Street Smarts

Adventures on the road and in markets

Book by Jim Rogers

Article and Review by GlobalMacroForex

Jim Rogers is a world renowned investor who was so successful with Quantum (a hedge fund he co-founded), that he could retire by age 37.  In this book he gives practical advise and real life stories of his experiences traveling the globe and investing.

We’ll cover topics including:

·      Avoiding bubbles

·      Boots on the ground research

·      Markets run ahead

·      The simplicity of commodities

·      The term “BRIC”’ is bullshit

Let’s dig right in…

Avoiding Bubbles

“From the Dutch tulip mania of the seventeenth century to the South Sea Company bubble and Mississippi land scandals a century later, to the dot-com and housing bubbles of just a few years ago-all bubbles look the same.”

Jim Rogers points out how most investors are too concerned with the immediate track record and not looking back enough in history.  He says when his mother is calling him about a stock, that’s the time to sell, not buy.  People keep buying into these bubbles and it creates a trend.  You have to know when to get out of things because the fundamentals changed and it’s bubbly.

“In one sense, what you want in a bull market is a kid who is too young to know what he is doing.  You want a kid who will race into a bubble and leverage it higher and higher.  Guys like me will not make nearly so much money because we see what is going on.  The kid does not know why he is making money, which is why he is making so much money.  The rest of us are experienced enough or smart enough to know that this is going to end badly.”

He says this is part of the cause of the financial crisis because people are looking around and thinking the bull market will last forever.  They have all this money and so let’s buy even more.  The real experience comes from being around long enough to see the writing on the wall.

Boots on the ground research

Jim Rogers is known for traveling all over the world.  He pushes the importance of boots on the ground research in these foreign countries.  If it’s worth it, get the ones that aren’t in the ETFs.  He says there’s more to be gleaned from actually being in a country and seeing what it’s like than official numbers like GDP.  He asks,   “When you cross the border, do you have to pay bribes?”  How it should take only 10 minutes.  He asks are there traffic lights, shops, or real hotels?  If it’s corrupt, you’ll immediately know.  Mr. Rogers exchanges his money at the boreder at the official government rate only so he knows what the currency is supposed to look like because later he’ll buy more on the black market and wants to see if it’s counterfeit.

 “Black market is like taking someone’s temperature, we know whether something is wrong.  We do not know what is wrong.  If you have a high temperature, we know that something is really wrong.  The black market operates the same way.  You do not know what is wrong if there is a black market, but it gives you the first hint.”

Mr. Rogers recalls from his travels that Botswana had good highways, traffic lights, road signs, shopping centers that could have been in American suburbs.  So he bought every share on the Botswana exchange.  Holding those for many years, he saw significant gains.

Markets run ahead

Jim Rogers recalls the story of how President Richard Nixon closed gold window in August 1971 and banned Americans from trading gold.  It took until January 1st, 1974 for gold to begin trading in America.  In the meantime, gold shot up 600% to $200 ounce because the markets were anticipating it being sold out.  So Jim Rogers shorted gold on its first trading day.

“Whenever the market knows that somebody is coming, the market rises accordingly.  Markets are very smart, they always run ahead.”

He ended up making a killing, it dropped to $100. He knew that the market was running ahead of the reality.  You have to think ahead and have the experience to ask if this run up in prices is real or “running ahead”.

Commodities are simpler

Jim Rogers recalls how commodities bull run ended after the 70s, and early 80s as demand slowed and prices increased.  He says because the prices went up, people started rationing more. Because the prices shot up, producers rushed in.

“It’s classic economics.  The cure for high prices is high prices.  It always works.”

He points out how these basic-supply and demand relationships work through the years and it’s actually easier than the stock market where there’s so many factors that it’s difficult to ask the right questions, let alone get the answers.

“The truth is that commodities are actually simpler to figure out than stocks.  Nobody can understand IBM, not even the chairman.  IBM has hundreds of thousands of factors-employees, products, parts, suppliers, commpetitors, goverments, balance sheets, and unions- that is has to deal with.  Cotton, by contrast, is pretty straightforward.  All you have to know about cotton is this:  IS there too much cotton or too little cotton?   Cotton does not care who chairmen of the Federal Reserve is.”

Realizing there would be a bull market in commodities, Mr. Rogers started his own index because he found flaws in all the others.  For example most other indexes were too much in oil, it needed more diversification to truly be an index and not an energy share.  He noted the Dow Jones Commodity Index changed the weights too often and the Reuters/Jefferies CRB index had orange juice and crude oil with equal weights.  Oil and orange juice shouldn’t be the same weight.   So the Jim Rogers Commodity Index was born and had a huge bull run success.

“BRIC” term is bullshit

Jim O’Neill of Goldman Sachs created the term ‘BRIC’ to describe the emerging markets of Brazil, Russia, India, and China.  According to Mr. O’Neill, because these countries have rapidly growing GDP numbers, they will overtake America and have huge equity market gains.  Jim Rogers points out how even though this acronym sounds lovely, these countries have nothing to do with each other and O’Neill is an idiot for putting them in the same category without visiting all these countries.

While Mr. Rogers agrees China would be in a bull market (this book was written in 2013 and he did acknowledge the housing bubble) but Brazil and Russia are dependent on commodities and the commodities bull run could easily end.  He points to Brazil’s long history of government interference in the market or how Russia has a demographics problem with an aging population.  Then he argues that India has the opposite population problem: there’s too many people who don’t get along.  Mr. Rogers says India isn’t really a country when there’s so many different ethnic groups and languages that are fighting and the country is arbitrarily united because of England’s previous rule.

In general, Mr. Rogers is critical of people who think they know things without really researching it.  This comes back to the idea of boots on the ground, that you’re going to learn more from checking out a country’s black market in person, then an official government GDP number.

Conclusion

I highly recommend this book for anyone interested in Global Macro investing because Mr. Roger’s unique approach really shows how some contrarian but common sense thinking is needed when thinking about investments.  My summary only covers but a few of the many points, he goes on to talk about China, diversification, immigration, housing bubbles, government policy, currencies, and more.  In this article, we discussed avoiding bubbles, markets moving ahead of themselves, BRICs being bullshit, and the need for practical boots on the ground research.  While this book doesn’t give typical investment formulas or balance sheet equations, his practical experience of actually traveling to these countries and trading for so many years, gives us insights that no academic textbook ever could.  Maybe we all need a little street smarts.