Even before she knew what the term meant, Lauren Templeton, founder of Chattanooga, Tenn.-based Lauren Templeton Capital Management, was applying the principles of behavioral finance to her investment philosophy.
It was natural to do so, she says, because behavioral finance is the core principle behind value investing. Value managers have no choice but to conquer their fears and inhibitions vis-à-vis the markets in order to do what they have to do: Make hay when others are not.
"As a value manager, you have to buy whatever other people are selling and when other people are selling it," Templeton says. "That is a psychologically difficult thing to do, but value mangers have no choice but to do it and to understand their biases. They know they are scared, but they have to also train their brain to buy at very scary moments, because that's what really allows people to reap maximum rewards."
No one is born a great value investor, Templeton – whose firm manages about $135 billion in a global long/short hedge fund and in separately management accounts — says, but the only way to become one is to "force yourself to go in and do it. Once you have done it and you've reaped the rewards of buying at these points of what I call maximum pessimism, you've actually retrained your brain and it's anticipating the next big opportunity."
(Read Outlook 2012: Value Investing–A Glimmer in the Gloom at AdvisorOne.com)
Value investing does become exciting, but taking that first step is extremely tough for all value investors. Even for Templeton — her great uncle, legendary value investor Sir John Templeton, seeded her first hedge fund when she was only 24 years old – market volatility was extremely nerve-wracking at the outset. Now, though, "I think it's awesome when we get a good crisis," she says.
