CHAPTER 1

INTRODUCTION TO THENEW EDITION

by John Marks Templeton

Sir John Marks Templeton has had a long career as aninvestment counselor Founder of the successful Templetongroup of funds, he has been a pioneer in searching outworldwide investment opportunities. He is also widely knownas a philanthropist, particularly for his foundation'sTempleton Prize for Progress in Religion, the world's mostgenerous philanthropic cash award.

Just over a century ago, when Edward Bellamy penned his classicLooking Backward, he envisioned our globe in the year 2000 as asomewhat somber place—a world in which individualism had beensuppressed and entrepreneurship vanquished, with most of itspeople toiling under a system of state socialism. Now, we standpoised on the brink of another new century—indeed, a new millennium—andBellamy's predictions have, thankfully, been tested andproved wanting. Today's world is not a place of gray uniformity andinstitutionalized drudgery for the sake of social security and theleast amount of injustice. Rather, it is a world of great hope and gloriouspromise—a world stepping boldly into a new golden age of opportunity.

We live in a wonderful age—a period of unprecedented discoveryand opportunity, a blossoming time for mankind. It is also a worldof dramatic changes—politically, economically, culturally, and spiritually.

The evolution of human knowledge is accelerating enormously.More than half of the scientists who have ever existed have livedduring the twentieth century. More than half of the discoveries inthe natural sciences have been made in this century. More than halfof the goods produced in the history of the earth have been producedsince 1800. More than half of the books ever written werewritten in the last fifty years. More new books are published eachmonth than were written in the entire historical period before thebirth of Columbus.

We know, in a vast and intricate cosmos, that there is still muchmore to be discovered. And we need to plan! Now, more than everbefore, we need to try to see the future more clearly. What will thenext thirty or forty years portend? From a business perspective, wemust consider the types of products that we will be buying and selling.What careers will be meaningful? What will the job market belike? What types of materials and services, which currently do notexist, are likely to be commonplace by then? Will our lifestyles fortyyears from now be as different from our current lives as our currentlifestyles are from those of forty years ago?

THE ART OF PROPHECY

This book is intended to suggest some answers to those questions—tolook ahead with a sense of expectancy and hope. We will try topeek into the future through clouds of uncertainty, much as we tryto watch a parade from behind a crowd of heads.

Of course, prophesying is not without its hazards. The Princetonphysicist Gerald O'Neill discusses its complexities in his book, 2081.His opening chapter, "The Art of Prophecy," notes that many writers,in addition to Edward Bellamy, seeking to anticipate the futurehave badly missed the mark. Rudyard Kipling wrote that war wouldbe out of fashion by the year 2000. H. G. Wells prophesied thatthere would be a World State in 1977, which would suppress all religions.Kipling further believed that future travel belonged to thezeppelin; Wells was convinced that the moon would not be exploreduntil the year 2054. Perhaps Jules Verne, the famous Frenchscience fiction author, was most accurate. He boasted that he hadread a thousand scientific articles and books before he began hisprophetic 20,000 Leagues Under the Sea. And his vision was quite uncanny.He correctly anticipated the Apollo moon program—theFlorida launch site, the three-man crew, the initial circumnavigatingaround the world, and the subsequent moon landing. And he didall of this one hundred years before the fact.

Among the scientific prophets of the past, O'Neill extols thevirtues of the English biologist J. B. S. Haldane, who argued correctlythat fundamental scientific advances have an enduring significancewhereas the impact of military conquest diminishes with thepassage of time. Thus, the generals of World War I are virtually forgottenexcept by a few historians. But every schoolboy knows aboutAlbert Einstein. During the first quarter of our century, Haldanecorrectly anticipated the fertilization of human eggs outside thebody—first carried out in 1978. In 1928, he prophesied that theworld was at risk of successfully completing experiments in "inducedradioactivity," the precursor to nuclear reactions.

