I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the eighth in a series of curated interview questions and responses from the notes that I took while reading the book.
Who is Jim Rogers?
Jim Rogers is perhaps the most well-known trader interviewed by Jack D. Schwager in Market Wizards. Rogers and George Soros founded the Quantum Fund in 1973, one of the longest-running and best-performing hedge funds in the world.
Jack D. Schwager was eager to interview Rogers “because of his stellar reputation as one of the shrewdest investors of our time” and Rogers is unique in the sense that he is one of the only traders interviewed in the book that considers himself a bad trader. Rogers says, “I am probably not the person you want to interview. I often hold positions for many years. Furthermore, I’m probably one of the world’s worst traders. I never get in at the right time.” Rogers humble response does not change the fact that he is widely considered as one of the most famous and successful traders of our generation.
The notes I took on this chapter are the longest, and I consider his interview to be the most helpful, most entertaining, and best interview in the book.
On a margin of safety:
Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. If there is very good value, then I’m probably not going to lose much money even if I’m wrong.
It sounds like you have a great deal of conviction when you put on a trade.
Yes, I usually do; otherwise, I don’t bother doing it. One of the best rules anybody 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.
Do you always wait for a situation to line up in your favor Don’t you ever say, “I think this market is probably going to go up, so I’ll give it a shot”?
What you just described is a very fast way to the poorhouse. 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. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should just there until you find something.
Trade as little as possible.
That is why I don’t think of myself as a trader. I think of myself as someone who waits for something to come along. I wait for a situation that is like the proverbial “shooting fish in a barrel.”
Are all your trades fundamentally oriented?
Yes. Occasionally, however, the Commodity Research Bureau charts will provide a catalyst. Sometimes the chart for a market will show an incredible spike either up or down. You will see hysteria in the charts. When I see hysteria, I usually like to take a look to see if I shouldn’t be going the other way.
Can you think of any examples?
Yes. Two years ago, I went short soybeans after they had gone straight up to $9.60. The reason I remember it so vividly is because that same evening, I went to dinner with a group of traders, one of whom was talking about all the reasons why he had bought soybeans. I said, “I really can’t tell you why all the bullish arguments are wrong; all I know is that I’m shorting hysteria.”
How do you pick the time to go against the hysteria?
I wait until the market starts moving in gaps.
That brings to mind a classic example of hysteria. In late 1979 – early 1980, the gold market witnessed an incredible accelerated advance. Did you go short that market?
Yes, I sold gold at $675.
That was almost $200 too early!
I told you I’m not a good trader. I’m nearly always too early, but it was only about four days before the top.
I didn’t say you were way off timewise, but pricewise it must have been a pretty scary ride. When you do a trade like that, isn’t there a point where you have second thoughts?
Yes, when it goes to $676 [he laughs].
But you stayed with the trade?
Yes, in that case, because it was chaos. It was something that couldn’t last. It was the gold market’s dying gasp.
Was that a matter of recognizing the fingerprint of a market in its final blowoff, or was it a matter of gold being overpriced?
Both. Gold was overpriced, but basically it was – I like your terminology – the “fingerprint” of hysteria. Just about every time you go against panic, you will be right if you can stick it out.
So when you see panic, do you automatically go against it?
The panic, the hysteria, in and of itself is only a catalyst to make me look to see what is going on. It doesn’t mean I’m going to do anything. In the case of the early 1980 gold market, I had a view of the world that was bearish for gold. Volcker had just become the Federal Reserve Chairman a few months earlier and said that we were going to beat inflation. I believed he meant it. I also happened to be bearish on oil at the time, and I knew that if oil went down, gold would go down as well.
Actually, the decisive step came in October 1979, when the Fed changed its policy from controlling interest rates to controlling money supply growth. Yet the gold market apparently didn’t believe it, because it went up for several months after that point. In situations like that, are the markets too wound up in their hysteria to pay attention to changing fundamentals?
Absolutely. It is amazing how sometimes something important will happen, and the market will keep going despite that. Now, I am experienced enough to know that just because I see something doesn’t mean that everyone sees it. A lot of people are going to keep buying or selling just because that has been the thing to do.
So, just because the market doesn’t respond to some important news, such as the October 1979 change in Fed policy, doesn’t mean that it isn’t important.
All the better. If the market keeps going the way it shouldn’t go, especially if it is a hysterical blowoff, then you know an opportunity will present itself.
Were you short stocks or long puts?
I was short stocks and short calls. I don’t buy options. Buying options is another fast way to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lose money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls.
When did you cover your positions?
During the week of October 19. If you remember, by that time, everybody thought that the financial structure of America was over.
Did you cover because w had hysteria going the other way?
That is exactly right. That week was a textbook case of hysteria. Under those kind of conditions, if you are still solvent, you have to step in there and go against it. Maybe that was going to be the one time it was the end of the world, and I would have been wiped out too. But 95 percent of the time when you go against that kind of hysteria, you are going to make money.
Between October 1987 and January 1988, I didn’t have any shorts. That was one of the few times in my whole life that I didn’t have any shorts. Whether I am bullish or bearish, I always try to have both long and short positions – just in case I’m wrong. Even in the best of times, there is always somebody fouling up, and even in the worst of times, there is somebody doing well.
