Who was Sir John Templeton?
Sir John Templeton (1912-2008) was the pioneer of global value investing. He founded the Templeton Growth Fund and spent decades hunting bargains in markets most American investors ignored — one of the first U.S. money managers to buy abroad, in Japan, in Argentina, wherever prices had fallen furthest below worth. The financial press called him "the Christopher Columbus of investing" for it. His method traced back to college, where he studied security analysis under Benjamin Graham, the forefather of value investing, and caught what he described as the contrarian bug. Templeton's most quoted rule is also his hardest to follow: buy at the point of maximum pessimism. "To buy when others are despondently selling and sell when others are avidly buying," he said, "requires the greatest fortitude and pays the greatest potential reward." The Templeton Screen is AAII's rules-based reading of how he found those bargains.
The core idea
At its base the Templeton Screen is a low-price-earnings search. Templeton wanted to pay a low multiple relative to a company's long-term earning power, on the contrarian bet that a depressed price reflects the market's mood rather than the business's real value, and that the gap closes as sentiment normalizes. The difficulty with any cheap-stock filter is telling the misunderstood company from the deservedly cheap one. Templeton's answer was what he called future probable earnings — a company's forecast growth had to be genuinely favorable, and better than its industry's, before he would treat a low multiple as opportunity rather than warning. Around that he layered evidence the business was already healthy: consistent earnings increases, operating margins above the industry norm and rising, and a balance sheet carrying less debt than its peers, so the company could survive the stretch of neglect before the market came around.
What the Templeton Screen looks for
- Over-the-counter (OTC) stocks excluded — this version keeps to domestic listed issues.
- A current price-earnings ratio below the company's own five-year average P/E, which also requires five years of positive earnings to compute.
- An average P/E under 75 in each of the last five fiscal years, to strip out distorted outlier years.
- Positive earnings-per-share growth over both the trailing 12 months and the last five years.
- A positive estimated long-term earnings growth rate that also beats the industry median — Templeton's future probable earnings test.
- Trailing-12-month earnings per share at least equal to the last full fiscal year's, plus year-over-year EPS increases in each of the last five fiscal years.
- A positive operating margin over both the trailing 12 months and the last fiscal year.
- An operating margin that beats the industry median in both those periods, and that tops the company's own five-year average.
- Total liabilities to total assets, at the latest quarter, below the industry median.
Why the Templeton Screen can work
Value has a long record of holding up better than growth in bear markets, the very conditions Templeton relished — he told shareholders to be ready, emotionally and financially, to treat a bear market as a chance to buy. The logic is the reversal of crowd error. He kept Charles MacKay's "Extraordinary Popular Delusions & the Madness of Crowds" close and recommended it to serious investors, because he traded against exactly the manias it chronicles: buy when panic has pushed a sound company's price below its earning power, and sell into the euphoria that later overprices it. The screen tries to bottle both halves of that discipline — the low multiple to enforce a cheap entry, and the growth and margin tests to confirm the company is worth waiting for rather than one the market has correctly written off.
What to keep in mind
The strategy demands a temperament most investors lack: buying what everyone else is dumping, then sitting through the discomfort until the thesis pays. Templeton himself often sold before the peak — deliberately, to stay on the safe side — so the approach is built to leave money on the table at both ends. Note too what this version leaves out. Templeton's real edge was geographic, ranging across countries for the single best bargain; this screen keeps to domestic listed issues and excludes OTC names, stripping out the global hunt that defined him. The quality filters reduce but do not remove value-trap risk — a stock can clear every margin and growth test and still be cheap for a reason the numbers have not yet caught. And the rule capping the five-year P/E at 75 only trims wild outliers; it is a filter against distortion, not a demand for cheapness on its own.
Sources
Templeton's life and method as told in Lessons From the Legends of Wall Street, Nikki Ross (Dearborn Financial Publishing, 2000), and Money Masters of Our Time, John Train (HarperCollins, 2000).
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition.