How Sir John Templeton Would Play Today’s Markets

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Speculation of a looming U.S. recession has been acute.

Analysts like Gary Shilling suggest that we are already in the midst of a recession.

In contrast, Trump advisor Larry Kudlow, the director of the National Economic Council, recently asserted, “I don’t see a recession at all.”

This debate has struck global stock market sentiment hard.

The CNN Fear & Greed Index – my favorite measure of market sentiment – is fluctuating between “fear” and “extreme fear” levels.

But long-term investors know that both recessions and bear markets are inevitable, making the question not if but when?

Whether or not a recession is in the cards today, savvy investors who position themselves appropriately stand to profit.

And even small investors can boost their gains through the use of exchange-traded funds (ETFs).

So now I want to look at how Sir John Templeton – the father of global investing – would play our current financial markets.

An Illustrious Investment Career

These days, you can buy a foreign stock traded on a foreign exchange with just a click of the mouse. That makes it difficult to appreciate what a pioneer Templeton was in the world of global investing.

Born in 1912, Templeton hailed from Tennessee. He graduated from Yale in 1934 and won a Rhodes scholarship to study at Oxford.

After studying law in England, Templeton embarked on a whirlwind journey that took him to 35 countries in seven months. This experience opened him up to the enormous investment opportunities outside of the United States.

Templeton then returned to Wall Street in the depths of the Great Depression in 1937 to start his investment career.

He quickly established himself as a contrarian. He borrowed a princely sum of $10,000 as a 26-year-old and bought shares of 104 U.S. companies trading at $1 a share or less.

This was in 1939, even as the German tanks were rumbling into Poland. Templeton held on to each stock for an average of four years. He turned his initial $10,000 investment into $40,000.

A Contrarian to the Core

Templeton was perhaps best known for investing in Japan in the 1950s – when “Made in Japan” was synonymous with trinkets hidden in cereal boxes. At one point in the 1960s, more than 60% of the Templeton Growth Fund’s assets were in Japan.

Equally importantly, Templeton had the savvy and discipline to exit markets when they were overvalued. He sold his positions in Japan well before its market collapsed in 1989.

Templeton also had an enviable grasp of financial history – and how to profit from it.

In 1999, he famously predicted that most internet companies would be bankrupt within five years. He very publicly shorted the U.S. tech sector.

At the start of his trade, his positions went against him. But by March 2000, Templeton’s bet against the dot-com stocks looked ingenious. He had made $90 million in a matter of months.

It’s a terrific irony that Templeton – a value investor celebrated for sussing out little-known global opportunities – made his quickest fortune by shorting U.S. stocks.

How Templeton Would Play the Markets Today

If Templeton were alive today, he’d have two important insights.

First, like Robert Shiller – Yale professor, Nobel laureate and author of Irrational Exuberance – Templeton would recognize the U.S. stock market as overvalued.

Even with the recent pullback, the S&P 500 is trading at a cyclically adjusted price-to-earnings ratio of nearly 30. That puts it more than 70% higher than its historical mean. (It also makes the U.S. stock market the third most expensive in the world after Ireland’s and Denmark’s.)

Second, Templeton would argue that many names in the U.S tech sector are massively overvalued. And based on the success of his bets against internet stocks in 1999, he’d start placing bets against some of today’s high-tech market darlings.

Implementing Templeton’s Thinking

Twenty years ago, you’d have to buy and sell short stocks to implement Templeton’s views. Today, you would buy relevant ETFs.

First, you would buy the cheapest stocks in the world through the Cambria Global Value ETF (CBOE: GVAL).

Second, you would short the darlings of the U.S. tech sector by buying MicroSectors FANG+ Index -3X Inverse Leveraged ETN (NYSE: FNGD). This ETF bets against the entire FAANG (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) sector using leverage to triple your profits over the short term.

Neither of these positions is a current recommendation in my ETF trading service. But they may be in the future.

If and when I do recommend them, I am certain that Templeton would approve.

Good investing,

Nicholas

P.S. I’m currently listening to Ryan Holiday’s The Obstacle Is the Way, a contemporary discussion of the ancient philosophy of stoicism – which has taken Silicon Valley by storm.

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