So far, this summer has proven that the U.S. economy is still extremely vulnerable. Housing sales and prices are still low, unemployment is high, and the stock market is volatile.
John Templeton’s investing prowess is key to understanding that there are better days ahead. His principle strategy, maximum pessimism, should be embraced by economists and investors right now. An interview with Templeton in Forbes magazine article from January 16, 1995, outlines his approach to investing and uses historical examples to illustrate why maximum pessimism works.
In our first excerpt of the article, Templeton explains maximum pessimism in his own words:
“People are always asking me where is the outlook good, but that’s the wrong question,” he responds. “The right question is: Where is the outlook the most miserable?” Templeton calls this approach to investing “the principle of maximum pessimism.” Others might call it contrarianism. He explains it this way:
“In almost every activity of normal life people try to go where the outlook is best. You look for a job in an industry with a good future, or build a factory where the prospects are best. But my contention is if you’re selecting publicly traded investments, you have to do the opposite. You’re trying to buy a share at the lowest possible price in relation to what that corporation is worth. And there’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason.
“To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.”