That’s one of the messages of legendary investor Jim Rogers, who I spoke with a few months ago (you can read the full interview here). In the early 1970s, Rogers co-founded the Quantum Fund, one of the world’s most successful hedge funds. After generating returns of 4,200 percent over ten years, he quit full-time investing in 1980.
He went on to travel the world a few times, and wrote a few books about what he saw and learned. His investment tourism books –Investment Biker and Adventure Capitalist – are still must-reads for anyone interested in understanding how global markets work.
I recently re-read parts of Rogers’ books (along with another, more autobiographical book, Street Smarts) and found a few lessons very relevant to investing today:
Why central banks will always fail to control prices (fromInvestment Biker, 1994)
“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… 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 [when the U.S. dollar was backed by gold] or the lira [Italy’s currency before it joined the euro] 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.”
The best example of this today is in China, where the central bank controls the exchange rate of the renminbi. As we’ve written before, and as Jim Rogers told me before, it’s a matter of time before the Peoples Bank of China (China’s central bank) is forced to allow the currency to depreciate. In recent decades, nearly all the central banks that controlled their currencies were eventually forced to surrender to market forces.
In January, a lot of investors were concerned that China’s currency was going to depreciate sharply. It didn’t, and the issue faded from the headlines. That doesn’t mean the it’s gone away, though.
Rather, it means that business journalists and talking heads have gotten tired of talking about it. And remember: The unexpected doesn’t happen when everyone’s talking about it. The unexpected happens when, well, no one is expecting it. Until China’s currency is set free, uncertainty over it will periodically make global markets shiver.
Why commodity prices rise – and fall (from Street Smarts, 2013)
“The cure for high prices is high prices. It always works… 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, competitors, governments, balance sheets, and unions – that it 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 the chairman of the Federal Reserve is. The head of IBM has to know and care about such things. Cotton: Is there too much or too little? Now, figuring that out may not be easy at all, but the question itself is simple, and in the end it is the only question with which you have to be concerned.”
We’ve written a lot about different commodities, including gold, silver,natural gas, copper and oil. And a lot of what we focus on is supply and demand. Price levels that are too high or too low – because of excessive investor pessimism, for example – eventually cause an imbalance in either supply or demand. At that point the price of the commodity either corrects upward or downward accordingly. The solution to high prices is high prices – and the solution to low prices is, of course, low prices.
Reflecting on these two nuggets of wisdom can help you see through all the market, and financial media, noise. These two ideas have worked very well for Jim Rogers, and they’ll work for you as well.