John Templeton’s 16 Rules for Stock Market Success

“This time it’s different!”

How many times have you heard this from a stock market expert or from your friend who has made big money from stocks in a short time?

These words are commonly used in the stock markets to explain that stock prices can touch the sky, or touch the earth’s crust depending on whether they are rising or falling.

But if you were to listen to the legendary Sir John Templeton, these are four most dangerous words in investing – “This time it’s different.”

Apart from this, there are many other investing lessons that all investors can take from the experience of Sir John, who was the founder of the Franklin Templeton Group.

He has done well to distill his years of experience and expertise into the “16 Rules for Investment Success.”

The Templeton approach, although clear and simple, requires skill, dedication and astute judgment.

So let’s get started.

Templeton’s 16 rules for investment success

1. If you begin with a prayer, you can think more clearly and make fewer mistakes
Prayer can help you think clearly and make fewer mistakes. It reduces anxiety and stress – two of the biggest killers of investment returns. Reduced stress can help you make better investing decisions.

2. Outperforming the market is a difficult task
The challenge is not simply making better investment decisions than the average investor. Given that inflation eats into your returns, the real challenge is making investment decisions that are better than the rate of inflation over the long term.

3. Invest – don’t trade or speculate
We’ve discussed in the past that the stock market is not a casino. However, if you treat it like one – like most people were doing in 2007 and 2008, and move in or out of stocks rapidly, the market will be your casino. And like what happens in a casino, you will lose eventually.

4. Buy value, not market trends or the economic outlook
There’s no point in worrying about economic or stock market forecasts that don’t matter at all. Instead, you should spend your precious time trying to know what’s happening on the ground – with the companies whose stock you own or want to own.

Ultimately, it is the individual stocks that determine the market, not vice-versa. Individual stocks can rise in a bear market and fall in a bull market. So buy individual stocks, not the market trend or economic outlook.

5. When buying stocks, search for bargains among quality stocks
Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.

6. Buy low
Now this is a very simple concept to preach, but very difficult to execute. When prices are high, a lot of investors are buying a lot of stocks as we saw in the heydays of 2007 and early 2008. And when the markets crashed and had reached their multi-year lows in late 2008, there weren’t any buyers.

I still remember that period post the Lehman Brothers bankruptcy when each and every expert appearing on CNBC or other business channels was pronouncing the death of equities. When the Sensex was at 8,000, these experts were predicting the 5,000 levels.

Such are the times that provide a very good hunting ground for small investors. If you buy quality stocks when no one else is buying, you’ll get things cheap. Only then will you do a lot better than other investors over the long term.

7. There’s no free lunch
A ‘hot tip’ isn’t usually one that makes you a lot of money. Instead, it’s often so hot that it burns your hands and pockets. So never invest solely on a tip. You would be surprised how many investors do exactly this. But a ‘tip’ isn’t a way to fast profit. It’s the shortest way to financial ruin.

8. Do your homework or hire wise experts to help you
People will tell you: Investigate before you invest. It’s important that you listen to them. It’s important that you study companies to learn what makes them successful or failures.

9. Diversify
In stock markets, there is some safety in numbers. No matter how careful you are, you can neither predict nor control the future. So you must diversify. But don’t ‘di-worse-ify’ by adding stocks in unfamiliar sectors for the sake of diversification.

It is important to make sure that you don’t spread yourself too thin. Or it would get difficult for you to manage what’s happening to your money. Like what happened to a friend recently who came to know after his father’s death how the financial advisor had advised him (the father) to invest across 192 mutual fund schemes…and most of them were worthless!

10. Invest for maximum total real return
This means the return after taxes and inflation. This is the only rational objective for most long-term investors.

11. Learn from your mistakes
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors and certainly do not try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience.

12. Aggressively monitor your investments
Remember, no investment is forever. ‘Buy and hold’ doesn’t mean ‘buy and forget’. Expect and react to change.

13. An investor who has all the answers doesn’t even understand all the questions
An arrogant approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. The wise investor recognizes that success is a process of continually seeking answers to new questions.

14. Remain flexible and open-minded about types of investment
There are times to buy blue-chip stocks, cyclical stocks, mid and small cap stocks, and there are times to sit on cash. The fact is there is no one kind of investment that is always best. So remain flexible and open to the demands of time and situation.

15. Don’t panic
Sometimes you won’t have sold when everyone else is buying, and you will be caught in a market crash. Don’t rush to sell the next day. Instead, study your portfolio. If you can’t find more attractive stocks, hold on to what you have.

16. Don’t be fearful or negative too often
There will, of course, be corrections, perhaps even crashes. But over time our studies indicate, stocks do go up…and up…and up. In this century or the next, it’s still – “Buy low, sell high.”