Connors’ Weekly Battle Plan
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 (which called him “the
Indiana Jones of Financeâ€), 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; 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?
|
‘I |
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 the
Botswana 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?
|
‘(The |
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, for
instance.
(
FNM |
Quote |
Chart |
News |
PowerRating) 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 |
Quote |
Chart |
News |
PowerRating) — 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
(
C |
Quote |
Chart |
News |
PowerRating)
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?
|
‘What |
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?
|
of whack for nearly all commodities… The exception, of course, is gold.’ |
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:
Then
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
(
PD |
Quote |
Chart |
News |
PowerRating), 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 our readers’ sake, what’s the name of the fund again?
Rogers:
The Rogers
International Commodities Index (Editor’s note:
grohrs@pricegroup.com)
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 called
Investment
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.
What’s New:
1. Chris Curran’s E-mini trading course is now available. Chris
is a professional trader with a solid track record, and if you trade
the E-minis (or want to learn how to trade them) you can read about
Chris’ course
here.
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
here.
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)!