A Lesson Learned the Hard Way (w/ Jim Rogers) | Perfect Timing

A Lesson Learned the Hard Way (w/ Jim Rogers) | Perfect Timing


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When I first was in the business, I used to assume that everybody knew a lot more than
I did. They were educated. They were experienced and everything. And so I just assumed they said x, x was probably
the case. It took me a little while, but not too long
to figure out they didn’t know any more than I did. Well, the different answers to that question,
I used to work for somebody named Roy Neuberger, who founded Neuberger Berman back in the ’30s. And Roy Neuberger was an astonishing trader. He would be sitting there reading the Wall
Street Journal, and he would say to me, there’s 100,000 shares of IBM on the floor. Bid 90 and an eighth. I would say, what the hell was he talking
about? So we’d go to the floor, and sure enough,
100,000 shares of IBM for sale. I don’t know how he did it. He just had a sense of watching– that they
had the tape in those days, you know? He just had this unbelievable sense of timing
and trading. He was a remarkable trader. Now, I’m horrible. He might have been the best trader I ever
saw. Mike Steinhardt’s another great trader, some
great, great old traders in the business. If you’re going to be a contrarian investor,
which you’ve been very successful at, and you’ve had some epically great calls– I was
in Asia when you started talking about mainland China, when even lived in Hong Kong, no one
thought there was a future for it. So you’ve got a record to prove it can be
done. But I think for an awful lot of investors,
both professional and people doing it with their own money, it’s incredibly hard to end
up with a level of conviction that allows you to be a contrarian investor. I mean, how do you develop that level of conviction? Well, first of all, you just used the term
“contrarian.” And by definition, I guess that’s right. I never thought of myself that way. A contrarian would just say, they’re all buying
x. I’m going to sell x. That’s not what I do. You’re an independent investor. Right. That’s a better way. I like that. That’s what I’m trying to teach my girls,
to think independently, to be curious. First of all, to be curious, to go and look
at that thing that nobody’s looking at. And then to think independently and say, they
all say this is terrible, but I know– it goes into my brain, and I spin it around,
and it comes out that I know this is going to be good in the end. When I first was in the business, I used to
assume that everybody knew a lot more than I did. They were educated. They have experience in everything. And so I just assumed if they said x, x was
probably the case. It took me a little while, but not too long
to figure out they didn’t know any more than I did. In fact, they might know less than I did,
even though they were experienced, and knowledgeable, and well-educated. So I guess that came from experience, I was
insecure like everybody else. But it came from experience that, hey, when
I see something like this, it’s often right. Maybe I should do more and more of this. And I learned that from experience. Don’t think I didn’t make plenty of mistakes
along the way. I was just thinking of one of my great mistakes
along the way, but that built up my confidence. Well, for the sake of the–
OK. Back when it was a time when the market, everybody
was bullish, I became bearish. I put all my money into puts. And lo and behold, 6 months later, I had tripled
my money. Everybody else– I mean, it was really a massive
bear market, and everybody else was losing their share. And on the day of the bottom, I sold my puts. I mean, bad timing, because it was pure luck. And I said, OK, I’ll wait for the market to
rally, and then I’m going to sell short. I don’t want to pay the premium this time
at buying the puts. So I waited for the market to rally, and it
did rally. And I said, 2 months later I waited. And I sold everything I had in 6 stocks, so
short 6 stocks. Well, 2 months later, I was wiped out. I’d lost everything. But the main moral of that story is within
2 years, all 6 of those companies had gone bankrupt, literally bankrupt. I mean, I knew what I was doing. So it’s a sizing issue or is it a timing issue? Well, in that case, it was a timing issue. I told you I’m the worst trader in the whole
world. I can prove it many, many, many times. Literally within 2 years, they were all bankrupt,
but I went broke first because of my timing. Jim, how do you know the difference between
being early and being wrong? You teach me that, OK? I’d like to know. I’m still trying to learn. Well, I really don’t know either. I mean, one of the things that has confounded,
I think, a lot of us in this recent unprecedented rally– I mean, it’s not unprecedented in
history, but the sort of things that have gone up and the level of volatility that has
