Morningstar - Q2 2020 - 12

Dispatches

The Wisdom of Sages
Be humble, be alert,
and stay the course.
P H I L L I P S C U RV E

Don Phillips

My first investment experience was with
the Templeton Growth Fund. My father introduced
me to the fund, and we watched Sir John
Templeton together when he appeared on Wall
Street Week with Louis Rukeyser. I was
impressed by Templeton's plain-spoken manner
and his commonsense approach- he spoke about
investing in terms that even I as a teenager
could grasp. I was so impressed that I dug deeper,
reading several books either by or about
Templeton that made an indelible impression on
me. I was taken aback by his insights and
his occasional boldness, such as when
he famously borrowed money to buy shares of
every stock on the New York Stock Exchange
trading at less than $1, betting that America would
lead a global recovery and expansion after the
horrors of World War II.
Mostly, I was impressed by his humility.
One thing Templeton said that has stuck with me
to this day was that any time you buy a stock,
no matter how well you have researched
it, no matter how convinced you are of its merit,
you should be prepared for it to drop by
50%, 60%, 70%, or more. I was floored by this claim.
Templeton was a stock-picking genius. He had
a team of talented analysts. He had access to the
best Wall Street insights. Surely he was
rarely wrong about a stock, and surely when he
was, it was never by this magnitude. I could
see my stock picks dropping sharply, but surely not
those of such a respected pro!
When I joined Morningstar and began to pursue
a career in investments, I recognized a need
to expand my reading beyond Templeton. I started
a program of trying to read an investment
book a week for the next two years. Some of these

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Morningstar Q2 2020

texts, such as John Train's The Money Masters
or Burton Malkiel's A Random Walk Down
Wall Street, were similarly insightful, but much of
what I read was of a very different tenor.
Gone was the humility of Templeton. In its place
was a greater degree of hubris about the
inevitability of investment success, the certainty
of bets now seen in retrospect. While some
of these texts conceded that investment returns
could be unsteady, they all focused to
various degrees on the certainty of long-term
winnings, provided one stuck with the program.
These writers all assumed that stocks would
rise by 10% a year on average-small stocks even
more. (And their picks, of course, could be
assumed to rise over time by something more than
these market averages because at that time
it was assumed that great managers regularly
beat the market-and the people who
got contracts to write investment books were
obviously great investors.)

of hubris I saw there. Armed with sophisticated
mathematical models, these investors could
spit out expected returns and risk exposures to the
second decimal. The abject failure of portfolio
insurance or the inability of these models
to navigate the Asian or the peso crises, the tech
collapse, or the 2008 global financial crisis
did not diminish the hubris of these pros. The
contrast between Templeton's humility
and their arrogance could not be more extreme.
The more sophisticated your model, it seems,
the harder it is to admit that you just don't know.
After all my reading and experience in the
investment world, I still come back to Templeton's
insight: Any stock at any time can lose
most of its value in an instant. The best financial
advisors embrace this truth. But they also
recall Templeton's belief that even given this
chance of loss, investing is still a worthy
activity and that out of the chaos of great losses

You just need some courage and some
common sense.

These writers conceded that investment
returns might be choppy, say up 20% some years
and down 20% in others, but they uniformly
assumed that they would average around 10%.
None of these experts asserted the possibility,
much less the likelihood, of a 70% drop as
Templeton had. As such, of course, none addressed
what it takes to get back to a 10% average
if you experience a 70% decline-especially
if it happens early in your experience and it scares
you out of the market. In other words, these
writers of lesser skill and experience than
Templeton had only a fraction of his humility and
real-world insight.
As I continued my career at Morningstar, I got
more insight into the world of institutional
investing and was struck by the even higher level

comes the opportunity for great gains, as seen
in Templeton's big bet on downtrodden
stocks coming out of the Second World War. Wise
investors must be ever alert to both the
dangers and the opportunities the market brings
them. You don't need a multimillion-dollar
model to tell you that. You just need some courage
and some common sense.
When all the latest technology fails us, we can
take solace in time-tested wisdom: Be prepared
for big, unexpected losses. Be alert for
opportunities when others lose hope. Above all,
stay the course. K
Don Phillips is a managing director with Morningstar. He is
a member of the editorial board of Morningstar magazine.
Morningstar - Q2 2020

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