Lessons from John Templeton

These attitudes or mindsets are taken from John Templeton's timeless observations in Sixteen Rules for Investment Success published in 1993 but still very relevant today.

1) Have a learning attitude

An investor who has all the answers doesn’t even understand all the questions. A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. Even if we can identify an unchanging handful of investing principles, we cannot apply these rules to an unchanging universe of investments—or an unchanging economic and political environment. Everything is in a constant state of change, and the wise investor recognises that success is a process of continually seeking answers to new questions.

2) 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. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.

The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.

The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.

3) Do your homework

Investigate before you invest. Study companies to learn what makes them successful. Remember, in most instances, you are buying either earnings or assets. In free-enterprise nations, earnings and assets together are major influences on the price of most stocks. If you expect a company to grow and prosper, you are buying future earnings. You expect that earnings will go up, and because most stocks are valued on future earnings, you can expect the stock price may rise also. If you expect a company to be acquired or dissolved at a premium over its market price, you may be buying assets.

Never invest solely on a tip. It is obvious, but you would be surprised how many investors, people who are well-educated and successful, do exactly this. Unfortunately, there is something psychologically compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.

Do your homework. If you cannot, hire experts to help you.

4) Have the right mindset

Do not be fearful and panic. For 100 years optimists have carried the day in  stocks. Even in the darkdays, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies.

There will be corrections and crashes. But, over time, stocks do go up…and up…and up.

The basic rule of building wealth by investing in stocks will always be “Buy low, sell high.” Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash. There you are, facing a 15% loss in a single day. Maybe more. Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them now is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.

5) Don’t be complacent

You must monitor your investments. Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great.

Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business.

Remember, no investment is forever.