been unprecedented. I mean, the only period that I can compare
it to would be the late ’90s, where just everything in a certain area went up. Now, it looks like at least in the states,
it’s almost everything across the board. And there have been plenty of people who’ve
wanted to short the FANGs, to short some of the tech stocks, to short some of these very
expensive blue chips. And they have been very badly punished. And even in the case of very good mutual fund
investors, people with tremendous track records like Grantham, Mayo, who’ve moved to a higher
cash position, they’ve seen massive redemptions because their own investors don’t seem inclined
to stick around and see how it plays out. So both on a personal and a professional level,
being early seems to be incredibly painful and destructive to your business. It sure can. If you’ve got a conviction, what do you do? Do you wait for a change in momentum? Do you use moving averages, which is something
that I know people have used, and I’ve used something myself, which is to wait until the
5 and the 20-day diverge, and that gives you a signal that momentum’s coming out of a trade? Or do you just need to size it to a degree
which you can be persistent? Well, I usually, since I know I’m always early,
I make a decision and then wait, and then just make myself wait a month, 6 months, whatever
it happens to be. And I’m still too early. I’m still too early nearly always, because
I make the decision too soon, I realize. So maybe I better start making the decision
later in life. Sometimes, you just have to throw in the towel,
especially on the short side. You have no choice. If they’re just racing against you all the
time, you can sit there and meet the margin calls all day long. But one of the old adages is never meet a
margin call, which you may have heard from old-time traders. If you get a margin call, just don’t meet
it, because that means something is very seriously wrong. Right. That’s your stop loss. Yeah. Well, stop losses are usually before a margin
call comes. But I want to go back to something you said. You’re not is experienced I am, obviously,
because you’re not as old as I am as is what I’m saying. But I remember in the early ’70s, there was
something called the Nifty 50, and they were 50 stocks that everybody, JP Morgan bought
everyday. Didn’t matter. Avon, Xerox, IBM, they were stocks that always
were eternal growth stocks. And they just kept– we were short them. And they just kept going up. They’d never stop. Polaroid, that was another. And they just never stopped going up. Everything else stopped going up, but those
Nifty 50, which would be something like the FANGs today, or maybe in the late ’90s, some
of the other kinds of stocks. So this has happened before in market history. They eventually crack. There’s no question. And to today, if you look at the S&P 500,
for instance, in the US, I think there are only 40 45 stocks that are above their 50-day
moving average, to use technician’s kind of talk. Everything else is in a downtrend. So there’s a lack of breadth. And yet the market is making all-time highs. And so there’s a lack of breadth of the market. Definitely a that of breadth, you know? What it is that? Over 90% of the stocks are in downtrends. 10% are in uptrends, but they’re big companies. And since the S&P is capitalization-weighted,
those 50 stocks, 40 stocks, whatever it is, drag the average to all-time highs. Now, that doesn’t mean it’s not painful if
you’re short those stocks. Even if you were– well, if you short them
yesterday, it’s OK, because they collapsed yesterday. But basically, this has happened many times
in market history. It gets narrower and narrower and narrower,
the advance does, until it’s just down to a few names. And eventually, they crack, too. That doesn’t mean you’re going to make it. No, I told you I shorted 6 stocks once. They all went bankrupt 2 years later, but
I lost everything first. There’s a lack of diversification in having
all of your money in 6 shorts, though. Yeah, but I knew I was right. OK. Well, we just started about the time I’d had
it, I get that confidence. I knew I was right, but it was very early
in my career. Well, that’s how I learned. That’s how I built my confidence. Because even though I lost everything, I was
right. And so I learned, OK, it takes more than being
right, apropos of this conversation. It takes a lot more than just being. Right you have to get your timing right. You have to get a lot of other stuff. I always assumed that everybody knew what
I knew. I now know in those cases, nobody knew what
I knew, because those stocks went up and up and up. There was a company, University Computing. I shorted this stock at 49. It went to 96. I had to cover before that. But then it went to zero. Well, I was right. Big deal. Big deal. But that helped build my confidence that I
knew what I was doing, but it destroyed my confidence as far as market time. [MUSIC PLAYING]