that support its existence - its own telephone listing, for example, and its own letterhead, bank account, office space, and so on. In response to a question from the audience, Pyne said that the likelihood of a service corporation's being struck down was low. "The chances are minimal. But if an assessor walks in on you and finds the company doesn't do anything, then the chances are high." In setting up the corporation, there is considerable leeway in deciding the most suitable share structure to adopt - and the option that is selected can lead to benefits beyond the immediate tax saving. For example, a doctor could set up his share structure so that he personally holds preferred shares that carry perhaps 10 votes each. He would then be able to outvote all other shareholders, and so have control. Meanwhile, he might issue common shares to his family, so that they could participate in the growth of the company, and so that the size of his estate could be held below $300 000 - the level at which succession duties would be triggered upon death. Also, once established, the company could have additional functions, such as holding the doctor's other investments, and thereby limiting his financial liabilities. In a specific example to show the tax-saving benefits, Landry led the audience through a situation in which a doctor has $80 000 in gross income and $30 000 in expenses. Allowing for normal deductions and assuming a 1977 tax rate, the doctor would save himself $2000-$2500 if
he employed a service corporation. (The example assumes a 15% mark-up.) While the saving might seem attractive, there are costs associated with the company that can rapidly take away some of the glitter. First, there are accounting fees, which, Landry said, could be as high as $800 (although they should be lower). Second, there is the initial cost of establishing the company, which might run anywhere from $600-$2000 (although, again, it would likely be lower - perhaps in the $600-$800 range). Also, if the doctor's annual expenses were lower than the $30 000 assumed in the example, then clearly his after-tax saving would be lower too. Furthermore, the example assumes that the doctor's wife is employed by the company and that she is paid an annual salary of $4000 - an amount that reflects fair market value for the part-time work she performs. If the wife does not work for the company then the overall tax saving will once more be reduced. If both these situations apply - a lower overhead and a wife who does not work for the corporation - then the corporation might well end up costing the doctor money, rather than offering him a saving. "You have to work it out carefully," Landry said, "to see if a service company is really worthWhile." There was much interest in the concept of a service corporation and in the tax savings that could be realized as a result. One doctor in the audience, for example, was a
member of a clinic in which 45 doctors were considering establishing a service company each. The good attendance, the lively discussion and the range and number of questions all reflected that interest. At times, though, the session bogged down in detail so that the underlying benefits were either lost or obscured. At other times, it seemed too unstructured, trying, as some doctors said, to cover too much ground that was not directly relevant to the audience. And then, too, there was Landry's warning that the benefits were not automatic, but had to be carefully weighed in the balance. Whatever the reason, the session by no means convinced everyone present that incorporation is really worthwhile. As one doctor said: "It's a lot easier to hear how it's done than to go out and do it. The savings just don't seem that great for the amount of effort involved." What seems to have happened is that those doctors who have already established corporations came away with their decisions endorsed. One (younger) doctor, who had set up a service company 2 years before, said bluntly: "You'd have to be crazy not to do it." At the same time, though, those who have not established a corporation remained unconvinced of their value. Not many minds were changed. Meanwhile, one (older) doctor had his own views on corporations and on the advantages of having his wife employed by one. "She may be a qualified nurse," he said, "but there's no way I'd want to work with her. It's just not on."
Part VI: A grab bag of investment options The final half-day session of the MD Management 3-day seminar roamed over a number of topics from tax shelters such as MURBs and movies to investment vehicles such as annuities and real estate. It was a lucky-dip grab bag of investment ideas - options, straddles, puts, calls - that were plucked out almost at random. What stood out most, however, was the presentation by the three senior executives of Mackenzie Financial Investment Management Ltd.. 648 CMA JOURNAL/SEPTEMBER 23,
the Toronto firm that took over the bulk of the management of the CMARSP stock fund June 1 this year. It's not hard to see why the management of the fund has been shifted. Under the Royal Trust Company, which had managed the fund since 1957, the common stock fund (but not the guaranteed income fund) has performed dismally - as few doctors probably need or want to be reminded. It ranked 56th out of 66 comparable funds recently assessed 1978/VOL. 119
by Pirbeck Investment Measurement Ltd., so the management was long overdue for a change. The Mackenzie people, meanwhile, have a remarkable record. As B.E. Freamo, executive vice president of MD Management Ltd., said in introducing the three speakers, the Industrial Growth Fund that Mackenzie manages ranks first in performance among all Canadian registered retirement savings plans over the past 5 years. Last year alone, it had an impressive 28% rate of return.
