"Sovereign Society's Offshore A-Letter"

Meet John

Templeton, that is. Sir John Templeton.

He was originally from Tennessee, but ended up renouncing his US citizenship to get away from the taxes (we thought you’d like him). And John believed in careful, fundamental analysis and common-sense valuation techniques to build his fortune.

He stepped into the history books in earnest during the Great Depression.

After starting his Wall Street career in ’37, he made his first “slam-dunk” in 1939, when the stock market was still crawling out of its slump.

He did it by purchasing 100 shares of 104 different companies – each share costing a dollar or less, and with 34 of those companies already in bankruptcy – that met his set of parameters.

The reason?

Pessimism was vastly overdone in the markets, and many of the shares were selling at unbelievable levels – sometimes selling for less than the cash & equipment they had on hand.

Only four of those companies ended up going bust, and his investments returned in spades…when – after just four years – he sold off the stocks for far more than he’d originally paid.

So that’s your first example of a true “slam dunk.” As you can see, a slam dunk is one of those moments where “the stars align”…something I say at the risk of sounding like a hippy spiritualist.

In this case, the stars are things like the micro story…the macro (global) story…the sector story …the asset class story…and the long-term story…

That might sound overwhelming, but it’s not really.

To explain, let’s look at Sir John’s US$100 million slam dunk…

The Big One (And How he Did it)

Okay.

So fast-forward about sixty years to the tech boom: The macro story was the same as it had been for most of our lives…persistent inflation…rising stocks…and technological progress. In hindsight, the latter was definitely a little overstated in many investors’ outlooks, but what about Sir John?

Well, believe it or not, he was still kickin’…and still watching the markets. At ninety, you might have expected him to be watching Matlock, but he’s far more intrigued by something he’s seeing in stocks…

It was January of 2000, and general market consensus said that stocks were overpriced. So that’s your asset class story…one that’s highly intriguing to the market’s short-sellers.

But beyond that, the sector story was ringing warning bells in Sir John’s head. Never in his ninety years had he ever seen Price-to-Earnings – a key valuation measure – rise so high on tech stocks.

He told his brokers, “This is the only time in my 88 years I’ve seen technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It is insane, and I am going to take advantage of the temporary insanity.”

Sir John knew that in the long-term.

But of course it couldn’t stop there.

After all, would Michael Jordan go for a layup if he had an opening to go for a tongue- wagging slam dunk from the free throw line?

I don’t think so.

So Sir John dug a little deeper…and he found the real golden goose in the micro story for so many tech stocks…

As you probably know, executives at publicly traded companies are usually compensated in stock options, and the tech boom was no different…most of these wily techs were giving out options like water.

But the insiders couldn’t just turn around and dump stock as soon as they got their options.

They had to wait through what’s called a “lock-up” period…a safeguard for other investors. And these lock-up dates are filed in various SEC reports, etc.

It all clicked. And Sir John could see it.

He turned to his brokers and told them to short every single tech IPO in 2000. He told them to open US$2.2 million dollar positions approximately eleven days before “lock-up” expired. So Sir John was getting the jump on the insiders; dumping stock before they got the chance.

Slam….Dunk. It was the trade of a lifetime.

Over about half the positions, shares tumbled in price by about 95% before Sir John covered. All told, he raked in about US$1 million per position…a 50% jump in an average holding time of just a few months.