Jim Rogers interview at Investment U

Thanks to CanadianValue at GuruFocus, I ran across a good two-part interview of Jim Rogers at Investment U (part 1 here and part 2 here).

I haven't followed Jim Rogers much in the last few years. Partly it's because I am bearish on commodities and China and I find that my views aren't consistent with his investment recommendations. The other reason is that I find him a bit repetitious since most of his interviews cover the same topic, with some interviewers even repeating the same questions of others.

Yet, I do keep an eye on Jim Rogers' thoughts once in a while. Long-time readers may know that I started off more as a macro investor—I still am to some degree and you may get this feeling from my writings (haven't done much lately though :( ) and the articles I cover; it's also why I don't think I will ever be a true value investor—and Jim Rogers, along with Marc Faber, were two of my biggest influences. The good thing about Jim Rogers is that he is a straight shooter and doesn't couch his views.

This interview by Investment U is a great one and I thought I would add my comments to some of the thoughts that are expressed. (As usual, bolds within quotes are by me.)


"Swim Your Own Races"

Garrett Baldwin: You start with the message: “Swim your own races.” How has that lesson helped you, both as an investor and, as you put it in the book, “a citizen of the world?”

Jim Rogers: Well, I, probably like many other people, always assumed that [everybody] else knew more than I did, and so I would try to copy or mimic other people, or at least think about how other people were doing things.

But eventually I realized when I listened to someone who I thought knew what he’s talking about, but I disagreed with him, it turned out that I was right and he was wrong. After that happens enough times, you start to realize, “Maybe I should listen to myself instead of [everyone else].” That gave me the insight and the confidence to swim my own race.

Jim Rogers' comment applies to, not just investing, but any aspect of one's life. I always like to say that one needs to chart their own path in life. It isn't always that the other person is wrong but that the strategy or skills may not suit you. This certainly applies to investing. For example, I see many newbie investors trying to imitate Warren Buffett and pretend to be value investors but, I am not trying to be arrogant here, they just aren't suited to follow his strategies. One needs to figure out what works for them.

Bubbles, Bubbles, Always the Same

Garrett Baldwin: You state that the more ridiculous the investment idea, the better it is for the contrarian investor. So what seems ridiculous but also high potential on your radar?

Jim Rogers: Well, U.S. government bonds are awfully ridiculous. They have been for a while. It takes a while for a bubble to blow up. But [U.S. bonds seem] to be a bubble. Imagine lending money to the United States government in U.S. dollars for three or four or five or six percent. You pick the number because when a country goes bankrupt, eventually the interest rate goes to staggeringly high levels. And that’s going to happen in the United States.

Another bubble I see is American tertiary education, but I don’t know any way to short either Harvard or Stanford. English and European football teams are a bubble, but I don’t really know any way to short those, either. There are always bubbles in the world, but the one that I’m planning to short next is the U.S. government bond market.

I don't agree with Jim Rogers that USA is going to default any time soon but I wouldn't go long unless you were making a macro bet (eg. a deflationary bet or something). As for higher education, I agree that it is getting ridiculous. It costs a fortune—five to eight years worth of savings for a typical household—to send their kids to university. And I'm not even talking about the best programs with the best job prospects! At some point in the near future, this whole thing is going to unravel. I am a strong advocate of education but not with these costs. As for European football teams, I have no clue. I don't think many owners of sports teams in any sport own them for economic reasons.

Jim Rogers: Bubbles throughout history all look the same. It doesn’t matter what the asset class or what country it took place. If you go back, you’ll hear people say the same thing. They say, “It’s different this time.” Or there’s this major new breakthrough, often in technology [that helps drive speculation]. You see many people investing who’ve never invested before. You see students and people leaving their jobs to go into the new holy ground whether it’s gold in California or real estate in Texas or dot-com [companies] or stocks in Kuwait. They all look the same.

In America, we were told house prices would never go down. You heard the same things: “House prices can’t go down. Stocks always go up.” If you read about the bubbles in history, the same things are said, the same actions are taken, the same skyrocketing prices take place, same financing, new instruments, everything. It always happens. They always look the same.

Bullish on Agriculture

Jim Rogers has been consistently, long before Wall Street ever turned bullish, promoted agricultural commodities:

Garrett Baldwin: So when you talk about this potential commodities boom, what industries in the United States would benefit, aside from the commodities producers themselves?