For the seminar audience, how- it peaked in 1974 and since then a ever, the appeal of the Mackenzie "natural" decline has set in. The presentation was not just that it of- reversal that showed up in 1977 was fered a chance to assess the stock merely a reflection of the lower Cafund's new management; it was also nadian dollar, which has raised the the fact that the audience had direct price of imports in Canada. If that access to a trio who seldom make effect is taken out of the picture, and their views known in public, and as only domestic prices considered, a rule go out of their way to avoid there has been no reversal at all interviews with the media. It was a just a steady decline. "We look for rare opportunity that was too good lower inflation in the years ahead." to be missed. Secondly, Crerar considered the changing pattern of wage rates in Canada - "another example of the Unconventional wisdom improvements that have taken place The Mackenzie management has in this country." Wage rates jumped something of a maverick reputation a full 18% in 1975 - a much high- of betting against the trend and er increase than the Americans exmoving contrary to the prevailing perienced - with the result that mood. It's often a sound investment Canada priced itself out of world strategy, of course, to buy when markets and became dangerously vuleveryone else is trying to sell, and nerable to import competition. Now, to sell when everyone else is desper- though, Canadian wage rates are ate to buy. As Mackenzie president increasing at a rate of just 6% a Alexander Christ said at one point, year - a lower rate than in the US. succinctly summing up his company's "There's been no wage explosion philosophy: "Beware of conventional after the AIB controls began to be wisdom... lifted. There's no wage inflation out Certainly, the three-part presenta- there. People are more concerned tion that the Mackenzie people gave with finding a job and keeping it." demonstrated that philosophy clearThe reason for this, of course, is ly. Their outlook for the future per- the high level of unemployment in formance of common stocks in Can- Canada, currently around 8.5%. ada was outrageously bullish, and it "There's excess capacity in mandefinitely flew in the face of "conven- power, and that is now helping to tional wisdom". bring down inflation and to bring Some of their assumptions for the wage costs under control." future may have failed to sway a Equally, there is considerable slack sceptical audience, but there was no in Canadian manufacturing producdoubt that the expressed strength of tion. Industry is operating at 84% their convictions raised more than of capacity, well below the practical a stir of interest and caused a few in limit of 95%. And that means, the audience to reconsider their over- Crerar said, that price increases will all investment strategies. be held to an acceptable level. William Crerar kicked off the session with a look at the "underlying Inflation villain influences" that affect market performance. "Things are not as bad as At the same time, government you read in the papers," he said. the "real inflation villain" - has "We tend to emphasize the negative finally accepted the message it has in Canada. There's a lot of gloom been receiving from the electorate and doom feeling out there. And and has begun to curb its spending. that's why values are so good in the Spending peaked in 1975 at 42% of market now." the GNP, but since then the trend Using a series of charts, Crerar has been down. "We look for a deran through some of the economic crease in government involvement. indicators that show (to the Macken- And the capital markets won't let zie people at least) that the doom and governments increase their deficits gloom soothsayers are all facing the anymore. wrong way, looking at the problems Not only that, but Crerar sees of the past rather than the promise government making a determined efof the future. fort to get the slack out of the proThe consumer price index, first of ductive capacity, and out of the all, began to accelerate in 1972; but labour market too. "We look for
large doses of stimulation for business - lower taxes, easier money, faster write-offs for plant and equipment.. Relating the favourable outlook to the stock market, Crerar then looked at the historical course that the Dow Jones industrial average has followed over the past 60-odd years. On two occasions, he pointed out, the Dow has shown long, sustained increases - in the 1 920s (before the crash), and in the 1950s-early 1960s. On both occasions, the increases occurred at a time of low inflation, immediately following a period of relatively high inflation. The stock market, in other words, doesn't like inflation, but nor does it like the anticipation of inflation. "It doesn't do well until inflation peaks. We contend that inflation has peaked, that it will go under 6%, and could go as low as 4%. There is nothing out there to put upside pressure on inflation." The market will do well; and common stocks are the place to be. Slide to stability
