The Speculator
Adventures with a
globetrotting investor
Jim Rogers hit the road for a tour of global
capitalism and recounts his adventures in a new book. We love its humor and
insight -- though its focus on investing in commodities strikes us as off base.
By Victor
Niederhoffer and Laurel Kenner
"No matter how far I traveled,
human ingenuity never failed to astonish me."
-- Jim Rogers, author of "Adventure Capitalist: The Ultimate Investor’s
Road Trip"
In one of the most extraordinary travel adventures
since the 16th century expedition of Ferdinand Magellan, global investor Jim
Rogers spent the last three years driving around the world in a yellow Mercedes
in search of investment insights. Only one of Magellan’s five ships made it
back to Spain, laden with precious spices, completing the first
circumnavigation of the globe, and Magellan wasn’t on it. (He was killed on the
island of Cebu in the Philippines.) Alabama-born, Oxford-educated Rogers
bargained and befriended his way through bureaucracies and war zones to return
alive to the United States laden with observations of markets, governments and
economies worldwide.
He memorializes his findings in a must-read book,
"Adventure Capitalist: The Ultimate Investors Road Trip,” which rivals the
accounts of Marco Polo and Richard Burton for fascination and novelty. Far more
than a travelogue or an investment tome, the book shows Rogers in his personas
of humorist, free-market economist, ground-level historian, wise investor,
investigative reporter, savvy traveler and romantic. (He marries his travel
companion at the turn of the millennium in a dream wedding.) The tribute to
Jim’s father, who dies of cancer back home, brings tears to the eye.
As much as we like the book, we have doubts about one of the major
investment themes of the book: that natural resources are where the action is.
The 20-year bear market in commodities has ended, he contends, arguing that
rising worldwide demand must eventually exceed supply. China, he notes, is
already importing raw materials and worldwide inventories are down.
“Commodities will do well for years, while stocks, recovering from the bubble,
will do little,” Rogers writes. “The new commodities bull market has started,
but few realize it yet.”
Rogers sees inflation as an imminent danger, and looks for skyrocketing
interest rates, declining stocks and collapsing currencies at every corner. He
somehow is able to take the 1,500,000% increase in the average stock over the
last century vs. the 1,000% increase in the average commodity over the same
period and dismiss the differential as due to cycles and differences in supply
and demand. He believes that buy-and-hold equities investing has somehow been
discredited by the fact that if you take the high in 1999 or 1972, there have
been periods when you had to wait many years to surpass that maximum. But that
is a normal property of random numbers. There are always starting and stopping
points that will show long periods of no gains in a series that has a drift of
10% a year, and an average deviation about that level of 20% a year.
The long, long bear market
A good antidote to this belief appears in the table below. The Commodities
Research Bureau kindly provided us with inflation-adjusted cash settlement
prices for nine key commodities during the postwar period, from 1946 to 2003.
As the first column in the table shows, cattle, cooper, corn, cotton, soybeans
and wheat showed devastating declines over the period, while gold rose a mere
10% during the entire 56½ years. Gains in crude oil and natural gas were far
outpaced by those in stocks.
While commodities have indeed been in a bear market for the last 20 years,
the right column shows that the period from 1946 to 1982 was also quite
bearish. Compare the disaster in commodities with the price appreciation
(dividends excluded) of the S&P 500 ($INX), adjusted for inflation.
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Selected commodities |
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*inflation adjusted, w/o dividends reinvested; **dividends
reinvested, non-inflation adjusted
Source: Commodities Research Bureau, Bloomberg
The comparisons are even more dismal for longer periods like 100 years,
where relative performance on the order of 1,000 to 1 in favor of stocks is the
norm. Nor do commodity returns stack up against AAA-rated bonds, as documented
in "The Doomsday Myth", by Charles Maurice and Charles W. Smithson.
