Subject: Interview with Jim Rogers
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Achieving a 4000% Return In 10 Years: An Interview With Jim Rogers
Monday August 11, 10:40 am ET
By Larry Connors
This week, I'm going to take a little different approach. As you know, my column predominately focuses on short-term trading and the many aspects of it. But, this week, I'm going to broaden the information a bit and focus on the longer-term side to the markets. And who better to do this with than a gentleman who achieved a 4000% compounded return in 10 years (versus a 50% rise in the S&P's) and who retired from the hedge fund business at the ripe old age of 37. Who is this gentleman? George Soros' original partner, Jimmy Rogers.
Last week Ed Allen, who writes a terrific macro-economic piece for us each day, and our editor-in chief Brice Wightman, got a chance to interview Jim. In this interview you will learn how this investment giant goes about making his decisions. There's no short-term thinking here. This is big picture, long term thinking. And, when this type of thinking is correct, it occasionally leads to such spectacular gains, that one can be in the position to retire before they reach the age of 40.
Before we go to the interview, here's some brief background on Jim:
Jim Rogers has been chronicled in Jon Train's Money Masters of Our Time, Jack Schwager's Market Wizards, and other books. He has been frequently featured in Time, The Washington Post, The New York Times, Barron's, Forbes, Fortune, The Wall Street Journal, The Financial Times, and most publications dealing with the economy or finance. He has also appeared as a regular commentator and columnist in various media and has been a visiting professor at Columbia University.
Born in 1942, Rogers won a scholarship to Yale, where he was coxswain on the crew team. Toward the end of his four years there, he received an academic scholarship to Oxford, where he attended Balliol College and studied politics, philosophy, and economics. It was during the summer of 1964, while working for Dominick & Dominick, that Rogers fell in love with Wall Street. And that's exactly where he headed after Oxford and a stint in the Army.
After apprenticing with Arnhold and S. Bleichroeder in the early 1970s. Rogers co-founded the Quantum Fund, a global-investment partnership. During the next 10 years, the portfolio gained more than 4000%, while the S&P rose less than 50%. Rogers then decided to retire - at age 37. Continuing to manage his own portfolio, Rogers kept busy serving as a professor of finance at the Columbia University Graduate School of Business.
Here's the interview Ed Allen and Brice Wightman conducted last week with Jim Rogers:
Edward Allen: Jim, would you take us through your investment decision process?
Rogers: Gosh, that's pretty complicated but essentially whenever I stumble across something, whether it's a country or an industry or a company or a currency or a commodity, for whatever reason that it strikes my fancy - it may be cheap which deserves exploration or it may be expensive and deserves exploration because you can make as much money selling short… not as much money… then I start exploring and doing my research to find out if it's an accurate investment decision or not.
I don't like to buy anything unless it's very, very cheap because then even if I'm wrong, I probably won't lose much money. Likewise, I don't like to sell something short unless it's unbelievably expensive. I've shorted lots of things in my life that were expensive, only to see them get more expensive. So I like to make sure it's very, very expensive and there's a lot of exuberance before I sell short.
Allen: How do you know when to get out of a trade? In other words, whether it's a profitable trade or whether it's a losing trade or investment - when do you decide that enough is enough?
Rogers: Well, on both of them, I try to stay with them until the fundamentals - until the secular change comes going the other way. If I've owned something for a number of years and I suddenly see that the management or the industry is going bad or that there's excess capacity coming into an industry, then I will probably sell it. Or if a government is changing from being pro-capitalist to anti-capital, I will probably change. On the other side, when I'm wrong, I'm as bad as everybody else. I sort of panic and close out my position - often at the wrong time. Sometimes I just continue to take the pain on the short side and I cover a short that goes against me. Not so much on the long side. Even on the short side, I usually stay with them.
Allen: What are some of your most memorable trades that would take us through this process?
Rogers: Well, there are lots. There are things that I still own. I can tell you that I still own every share in Botswana that I ever bought. I drove through Botswana in 1991 on a motorcycle and realized this is a spectacular country where things are going right and I did a lot more homework. I got to the capital city and bought shares of every company on theBotswana Stock Exchange because I saw that things were going right.
I continued to buy every share that comes public and I have reinvested all my dividends and sent more money to Botswana. The country has continued to develop - it's one of the most well managed, democratic, solid countries in the world. It's one of the better ones in the world as far as I'm concerned. The stock market has gone up many times. That's one that I've been very, very pleased with.
As far as things that have gone bad, I vividly remember selling oil short in 1980 right before Iraq invaded Iran, which was not a good time to be short oil. I covered in the run up - there was a lot of skyrocketing when that war started out --I shouldn't have because the fundamentals were still bad for oil. I got shocked and panicked like everybody else.
