Quick Thoughts: This Time Is Different

Stephen Dover, Head of Equities on opportunity for active equity investors.

Stephen H. Dover, CFA

Stephen H. Dover, CFA Head of Equities

Our Stephen Dover gives his take on why Sir John Templeton might recognize today’s economic environment as another opportunity for active equity investors.

While we seem to be living in unique economic times, perhaps the landscape is not as different as we may think. I came across a letter Sir John Templeton wrote to clients during the 1954 recession that makes me think of his famous advice that the four most dangerous words in investing are “this time it’s different.” At stock market tops and bottoms, investors invariably use this rationale to justify their emotion-driven decisions.

Sir John penned:

  • “If high interest rates were available on top-quality bonds or good yields on high-grade preferred stocks, then these investors might use those means of investment… The yields on bonds and preferred stock are low now.

  • …The prices of top-quality common stocks have been bid up much more than the prices of medium and lower-quality common stocks…

  • …A greater ultimate reward may be achieved by searching now for those stocks which are not regarded as top-quality now, but may gain that reputation within a few years. Such stocks can be bought at much lower prices; and then later an improving reputation may lead to… improving prices…
  • …Another policy which may be successful in selecting stocks is to purchase those which may have medium quality but increasing earnings…”
    —Sir John Templeton, July 29, 1954

Sir John recommended focusing on companies with improving businesses at sensible prices, and to manage risk, avoid both high-quality companies at very high prices and low-quality businesses at giveaway prices. He thought uninvested cash is “idle cash.” Managing for growth is as compulsory now for good active management as it was in 1954. I believe Sir John would recognize today’s economic environment as another opportunity for active equity investors.

What Are the Risks?

All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated, or may decline further in value. To the extent a portfolio focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a portfolio that invests in a wider variety of countries, regions, industries, sectors or investments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.