Going from zero to September 1970, where did you start picking up tradingwise to build up to your ultimate trading success?
My early losses taught me a lot. Since then – I don’t like to say this kind of thing – I have made very few mistakes. I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right, and a price so right, that even if you are wrong, it is not going to hurt you.
Is there a lot of similarity between different cases of market hysteria?
It’s always the same cycle. When a market is very low, there comes a time when some people buy it because it has become undervalued. The market starts to go up, and more people buy because it is a fundamentally sound thing to do, or because the charts look good. In the next stage, people buy because it has been the thing to do. My mother calls me up in says, “Buy me XYZ stock.” I ask her, “Why?” “Because the stock has tripled,” she answers. Finally, there comes the magical stage: People are hysterical to buy, because they know that the market is going to go up forever, and prices exceed any kind of rational, logical economic value.
The whole process then repeats itself on the downside. The market gets tremendously overpriced and it starts to go down. More people sell because the fundamentals are turning poor. As the economics deteriorate, more and more people sell. Next, people sell just because it has been the thing to do. Everybody knows it is going to go to nothing, so they sell. Then the market reaches the hysteria stage and gets very underpriced. That’s when you can buy it for a pop. But for a long-term investment, you usually have to wait a few years and let the market base.
Is that a general principle: When government measures are implemented to counteract a trend, you should sell the rally after the government action?
Absolutely. It should be written down as an axiom that you always invest against the central banks. When the central banks try to prop up a currency, go the other way.
What is the biggest public fallacy regarding market behavior?
That the market is always right. The market is nearly always wrong. I can assure you of that.
Never, ever, follow conventional wisdom in the market. You have to learn to go counter to the markets. You have to learn how to think for yourself; to be able to see that the emperor has no clothes. Most people can’t do it. Most people want to follow a trend. “The trend is your friend.” Maybe that is valid for a few minutes in Chicago, but for the most part, following what everyone else is doing is rarely a way to get rich. You may make money that way for a while, but keeping it is very hard.
But actually, your whole style of trading involves staying with a trend for years. So isn’t what you are saying contradictory?
That kind of trend – a trend that is economically justified – is different. You have to see the supply/demand balance change early, buy early, and only buy markets that are going to go on for years. By “trend following,” I meant buying a market just because it goes up and selling it just because it goes down.
What other trading rules do you live by?
Look for hysteria to see if you shouldn’t go the opposite way, but don’t go the opposite way until you have fully examined the situation. Also, remember that the world is always changing. Be aware of change. Buy change. You should be willing to buy or sell anything. So many people say, “I could never buy that kind of stock,” “I could never buy utilities,” “I could never play commodities.” You should be flexible and alert to investing in anything.
If you were counseling the average investor, what would you tell him?
Don’t do anything until you know what you are doing. If you make 50 percent two years in a row and then lose 50 percent in the third year, you would actually be worse off than if you just put your money in a money market fund. Wait for something to come along that you know is right. Then take your profit, put it back in the money market fund, and just wait again. You will come out way ahead of everyone else.
Are you ever wrong on a major position play? That is, are one of your almost sure shots ever wrong, or are they so well selected that they just invariably go?
I don’t want to make it sound like I don’t know how to lose money – because I know how to lose money better than most people – but there has not been a major mistake in a long time. But you have to remember that I don’t trade that often. I tis not as though I’m making three decisions a month. I may make three decisions a year, or five decisions a year, and I’ll stay with them.
How often do you make a trade?
Well, there is a difference between making a trade and deciding to buy bonds in 1981. I’ve owned bonds since 1981, but I sell around the position. I make trades, but basically I own them. I went shor the dollar at the end of 1984. Now, I have made a fair amount of trades in currencies since the end of 1984, but it is basically one trade with a lot of trades around it.
Very few investors or traders are as successful as you have been over time. What makes you different?
I don’t play. I just don’t play.
I can understand that. But still, very few people can analyze the same fundamentals you are looking at and so consistently be correct in assessing all the variables.
Just don’t do anything until you know you’ve got it right. As an example, until you see American agriculture hit a low, then no matter what happens in the world – unless the world is going to stop eating – you can’t go wrong. American agriculture is now so competitive, and so many marginal farmers have been washed out, that it has to go up. You just watch American agriculture deteriorate, deteriorate, deteriorate, and then you buy. You may buy early or late. In my case, usually a little bit early. But, so what? The worst that happens is you bought it too early. Who cares?
Is there anything else besides the fact that you are very selective that sets you apart?
I have no boundaries. I am totally flexible. I am open to everything, and I pursue everything. I have no more compunction about speculating in Singapore dollars or shorting Malaysian palm oil than I do about buying General Motors.
Any last words?
Good investing is really just common sense. But it is astonishing how few people have common sense – how many people can look at the exact same scenario, the exact same facts and not see what is going to happen. Ninety percent of them will focus on the same thing, but the good investor – or trader, to use your term – will see something else. The ability to get away from conventional wisdom is not very common.
Interview questions and responses are from Market Wizards: Interviews With Top Traders by Jack D. Schwager. If you enjoyed this post, follow Curated Alpha via Email,RSS, or Twitter . You can also purchase Market Wizards at Amazon.