Allen: I know that one of the things that really piques your interest is panic in certain markets. What do you make of the recent sell-off in the Treasury market?
Rogers: I'll come back to that one but last summer, for instance, there was a lot of panic selling in the American and European stock markets. For the first time in many years, I covered all my shorts. I had no shorts from July of last year because there was a lot of panic selling. It wasn't just the panic selling by the way. It was the panic selling -- which whetted my appetite -- but then I noticed Greenspan was printing money at a very rapid rate. Bush was spending money at a very rapid rate. That had to mean stocks had to go up. So I had no shorts.
I don't like having no shorts, but that went on until June of this year when I started selling short again for the first time in a long time in a long time. Now, I shorted the bond market in June because there was hysteria. Everybody in the world was buying long bonds. I shorted that market in June. I covered< a week or two ago - much too soon, obviously. I covered because I thought I saw panic selling again. I mean bonds were - we had interest rates come down 100 basis points in two or three weeks, so I covered -- and I covered too soon. When panic gets out of control, it can be quite serious panic. But that's how I played both the stock market and the bond market in recent months.
Allen: Do you think that the 22-year run in the bond market is coming to an end?
Rogers: In my view, yes, the bond market -- the bull market we started in 1981 is over now. There will be rallies. The reason I covered my shorts is that I'm expecting a rally - maybe a very nice substantial rally but I expect to sell the bond market rally because I think that the bond market rally has come to an end.
This is going to cause enormous dislocations in many other markets. I'm short Fanny Mae, (NYSE:FNM - News) for instance. FNM will be a $5 stock before it's over. There are going to be huge dislocations because there has been so much credit and so many derivatives built up in the past five, ten years that we've had this explosive bull market in paper, if you will.
(all charts created with QCharts)
Allen: Some people have pointed out that there are similarities between the current market and that of the 1970s, when people favored physical assets over paper assets. Are you finding that?
Rogers: Well, if you've read everything I have written and broadcast in the last five years including my latest book, which is called Adventure Capitalist, you'd know that I have explained that the bear market in stocks was beginning and the bull market in commodities was beginning. We started a commodities index fund on August 1, 1998, because I felt that a bull market in commodities was beginning and the bear market in stocks was beginning. That index fund is up 95% since then. I think you probably know what's happened to stocks since then.
Allen: Right. Absolutely.
Rogers: So yes, it's going to be a similar period to what happened in the 1970s in stocks and commodities but it's happened throughout history. It's not just a one-shot thing. At the beginning of the twentieth century, commodities went through the roof for about 20 years. Stocks did nothing, even though America went from being a debtor nation to being a creditor nation and the most successful nation in the world.
Stocks did absolutely nothing until the mid-1920s, but commodities boomed. There have been many periods in history (including the one you mentioned) where stocks do one thing for many years and commodities do another for many years. We are now in a multi-year period when stocks will not be a great place to be - they'll be sideways, they'll zig and zag, they'll go down -- probably down more than up. Commodities will have a bull market, which has already started. As I explained, this index fund is up 95% in the last five years. It will go on for another 5-10 years. That's the place to be if you want to get rich.
Brice Wightman: Jim, I just wanted to ask you a follow-up question on the change in trend in bonds, where you mentioned that FNM was probably going to $5. What other sectors do you see as shorts here?
Rogers: Well Brice, the excesses in the financial markets are what you should always sell short. Back in 1980, oil made up about 30% of the S&P index, it was so strong and so powerful. But of course you should have shorted oil at that point. By the way, technology made up about 30% of the S&P five years ago. Financials now make up about 30% of the S&P today and that's where the excesses are. I don't think you have to be a genius to know that that's where we've had the massive excesses of the past five years.
Look at Wall Street. MBAs still want to go to Wall Street. People on Wall Street are still making a lot of money. Things are down, but they're down nothing compared to what they could be. Employment is essentially the same on Wall Street as it was a few years ago with many people are still making huge salaries. There's gigantic leverage in the system, tremendous leverage. Everybody's been playing the bond carry the last few years -- God knows how many derivatives there are in the world. Nobody knows. That's where the excesses are.
Just an example, you may remember Japan in 1989 and 1990 when the Japanese average was at 40,000. Well, the Japanese average today is about 9,000, up from 7,000 two months ago. The Japanese mutual fund industry has lost 95% of its assets in that period of time. That's not a typo. They have lost 95% of their assets. That's a bear market. If you have that kind of suffering and pain, that's when the system will be cleaned out and that's when you can have a new bull market in stocks. So I'm shorting the financials. I'm shorting us. I'm shorting you and me. Fanny Mae FNM -- I mean that's one of the names I mentioned; I'm shorting money managers; I'll probably be shorting some of the brokers soon. That's where the excesses are. Citibank (NYSE:C - News) will be a short -- I'm not short it at the moment -- that will be a magnificent short. Those will be the places to be.