Jim Rogers: Everybody who has second homes in Iowa would be rich because all the farmers are going to be stunningly rich. You want to buy a lake house, buy it in Iowa or Oklahoma. Don’t buy it in Massachusetts. You know, the stockbrokers are going to be broke. Buy where the people are going be rich. Open yourself a chain of restaurants in the agriculture area or department stores or hotels. Anything that you want to do in an area where people are making lots of money, you’ll make a lot of money, too… just because they’re rich.

Certainly, [look at] the seed manufacturers and the tractor manufacturers, backhoe dealers, everybody who has anything to do with production of raw materials is going to get rich. I don’t know if you’ve been to North or South Dakota recently – they can’t fill the jobs. There are massive numbers of jobs.

...

Jim Rogers: You can buy farmland. You can buy agricultural products. You can buy stocks that will benefit if you’re a good stock picker. You can invest in countries that will benefit. Canada is going to have a better economy than the United States. Australia is going to have a better economy than Belgium.

If you don’t want to become a farmer, buy a mine or buy a farm, there are other ways to do it. You can buy currencies. The Canadian dollar is going to continue to do better than the U.S. dollar.

Nothing new here. Jim Rogers has been super-bullish on soft commodities and anything related to it for many years now. As I have mentioned in the past, the problem with agriculture is that return on equity is very low. You either end up with low returns or you end up with cyclical, capital goods, companies. You are essentially making a macro bet becaue if commodity prices flatline or decline a bit, you are going nowhere. In contrast, companies with strong ROEs and in non-commodity industries (e.g. Coca-Cola or P&G) will earn 8% or so per year without much difficulty.
On China

Jim Rogers: I first went to China in 1984. I was scared to death when I went, having been filled with Western and American propaganda all my life. I soon realized it was not what they said when I arrived and traveled around.

In 1986, I went back and motorcycled around part of China. I realized that these guys were amazing capitalists. Capitalism was on the rise. Entrepreneurship was on the rise. So my view changed dramatically once I saw what was going on, and it sank in.

...I came to realize that China is the only country in the world that’s had recurring periods of greatness. Great Britain was great once. Egypt was great once. Rome was great once.

But China’s had three or four periods of astonishing greatness and success. They’ve also had three or four periods of catastrophe. But they’re on the rise again. In my view, it’s something that has happened before and will undoubtedly happen again.

As far as the political system, it has opened up enormously. When I first went, there was [only] one TV station, one radio, one newspaper, one everything. One way to dress. Everybody dressed the same way.

Well, that’s changed unbelievably. Now there are hundreds of internet sources in China including periodicals and TV stations. The idea of having a demonstration in 1984 was preposterous. Now of course there are lots of demonstrations each month as people are demanding what they think are their rights. Their system has opened up a huge amount in that period of time.

There will continue to be setbacks, of course, mostly the economy, the political system in society, just as there were in the United States in the nineteenth century. In the United States in the nineteenth century, we had many depressions. We had a horrible civil war. We had riots and massacres in the streets periodically. We had no human rights. We had very little rule of law. In the nineteenth century in America you could buy and sell congressmen. Well, you can still buy and sell congressmen in America, but in those days, they were cheap. Now it’s downright expensive to buy a congressman.

I would quibble a bit with the fact that Rome only had one great period. I would actually argue it was two since the Renaissance was an important period driven by Italy and Italians are essentially the Romans. In any case, Rogers is quite correct in pointing out that China is probably one of the few that had a 2 or 3 great ascents.

I share Jim Rogers' view that China is likely to be the next big economic power but as he, himself, points out, there will be setbacks. I could be wrong but I feelt it could easily face a big setback within the next decade. The out-of-control spending on real estate, or fixed assets in general, likely won't end well. China may be worth buying (assuming you are investing in some thing where property rights won't be called into question e.g. foreign supplier to China) but I would wait until a crisis. Because China is running a totalitarian system, adverse outcomes from any political crisis could be far worse than what USA ever faced.

Russia and its "Mafiadom"

Rogers maintains his bearish view of Russia.

Garrett Baldwin: In The Ultimate Investor’s Road Trip, you were bullish on China. In your new book, you are bullish on Brazil and China, skeptical of India and bearish on Russia. Has that view changed at all on Russia?

