Sir John Templeton was arguably one of the greatest investors to ever walk the earth. A true contrarian, he knew well what it was to take on risk and manage that risk successfully.
One of his famous quotes is: “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude…and pays the greatest reward.” This is the mark of a true contrarian, one who knows the value of risk in the markets.
Templeton began his contrarian style of investing all the way back in the 1950s when he began pouring investors’ money into the German and Japanese markets. Given that WWII had just ended, most Americans weren’t too fond of their former adversaries in war. But Templeton saw that the rebuilding of both countries would provide huge returns, and so it did.
Over the course of the 54 years between 1954 and 2008 a $10,000 investment in the S&P 500 would have grown to be $2.8 million, however, the same $10,000 invested in the Templeton Growth Fund would have grown to be more than $10.75 million over the same period of time.
One of his greatest, and by his own admission his easiest trades was in shorting technology stocks at the height of the dot-com bubble in the late 1990s and into 2000.
During that time, he was shorting dozens of young internet start-ups and making money hand over fist. During one period of several weeks, he netted $80 million.
The strategy he used was deceptively simple. He simply began selling stocks a week or two ahead of the end of the six-month lockup, or cooling-off period, following the IPO of these internet stocks.
He took a risk that the newly minted founders and CEOs of these internet companies would be cashing out as soon as possible, and his risk-taking paid off in a big way.
In hindsight, this trading strategy probably seems completely logical, but at the time Sir John Templeton was selling the same stocks that everyone else was buying. Some of these stocks remain at 70%, 80% or even 90% below the highs they reached at the height of the dot-com bubble.
Existing companies were either swallowed up in a merger or acquisition or simply went out of business and were swept aside by innovation.
Sir John Templeton’s approach to shorting stocks serves as a reminder that risk when understood and managed professionally, can be a positive thing, especially as it pertains to market returns.
Not everyone can be such an amazing investor, but by studying how the top investors handle market risk, we can all hope to improve our trading results.
We at AvaTrade provide our traders with a wealth of risk management tools and educational resources that can help manage risk depending on individual circumstances, including personal risk appetite and financial means.