James O'Donnell, another Mackenzie vice-president, then put the slide of the Canadian dollar into some perspective. The media, he said, tend to focus on the present, seeing the decline only in relation to the immediate past. A look at the historical record, however, shows that a Canadian dollar at or below par with the US dollar is the norm not the exception. The recent slide, furthermore, is beneficial in that it helps Canadian exports; also it was a necessary and desirable correction that lowered the wage differential between Canadian and US labour. Most pertinent to the expected performance of the stock market, however, was the presentation by Alex Christ. He looked at historical price-earnings ratios the ratio of the earnings per share and the price per share - and found that on just three occasions this century, the PE ratios for the stocks that make up the Dow Jones industrial average have fallen below 12 for an extended period - in the late 19 lOs-early 1920s, the late 1940s-early 1950s and now. A similar pattern shows up on a plot of PE ratios for the stocks in the Standards & Poor's "500" stock index. "We are therefore in one of
CMA JOURNAL/SEPTEMBER 23, 1978/VOL. 119 653
the three historical lows of this century. The market offers good value." A better measure, however, is the price-dividend ratio. The earnings of a company are a poor base on which to gauge performance, because they are determined to some extent arbitrarily, varying quite dramatically with the system of accounting that is used to compute them. Dividends give a better measure, because they are fixed. And a plot of historical price-dividend ratios again confirms that we are in one of the abnormally low periods. Furthermore, companies have historically paid out about 55% of their earnings in the form of dividends. But since 1972, the proportion that has been distributed to shareholders as dividends has dropped considerably. In the US it has fallen to 42%; in Canada it has slumped to 38%. Companies are therefore conserving their cash, Christ said. "We expect a greater payout in future. There's lots of room for improvement." Finally, Christ looked at the advance-decline ratio for the Dow Jones stocks that trade on the New York exchange - the ratio that shows the number of stocks that have risen in price compared to the number that have declined. In the years immediately following the crash, the ratio (understandably) went down. In the years 1965-75, it dropped again, but this time much more dramatically. To some extent, the drop escaped attention because it took place over a decade, not over the 2- to 3-year period as happened after the crash. The decline may have been more gradual; even so, the ratio fell to a level that, by 1975, was equal to the low it had reached in 1932. Most significant, however, is the fact that since 1975, the ratio has once more been on the rise. The key to successful investing in common stocks, Christ said, is a combination of "valuation and timing". The indicators are such that the market clearly offers good value: PE ratios, dividend-earnings ratios and advance-decline ratios are all at unusually low levels. In addition, the indicators also show that the bottom has been reached, and that a recovery is underway. "We are now at a historical low," Christ said, "that will prove out in the next 10 to 15 years. Fortunes will be made by people who
are prepared to be patient." It was a refreshing view of the future - optimistic, aggressively bullish, almost euphoric. Whether it really swayed the audience is another matter. As was clear from their conversation, many of the doctors had already been burned too many times before, and they had listened to so many conflicting views from the experts that they now give equal (and low) credibility to all. Particularly hard to accept was Crerar's assumption that government had learned its lesson and was starting to mend its ways, cutting down on spending, reducing its deficits, and considering a sharp, stimulative
Alex Christ: optimistic, aggressive look at future.
boost to the private sector. Fears of creeping socialism are not that easily allayed. As for the future prospects of the CMARSP stock fund - now that it is to be managed by Mackenzie the presentation failed to persuade doctors who had withdrawn from the plan that they should once more get involved. Grumbled one who spends 45 minutes a day on his portfolio: "I got out, and I'm staying out. Ten years of misery in that thing is more than enough." Mackenzie, of course, is now managing the Canadian stocks of the fund; the American and overseas stocks - the other 10% of the portfolio - are under the control of John Templeton. In a later presenta-
654 CMA JOURNAL/SEPTEMBER 23, 1978/VOL. 119
tion, Mr. Freamo gave a review of a recent meeting he had had with Templeton, in which Templeton had outlined his highly successful but somewhat unusual approach to the market. Templeton, Freamo said, is a "contrary buyer", much like the Mackenzie people. He pays no attention to short-term developments, but follows the long-term trends instead. There may be a recession later this year, Templeton feels, but he for one could not care less. He is looking for bargains, and there are always bargains to be found, particularly when the market is down. Most of the bargains he finds are in the US. but he also looks in Europe, Australia and South America. For his own personal investments, he has sunk a lot of his money into South Korea, where stocks on average are trading at just two times earnings. The value is just too good to ignore, in spite of the ever-present threat of invasion from the north. Freamo then outlined Templeton's distinctive and systematic approach to picking his bargains. First, Templeton works hard at it, reviewing as many as 10 