Julian Simon has some good
historical tables in his highly recommended book, "The Ultimate Resource
2". He points out that the inflation-adjusted costs of almost all raw
materials have fallen sharply over almost all periods of recorded history. The
reason is that reserves are not finite. They expand due to improved technology
and new discoveries. Reserves and resources are part of an ever-changing
feedback loop; as Simon puts it, “They cannot be inventories like cans of Spam
on a supermarket shelf.” Each epoch has seen a shift in the bounds of the
relevant resource system. Each time, the old ideas about limits and the
calculations of finite resources within those bounds were thereby falsified.”
Moreover, when prices rise, the human ingenuity that Rogers observed everywhere
in the world comes into play as people make substitutions to get by.
We hasten to note that Rogers’ track record is far superior to that of the
Spec Duo. Indeed, from a close reading of Rogers’ two books, it appears that he
has hardly ever had an unprofitable trade. As our readers know, it’s just the
opposite for us. We hardly ever have a profitable one, at least not one that
we’ll own up to. Thus, the reader is urged to place a much greater degree of
belief in Rogers’ recommendations than our own.
Exposing corruption
Our misgivings over Rogers’ bent for commodities does not diminish our
appreciation for his book. His accounts of fraud and waste by the United
Nations and nongovernmental organizations around the world could win a Pulitzer.
Rogers the economist reminds us, “History will remember Russian communism and
its disastrous 70-year economic experiment chiefly for having impoverished the
lives of hundreds of millions of people around the world.” He has no respect
for politicians: “The low opinion they enjoy is well deserved. Ask yourself why
they are in politics to begin with. … Very few politicians could build a
company.”
In an interview, Rogers told us he is restless in New York and is thinking
of moving to Shanghai or one of the countries he found where fortunes are
waiting to be made. If he changes his mind, we are nominating him for U.S.
senator and are ready to throw our full support behind a Jim Rogers platform
to:
Some of his sharpest arrows hit the United States.
On returning home, he writes, he and his wife, Paige, were shocked at how much
prices had gone up for movies, dry cleaning, heating, education, lawyers,
postage, accountants, dentists, plumbers, electricians, candy, medical care,
housing, sporting events, tolls, fees, telephone bills, entertainment,
restaurants, suits, insurance, fuel, food and real-estate taxes -- despite the
government’s claims that inflation has been held at bay.
He lambastes Federal Reserve Chairman Alan Greenspan for botching his job
and predicts that the Federal Reserve will collapse just as its two
predecessors did. As for the recent wave of corporate scandals, they show that
U.S. accounting standards are the world’s worst, not the best, he says.
Readers will find themselves laughing often as Rogers points out, for
example, that many of the people he met along the way doubtless said, “Hey, we
forgot to rob those people,” or “Weren’t we supposed to kidnap them?” He
observes that he chose a Mercedes for the drive because every dictator and
Mafiosi in the world drives a Mercedes, “so service is available.” Also
hilarious is his willingness to pose with such creatures as pythons and monkeys
on his back or around his neck.
Rogers’ tips on travel alone are well worth the
price of the book. He and Paige took hundreds of Polaroid photographs to smooth
the way over borders. He carries an extra wallet stuffed with foreign currency
of little value to give to robbers. Once in a country, he always hires a taxi
to guide him to the hotel. He advises using diesel fuel, as it is usually
available, while gasoline is frequently unobtainable. When passing a border, he
advises: “Get going as fast as possible. Otherwise, someone may change his
mind.” And of course, never drink the local water -- drink beer instead because
it is always safe.
We particularly enjoyed Rogers in his persona as negotiator. The book
starts with him asking a Mercedes rebuilder for some specs. Next thing we know,
he has two free Mercedes, with service around the world. On a trip to Russia,
he finds the accommodations of a $25 hotel not to his liking. Sure enough,
there he is downstairs that evening, with a downward adjustment of $15 to
mollify the insult. On another continent, a broker in Bolivia owes him $3,000;
after Rogers tracks him down over many weeks in another country, with many
threats, the broker happily repays with interest.