Allen: I know losing the dollar standard is a theme that you've followed for many, many years. Eventually if debt continues to balloon in the US, what implications will that have for stock investors here in the US?
Rogers: The US dollar is a terribly flawed currency. We owe over $7 trillion -- I mean I hate this -- I don't particularly like this at all but as an investor one has to invest with reality, not with what one would like. We are the largest debtor nation the world has ever seen. Our foreign debts exceed the foreign debts of every debtor nation in the world put together. The dollar has started going down but it has a long way to go before it's over. And the official policy of the US Federal Reserve is now to debase the currency. They have announced it. They have put it in their minutes. Every one of the governors has made a speech saying, "Yes, we're going to debase the currency. It is our policy. We are going to drive the value of the dollar down and the price of things up. What more do you need to know? You've got to sell dollars. It's a horribly flawed currency anyway, with unsound underpinnings. The debt is increasing at the rate of over $500 billion a year, and the Central Bank is debasing it -- out of official policy.
I hate it - it has never been good for a country to debase a currency. It has never worked in the long run. It has always been a disaster in the long run. It sometimes has worked short-term. What more do you need to know? You've got to sell dollars. The problem is, of course, that there aren't many sound currencies left in the world anymore. I own 12 or 15 currencies around the world. I look every day for a sound currency.
Everybody's learned to debase their currency, to buy votes, to beggar thy neighbor. Even Singapore which tried to run a sound currency can't do it any more, because with everybody else debasing their currency, they can't compete. So even they have to be looser than they'd like to be. If you can find me a sound currency, I would love to know about it. And by the way, that's one of the reasons why I'm optimistic about commodities because all the things that are happening in the world are bullish for commodities., including debasement of the currencies.
Allen: Would you then favor gold in that instance?
Rogers: Well no, I own gold. Gold is a commodity but gold is one of my least favorite commodities. There are other commodities that are going to do a whole lot better. Supply and demand are completely out of whack for nearly all commodities, and the inventories -- they've run down the inventories of nearly every commodity in the world. The exception, of course, is gold.
Gold exploration has continued to expand for the past 20 years, gold mining production has continued to expand -- it certainly hasn't declined in the past 25 years even though gold is down, and gold inventories are at the highest in the history of the world. I mean all the gold that's ever been mined is still out there. The Central Banks own it. The Central Banks want to sell it. I'm not saying they're right or wrong, mind you, don't get me wrong. I'm not making a value judgment here. I'm just dealing with facts. So I own gold. It's in my index. I own a couple of gold-mining shares but I am less optimistic on gold than I am on most other commodities. But I do own it. For centuries, people have tried to figure out how to turn lead into gold -- do you know that alchemist's quest: "If we could figure out how to turn lead into gold, we'd all be rich." I would submit to you that you should figure out a way to turn gold into lead and you'd make a lot more in the next few years because lead would go up more, percentage wise.
Allen: Of the industrial commodities or metals, which one do you favor? Would that be lead, then?
Rogers: Well, if I tell you the best one, it will undoubtedly turn out to be the worst one -- you must know that. Zinc is terrific right now. Lead is good right now. Aluminum is good right now. Which would turn out to be the best? I don't know. But buy Sugar. Coffee. There are plenty of things that you can buy that are going to do terrific. I'd rather buy Sugar or Coffee right now but Zinc is great. Aluminum. There are plenty of things you can buy. Soybean Oil is getting whacked at the moment but there are plenty of things to buy for the next 5-10 years.
Allen: China has been an important factor for commodities markets for the past few years. They've really become a much bigger consumer in terms of metals and a lot of other commodities. What do you see as China's role in the global economy going forward?
Rogers: The nineteenth century was the century of the UK; and the twentieth century was the century of the US. The twenty-first century will be the century of China. The best way to play China is to buy things that the Chinese need and will buy. The Chinese are not going to buy cars or TVs from us -- I promise you. But they are going to buy commodities, because they are desperately in need of commodities. That is the single best way to play China as far as I know -- even better than buying shares on the Chinese Stock Exchange, which I own by the way -- because they are going to have to import an enormous amount of stuff. They've already become one of the largest importer nations in the world and it's going to get bigger and bigger and bigger. The most important financial change in the world right now, country wise, is the rise of China. The best way to play it is to buy commodities. They're going to buy all the copper you can imagine, all the steel -- and all the stuff that they don't have. They've started importing oil, hydrocarbons -- they're going to have to import a lot of things over the next few years. Anybody who thinks he's going to do business in China is going to have a long, hard slog, but anybody who can sell to China is going to make a fortune.