000 financial reports a year. The majority he just glances at, then immediately discards. But he studies about 1000 in detail. What Templeton concentrates on is the simple PE ratio. He's looking for ratios of three to five. If he finds one, he then studies the 5-year history of the company to see if the earnings have been sustained. Ideally, he's hoping for a 5-year history that shows earnings increasing by 10% 15% per annum. Understandably, Templeton doesn't find many that fit both his requirements. But that is the base aga?nst which he measures performance. The stocks that come closest are the ones he buys, and generally he buys with the intention of holding his position for about 2½ years. Basing an investment decision almost entirely on such a basic guide as a PE ratio is hardly the kind of approach that most professional counsellors would recommend. But they're not rich; Templeton is. No doubt, more than a few of the doctors who were in the audience will be attempting to emulate Templeton's success. With his track record, he is obviously doing something right. So, who can fault him?E
he employed a service corporation. (The example assumes a 15% mark-up.) While the saving might seem attractive, there are costs associated with the company that can rapidly take away some of the glitter. First, there are accounting fees, which, Landry said, could be as high as $800 (although they should be lower). Second, there is the initial cost of establishing the company, which might run anywhere from $600-$2000 (although, again, it would likely be lower - perhaps in the $600-$800 range). Also, if the doctor's annual expenses were lower than the $30 000 assumed in the example, then clearly his after-tax saving would be lower too. Furthermore, the example assumes that the doctor's wife is employed by the company and that she is paid an annual salary of $4000 - an amount that reflects fair market value for the part-time work she performs. If the wife does not work for the company then the overall tax saving will once more be reduced. If both these situations apply - a lower overhead and a wife who does not work for the corporation - then the corporation might well end up costing the doctor money, rather than offering him a saving. "You have to work it out carefully," Landry said, "to see if a service company is really worthWhile." There was much interest in the concept of a service corporation and in the tax savings that could be realized as a result. One doctor in the audience, for example, was a
member of a clinic in which 45 doctors were considering establishing a service company each. The good attendance, the lively discussion and the range and number of questions all reflected that interest. At times, though, the session bogged down in detail so that the underlying benefits were either lost or obscured. At other times, it seemed too unstructured, trying, as some doctors said, to cover too much ground that was not directly relevant to the audience. And then, too, there was Landry's warning that the benefits were not automatic, but had to be carefully weighed in the balance. Whatever the reason, the session by no means convinced everyone present that incorporation is really worthwhile. As one doctor said: "It's a lot easier to hear how it's done than to go out and do it. The savings just don't seem that great for the amount of effort involved." What seems to have happened is that those doctors who have already established corporations came away with their decisions endorsed. One (younger) doctor, who had set up a service company 2 years before, said bluntly: "You'd have to be crazy not to do it." At the same time, though, those who have not established a corporation remained unconvinced of their value. Not many minds were changed. Meanwhile, one (older) doctor had his own views on corporations and on the advantages of having his wife employed by one. "She may be a qualified nurse," he said, "but there's no way I'd want to work with her. It's just not on."
Part VI: A grab bag of investment options The final half-day session of the MD Management 3-day seminar roamed over a number of topics from tax shelters such as MURBs and movies to investment vehicles such as annuities and real estate. It was a lucky-dip grab bag of investment ideas - options, straddles, puts, calls - that were plucked out almost at random. What stood out most, however, was the presentation by the three senior executives of Mackenzie Financial Investment Management Ltd.. 648 CMA JOURNAL/SEPTEMBER 23,
the Toronto firm that took over the bulk of the management of the CMARSP stock fund June 1 this year. It's not hard to see why the management of the fund has been shifted. Under the Royal Trust Company, which had managed the fund since 1957, the common stock fund (but not the guaranteed income fund) has performed dismally - as few doctors probably need or want to be reminded. It ranked 56th out of 66 comparable funds recently assessed 1978/VOL. 119
by Pirbeck Investment Measurement Ltd., so the management was long overdue for a change. The Mackenzie people, meanwhile, have a remarkable record. As B.E. Freamo, executive vice president of MD Management Ltd., said in introducing the three speakers, the Industrial Growth Fund that Mackenzie manages ranks first in performance among all Canadian registered retirement savings plans over the past 5 years. Last year alone, it had an impressive 28% rate of return.
