I find Jim Rogers travelling round the world and evaluating investment potential very inspiring. Investment Biker is a book about his adventure and his thoughts on economy and investment in remote corners of the world. Some places you would not even dare to put your foot on and he had went. Not by planes, but on his motor-bike. That’s how he got his nickname – The Indiana Jones of Finance. This book was written in 1994 and you could see some of his judgement have became reality.
Investing in immature markets
Rogers, when he was in Austria, wrote “My attitude is, if you believe in a country, you should buy shares of every decent stock on its exchange. If you’ve got the right concept, going for you, they’re all going to move up together. I bought shares in everything that had a solid balance sheet – a home-building construction company, finance and manufacturing companies, banks, other construction firms, and a big machinery company.”
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While in Turkistan (a town south of Kazakhstan), Rogers found that the land was very cheap and with the opening up of the borders, trade will boom and land value would go up. But he said, “I didn’t buy any land myself, because I invest only in what I believe I’ll be able to sell quickly, whether I actually can or not. Besides, this would be work, and I didn’t want to work anymore.”
Capitalism vs Communism
He also shared the difference between Capitalism and Communism, “Riding along the Caspian Sea we saw hundreds of these discarded drilling rigs, all stripped. Nobody maintained the pressure in the wells. Back home you maintained them because you wanted the extra 50 percent from a well. Here, they took the oil off the top and left it. They were doing what they accused the capitalists of, skimming off the easy money and running. Capitalists would have maintained these wells till they ran dry, otherwise they’d be bankrupt capitalists.”
He added, “The Russians had thought they could use the water to turn the area into a cotton plantation. But they had treated the land the way they treated the oil fields we had passed: They stripped it and moved on. In the United States, if you were to go out and buy a hundred thousand square miles of farmland, and then go to the bank and get several billion dollars to cultivate it, sooner or later even a banker would say, “Whoa, this ain’t working. We’re not going to go on throwing money at this; it’ll collapse.” There would be some discipline. But not in Communism. You could ruin a resource by gutting it without anyone saying, “Halt.””
Resurgence of Islam
“One of the thrusts of the future could well be the revival of Islam versus Christianity. All the Muslim areas are resurgent, not so much because they want to be Islamic, but because they need a vehicle to help them get more. If people are prosperous, they tend not to fight. What they’re reaching out for is Islam, the only unifying thread they have, to help them achieve their own prosperity and identity. As these Muslims move toward autonomy, clashes will occur, because the Muslims won’t be able to blame their problems on the Communists anymore – they’ve all been swept out; they’ll blame their problems on the Christians, for lack of a better scapegoat.”
Analyse the effects of change
In China, Rogers was intrigued that the road building works between Urumqi (in Xinjiang) to Pakistan and Urumqi to Soviet Union had driven up the price of cashmere (wool from cashmere goat). It was a good example of how an investor should think, “It they’re putting in a big road in Pakistan and China, it has to have an effect somewhere. Every time an investor sees a big change coming he has to start thinking, Okay, what does this mean? Where does it lead? What are going to be the economic, political, and social shifts because of it? And won’t the new railroad to the USSR intensify these effects? Well, in thirty years most of the yurts (Mongolian nomads) are going to be gone, with the owners of those left charging forty dollars a visit. They’ll fix them up with a bed and indoor plumbing and charge you a fortune to have a genuine nomadic experience, plus you’ll pay more for cashmere. (When I called my office, I had them stockpile two or three cashmere sweaters for my return.).”
While in Japan, he found it was profitable to buy a seat in the Japanese commodities exchanges. It has fulfilled 2 of this basic investment principles, “First, we’ve found something that’s cheap. Second, a dynamic change in its favor is about to occur. These principles may sound simple, but they are keys to successful investing and will repay the closest study. Most investors don’t have a problem knowing when an investment is cheap. The hard part is knowing that a change is about to occur in the near future. This is where studying markets and their history is so important. In my finance classes I insist that my students practice by studying everything that could have been known at a particular time in history and by making their own predictions. What would have told you in 1929 that the New York market was going to crash? How could you have known after the War Between the States that the Manhattan real estate market would soar? After World War II, Montgomery Ward predicted a recession and drew in its horns. Sears Roebuck correctly predicted a boom, expanded, and made a killing. What told an investor which company to bet on?”
