Re: Investments

James Rogers (
Thu, 22 May 1997 12:20:40 -0700

At 12:52 PM 5/22/97 -0400, Perry Metzger wrote:
>> From: James Rogers <>
>> 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.
>You may believe, based on "gut" that the markets aren't efficient, but
>the statistics don't bear this out. In particular, attempts at
>objective metrics like those used in so-called "Value Investing" turn
>out not to work very well.

Objective metrics don't work well primarily because of market inefficiency.
When you look at the markets, especially at a fine granularity, there
tends to be a high level of arbitrary action that is doesn't model very
well. Models do start to make sense when the granularity gets coarser,

>> >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.
>Of course, the question of what "sufficient education" means is rather
>hard to quantify. I've seen many smart people fail miserably in the
>markets, or decieve themselves into thinking they were outperforming
>the market higher than statistical chaance would permit.

How smart you are makes no difference when it comes to investing. Although
sufficient education is a loose term, it does imply significant knowledge
of relevant subjects. Being smart won't help you if you don't have enough
information or knowledge to make an informed decision.

>> >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.
>You do realize, though, that just random chance would lead to this
>distribution, correct?

You misread the statistical distribution. The *number* of people in each
category do follow statistical distribution, but that they make as much as
they do is *not* statistical. I was referring to individuals producing
consistent returns above and beyond the markets year after year.

For an individual to consistently outperform the markets year after year is
not random chance.

>What you are advocating is "active investing", the notion that you can
>do much better than the market by just putting a fairly modest amount
>of time in. I don't really believe that strongly any more. It is
>demonstrably possible that you can do better than the market -- but it
>isn't easy. Remember, if it was, everyone would do it. The markets
>*are* fairly efficient.

You are right. It isn't that easy. It takes time and experience to start
producing consistent above market performance. Very few investors take the
time to really investigate their positions. The top reasons people invest
in a company are "a friend told them it was a good company to invest
in","the company has 'cool' products", and "they heard the company was in a
hot market". None of these reasons justify investing in any company, yet
most people invest this way and lose money by it.

Just because so few amateur investors invest properly doesn't mean that
none do, or that it is impossible to learn.

>> >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.
>Well, "slow and steady wins the race". Better to get a nice steady 15%
>a year than zero.

15%? Not on an index fund. Realistically, it is more like 10-12%, with
10.x% being the long-term historical range.

>> >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.
>I see you haven't been following the research.
>In fact, a large random portfolio isn't especially stupid. It tracks
>the market average well. Most people can't afford sufficient
>diversification to get a large random portfolio -- you need a lot of
>different stocks to make one track the market properly -- and you are
>likely to do as well far more easily with an index fund, but there is
>little reason to refer to a large random portfolio as "stupid", and
>there is little reason to believe an active mutual fund to be "safer".

Why would you want to track the market average? The market averages are
not spectacular (and don't let the market boom of the last couple years
fool you). You would be better off buying into a smaller mutual fund that
doesn't track markets. There are non-tracking mutual funds that haven't
had a negative return in 75 years, yet the market has historically spent a
significant amount of time in the red.

>> >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.
>> Absolutely.
>Note my caution. "Sometimes".

By "absolutely", I was stating that you are in a position to make a wise
investment. That is, you would know whether to make an investment at all.
Knowing when not to invest is nearly as big an advantage as knowing when to

>> 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.
>This is the question: is your performance truly out of line with the
>markets? Absolute returns aren't very interesting -- returns relative
>to market, and the statistical likelyhood of getting there by
>accident, are far more interesting.
>Also, remember -- higher return often is a sign of higher risk.

My returns are almost always significantly above the market. To date I
have returned almost 50% on my stock investments this year. The risk of my
portfolio is really very average.

For example, my current active (i.e. short-term) portfolio ( I do have
long-term positions, but not many ) is:

WLA - Warner-Lambert Company ( big pharmaceutical group )
TQNT - Triquint Semiconductor ( gallium-arsenide communications chip design
and fab )
VISX - VISX ( surgical lasers, esp. eye surgery )
SUNW - Sun Microsystems
DEC - Digital Equipment Corp.

I've held all these stocks ~6 weeks (+/-2) and my return on this portfolio
for the last 6 weeks is 16.2% (after adjusting for costs of trading).

Indices for the same period (rounded to the nearest percent):

S&P 500: +12%
NASDAQ: +12%
Dow IA: +12%

p.s. I wouldn't recommend buying these stocks now. Most are past their
buying range and some are near their selling point.

>> 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.
>I'll point out that the second richest man in the U.S., Warren
>Buffett, often holds positions for years or decades.

That is his method of investment, and he has done well by it. Give me as
many years as he has had and maybe I will be the second richest man in the
U.S. ;^)

>> 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.
>40 or 50 shares is still too small -- you pay extra commission for odd
>lots, and round lots are always multiples of 100 shares except for
>oddball stocks like Berkshire Hathaway which trades at $30,000 a share.

Schwab charges $0.03/share or $29.95, whichever is higher. You can buy
odd lots at no penalty. Of course the exception to this is NASDAQ which is
almost always more expensive to trade on.

>> 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.
>True enough, but it isn't trivial. *That* you save and invest steadily
>is far more important than *if*.
>I don't want to sound like a naysayer -- there is nothing wrong with
>picking your own stocks. However, it isn't the way most people are
>going to become rich, and it is *real work*. If you are better at some
>other profession, investment is not the road to getting rich
>quick. Indeed -- there ARE no roads to getting rich "quick" that work

I am not saying this is a "get rich quick" scheme. It will still take a
long time to accumulate real wealth, but the returns will be larger and
faster if you take an active interest in it.

-James Rogers