Lauren Templeton on Generating Alpha from Value Investing

Investing the Templeton Way CoverLauren Templeton, the niece of Sir John Templeton and author of Investing the Templeton Way: The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter, was recently interviewed by

Q: How does your valuation methodology work?

[Lauren Templeton] Our methodology is pretty simple. We start out by looking at standard quantitative screens that we have used for many years.  There’s nothing sophisticated about them, they are standard valuation screens that most investors would use.  Once we run these screens, we focus on the bottom decile of the list.  If we find interesting companies we feel do not belong there, we will run them through a discounted cash-flow model to get their intrinsic value over a 10year view.   We will not employ capital unless we can find an opportunity that has a minimum of 50% upside to our intrinsic value over the term of our investment.  While we project over a 10 year period, our target holding is 3-5 years.

In terms of selecting companies, we look for companies that are growing faster than their peers… have higher operating margins than their peers… and have higher return on capital than their peers.  In currency, we pay attention to purchasing power parity and favor currencies that appear under-valued.  Right now this would be currencies like the South African Rand, the Chinese Renminbi and more.  There are also examples of currencies which are very well managed by their governments and are unlikely to lose value over time such as the Canadian Dollar.

Our sell discipline is that when a company or stock approaches our approximation of intrinsic value, we liquidate the put position… quickly if it’s a cyclical company.  This yields cash into the portfolio.   Typically you will have a few stocks, all at once, approaching your estimations of intrinsic value.   If the market is fair to over-valued, it will be more difficult to find these opportunities and this process will really slow down.

Read the full interview here.


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