Sir John Templeton famously created a list of 16 rules that he considered key to investment success. With the economy showing signs of life in recent years, it would be to the benefit of all to revisit his financial advice, compiled after a life-time as one of the most successful stock traders of all time. In honor of the new year, here are the first four rules from his oft-quoted list.

1. Invest for maximum total real return.

Templeton’s first rule addressed the issue of purchasing power being depreciated over time. Many people overestimate how much they will get on investments, forgetting how taxes and inflation can often cut into profits. For this reason, Templeton always advised against investing in fixed-income securities, which can fail to retain their value. Instead, investors should look at the “total real return” – or the return on invested dollars after the cost of taxes and inflation have been deducted. This is especially important wisdom for people considering long-term investments.

2. Invest, don’t trade or speculate.

High-stakes stockbrokers can be tempted to buy and sell stocks fairly quickly for a quick, big payout. Many investors have generated substantial returns in the short-term by using this investment model.  Yet Templeton’s second rule warns against the danger of “over-action,” or trading too often.  In the same way that gamblers who bet big in Vegas can also face catastrophic losses, this second rule addresses the downside moving stocks too frequently.

3. Remain flexible and open-minded about types of investment

Many people find one type of investment that seems to generate consistent returns and stick with it. Yet Templeton’s third rule suggests that even if an investment may be more stable in the long-run (such as bonds), there is no single type of investment that works the best in every situation. Investors need to evaluate individual circumstances to determine what will perform the best and return the most profits. Even a particular type of investment may have done well for them in the past, each situation is different and should be assessed accordingly.

4. Buy Low

While this might sound like obvious advice, so many investors get caught up in the initial buzz surrounding a company’s IPO that they will forget this. In order to truly putting Rule 4 to practice means going against the tide of popular opinion. After all, when a company is performing well, the value of its equity will obviously be in more demand and higher in price. The opportunity to buy low typically comes during times of economic difficulty, when investors are pessimistic about the overall market and demand is low. Templeton famously applied this strategy when he bought 100 shares of each company listed on the New York Stock Exchange. Because the country was in the middle of an economic depression, he was able to buy each share for $1 each ($17 today). When he sold the shares, the value had gone up substantially.

Have you used Templeton’s 16 Rules in your own investment ventures? Did you find them to be useful? Let us know in the comments.

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