Lauren Templeton: Eventually, machines will be capable of playing a role that more closely resembles active management. The past decade has already seen a broad expansion of passive investing. The best way for investors to adapt is to stay flexible and open-minded.
Oct 25, 2016 at 1:31PM
Lauren Templeton is the founder and president of Templeton & Phillips Capital Management, a value investing boutique in Chattanooga, Tenn. She began stock investing at age 7 and lives by the philosophy of "be greedy when the market is fearful." Key to the above-average returns she's achieved over her investment career has been buying into the market when others aren't looking.
Inside Value analyst Rana Pritanjali talked with her about the best temperament for value investors, paying up for quality companies, how the investing landscape might change in the coming years, and more.
Rana Pritanjali: Can you talk about your investment style? How has it evolved over the years?
Lauren Templeton: I am a bottom-up global value investor. When I first launched, the fund was focused strictly on U.S. equities. Experience has allowed me to broaden my universe of securities for potential selection. Also, my strategy was largely quantitative when I began my investment career. My great-uncle, Sir John Templeton, correctly assumed that a young person would not be able to control their emotions very well, and a quantitative strategy removed many of the pitfalls.
Rana Pritanjali: Are you still discovering things about yourself as an investor?
Lauren Templeton: It can be difficult for me to sell a winning position, and I find that it is easy to justify new valuations. I have discovered my bias here over the years, and I am careful to guard against it with an adherence to our estimate of intrinsic value. My learning curve was very steep early on. I launched my professional career as a portfolio manager at the age of 24. Years 24 to 32 were a vertical climb, particularly in terms of the volatility in the markets over that time period. The experience was invaluable, though, as it compressed many years of market environments into a short span of time.
Rana Pritanjali: How much importance do you put on the behavioral aspect of investing?
Lauren Templeton: The behavioral aspect to investing is most important, in my opinion. In my career I have employed several very smart analysts/portfolio managers who were much smarter with better resumes than mine. It is always interesting to me that most of the analysts that claim to be value investors do not possess the temperament to execute the strategy. (1) You have to be comfortable being unpopular (2) You must possess the capacity to suffer (for sometimes long periods of time). (3) You have to be patient (4) You have to be focused on the long term. (5) You have to remain calm and focus on the opportunity in a crisis situation.
Rana Pritanjali: Which valuation tools do you use? Have you found any limitations in them?
Lauren Templeton: We generally use a discounted cash model that forecasts 10 years of fundamentals under three different operating environments. Depending on the firm and industry though, i.e., a financial, we use a different valuation model, such as dividend discount model or residual value model. Still other firms with higher capital intensity may lend themselves to an NAV or replacement value approach. On firms with distinct operations, a sum of the parts and multiple analysis may be more appropriate. There are trade-offs in each of these models, and over time, you learn which ones work best in a given situation.
Rana Pritanjali: Do you think about why a company is mispriced?
Lauren Templeton: Of course. We are always trying to figure out why the stock is mispriced, and we focus on securities where the mispricing appears to be a temporary situation that can be resolved in the next few years, or perhaps longer, depending on the size of the discount. Our average holding period is five years. Often we can identify a catalyst, but in the cases where we have not, this has not always precluded investment. Often a catalyst can unfold over the course of many years due to economic factors, and so most often, the key is patience.
Rana Pritanjali: Do you think excessive conservatism (such as a big margin of safety) can limit your universe of stocks by eliminating high-quality companies that fail a too-rigorous valuation test? And would you pay up for companies that earn superior returns for longer than average?
Lauren Templeton: Of course. It is OK to pay more for a company that earns superior returns for a long period of time. The trick is to keep a "wish list" of securities in your desk drawer, and when there is a market sell-off, refer to that list for purchases. Uncle John went so far as to have GTC limit orders on certain stocks he liked, but at really low prices. It is rare that a broad market sell-off will trigger execution, but it has happened to us once.
Rana Pritanjali: Different investors have different risk appetites. How do you communicate your philosophy to your clients, especially during tough times?
Lauren Templeton: Very carefully. We do a really great job of educating investors on value investing and our strategy. My old office in downtown Chattanooga had the phrase "trouble is opportunity" in big gold letters above the front door, instead of "Templeton & Phillips." If an investor asked, "what does that phrase mean?" I knew it was a poor match.
Rana Pritanjali: Given the technological changes, how do you think the investment industry will evolve in the coming years?
Lauren Templeton: Radically. I think investing will become more machine-driven through the development of computing processes supported by artificial intelligence and deep learning.
Rana Pritanjali: Does that imply that passive investing will be more widely used?
- Oct 25, 2016 at 1:31PM
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