Theory doesn’t work in real world
On business schools, “I didn’t teach the kind of finance usually taught at business schools, the kind dreamed up by professors whose only relation to real money was their monthly paycheck. I taught what I knew, how to invest the way I invested, how to think about markets and opportunities the way I thought. It wasn’t orthodox in a time of computers and complicated mathermatical models of the economy, the stock market, and index derivatives. However, I’d used my way of thinking not only to make some money, but to keep it.”
It takes sacrifice to be Rich
Rogers said to become rich takes dedication and sacrifice. “If you ask a thousand people if they want to be rich, every one except the poet and the mystic will say yes. When you explain what is needed to become rich, maybe six hundred of that initial 998 will say, “No problem, I can do that.” But when push comes to shove, when they have to sacrifice everything else in their lives – having a spouse and children, a social life, possibly a spiritual life, maybe every pleasure – to meet their goal, almost all of them, too, will fade away. Only about six of the original thousand will continue on the hard path.”
Suppression of prices does not work
Rogers believes in free market or Austrian school of Economics, where prices should be left determined by the market, with minimal or no intervention from the government. “In all my years in investing, there’s one rule I’ve prized beyond every other: Always bet against central banks and with the real world. In the seventies, the central banks were defending the United States’ artificially low price of gold. Central banks and governments always try to maintain artificial levels, high or low, whether of a currency, a metal, wool, whatever. Usually these prices are absurd, and the market knows they’re absurd. When a central bank is defending something – whether it’s gold at thirty-five dollars or the lira at eight hundred to the dollar – the smart investor always goes the other way. It may take a while, but I promise you you’ll come out ahead. It’s a golden rule of investing. In its collective wisdom the market always knows that if some people are clinging to an artificially low price of thirty-five dollars, you should keep buying gold at that price. When after thirty-five years the price of gold was finally released, it went up more than it should have because it had been kept low for so long. Such violent movement happens whenever a price has been kept high or low.”
Buy low and sell high
The essence of buy low and sell high to make money is not understood by majority of the people. “This is how markets work. Something, a stock, land, or some other store of value, will bump along at a stable price. Eventually something changes the supply-demand balance. The price starts going up because people realize, “Hey, they’ve got a new product,” or “The railroad is coming through Smithtown.” The price goes up for legitimate and sound reasons. There comes a time, though, when people buy land in Smithtown only because its price is going up. At that point, my mother calls me and says, “I want to buy some acres,” or “I want to buy this stock.”
“Well, Jim, it’s tripled over the past year,” she says in a tone that reminds me of the one Tabitha (his riding partner) reserves for calling me a dodo-head.
“That’s not the way you’re supposed to do it,” I say. “You don’t buy it because it’s tripled. You buy it before it triples.”
But this is what happens. People see the price going up and know that here is the gravy train that’s going to make them rich. The newspaper will have stories about Joe and Sally, how they’re now rich because they bought all this land or a few shares of stock in the coal mine. The price now goes up because the price is going up.”
Understand supply and demand is key to successful investing
“Whenever you have a high price, you get supply… To finish the gold story, if you get out your commodity chart book, you’ll see that starting in 1980, for the first time in forty-five years, gold production started up worldwide. Every year since 1981, the world has produced more gold than in the year before. Remember, it takes a long time to bring a gold mine on stream. First, somebody’s got to decide to look for gold. After he’s found it, he has to rustle up the money to open his mine. It takes years to gear up. Now, look at the projections and you can see, with the number of mines coming on stream today, that the production of gold is going to continue to go up until at least 2000. More supply. Gold will have its day again, and that day is getting closer, but it’ll be based on supply and demand – not hope or mysticism. Prices have been down for fourteen years. Ultimately the process will be reversed, and if given a kick by a currency or inflationary crisis, gold could soar. Some people want to say, “No, it’s supply, demand, and price.” But they have to understand that price is supply and demand. Price describes where supply and demand hang out, the place they meet. Forget about the gold fanatics, forget everything else. Figure out supply and demand and you’ll get extraordinarily rich. It’s astonishing how many people cannot grasp this.”
“In the real world, real prices are the only mechanism that brings in the right amount of supply. All a government has to do to deal with a shortage is let the price go up. We didn’t need gas lines back in the Carter years. All we had to do was let the price of gasoline rise and oil would have been found under every service station. As the price goes up, people drive less. The price always matches supply and demand. That’s what the price is, that matchup.”
Do not take things as they are
Rogers does not take words of others as truth. “Whenever there’s a national problem and the government explains things to its citizens, don’t believe the explanation. Figure out where the money trail goes, and you’ll almost always know what’s going on in the real world.”
