Blogs & Comment

How to buy at maximum pessimism

I am starting to read Scott Phillips’ new book, Buying at the Point of Maximum Pessimism: Six Value Investing Trends from China to Oil to Agriculture(2010). Scott Phillips is principal and portfolio manager at Lauren Templeton Capital Management –and husband to Lauren Templeton (niece to the late Sir John Templeton).
Its off to a good start. The 2-page forward is written by Lauren Templeton and it displays a great deal of investment wisdom. I daresay those two pages contain more actionable guidance than many investment books in their entirety.
Buying at the maximum point of pessimism, as John Templeton advocated, increases the odds of investment success. But psychological inertia usually stands in the way of even the most rational investor during extreme market volatility, writes Ms. Templeton.
In my opinion, she continues, the best prescription for the paralysis that often accompanies a stock market panic is advance preparation. We know that often the best opportunities present themselves during times of crisis. Most investors even recite the motto: Crisis equals opportunity, but few have the fortitude to take advantage of these precious occasions.
One technique that Uncle John always used to prepare himself for future volatility was to maintain a list of stocks that he was interested in owning at a much lower price. This practice underscores the reality that the stock market is often too dynamic for anyone to predict with any accuracy. Instead, we should anticipate what actions we would take in order to capitalize on an opportunity should it present itself.
Of course, I would add, these days investors should also include exchange-traded funds (ETFs) on the list of investment opportunities they are prepared to act upon when prices have declined enough.