The persona that most people will be interested in is that of the savvy
investor. Rogers advises us to get into a country when a war has just ended or
when the black market isn’t paying a premium for dollars. He points out that
you can learn more from the common people than you can within the walls of a
five-star hotel, and that the average madam of a brothel is far better informed
than the average bureaucrat.
Among Rogers' investment insights:
The Rogers we find most appealing is that of the
devoted son writing a love story about his father. The manager of a Borden
Chemical factory in Alabama, the older Rogers is undoubtedly a hero of the
book. At age 82, dying of cancer, he travels to Siberia to spend a week with
his son. As his health worsens, he insists that Rogers not even consider
interrupting his trip to come home. Rogers' recollections of his father’s teachings
in such things as mechanics, chivalry and family values, his relation with his
son, and his own visit to his father’s grave are guaranteed to leave you a
better son or daughter.
Girls and boys
In a book with worldwide scope, it is natural to expect some areas where
the armchair adventurer might not be in total agreement with the traveler’s
conclusions. We have already mentioned our disagreement with the main
investment theme of the book, that it’s good to buy commodities as an
alternative to stocks.
However, with the commendable effort to keep the book timely, the author
apparently has not had the benefit of the normal vetting that one would expect
from a scholar of Jim Rogers’ erudition.
One simple error that applies directly to markets is the author’s analysis
of the high ratio of boys to girls in South Korea (a lamentable phenomenon
mainly due to abortion, as he noted at a talk about the book). The subject
happens to resonate with Vic because he has six girls and no boys, and is a
lover of statistics.
The book states: “You have a child. It’s a boy. You stop. Even if those
with a boy try again, half the second children are boys. That alone skews the
population.”
Like all good questions, this one can be proved true or false. To see why
this is wrong, suppose you modify the problem slightly for a moment and don’t
allow any families to contain more than two kids, but make them stop with a
boy. Assume you have 100 families. Half thefamilies will have one boy. That
makes 50 boys. One-quarter of the families will have one boy and one girl. That
makes 25 more boys and 25 girls. One-quarter of the families will have two
girls. That’s 50 girls.
Total them up, and that you get 75 boys and 75 girls in the population. No
skew.
Stopping the process after three kids, or four, won’t work; you’ll be
right back where you started, with the sex ratio unaffected.
For those who like to count or who have kids who like to be educated, the
following experiment is instructive. Take a coin. Flip it until you get a head.
Then stop. Repeat the process 150 times or so. Keep track of the number of
times the coin lands heads or tails. You'll find the number of each very close
to 75. To compute the exact probability of the results you have obtained, look
up the binomial probability of realizing 75 heads in 150 tosses of a coin with
probability 0.5. A good approximation is provided by looking at any table of
probabilities from the normal distribution with a mean of 75 and a standard
deviation of 8.
It’s a rare query that doesn’t bear fruit when posed by someone of Rogers’
sagacity. We took out the Spec pencil and envelope to see how a process like
this would work in the market. You come in long at the beginning of the week.
Whenever there’s a rise, you get out. If it’s down, you try again. We chose the
period from June 30, 2002, when the S&P 500 ($INX) was at 950, about the same
as today, to start.
By working out the profit and loss of this system,
we find that the actual profits during this last year were some 3.6% before
commissions. Since the average holding period was just three days, and the
market was unchanged during this period, that’s not an inconsequential sum.
Regrettably, however, the degree of confidence that such a result was
non-random during this period was only 70%. When commissions and bid-asked
spreads are deducted from each trade, the system loses much of its luster. But
it’s a good start.
Final, final notes
A workout of the one-boy/one-rise stop system, as well as CRB charts for
the nine commodities mentioned in this column, some going back to the early
part of the last century, are available on our Web
site. … A full discussion of the virtues of stocks as a long-term
investment is contained in our much-ignored book, "Practical
Speculation." We are holding a party for all readers of “The Speculator”
at 1 p.m. Sunday, June 29, at the Conservatory Gardens at Fifth Avenue and
105th Street in Manhattan.