Jim Rogers is a retired hedge fund manager and veteran investor best known for co-founding the Quantum Fund with George Soros (Trades, Portfolio). With over 50 years of experience in the finance industry, and with a reputation for often contrarian views of the markets, Rogers is an excellent source of investing wisdom.
Although Rogers has dealt in a wide variety of asset classes, from stocks to bonds to commodities, his investing principles are just as applicable to retail investors as they are to institutional players.
Why trading is not investment, and why price does not equal value
We have written previously on the difference between speculation and investment. In an interview with Jack Schwager in his book, "Market Wizards," Rogers provides his own distinction:
“I don’t consider myself a trader. I remember when I went to buy German stocks in 1982, I said to the broker: 'I want you to buy me X, Y and Z stocks.' The broker, who didn’t know me, asked, 'What do I do next?" I said, 'You buy the stocks and send me the confirmations.' He asked, 'Do you want me to send you some research?' I said, 'Please don’t do that.' He asked, 'Do you want me to send you opinions?' I said, 'No, no, don’t.' He asked, 'Do you want me to call you with prices?' I said, 'No, don’t even give me the prices, because if you do, once I see that these stocks have doubled and tripled, I might be tempted to sell them. I plan to own German stocks for at least three years, because I think you are about to have the biggest bull market you’ve had in two or three generations.' Needless to say, the broker was dumbfounded; he thought I was a madman.”
Although such extreme long-termism and disregard for price might be a bit too much for even the most ardent proponent of the Ben Graham value investing school, the overall principle here is recognizable: price does not equal value. Traders and speculators are concerned with price action; value investors care about long-term value. In this case, the long-term value was in a German market that had been underperforming for decades, even while the underlying economy was booming. As it happens, the market-friendly Christian Democrats came to power and ousted the ruling Socialists in 1982, triggering exactly the kind of bull market that Rogers was forecasting.
Why doing nothing is often better than doing something
Even conservative investors can fall prey to a fear of missing out on what they perceive as an opportunity to make easy money. Rogers expands on this point in the same interview:
“One of the best rules anyone can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people - not that I’m better than most people - always have to be playing, they always have to be doing something. They make a big play and say, 'Boy, am I smart, I just tripled my money.' Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop…I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
If you get in the habit of being in the game just for the sake of being in the game, chances are you will be worse off. In the best-case scenario you will pay the opportunity cost of not being able to invest in something truly special when it comes your way; in the worse-case scenario you will pay the very real cost of lost capital. Incidentally, this is an investment adage echoed by Warren Buffett (Trades, Portfolio): Approach investment the way a baseball slugger approaches a pitch: Wait for something to hit your sweet spot so that you can bat .400, rather than swing at everything that comes your way.
Why there is value in emerging markets
In a recent interview, Rogers presented his bullish view on several emerging markets:
“China is down 60% from its all-time high. Japan’s down 50% ... Russia is hated - I own Russian shares; I own Russian bonds - I own the currency.”
Now, there are certainly risks to investing in emerging markets, which do not exist to the same extent in developed markets, and we do not necessarily recommend doing so. But the basic principle behind this statement is sound: Be prepared to think outside the box when it comes to investment, particularly in face of changing macroeconomic factors. In a domestic context, this can mean looking at other asset classes or sectors. However, Rogers is quick to remind readers of the importance of doing their own research:
“If you can’t find Zimbabwe on a map … please do not invest … Only invest in what you, yourself, know a lot about.”
In other words: Work to expand and refine your circle of competence, but be careful to not stray outside of it.
(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)
Disclosure: No positions.
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