THE STATIC SOCIETY

The idea of future threats to personal freedom was seriously discussedin sobering terms by George Orwell in his classic 1984 and byAldous Huxley in Brave New World. Both authors perceived thethreat of a future government's absolute control over society, theend result being a static society devoid of creative thought and expression.The ultimate objective was "social stability" at the expenseof human experience. O'Neill expresses alarm that, in our contemporaryworld, distinguished scholars have published a book, TheLimits to Growth, which proposes restriction of certain freedoms inorder to more effectively manage a global static society. These authors,focusing on the negative aspects of our world, fear a rapid depletionof natural resources and the threat of nuclear catastrophe.The static society is not a new idea, having been proposed in the lastcentury by Rudyard Kipling and others. But it represents a pessimisticdoomsayer's approach to the future and fails to capture theenergy and resources inherent in the human spirit. From myperspective, this doomsayer approach is also inconsistent with theevolutionary history of our species, which has demonstrated its resilienceby creating and ever increasing its sophistication and adaptability,moving ever forward to some purpose. Indeed, thedoomsayer misses the overriding fact that there is a Creator behindthis drama, moving our world and us to bring an ever greater revelationof His goodness and concern for His creation.

THE INFORMATION SOCIETY

With the sheer driving force of advancing technology, it is increasinglyclear that our society is moving from a material-based one toan information-oriented/knowledge-intensive base. John Naisbittpointed out in Megatrends that, in 1950, only 17 percent of usworked in information-related occupations. By 1982, that figure hadsoared to 65 percent. Teachers, computer programmers, clerks, secretaries,accountants, stockbrokers, and so on, all saw their relativenumbers increase, and the knowledge and information content oftheir jobs explode.

Today, most Americans spend their time creating, processing, ordistributing information. In 1980, more than a decade ago, Americancompanies generated $60 billion in revenues from selling goodsand services overseas. That represented about 20 percent of theworld's share of trade. Since that time, America's trade deficit hasbeen the subject of widespread political and social debate; indeed,trade negotiations between the U.S. and some of its key tradingpartners have resulted in serious shifts in trading practices such asthe North American Free Trade Agreement. But in Megatrends 2000,Naisbitt and his co-author Patricia Aburdene suggest that the deficitproblem is overstated because conventional trade accounting focusesprimarily on the output of manufactured goods and fails fullyto account for trade in information and knowledge. Indeed, afteraccounting for our heavily information-oriented intangibles, Americamay be experiencing a significant trade surplus.

A second distinction of the information economy is that it isbased upon renewable and self-generating resources—knowledgeand information. It is thus inherently less dependent upon materialresources such as oil, coal, or nuclear energy. Consequently, wehave another reason to reject the static society doomsayer. As webecome more of an information-oriented society, we require fewermaterial inputs to create additional economic output. We are essentiallysubstituting knowledge for physical capital and unskilledlabor.

The major challenge to be faced by the new information economyis to find faster and more efficient ways to process the enormousamount of technical data accumulating in our society. In themid-1980s, scientific and technical information was doubling everytwenty months. Now it is doubling in less than nine months. Thisextremely valuable resource must be organized and made accessible.Consequently, the focus of current efforts should shift awayfrom the gathering of information and move toward analyzing, evaluating,and selecting the relevant segments of this information tidalwave. On-line databases and wide-spread access to the informationsuperhighway via the internet give the user direct access to resourcessuch as special libraries, indexes, and information onceavailable to a very few. Such "democratization" of information givesindividuals access to this wealth of information at only nominal cost.As this process continues, and the technology for providing informationevolves, the balance of power will shift from those who excelat providing information toward those whose strength lies in analyzingthe data and inferring superior insights from it.

With power shifting toward those who excel at analyzing data, wemust become concerned with the ability of our workforce to successfullyaccess information, analyze it, and draw valid conclusions fromthat analysis. This, in turn, requires an educational structure whichwill train our citizens to meet these knowledge-intensive tasks.There continues to be an acute shortage of high school and collegescience and math teachers, which has already adversely affected theentry-level competence of new workers. Perhaps just as important,there seems to be a failure in American society as well as in manyother societies to cultivate the intellectual skills required for criticalthought and analysis. Academics have bemoaned the deteriorationin writing expository skills, necessary tools for the critical thinker. Inconsequence, we have a powerful anomaly developing. As our societybecomes more information- and knowledge-oriented, our schoolsare providing us with graduates unable to meet the requirements ofour evolving society. In Naisbitt's words,

without basic skills, computer illiteracy is a foregone conclusion. Inthe new information society, being without computer skills is likewandering around a collection the size of the Library of Congresswith all the books arranged at random with no Dewey Decimal system,no card catalogue—and of course no friendly librarian to serveyour information needs.

And we would take his analogy one step further. Access to that greatlibrary is not enough. Without the ability to read, comprehend theideas, and utilize them, the benefits associated with entry to thattremendous library would be lost.

