Why the Best Is Yet To Come

On September 1, 1939, Germany made an unprovoked attack on Poland. Two days later, Britain and France retaliated and Prime Minister Neville Chamberlain declared war on Germany.

It was gloves off and guns on. World Word II (WWII) had just begun.

WWII was described as a ‘total war’. It involved 61 countries and 1.7 billion people (three quarters of the words population). The major participants threw their entire economic, industrial and scientific resources behind the war effort in a bid to get some sort of ascendancy.

The end result was unprecedented carnage. It is estimated that between fifty to eighty five million people lost their lives while hundreds of millions of people were injured. It was brutal and the deadliest conflict in human history.

Such was the decimation that shortly after the war broke-out, the Dow Jones index dropped 25% in a matter of weeks. Investor’s realised U.S. companies would not be able to sell products to defeated nations. In fact, the outlook was so dire that in June 1940 the Time Magazine ran an article suggesting the stock market should be closed. It was that grim.

Stocks were falling and pessimism was reaching all-time highs.

In the depths of all this despair, a young man by the name of John Templeton (later to become Sir) borrowed $10,000 and bought 100 shares in each stock trading at $1 or less on the New York Stock Exchange. (He bought 104 in total and 34 of these companies were already in bankruptcy).

Four years later his investment was worth more than $40,000 and only four stocks turned out to be worthless. (In case you’re wondering about the 34 stocks in bankruptcy, my guess is they were bought by a predators/competitors for their assets).

Sir John Templeton’s approach was very simple – his strategy was to buy at ‘points of maximum pessimism’. He applied this to picking companies, industries and nations that had hit rock-bottom.

Sir John amassed a fortune worth hundreds of millions of dollars (most of which he gave away to charity along the way) starting with nothing simply by buying assets at points of maximum pessimism.

The Masters and the Masses
Since Christmas, world stock markets have experienced some sharp falls on the back of weak oil and energy prices. The US Fed has also back flipped on its decision to increase interest rates and Japan is trying desperately to kick-start its economy. Meanwhile, China looks like one big dish of burnt Peking duck. Its fried and far from home.

For the past month the Australian Stock Market, or more specifically, the ASX 200 has oscillated between 4,900 and 5,100 points and continues to trend downwards. (The ASX 200 is what you see on the box every night).

The Australian market is currently quite good value however I expect it to get cheaper. In fact, I would not be surprised to see a further decline of 15-20% which will take the ASX 200 down to about 4000-4200 points.

When things get ugly, as they sometimes do, you can expect the masses to cast their aspersions the same way they did during WWII. The masters on the hand will see this as an opportune time to start buying big.

Here’s the difference…

The masses buy at points of maximum optimism, the masters buy at points of maximum pessimism. The masses usually buy high and sell low, the masters buy low and sell high. The difference is emotion.

And if Sir John was still alive and able to witness the apparent mess some world economies are in, I reckon he would be rubbing his hands with glee.

The best is yet to come!

Have a great weekend.

Adam

Back Paddock – Do you remember in the last Moowsletter before Christmas when I spoke about Joel, the young guy with Down syndrome who I met at Jervis Bay last year? He wanted to know why I was writing and not playing in the sand. Well guess who I saw in early January? His Mum remembered me straight away because she reckons I look like a detective! At least she thinks I belong on the right side of the law.

Anyway, this time I made sure I went for a swim with him. What a beautiful human being.

Speaking of really great guys, happy birthday to Shahab Sayyad for yesterday. Keep your eye out for this bloke. He’s only 22 but I’ll bet ya’ a dozen lobsters that within the next ten years he is one of Australia’s top chef’s. Great guy, gun cook!