For the seminar audience, how- it peaked in 1974 and since then a ever, the appeal of the Mackenzie "natural" decline has set in. The presentation was not just that it of- reversal that showed up in 1977 was fered a chance to assess the stock merely a reflection of the lower Cafund's new management; it was also nadian dollar, which has raised the the fact that the audience had direct price of imports in Canada. If that access to a trio who seldom make effect is taken out of the picture, and their views known in public, and as only domestic prices considered, a rule go out of their way to avoid there has been no reversal at all interviews with the media. It was a just a steady decline. "We look for rare opportunity that was too good lower inflation in the years ahead." to be missed. Secondly, Crerar considered the changing pattern of wage rates in Canada - "another example of the Unconventional wisdom improvements that have taken place The Mackenzie management has in this country." Wage rates jumped something of a maverick reputation a full 18% in 1975 - a much high- of betting against the trend and er increase than the Americans exmoving contrary to the prevailing perienced - with the result that mood. It's often a sound investment Canada priced itself out of world strategy, of course, to buy when markets and became dangerously vuleveryone else is trying to sell, and nerable to import competition. Now, to sell when everyone else is desper- though, Canadian wage rates are ate to buy. As Mackenzie president increasing at a rate of just 6% a Alexander Christ said at one point, year - a lower rate than in the US. succinctly summing up his company's "There's been no wage explosion philosophy: "Beware of conventional after the AIB controls began to be wisdom... lifted. There's no wage inflation out Certainly, the three-part presenta- there. People are more concerned tion that the Mackenzie people gave with finding a job and keeping it." demonstrated that philosophy clearThe reason for this, of course, is ly. Their outlook for the future per- the high level of unemployment in formance of common stocks in Can- Canada, currently around 8.5%. ada was outrageously bullish, and it "There's excess capacity in mandefinitely flew in the face of "conven- power, and that is now helping to tional wisdom". bring down inflation and to bring Some of their assumptions for the wage costs under control." future may have failed to sway a Equally, there is considerable slack sceptical audience, but there was no in Canadian manufacturing producdoubt that the expressed strength of tion. Industry is operating at 84% their convictions raised more than of capacity, well below the practical a stir of interest and caused a few in limit of 95%. And that means, the audience to reconsider their over- Crerar said, that price increases will all investment strategies. be held to an acceptable level. William Crerar kicked off the session with a look at the "underlying Inflation villain influences" that affect market performance. "Things are not as bad as At the same time, government you read in the papers," he said. the "real inflation villain" - has "We tend to emphasize the negative finally accepted the message it has in Canada. There's a lot of gloom been receiving from the electorate and doom feeling out there. And and has begun to curb its spending. that's why values are so good in the Spending peaked in 1975 at 42% of market now." the GNP, but since then the trend Using a series of charts, Crerar has been down. "We look for a deran through some of the economic crease in government involvement. indicators that show (to the Macken- And the capital markets won't let zie people at least) that the doom and governments increase their deficits gloom soothsayers are all facing the anymore. wrong way, looking at the problems Not only that, but Crerar sees of the past rather than the promise government making a determined efof the future. fort to get the slack out of the proThe consumer price index, first of ductive capacity, and out of the all, began to accelerate in 1972; but labour market too. "We look for
large doses of stimulation for business - lower taxes, easier money, faster write-offs for plant and equipment.. Relating the favourable outlook to the stock market, Crerar then looked at the historical course that the Dow Jones industrial average has followed over the past 60-odd years. On two occasions, he pointed out, the Dow has shown long, sustained increases - in the 1 920s (before the crash), and in the 1950s-early 1960s. On both occasions, the increases occurred at a time of low inflation, immediately following a period of relatively high inflation. The stock market, in other words, doesn't like inflation, but nor does it like the anticipation of inflation. "It doesn't do well until inflation peaks. We contend that inflation has peaked, that it will go under 6%, and could go as low as 4%. There is nothing out there to put upside pressure on inflation." The market will do well; and common stocks are the place to be. Slide to stability
James O'Donnell, another Mackenzie vice-president, then put the slide of the Canadian dollar into some perspective. The media, he said, tend to focus on the present, seeing the decline only in relation to the immediate past. A look at the historical record, however, shows that a Canadian dollar at or below par with the US dollar is the norm not the exception. The recent slide, furthermore, is beneficial in that it helps Canadian exports; also it was a necessary and desirable correction that lowered the wage differential between Canadian and US labour. Most pertinent to the expected performance of the stock market, however, was the presentation by Alex Christ. He looked at historical price-earnings ratios the ratio of the earnings per share and the price per share - and found that on just three occasions this century, the PE ratios for the stocks that make up the Dow Jones industrial average have fallen below 12 for an extended period - in the late 19 lOs-early 1920s, the late 1940s-early 1950s and now. A similar pattern shows up on a plot of PE ratios for the stocks in the Standards & Poor's "500" stock index. "We are therefore in one of