Jim Rogers: No. I recently read how there were six or eight developing enclaves of power in the former Soviet Union. It’s now broken up into many more. Vladimir Putin may say his people are running a section of the country, but nobody’s running Russia except the Mafia warlords.
Whether they’re called “Mafia” or something else, it’s the same thing. If you’re in bed with some of those guys or Putin in the areas he controls, you’re gonna make a fortune. But you’d better be very careful. Like any other warlord, if they change their mind, you’re going to be shot. If you’re lucky, you’re going to be shot. If you’re unlucky, you’re going to be tortured, jailed and bankrupted. So be careful. If you play that game, you’ll get rich. Otherwise, you’re going to suffer pretty badly.

I cover Russia quite a bit on this blog and anyone reading some of the articles I have linked would know what Jim is talking about here. I don't think the situation is as bad as suggested above—my impression is that Jim's comments are more representative of the 90's and early 2000's—but it isn't an easy place to do business. One just needs to look at BP and how it has been manhandled by the Russian government, its business partners, and various other entities. If someone had said a supermajor oil & gas company would roll over at the feet of some government, many would have said, 'no way.'

One criticism I need to raise is how Jim Rogers sort of downplays some of the problems in China. The Chinese government doesn't touch foreigners but the locals are treated horribly, just a bit better than what is happening in Russia. For instance, there are numerous individuals being jailed, beaten, and property stolen for questioning the goverment. People whose lands were stolen (often by municipal governments) are in jail on cooked-up charges simply for fighting for their own property. Let's not even get into anyone asking for freedom of speech or freedom of assembly. Some of the articles I have linked to in the past have detailed these state abuses. The difference in China, to reiterate, is that they don't touch foreigners. In Russia, it seems everyone is fair game.

Well-Manged Countries vs the Not-So-Well-Managed

A country could have a ton of commodities but if it isn't managed well or if business is not allowed to thrive, nothing will happen. Jim Rogers elaborates on this point:

Garrett Baldwin: We spoke briefly about Canada. Are there any other countries that look like winners?

Jim Rogers: Well the obvious commodity countries are Canada and Australia. They’ve demonstrated a reasonable rule of law over the decades. New Zealand, likewise. Brazil has [many] commodities and is reasonably well managed, although the new government looks more and more like the old Brazilian governments that everyone needs to worry about. Anybody who’s got a lot of natural resources, [but only] if they’re well managed. Pakistan has a staggering amount of cotton, but they’re not well managed. Burkina Faso has a lot of cotton, but they’re not well managed. The Congo has a lot of raw materials, but they’re not well managed.

I used to have great confidence in Uganda, but like everybody else, power corrupts. So I’m not sure it’s as exciting as it could be. If you can find well-managed countries with lots of natural resources, you’ll do well. Finding the countries with natural resources is very easy. Get out an atlas or just ask, for that matter. But you’ve got to make sure that the management is going to be good management in the future. If you think that [a country like] Uganda is going to become well managed again, certainly by all means [invest].

Zimbabwe has lots of natural resources. It’s been a disaster. It’s more likely to be [well] managed in the future once Mugabe dies and once you have the resulting turmoil. After that turmoil, Zimbabwe might be a great place to invest because it’s been such a disaster for 30 years.

Countries are kind of like businesses: it doesn't matter if you own the best business if management is terrible and destroying shareholder wealth. Commodity investors are more affected by foreign governments than many other industries because the operating location tends to be in far-flung places. One needs to consider property rights, corruption, and the like when investing in certain countries or companies that have most of their assets there. Having said that, the valuations on companies in risky areas tend to be lower so if one can avoid disaster in these regions, they should generate higher returns.

Not a Fan of Business Schools
There are a lot of people in the value investing community who aren't fans of business schools—mostly due to disputes over the efficient market hypothesis, modern portfolio theory, and capital asset pricing model. Well, Jim Rogers is even more critical of business schools.

Garrett Baldwin: We talked earlier about schools, about universities, particularly MBAs. We just had a serious financial crisis and there’s been a lot of blame in the United States that’s been thrown at business schools for following a shareholder [one overly committed to short-term profits and stock owners]. Do you see management education changing in the long term?

Jim Rogers: I said before that one of the bubbles I see in the world is tertiary education in the United States. It’s bankrupt financially and probably other ways besides financially. Business school is basically a waste of time. Most of what you learn is inaccurate and incorrect. Learning things like efficient market theory and some of the other gibberish that they keep putting out and Black Scholes…

All that stuff is totally wrong.

Those poor kids who’ve spent a couple hundred thousand dollars going to business school – not only have they spent a lot of money, but the stuff they learned was wrong. It was inaccurate. Yes, it’s got to change. It’s got to change dramatically.

