investments will be found in one location. If you look everywhere, you will find lots of good opportunities. Maclean’s: You, along with Warren Buffett, are as closely associated with value-based investing as anyone in the world. Do you still follow value-based investing in your personal dealing? Templeton: Let’s put this on tape. The investing world is rapidly changing. When I first became an investment counsellor in 1937, there were only 17 mutual funds on earth. And their total assets were less than $1 million. Today, on a given day, funds still in my name can take in as much as a billion in a day! Methods of selecting stocks are more sophisticated and more diverse. Up to five years ago, we thought that buying a share at low prices per share relative to earnings, assets and dividends was the right way to do it. But beginning five years ago, we had a psychological

change where people stopped caring what the earnings or the dividends were. They only wanted to know whether it went up yesterday. We republished a 150-year-old book called Extraordinary Popular Delusions and the Madness of Crowds, about famous bubbles. I never thought people would get as wild as they are now.

I never imagined that people like Warren Buffett and Benjamin Graham and I would miss out. We are regarded as old-fashioned. Why listen to anyone who is still looking at assets and dividends? Instead, why not buy something that is going up more quickly?

The big question is—is this high-tech craze a bubble? I, and almost everyone I know, say it is just like the South Seas or the Tulip Bulb craze. The introduction of railroads, electricity, oil and airplanes each convinced people that the world wouldn’t be the same. And in each case it wasn’t. However, each created its own boom and bust. When the tech bubble

bursts, it will be at least as bad as the Japan Bubble in the early 1990s, when the Nikkei fell from 39,000 to 14,000. Macleans: In 1997, you liked Russia, India, Turkey, Ukraine and Brazil. Are these still some of yourfavourites?

Templeton: Up until two years ago, I could always find some nation where stocks are still cheap. But in the last two years I haven’t found one. I’ve got out of just about everywhere. Maclean’s: I have never heard you say anything like that before. Templeton: That’s correct. And neither has [PBS interviewer] Louis Ruykeyser. He was amazed in January when I said buy bonds, buy bonds! Macleans: You’ve always been opposed to putting any wealth into bonds.

Templeton: That has changed. But it is temporary. What you do is buy bonds, and wait for the opportunity to buy stocks again when they are bargains. I estimate that before the next century is over the Dow will rise above 1,000,000. Macleans: So the global bull market is over?

Templeton: That’s a huge question. I’ve never been good at timing. But I’d say that chances are 50 per cent that it is over already. And it could be 10 years before you see the Nasdaq where it was on the 14th of March.

Macleans: What do you consider to be a good representative rate of return for stocks in any given year?

Templeton: Seven per cent. If you want to know where the market will be in 50 years, start in 1980 and project forward at seven per cent. Population increase has been steady but slow, inflation has been up and down but has averaged three per cent—and I expect that to continue—and productivity gains are accelerating. So when you add them all up, seven per cent for earnings and prices of shares is pretty good. And that should hold on a world basis. E]