CMA JOURNAL/SEPTEMBER 23, 1978/VOL. 119 653
the three historical lows of this century. The market offers good value." A better measure, however, is the price-dividend ratio. The earnings of a company are a poor base on which to gauge performance, because they are determined to some extent arbitrarily, varying quite dramatically with the system of accounting that is used to compute them. Dividends give a better measure, because they are fixed. And a plot of historical price-dividend ratios again confirms that we are in one of the abnormally low periods. Furthermore, companies have historically paid out about 55% of their earnings in the form of dividends. But since 1972, the proportion that has been distributed to shareholders as dividends has dropped considerably. In the US it has fallen to 42%; in Canada it has slumped to 38%. Companies are therefore conserving their cash, Christ said. "We expect a greater payout in future. There's lots of room for improvement." Finally, Christ looked at the advance-decline ratio for the Dow Jones stocks that trade on the New York exchange - the ratio that shows the number of stocks that have risen in price compared to the number that have declined. In the years immediately following the crash, the ratio (understandably) went down. In the years 1965-75, it dropped again, but this time much more dramatically. To some extent, the drop escaped attention because it took place over a decade, not over the 2- to 3-year period as happened after the crash. The decline may have been more gradual; even so, the ratio fell to a level that, by 1975, was equal to the low it had reached in 1932. Most significant, however, is the fact that since 1975, the ratio has once more been on the rise. The key to successful investing in common stocks, Christ said, is a combination of "valuation and timing". The indicators are such that the market clearly offers good value: PE ratios, dividend-earnings ratios and advance-decline ratios are all at unusually low levels. In addition, the indicators also show that the bottom has been reached, and that a recovery is underway. "We are now at a historical low," Christ said, "that will prove out in the next 10 to 15 years. Fortunes will be made by people who
are prepared to be patient." It was a refreshing view of the future - optimistic, aggressively bullish, almost euphoric. Whether it really swayed the audience is another matter. As was clear from their conversation, many of the doctors had already been burned too many times before, and they had listened to so many conflicting views from the experts that they now give equal (and low) credibility to all. Particularly hard to accept was Crerar's assumption that government had learned its lesson and was starting to mend its ways, cutting down on spending, reducing its deficits, and considering a sharp, stimulative
Alex Christ: optimistic, aggressive look at future.
boost to the private sector. Fears of creeping socialism are not that easily allayed. As for the future prospects of the CMARSP stock fund - now that it is to be managed by Mackenzie the presentation failed to persuade doctors who had withdrawn from the plan that they should once more get involved. Grumbled one who spends 45 minutes a day on his portfolio: "I got out, and I'm staying out. Ten years of misery in that thing is more than enough." Mackenzie, of course, is now managing the Canadian stocks of the fund; the American and overseas stocks - the other 10% of the portfolio - are under the control of John Templeton. In a later presenta-
654 CMA JOURNAL/SEPTEMBER 23, 1978/VOL. 119
tion, Mr. Freamo gave a review of a recent meeting he had had with Templeton, in which Templeton had outlined his highly successful but somewhat unusual approach to the market. Templeton, Freamo said, is a "contrary buyer", much like the Mackenzie people. He pays no attention to short-term developments, but follows the long-term trends instead. There may be a recession later this year, Templeton feels, but he for one could not care less. He is looking for bargains, and there are always bargains to be found, particularly when the market is down. Most of the bargains he finds are in the US. but he also looks in Europe, Australia and South America. For his own personal investments, he has sunk a lot of his money into South Korea, where stocks on average are trading at just two times earnings. The value is just too good to ignore, in spite of the ever-present threat of invasion from the north. Freamo then outlined Templeton's distinctive and systematic approach to picking his bargains. First, Templeton works hard at it, reviewing as many as 10 000 financial reports a year. The majority he just glances at, then immediately discards. But he studies about 1000 in detail. What Templeton concentrates on is the simple PE ratio. He's looking for ratios of three to five. If he finds one, he then studies the 5-year history of the company to see if the earnings have been sustained. Ideally, he's hoping for a 5-year history that shows earnings increasing by 10% 15% per annum. Understandably, Templeton doesn't find many that fit both his requirements. But that is the base aga?nst which he measures performance. The stocks that come closest are the ones he buys, and generally he buys with the intention of holding his position for about 2½ years. Basing an investment decision almost entirely on such a basic guide as a PE ratio is hardly the kind of approach that most professional counsellors would recommend. But they're not rich; Templeton is. No doubt, more than a few of the doctors who were in the audience will be attempting to emulate Templeton's success. With his track record, he is obviously doing something right. So, who can fault him?E