I certainly was telling students not to go to business school. If you want to spend a couple hundred thousand dollars, I would urge you to go down and short soybeans one day or start your own business. I tell you, you short soybeans a couple of times, you’ll learn more doing that than you could in 10 years at business school.

If you spend your time and money in the real world, you’re probably going to learn a whole lot more than what you would at business school, most of which is wrong.

To give you an idea, in 1958 America graduated 5,000 MBAs a year. In 1958, America was the richest, most powerful country in the world. There wasn’t a number two. Now we produce over 200,000 MBAs per year, and that doesn’t include all the MBAs in other countries. There are tens of thousands in other countries. Everybody else has jumped on this MBA bandwagon.

So MBAs are a dime a dozen at a time when finance is coming under more and more pressure from governments economically, financially and every other way. So MBAs are a terrible waste of time, energy and money. You should take your couple hundred grand and start a business. You’ll learn a whole lot more even if you go bankrupt and lose everything, then you will at business school.

...

Throughout history, we’ve had long periods when the financial types were masters of the universe. And we’ve had long periods when producers of real goods were in charge. It would be very hard for most of your readers to comprehend that in the 1950s, 60s and 70s, Wall Street and London were total backwaters. Virtually nobody went there or even thought about it as a place to go.

Along came the bull markets in the 80s and 90s. And now there are hundreds of thousands of MBAs cranked out every year. And this is at a time when governments are coming down hard on finance, at a time when there’s staggering debt in the west, staggering amounts of competition with all the MBAs. So finance is going to be a terrible backwater again and the producers of real goods are going to be the places that are in charge.

In my view, business schools, assuming the cost is manageable—you either get some scholarship or cheap government loan or can offset some costs by tutoring or something—are helpful for your career. But I don't think they will lead to success in investing.

Although, if you never studied business and don't like doing it on your own (outside the school environment), they are still the best bet.

Also, business schools are still useful, in my opinion, for non-investment careers. For instance, if you are pursuing a career in accounting, marketing, human resources, and the like, I think you will find the courses benefitial. It will be extremely difficult for you to become an accountant without going to business school. It doesn't have to be at the Masters level but you at least need an undergraduate education focused on accounting.

Overall, I share Rogers' view that the MBA is quickly losing its relevance. In addition to the best of the best on Wall Street, most of whom are MBA graduates from the top schools and earn high compensation, seemed to show little skill, the fact that it is hard to distinguish skilled MBA holders from the average probably signals a peak.

If the bond market enters a bear market (i.e. yields start rising), I suspect the financial industry will start shrinking.

One Thing You Should Study

Jim Rogers: ...One of the best things a person can study is history. Everybody – I tell students all the time what should be studied and I tell them to study history and philosophy, which they of course hate. They say, “Oh no, I want to be rich.” I say, “If you want to be rich you should study philosophy because history will teach you that everything is constantly changing.” No matter what it is you know today, it’s going to be totally different in 10 years whether it’s your life, your friend’s, your job – who knows?

But everything that you know is true today. Goodness knows in 15 or 20 years you will have totally forgotten about it. And you pick a year. Look at 1900 and look at the world 10 years later – 15 years later. Pick 1910, 1920 – you pick the year and you’re astonished at how everything that people thought and knew was true in 1920 was totally false by 1930, 1935, 1940. Everything at a personal level, at a professional level, international level, national level, etc. One needs to understand this about everything one is looking at today in your business, in your personal life, in your professional life. That’s one of the most important lessons that people have to learn because the world – and life – is very unstable, even though we all think we have a stable life.

No, we don’t. Everything changes. It has changed and will continue to. The way you become successful is to understand that and capitalize on it. And when you sit here looking at something now, say, “Well, wait a minute.”

Pretty good advice. A lot of people bash liberal arts but even if one doesn't study it, a grounding in history and philosophy cannot be a bad thing. Even if your investing goes nowhere and you give up on investing in a few years, history and philosophy can help with other matters in your life.

I think history is definitely benefitial to macro-oriented investors. You'll notice macro-oriented ones, such as Jim Rogers, Marc Faber, Donald Coxe, and Jeremy Grantham pay a great deal of attention to history. I don't know how valuable history is to value investors, growth investors, traders, and others, but I would definitely recommend that macro investors should have a good understanding of history.


Thanks for reading through all this and hopefully you learned something.