A few weeks ago, we shared John Templeton’s 1948 letter on the upside of a down market. Given the recent downturn of the stock market, Lauren Templeton and Scott Phillips contribute some of their thoughts:
The upside of a down market is a matter of common sense if an investor holds the perspective of a bargain hunter. Clearly, in light of the current stock market correction, John Templeton’s thoughts on this matter are as relevant today as they were in 1948. Templeton’s remark that “investors generally are unhappy” following a 9 percent correction in the late summer of 1948 is just as applicable to the recent 15.6 percent decline in the S&P 500 from its April 2010 high.
However, if one holds the view that buying future earnings and cash flows for the lowest possible price raises the probability of making a successful investment, and by extension higher future returns in the stock market, then corrections should be welcomed. The basic premise is that the likelihood of making a wise investment is much higher as stock prices fall, but many investors become too distracted by predicting the future path of the market over the near-term and lose sight of these opportunities.
In sum, one oddity of stock investing is that while identifying bargains becomes easier in a correction, the actual act of investing becomes much harder due to focusing too heavily on questions that are unknowable such as fear over what the stock market will do tomorrow, next week, next month, etc. With that said, those investors who focus solely on investing in the multiplying number of bargain stocks during a market sell-off will ultimately position themselves for higher future returns in the years to come, realizing the upside of a down market.
Lauren Templeton is president of Lauren Templeton Capital Management, LLC, and Scott Phillips is author of the newly released Buying at the Point of Maximum Pessimism: Six Value Investing Trends from China to Oil to Agriculture (FT Press, 2010). Templeton and Phillips are also coauthors of Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter (McGraw Hill, 2008).