The Point of Maximum Pessimism

You might have heard of Sir John Templeton. He is regarded as one of the greatest investors of all time. From 1954 to Templeton's retirement in 1992, the Templeton Growth Fund returned a 16% CAGR after fees, one of the best records in investing history.

I am sharing a story of Templeton’s early investment career here -   

In September 1939, Germany invaded Poland. Over the next few months, Norway, Holland, and Belgium surrendered to the Nazis. When Germany invaded France in May 1940, the Dow dropped to a new low of 112. The market crashed about 40% in less than four months.

At this point, Templeton made a bold move: He purchased all US stocks trading below 1 dollar, 104 in total – with borrowed money. His idea was that these companies were significantly undervalued and even the weakest companies were likely to rebound as the surging wartime spending would heal the economy and boost employment. However, Templeton knew that all of his stocks would not work out. 37 were already in bankruptcy. That’s why he substantially diversified.

Templeton not only had the courage to invest in stocks during such a bad time but also had the patience to hold them for years even though things continued to get worse.  

The Japanese attack on Pearl Harbor in December 1941 prompted the United States to enter the war. By April 1942, the Dow slumped to a generation low of 92. During that time, the State of New York Insurance Commission banned stocks from the portfolios of insurance companies, deeming them an ‘inappropriate investment’. To describe the overall market sentiment during that time, investment manager Barton Biggs writes -

“Every right-thinking prognosticator with a head on his shoulders was bearish.”

Yet Templeton stood firm!

Finally, in the spring of 1942, the market took flight as the US economy started to revive. Templeton’s stocks soared. He eventually sold them at ~5x prices after an average holding period of five years.

I have shared this Templeton story from the book ‘Richer, Wiser, Happier’ by William Green. In this book, William Green tells why and how the world’s greatest investors win in markets and life based on his interviews with them. I highly recommend this inspiring and thought-provoking book to investors. 

Templeton was one of the pioneers of value investing and a true contrarian. He used to buy stocks during times of extreme pessimism when people were desperately trying to sell. He coined the phrase: “the point of maximum pessimism” to describe the moments when fear and desperation go viral. 

Templeton's investment strategy to buy when there's extreme pessimism is still relevant. We know investors who remained optimistic during the pandemic-induced turmoil in the markets came out as winners.