Re: Investments

James Rogers (
Wed, 21 May 1997 22:46:40 -0700

At 02:25 PM 5/21/97 -0400, you wrote:
>> From: Max More <>
>> A few of us in So Cal have been meeting to discuss investments. I am very
>> interested in helping the development and communication of investment
>> wisdom among Extropians. You know the expression: "If you're so smart, how
>> come you're not rich?" We should all have a compelling answer... "Just take
>> a look at my portfolio, buddy!"
>Here are my thoughts.
>1) The markets are not perfectly efficient -- perfect efficiency
> requires perfect information transfer. The fact that markets are
> ever shifting, products ever changing, information always taking
> time to diffuse, means they can never be perfectly
> efficient. However, the markets are pretty damn close to efficient
> these days -- efficient enough that things like day trading are a
> risky way to make a living.

The markets are far from perfect. There are many wildly over-valued
companies (some over-valued for reasons I can't possibly fathom) and many
undervalued companies as well. Also, the values of all securities are
based on the expected *future* value and earnings, not the current book value.

>2) It is possible to exploit market inefficiencies to make money. I've
> seen people who are just too far out of the statistical spectrum to
> be accidents -- traders like Paul Tudor Jones and Louis
> Bacon. These people are, however, unusual. I've seen far, far more
> people who can't manage to trade their way out of a paper
> bag.

The keys to making money on the market are sufficient education on how the
market really works, and doing enough research to make informed decisions.
"Buy low, sell high" is not enough knowledge to make money on the market.
You have to be able to tell when "high" is really high and "low" is really
low. The vast majority of people who trade do not know enough information
to make trading a "guaranteed" thing. And listening to your stock broker
is almost always a surefire way to *not* make much money.

>3) The people who are guaranteed a place at the banquet are the casino
> owners. Brokers always get their vig. Traders -- especially
> amateurs -- don't always do so well. In the futures market, friends
> of mine at Refco tell me the average time between opening a futures
> trading account and losing *ALL* your stake is about a year.

Futures are a very dangerous market to trade; futures are even dangerous to
seasoned experts. Futures is one of the few markets I will not trade in.
Amateurs trading futures are foolhardy.

>4) The people who do manage to make money "trading" rather than
> "investing" are almost inevitably full time professionals who are
> very, very smart -- and even they sometimes "blow up". The author
> of the famous "Memoirs of a Stock Operator", Larry Livingston,
> killed himself a few years after writing his book after losing
> every penny he had.

There are many successful part-time traders. At every brokerage there are
one or two clients who average 100% return every year, a small group of
clients who average 50% every year, and a very large number who average 10%
a year. To lose everything requires holding risky positions in a
non-diverse portfolio.

>On the other hand....
>1) Over the long term, the stock market DOES outperform almost all
> other investments -- and outperforms it handsomely.
>2) You don't even have to think much to make money in the markets:
> passive investments like buying into an S&P 500 following mutual
> fund do bring their investors excellent returns.

Safe and profitable, but not aggressively profitable. It will take decades
to grow a sizeable sum, especially if you are starting small.

>3) Even random portfolios of sufficient size do pretty well in
> general.

Random portfolios are stupid. You might as well invest in a mutual fund,
which is probably safer.

>4) People who have a slight information edge -- like understanding
> what a high tech company does -- can sometimes get an advantage
> even if they aren't full time investors.


>My advice is therefore simple.
>If you want to be rich, you have two options:
>Option one: get a good job, save as much of your money has you can
>bear to starting when you are young, and invest it in mutual funds or
>in a diversified porfolio. If you wait long enough, the returns will
>be good. The higher paying the job, the more you can afford to
>save. Almost everyone can do this and be assured of living comfortably
>if you have enough patience. No, it isn't glamorous, and it won't make
>you "filthy rich". However, as the toroise and the hare found out,
>slow and steady often wins. If you can save 20% or more of your income
>and you invest all of it, in ten or twenty years you'll find yourself
>with a nice amount of cash.
>Option two: start a high growth business. This is the most practical
>way to become "filthy rich". It is, however, stressful and not for
>everyone -- and not everyone has good ideas.

This is also a good option. As I am fond of telling people: "Statistically
you are 1000 times more likely to become a millionaire working hard and
starting a business than playing the California Lottery." Yet a lot more
people play the lottery than start a business or invest.

So many people want it handed to them.

I have a third option:

Taking the time to do adequate research and to make informed decisions pays
off handsomely. I probably spend 20 hours per month doing research and
educating myself on the market. As a result, I have done very well over
the years, and far better than the indices. I am usually holding 6 to 8
stock positions at any one time and have not had a negative month that I
can remember. To date this year I have averaged ~8% return every month.
(Disclaimer: past performance is not a guarantee of future returns.) Some
years are better than others, but I consistently do far better than the
market by making intelligent trades and not reacting to the fluctuations
and fickleness of the market (especially the NASDAQ!). I rarely hold a
stock position more than a year and often no more than 6 months.

For those with only small amounts of money to invest (say $50 per month), I
would recommend investing in growth oriented mutual funds. The brokerage
houses penalize small trades heavily. Trading stocks starts to become
economical when you have enough money saved to start buying at least 40-50
shares per trade.

There is some risk involved, but there is no need to put such a grim spin
on trading. There are many people who make consistent profits as
part-time, amateur traders.

-James Rogers