Put some money in foreign currencies
Sharing his bearish views on US dollar, he urges his countrymen to buy some foreign currencies. “I urge all my American friends to open a foreign bank account, if only as an insurance policy. Second best is to buy foreign currencies in a brokerage or bank account here. People have life-insurance and automobile-insurance policies and never expect to need them. If you have to use them, however, you’re glad you have them. On that basis, every American should put some money out of the country. I don’t know what’s going to happen to the US dollar over the next twenty-five years, but I know what’s happened in the past twenty-five – it’s lost a lot of value, over a third compared with other major currencies.”
Buy the biggest companies in immature markets
In Bostwana, Rogers evaluated the stock market there. “I checked to see if these stocks were expensive. I looked at traditional measures, like price-to-book value. Were the balance sheets sound? Did they pay a dividend? Were the price-to-earnings ratios high? Were they viable industries? Did they have a good future in Bostwana? Things looked fine. I figured I was not going to lose any money. These stocks appeared cheap enough that the worst that would happen was the opportunity cost. However, they all paid dividends, so it wouldn’t be that unproductive. I would be getting dividends in a currency that was hard or at least semi-hard.”
Adding on, “Obviously, if you’re starting a stock market you don’t start with Joe’s Corner Liquor Store. You start with your largest, soundest enterprises – banks and mines. And that’s what they were – not a whole lot of risk. In the beginning, I never go into these markets with a lot of money. I like to get my feet wet and see what kind of problems happen before I really pie in.”
When there’s nothing to do, do nothing
“An investor is better off doing nothing until he sees money in the corner just waiting to be picked up. One of the biggest mistakes most investors make is believing they’ve always got to be doing something, investing their idle cash. In fact, the worst thing that happens to many investors is to make big money on an investment. They are so flushed, excited, and triumphant that they say to themselves, “Okay, now let me find another one!” They should simply put their money in the bank and wait patiently for the next sure thing, buy they jump right back in. Hubris! The trick in investing is not to lose money. That’s the most important thing. If you compound your money at 9 percent a year, you’re better off than investors whose results jump up and down, who have some great years and horrible losses in others. The losses will kill you. They ruin your compounding rate, and compounding is the magic of investing.”
Alternative to commodities futures
If you want to buy commodities but worry about expiry in futures contracts, here is an alternative: “I wanted to make a direct investment in wool in New Zealand, but if I bought wool futures, I’d have to worry they would expire sometime or that I might get a margin call. So I tried to buy a seat on the wool exchange. Whenever there’s a savage bear market, the seats on the exchange – whether for stocks, sugar, gold, or bonds – become seriously depressed. The best way to invest in a depressed market is to buy a seat on the exchange and forget it. Frequently, there’s not even maintenance to pay.”
“For example, an investor will say, “This stock has a lock on the market – a monopoly – it will grow at twenty-five percent a year forever.”
I ask,”What about high returns on equity bringing in competition or substitution?”
“Yes, that was true for IBM and Penn Central and oil, but this time it’s different because of [its patents, its management, its market position…]” – you fill in the blank.
Well, in the laws of economics, in the laws of history, in the laws of politics, and in the laws of society, it’s never different this time. The law of gravity isn’t ever suspended for someone’s convenience, and these laws are just as rigorous, though more subtle and complex.”
Two basic investment criteria of Jim Rogers
“Argentina fit my two basic investment criteria. One, change was coming – I’d been in the country several weeks and could see it – and two, investments were still dirt cheap. Money would now be thrown at these three industries and others, and shares would skyrocket. I wanted to buy the biggest companies because when the market started to move up, various money-center institutions would be interested and create special country funds, establish local offices, buy seats on the exchange, and spread the word about Argentina throughout the world. This crowd would buy the biggest, strongest companies, bulling them up yet further. I looked over the market and bought nineteen of the stocks whose industries made sense to me, companies with strong balance sheets to give me downside protection.”
Monopolies do not last forever
Panama Canal was an important passage for shipping between Atlantic Pacific Oceans. “For a long time our government had had a monopoly on this Atlantic-Pacific passage and it kept raising prices. When it had cost say $100,000 to go through the canal and $97,000 to go around, owners had sent their ships through the canal, figuring the risk of rounding the Horn wasn’t worth it. When it had become twice as expensive to go through the canal, they went around. In the history of the world there has never been a monopoly that has lasted forever. The canal was one you’d thought was perfect; but the world changed, as it always does. Most monopolies priced themselves too high or become inefficient and lax and provide bad service.”
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