The Greatest Trades I
Maybe this will be a new series of posts. Random musings from things we’ve read. We’ll keep them short.
Investing the Templeton Way is a great book about John Templeton, one of the more fun and rewarding value investors to study. His career was filled with novel insights. In the first half of the century, before he became a household name, he experimented tirelessly with different investing techniques.
The book sets the scene
“The year was 1939, and despite a brief pause in the economic malaise from 1935 to 1937, the U.S. economy had been treading water since October 29, 1929…
The psychological turmoil that accompanied rampant unemployment, homelessness, and even the inability to secure a hot meal was never far from the public’s consciousness.”
One thing lead to another and soon the world found itself on the precipice of a second world war. Templeton read the signs. And in 1939 as the Nazis invaded Poland, he rightly concluded that US would have to become a crucial commodity supplier to Europe if the allied forces stood any chance of defeating Germany.
So he decided to invest in industrial companies. But which ones? To answer that, he got to work studying the US civil war and the first world war and the stimulative effects those events had on industrial activity.
“As the corporations and businesses in the United States scrambled to win contracts and supply the government with all the iron, steel, textiles, food, and so on, that would be needed, all those materials would require transportation from different parts of the country.”
From a contemporary perspective, it seems now obvious that railroads would stand to benefit from such a situation. But in the heat of the moment the market was gripped by fears of another economic depression. Templeton saw an opportunity.
Railroad companies offered a safe investment with plenty of upside. But his real stroke of genius came when he decided to eschew the strongest operators in favor of the weakest. Why? His study of wartime economics led him to conclude that the U.S. government would likely tax “excess profits” (as it had in WWI) at extraordinarily high rates to help fund the war.
He was right: taxes were as high as 85% on any company profiting from the boom. In contrast, a company such as Missouri Pacific, which had been unprofitable for years, could carry forward any accumulated losses and count them against its future tax bill. Investors could therefore capture much more of the upside since the gains were not swallowed up by wartime taxation.
It’s not entirely clear how much Templeton actually made on this investment, but it was certainly an astronomical amount. When he purchased Missouri Pacific it was trading at $0.125 per share. Over the next few years the stock rose as high as $105. Somewhere along the way he sold it.
The book goes into greater detail on this investment, and many others, and is well worth the read. For our purposes, such examples are valuable because they broaden our sense of what investing can be.
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