Allen: So would you favor some of the American mining companies?
Rogers: Anybody who's got excess copper -- excess anything to sell -- yes. But again, the best way -- they're not buying that much from the US, as you know. For whatever reason, historically partly, they're buying from Asian mining companies and Australian mining companies and South American actually, to some extent. They bought a big steel mill and iron ore mine down in Peru. That has been their history. But yes, of course. It doesn't matter where China buys its copper. If they buy a lot of copper, the American companies which produce copper are going to do better because the price of copper is going to be strong.
The best way to invest in commodities... you can invest in commodity companies or commodity countries, even, Canada or Australia. But the best way is always to invest in the commodity itself. Copper is pretty simple. Copper is pretty dumb. If there's too much copper, the price is going to go down. If there's too little, it's going to go up.
You could invest in Phelps Dodge (NYSE:PD - News), but when you invest in Phelps Dodge, you have to worry about the American stock market. You have to worry about management. You have to worry about competitors, you have to worry about balance sheets, you have to worry about accounting, you have to worry about government policies... you've got to worry about a lot of stuff. It's a lot easier to analyze copper, pure, dumb copper, than it is to analyze copper companies and countries. I do both and have done both for all my investment career but it's a lot easier to do the simple commodity itself. It's a lot easier to buy and sell it, too.
Wightman: You're talking about more of a pure play in the futures market?
Rogers: Yes, that's the way to play it. The index fund is a fund of commodities, not of stocks. We buy commodities. We buy copper and copper and silk and soybeans, stuff... That's the fund that's up 95% since August 1, 1998. And it's an index fund, by the way. I'm not sitting here and saying I'm smart or anything -- it's an index fund. The computer runs it. I don't run it.
Allen: Just for the readers' sake, what's the name of the fund again?
Rogers: The Rogers International Commodities Index. (Editor's note: 1-866-304-0450)
Wightman: Tell us about your books.
Rogers: The new book which is just out is called Adventure Capitalist -- it's about a three-year drive around the world. We went through 116 countries, 152,000 miles. It was 1999, 2000 and 2001. Got in The Guinness Book of Records for it (but The Guinness Book of Records doesn't pay the rent, I promise you). My earlier book was calledInvestment Biker. That was about a trip in 1990, 1991 and 1992, ten years earlier, around the world on a motorcycle. It also got me in The Guinness Book of Records, by the way.
They are entirely different books, entirely different routes, entirely different approaches. They're two entirely different books but people keep writing me that the new one is better. I don't have a clue but everybody says Adventure Capitalist is a better book than Investment Biker, the ones who read them both. They all say they like them both but they like this one better.
Wightman: You sure had a good time writing both -- and you learned a lot, I imagine.
Rogers: I learned a whole lot doing both, that's for sure. There's nothing quite like seeing the world close to the ground to learn what's really going on -- the only way. Go and talk to the black market, cross the border out in the middle of the jungle -- that's how you find out about a country, much better than flying in to the International Airport and seeing the Finance Manager and going to the five-star hotels. You don't learn much that way. I know what the Finance Minister is going to say. I can say it better than he can. I've been in the investment business over 30 years. I know what he's supposed to say, but the way to find out for real is to go down to the black market guy. He'll tell you what's really happening.
Allen: Thank you, Jim. We certainly appreciate it.
Wightman: Thanks a lot, Jim.
Rogers: Thank you.
There's a lot of great information here. Obviously, Jim Rogers is looking for large outsized gains. He's not looking for positions that rise a few percentage points. He's looking at themes that can provide him with returns that are potentially substantial. He's obviously bearish but one does not need to be a bear to take advantage of some of his ideas. He's looking for opportunities and he invests as those opportunities arise (if you need further help in understanding how to apply this information, you can email Ed Allen at edwarda@tradingmarkets.com). Special thanks to Jim for taking time to speak with us and sharing his investment ideas.
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2. Kevin Haggerty's Trading With The Generals 2003 (plus his 500+ page training manual) is also now out. You can find details for it at www.tradersgalleria.com.
Finale
You've heard me say many times that there are many, many ways to make money from the marketplace. Anybody who tells you their methodology is the only way is delusional. There are traders who make money trading one-minute bars, 5 minute bars, options, E-minis, stocks, swing trading, long-term trading and very long-term trading. It's good to understand the many ways one can profit from the markets and as we've just seen, the Jimmy Rogers way is certainly a way that's proven successful for him (and many others) over the years.
Have a great week trading (and between Arnold, Kobe and the Sox making a run at the Yankees, this should be one hell of a next eight weeks)!
Larry Connors
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