Sir John Templeton Urges Caution
By Scott Burns
NASSAU, Bahamas — Sir John Templeton’s office in Lyford Cay is far from the T-shirt shops, cruise boats and diamond dealers of Nassau. It’s also a world apart from the glitzy Atlantis Resort and Casino on Paradise Island. Now 92, the global value investor still manages his investments and oversees the activities of his foundations. As you will see from his answers in this exclusive interview, Sir Templeton is positive about the long-term future but very cautious about current valuation levels for stocks, bonds, the dollar and real estate.
Q: Wall Street analysts appeared to be uneasy with the market implications of either a Bush re-election or an election win for Kerry. What will the winner have to do to restore confidence to the currency, bond and equity markets?
Sir Templeton: Twelve years ago, I sold to a strong competitor the investment counsel organization I helped to build, including a listing on the London Exchange, so that I could devote seven days a week to help the top 1 percent of intellectual leaders in all nations to become enthusiastic about the benefits of devoting at least 1 percent of gross national product to methods of science for research and discovery, so that humans can benefit from over a hundredfold more understanding of spiritual realities.
However, 45 years service as an investment counselor enables me to answer your first question by pointing out that within a few years, the United States will be forced to find methods to have a balanced federal budget and also, a balance of import and export trade, and also a great reduction in citizens’ expectations about government pensions as early as age 60 and about government subsidy for medical costs.
Q: In the last year you’ve expressed concern over U.S. housing prices. Would you explain why?
Sir Templeton: Prices of houses in all nations for centuries have fluctuated above and below cost of reproduction. In the United States now, in most major cities, homes can be sold for far higher prices than reproduction costs. Several times in my lifetime, house prices have been far below reproduction costs and such cycles are likely to continue.
Q: In recent trading, the dollar has fallen significantly and Europeans are less worried than usual, largely because a cheaper dollar means lower priced oil for Europe. Do you think the dollar will fall further?
Sir Templeton: Throughout the world, prices of oil and gas have no relation to the exchange rate between the U.S. dollar and other currencies, but instead depend on the fact that consumption continues to increase much greater than supply, which will eventually force humans to discover many different ways to reduce their consumption of oil and gas.
Q: As a global value buyer, what markets look best? Which markets are least attractive?
Sir Templeton: In the 92 years since I was born, investors could always find several nations where share prices were more reasonable, but recently, all over the world, share prices have been higher than the cost of creating similar corporations.
Q: In light of current high equity valuations, you have suggested owning less in stocks. Would you put this in terms of a conventional pension fund? Would you suggest some alternatives to equities?
Sir Templeton: Because both share prices and bond prices are high this year, many wise pension managers invest in open-end mutual funds who try to maintain short positions in stocks about equal to their long positions. In this way, a pension fund can benefit from a wise security analyst while waiting for the time when either stocks or bonds can be bought at bargain prices.
Q: There is a school of thought (Arnott, Asness, Bernstein, etc.) that believes investors can no longer expect the historic 10 percent to 11 percent total return on equities. Do you agree?
Sir Templeton: It is normal for voters to elect politicians who promise to spend too much. This increases the rate of inflation, and so after adjusting for inflation, return on stocks over the next market cycle may average only 3 percent.
Q: Junius Morgan once advised his son, J. Pierpont Morgan, that one could never go wrong being bullish about America. Given some of the current concerns, especially the idea that the West’s historic advantages may be waning, do you agree with Junius today?
Sir Templeton: Throughout history, all major nations have eventually had a weaker competitive position; and therefore the Morgan family was shortsighted in thinking that nations of Asia cannot become stronger competitors than the U.S.A.
Q: Economic historian Niall Ferguson has written that the West may soon see the threat of radical Islamic fundamentalism to be as large as the former threat of Russian communism. Do you agree? Would you comment on the rise of Islamic fundamentalism as a trend?
Sir Templeton: Islamic fundamentalism seems to be more backward-looking than progressive. Therefore, nations with the most free enterprise are likely to become more prosperous compared to nations controlled by communism or Muhammadanism.
Q: Do you believe, as historian Samuel Huntington has written, that the period when the West eclipsed manufacturing in China and India is over?
Sir Templeton: Nations of America and Europe in the latest two centuries have encouraged free competition and therefore, enjoyed increasing prosperity, but this advantage will be smaller now that China and Russia have understood the limitations caused by communism.
Q: The late futurist Herman Kahn once wrote that the broad world trend was toward an “increasingly sensate” culture. Your life reflects a very different set of beliefs and values. Do you see a countervailing power to the trend Kahn observed? Do you think fundamentalism (Christian and Islamic) might be that countervailing power?
Sir Templeton: Future prosperity will expand more rapidly in those nations with the greatest thrift and free enterprise.
Q: As I understand it, you have a spiritual view of the world that is beyond the walls of institutionalized religion, perhaps akin to Hegel or Teilhard de Chardin. Have I interpreted it correctly and, if so, would you tell me how you came to it and how you observe it in your daily life?
Sir Templeton: Intellectuals of human history were misled by very limited concepts of reality. Only in the latest century have some humans begun to understand that humans are only one species on one planet out of hundreds of millions of galaxies. I now work seven days a week to help intellectual leaders to welcome research and discoveries vastly greater than humans now comprehend.
Q: Some have argued that America will win the war on terrorism because “The Shah Always Falls” — that free societies always triumph over un-free societies, because un-free societies are intrinsically weaker.
Others see it differently. They don’t see a contest between societies. Instead, it is a contest between a free society and something that isn’t a society.
Sir Templeton: Future progress is helped by experimentation, competition and science. Therefore, education that looks backward is likely to be far less beneficial than diligence in planning for the future.
Q: Can you suggest what the average American can do to prepare for a struggle with terrorism and/or fundamentalism that may go on for decades? Are there investment ramifications to this struggle?
Sir Templeton: Throughout human history the destructive force of terrorism has been far greater than now. Today, we are blessed by the ability to enforce personal ownership of material assets and also by the freedom to build spiritual wealth. It will be a blessing if everyone, including the poor, devotes at least 10 percent of their income toward increasing personal wealth and human wealth, both material and spiritual.
Q: What is your view on the growth of hedge funds?
Sir Templeton: There will be a scandal because the cost burden is so great. In mutual funds it is unusual for a fund to be ahead more than 2 percent or 3 percent. The typical hedge fund is charging 2 percent to 3 percent, plus 5 percent to invest, and 20 percent to 25 percent of profits.