Nov. 22, 2004
ADVICE: PERSONAL FINANCE
Templeton offers unique perspective
By SCOTT BURNS
Universal Press Syndicate
Sir John Templeton's office in Lyford Cay is far
from the T-shirt shops, cruise boats and diamond
dealers of Nassau. It's also a world apart from the
glitzy Atlantis Resort and Casino on Paradise
Island. Now 92, the global value investor still
manages his investments and oversees the activities
of his foundations.
As you will see from his answers in this
exclusive interview, Sir John is positive about the
long-term future but very cautious about current
valuation levels for stocks, bonds, the dollar and
real estate.
In the last year you've expressed concern over
U.S. housing prices. Would you explain why?
Prices of houses in all nations for centuries
have fluctuated above and below cost of
reproduction. In the United States now, in most
major cities, homes can be sold for far higher
prices than reproduction costs. Several times in my
lifetime, house prices have been far below
reproduction costs and such cycles are likely to
continue.
In recent trading, the dollar has fallen
significantly and Europeans are less worried than
usual, largely because a cheaper dollar means lower
priced oil for Europe. Do you think the dollar will
fall further?
Throughout the world, prices of oil and gas have
no relation to the exchange rate between the U.S.
dollar and other currencies, but instead depend on
the fact that consumption continues to increase much
greater than supply, which will eventually force
humans to discover many different ways to reduce
their consumption of oil and gas.
In light of current high equity valuations, you
have suggested owning less in stocks. Would you put
this in terms of a conventional pension fund? Would
you suggest some alternatives to equities?
Because both share prices and bond prices are
high this year, many wise pension managers invest in
open-end mutual funds that try to maintain short
positions in stocks about equal to their long
positions.
In this way, a pension fund can benefit from a
wise security analyst while waiting for the time
when either stocks or bonds can be bought at bargain
prices.
There is a school of thought (Arnott, Asness,
Bernstein, etc.) that believes investors can no
longer expect the historic 10 percent to 11 percent
total return on equities. Do you agree?
It is normal for voters to elect politicians who
promise to spend too much. This increases the rate
of inflation, and so after adjusting for inflation,
return on stocks over the next market cycle may
average only 3 percent.
Junius Morgan once advised his son, J. Pierpont
Morgan, that one could never go wrong being bullish
about America. Given some of the current concerns,
especially the idea that the West's historic
advantages may be waning, do you agree with Junius
today?
Throughout history, all major nations have
eventually had a weaker competitive position; and
therefore the Morgan family was shortsighted in
thinking that nations of Asia cannot become stronger
competitors than the U.S.A.
Do you believe, as historian Samuel Huntington
has written, that the period when the West eclipsed
manufacturing in China and India is over?
Nations of America and Europe in the latest two
centuries have encouraged free competition and
therefore, enjoyed increasing prosperity, but this
advantage will be smaller now that China and Russia
have understood the limitations caused by communism.
What is your view on the growth of hedge funds?
There will be a scandal because the cost burden
is so great. In mutual funds it is unusual for a
fund to be ahead more than 2 percent or 3 percent.
The typical hedge fund is charging 2 percent to 3
percent, plus 5 percent to invest, and 20 percent to
25 percent of profits.
Questions about personal finance and
investments may be sent to:
SCOTT BURNS,
P.O. Box 655237, Dallas 75265; e-mail can be
sent to
scott@scottburns.com.
Burns' Web page is
www.scottburns.com.
