I stumbled upon this document which talks about Sir John Templeton Rules for Investment Success. It was such a basic and nice reading that I was prompted to write down this article with my tits and bits thrown in. Sir John Templeton was an investor and mutual fund pioneer who became a billionaire by pioneering the use of globally diversified mutual funds.

Templeton started his Wall Street career in 1937 and went on to create some of the world’s largest and most successful international investment funds. Called by Money magazine “arguably the greatest global stock picker of the century” (January 1999), he sold the Templeton Funds in 1992 to the Franklin Group for $440 million.

Here is his wisdom in the form of 16 Golden Rules or  John Templeton Rules for Investment Success. While his rules were more relevant to the stock market, my commentary is more generic.

Sir John Templeton Rules for Investment Success

1. Invest for maximum total return

What Sir John means by this statement is that one needs to look at the REAL return on his investments.

For example, if you park your money in a FD which is promising 9% rate of return, then 9% is not the actual returns you made on it as inflation reduces your purchasing power. While most of the readers are aware of what inflation means, there is taxes as well that eat into your returns.

So before you jump with joy at the inference of having made 9% on your FD, remember that taxes and inflation need to be taken into account.

There is only one place to invest to tackle the rising inflation and that’s the stock market.

2. Invest – do not trade or speculate

This is so basic. So so basic. I keep saying from my articles – the average investor who believes in long term investing will make same or more money than the one who is actively looking at the ticker, has his heart in his mouth and makes less money trading many times and loses all of it at one go.

Keep in mind the wise words of Lucien Hooper, a Wall Street legend:

“What always impresses me,” he wrote,“is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’”

3. Remain flexible and open minded about investment types

This is a nice one as well. Sir John means to say that at some point of the year, there will be an investment avenues that will become very famous among investors. However, as Change is the only constant, it will consistently never be famous.

At some point of time, investors will take fancy to some other avenue.

For example, right now, investors are lapping up long term debt funds as the interest rate cycle is going to reverse.

While sometimes stocks will catch one’s fancy, at other times they wont (2011, anyone?). So one needs to remain flexible and move among different asset classes.

4. Buy Low

This is a master stroke. It is so simple in understanding but hardly anyone ever executes it.

For a moment pause here and ask yourself whether in 2011 you were buying the blue chip stocks when the entire Indian stock market was on sale. Not many will say yes.

Advice will be given out and investors will read it but never execute. The reason is simple – fear of making losses when things are going down over powers your basic reasoning of buying when everyone is running away.

As Benjamin Graham put it – “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”

5. When buying stocks, search for bargains among quality stocks

This John Templeton Rules for Investment Success is Self-explanatory!

6. Buy value, not market trends or the economic outlook

If you belong to the section of people who look at how up Sensex or the Nifty is headed and then buy (say) Infosys, then this is for you. One needs to buy Infosys because the company is good and rich in valuation. You cannot buy it because the overall market is going up.

The inference here is that the stock market is driven by the individual stocks that are its constituents. Stocks drive the stock market, the stock market does not drive the stocks!

7. Diversify

This and the next point of John Templeton Rules for Investment Success are self-explanatory.

8. Do your homework or hire experts

9. Monitor your investments aggressively

Active management of your portfolio is any day better than passive management. Be it stocks, mutual funds, fixed income instruments or even cash – the products do not stay awesome for the rest of their lives.

You need to get rid of stocks every quarter should their performance go down and mutual funds needs to match up to their benchmarks and peers otherwise they need to be weeded out.

All products need monitoring – the more you do the better but this cannot come at the risk of impacting your daily work.

10. Don’t panic

There are times when each one of us has made mistakes with our investments. To err is human so we will make mistakes even in the future.

But the point is when the mistake happens, do not panic.

So if you did not sell your stocks in the end of 2010 before the stock market nose dived in 2011, why did you sell all of it in 2011 when the stock market was already down? This meant losses for you.

Tie this back to the point earlier on Buy Low and you will realize that this rule of “Don’t panic” would have helped you immensely to lie low in 2011 and you would have probably invested more in equity for the long term.

In 2011, we all should have stayed calm and invested in equity more.

11. Learn from your mistakes

Sir John Templeton Rules for Investment Success says that the biggest difference between people who are successful and those who are not is that the former have learnt from their mistakes.

It does not make sense to fret about mistakes and brood on them, does it ? Many people stop investing in mutual funds or stocks after having burnt their fingers. The mistake they made was to invest in the wrong way (buying too high; going with IPOs; investing in NFOs; investing one time and forgetting to name a few).

Once they burnt their fingers, some investors stopped investing completely. Now that is the biggest mistake, says Sir John.

12. Begin with a Prayer

A prayer will give you more confidence in anything that you do – simple and lucid.

13. Outperforming the market is difficult

Sir John says “The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.”

Now that is difficult. As an investor, are you happy with the returns that the market is offering or do you want more?

If it’s the former, investing in index funds will satisfy you, if it’s the latter, then professionally managed diversified equity funds might be your answer. Of course, there is no guarantee that the latter is necessarily going to return you more than the market.

14. An investor who has all the answers does not even understand all the questions

Remember the gurus of the stock markets who come on TV and predict where the market will go ? Well they are seldom right.

The biggest challenge with investing is that an investor might master himself on all existing principles, rules, tips and tricks, best practices and be ready to invest. However, he can never master how he will react to the changing economic and investment situation around him.

That is a learning process he will go through all his life – everyone does!

So be wary of people who say they know everything.

15. There is no free lunch ever

In India’s context, your dad’s good friend sells you LIC policies not because it’s the best product for you but because he earns commissions; the IPOs that are launched promise you a killing on the day of listing but not everyone who invested can keep making that mad money; life insurance agents make financial plans for you with the only investment products as policies that they can sell.

There is no free lunch and everyone has a motive in mind. Be wary.

16. Do not be fearful or negative too often

We will have our own fair share of scams and market crashes but remember that over a long period of time, the economy of our country is still good. We might be behind China but we are way ahead of others.

Our politicians might be pocketing the taxes we pay but some went behind bars to set a precedent in this country which should improve things.

Hang in there for a long term and all of us are sure to be rewarded.  Be positive.

Thoughts, readers on these John Templeton Rules for Investment Success?