To meet the predicament, corporations are going into the educationbusiness. Many of the nation's largest companies are operatingremedial courses in basic math and English for new employees.And, of course, the opportunities for science, math, and Englishteachers to consult and to tutor in these areas are widespread. But,interestingly, the "invisible hand" of the market may be aiding us aswell. Preschool students are successfully being introduced to our informationsociety through a wide variety of computer games, videoarcades, and a host of child-oriented products. While these productshave been criticized (perhaps rightly so in many cases), today'syouth are far more computer-literate than most of their parents. Indeed,many young people are computer-literate before they arebook-literate. In every generation, we tend to underrate our youth.Perhaps we are doing the same now. Watching a preschooler successfullyoperate a computer beyond my capabilities leads me toconclude that our youth, as historically has been the case, will rise tothe needs of society.

As I look out over the next forty years, I am watching a swiftlymoving cavalcade of progress. The technology to access and deliverunfathomable amounts of information is evolving rapidly. Increasinglysophisticated and accessible technologies allow for realtime/high-resolution audio and video access between individualswith personal computers, and transfer of information to and fromthe great libraries of the world.

The same technological innovations will allow individuals accessto video/audio/written information between virtually anyone locatedanywhere on the earth. A child with moderate computer skillscan log on to the internet today and converse in real time with anotheryoungster thousands of miles away. Companies that were oncelimited in their expansion capacities by distance and travel time toforeign locations can now carry on virtually every facet of businesswithout leaving their home turf. Extrapolating into the future, I expectthat one day soon, today's fax machine, overnight delivery, andinternet services will seem as primitive to our grandchildren as thetelegraph key and the Pony Express are to us today.

In practical terms, sitting in my home in Nassau in the Bahamas, Ihave immediate real time high-resolution multimedia access to virtuallyany information source. Information sources include not justbooks and library documents, but also video, radio, and theatricalbroadcasts, great symphonies, moving operas, recorded speeches,and conventional data. Moreover, it is all available not only from myoffice, but from the pool side or the beach!

Perhaps I can provide a helpful example of why critical analyticalskills will become increasingly important with time. Allow me theliberty of using the investment management business, a businesswith which I was associated for over fifty years. As information technologiesevolve, the transaction costs involved with buying and sellingstocks should decline sharply. In today's world, expensivebrokers take the orders to expensive stock exchanges to process thebuys and sells. However, as technology continues to develop, we areincreasingly able to cut through those two layers to effect a transaction.Investors from anywhere in the world are already able to enterorders on several automated trading systems, and this will accelerateover time. The democratization of information, coupled with theability to implement decisions based on that information instantaneouslyand inexpensively, will mean that markets are likely to becomeincreasingly efficient. Consequently, those who seek to benefitfrom short-term trends will find the opportunities increasingly elusive.I have seen this process developing in the United States, whereindex arbitragers, using the more common models, are unable consistentlyto generate profits above their costs of capital.

Those who are successful today are employing increasingly complexcomputer algorithms and more expensive computer networks.Such complex investing systems require immediate access to informationand computer power. However, within the next forty years,the sophisticated systems of today will look crude, and technologiesfor developing even more sophisticated computer trading modelsare likely to be widely disseminated. Consider the following analogy.Fifty years ago, computers costing millions of dollars and occupyingwhole rooms were used for calculating missile trajectories—the importantstate secrets of the day. Today, the same computer powercan be found in a notebook-sized computer and the software can bewritten by a precocious junior high school student. The diffusion ofthe technology has been widely disseminated.

Increasingly, there will be little value added to following short-terminvesting strategies that rely on mere computer power. Thecomputer systems required to do the job and the information requiredto be processed are readily available to a wide spectrum ofusers. While those with the most money available will do what theycan to push the envelope of investment technology further along,additional gains will be difficult to achieve as the costs of accessingthe information and applying advanced computer techniques to theinformation continue to decline. Computers and internet accesshave made special trading strategies such as "index arbitrage" possible.But, as the costs of these computer systems have dropped, andthe computer programmers who know how to execute these strategieshave multiplied, the markets have become more efficient andprofits using these strategies have become increasingly difficult toachieve. Over the next forty years, these trends will continue, forcingthe global markets to become increasingly efficient. This efficiencywill make it difficult for even the best traders to consistentlyprofit from their short-term trading techniques.