Templeton Borrowed Money to Buy 104 Distressed Stocks
After Germany invaded Poland in 1939, John Templeton borrowed about $10,000 and instructed his broker to buy all stocks on the New York Stock Exchange and the American Stock Exchange priced below $1, investing $100 in each of the 104 stocks; about 37 of these companies were already in bankruptcy proceedings at the time. When the broker pointed out that some stocks were 'already bankrupt,' Templeton insisted on proceeding, believing that the war might restart demand for U.S. industry and change the market's pricing of distressed companies.
This was not a bet on a single dark horse, but an extremely diversified 'maximum pessimism' portfolio experiment. Templeton did not judge which distressed company would necessarily recover but bought the entire pool of low-priced stocks abandoned by the market; four years later, only 4 of the 104 stocks ultimately went to zero, while the rest generated profits, yielding a total return of about 400%. His core judgment was that panic caused by war and recession might lead the market to confuse 'temporarily losing, in restructuring, with weak balance sheets' with 'permanently worthless.'
The preferred stock of the Missouri Pacific Railroad is one of the most representative cases. This security originally had a par value of $100 and paid an annual dividend of $7, but due to the company's bankruptcy during the Great Depression and years of suspended dividends, its price fell to 12 cents; Templeton bought about 800 shares for around $100. After the U.S. entered the war, demand for rail transport rebounded, the company returned to profitability, and the preferred stock rose to about 40 times his purchase cost before he sold it, continuing to rise to $105 afterward.
Templeton later developed this logic into a global contrarian value investment strategy: not chasing popular assets but seeking targets priced far below long-term profitability, asset value, or replacement cost when countries, industries, and companies are at their 'maximum pessimism moment.' He founded the Templeton Growth Fund in 1954; if $10,000 had been invested at its inception and dividends reinvested, by 1992 when the fund was sold to Franklin Group, it would be worth about $2 million, corresponding to a compound annual return of about 14% to 15% over 38 years.
In market mechanisms, panic holders, forced liquidations of leveraged funds, funds facing redemptions, and impatient retail investors are the sellers of low-priced assets; contrarian investors with cash, research capabilities, diversified portfolios, and long holding periods are the buyers. A price crash does not create value in itself, but when sellers sell due to liquidity and emotional pressure rather than fundamental judgments, asset prices may temporarily fall below their reasonable discounted value of future cash flows. Templeton's gains came from catching these forced sell-offs rather than simply predicting when the market would rebound.
Source: Public Information
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Templeton's 1939 trade is often misread as 'daring to bet on bankrupt stocks to get rich,' but the real structure was extremely diversified. If he had only bought Missouri Pacific Railroad, the outcome would have heavily depended on a single company's restructuring, rail demand, and the priority of preferred stock repayments; by buying 104 low-priced stocks, he transformed the bet from 'will a certain company revive' to 'will the U.S. industrial system as a whole recover under a wartime economy.' The 37 companies already in bankruptcy did not mean he believed each was worth holding, but rather that he believed at sufficiently low prices and with a large enough sample, a few significant recoverers could cover a multitude of failures.
The preferred stock case also reveals the importance of capital structure in crisis investing. The common stock of Missouri Pacific Railroad might have had almost no residual claims at bankruptcy, while preferred stock has priority over common stock in liquidation, restructuring, or dividend resumption. Templeton was not buying 'cheap stock prices' per se, but rather securities that originally had a par value of $100 and had superior claims to railroad assets and future cash flows at a price of 12 cents. The real starting point for research is the balance sheet, debt hierarchy, restructuring path, and post-recovery profitability, not the price decline.
The capital path of the Templeton Growth Fund further illustrates that Templeton did not confine his investment philosophy to wartime bets. He established an open-end fund in 1954, bringing global allocation to the U.S. mutual fund market early on, and began investing in overlooked markets like Japan in the 1960s. His long-term advantage came from seeking valuation mismatches across countries, industries, and asset price cycles, rather than always holding the 'cheapest' stocks; cheapness is merely a starting point for research, while corporate competitiveness, profitability recovery, management capability, and balance sheets determine whether it is worth buying.
There are clear differences between Templeton's and Buffett's paths in value investing. Buffett later preferred to buy excellent companies at reasonable prices and hold them for their compounding ability; Templeton was more willing to buy severely undervalued assets, even those with significant problems, during extreme market pessimism, and then sell them when pessimism faded, valuations returned, or fundamentals improved. The former relies on corporate quality and sustained compounding, while the latter relies more on valuation mean reversion, cyclical recovery, and market sentiment reversal.
Historically, similar opportunities typically arise during liquidity crises rather than general corrections: the Great Depression of the 1930s, the energy shocks of the 1970s, the 1987 stock market crash, the 2008 financial crisis, and the pandemic panic of 2020 all experienced phases of 'prices collapsing first, fundamentals confirming later.' But the most dangerous trap of contrarian investing lies here: the market is sometimes not overly pessimistic but is correctly pricing for bankruptcy, technological obsolescence, uncontrolled debt, or governance failures. Templeton's method requires investors to distinguish between 'temporary pressures' and 'permanent capital losses,' and to endure judgment errors through diversification, position management, and long-term capital.
This is about transfer of pricing power. In extreme panic, asset prices are no longer primarily determined by long-term value judgments but by who is most cash-strapped, who is most afraid to hold on, and who must sell that day. Investors with cash, research capabilities, and no forced selling gain the opportunity to take over pricing power; but only when future profitability, asset value, or restructuring value genuinely exists can low prices turn from traps into opportunities.
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