Two Timeless Investing Lessons from Jim Rogers
Jim Rogers is an investing legend. He was a co-founder of the Quantum Fund with George Soros, which became one of the world's leading hedge funds. Rogers quit full-time investing in 1980, after earning investors returns of 4,200% over ten years.
He then traveled the world -- a few times -- and wrote some of the most educational and entertaining books on investing you'll ever read. Even if you don't enjoy traveling or the world of finance, these books are worth a look.
In 2003, after covering 152,000 miles driving around the world for three years, he wrote Adventure Capitalist. After reading this book again, I found two lessons that especially apply today.
1. Hold Good Stocks Forever -- But Avoid Value Traps
Rogers: "I like to buy things and own them forever. And what success I have had in investing has usually come from buying stock that is very cheap or that I think is very cheap. Even if you are wrong, when buying something cheap you are probably not going to lose a lot of money. But buying something simply because it is cheap is not good enough -- it could stay cheap forever. You have to see a positive change coming, something that within the next two or three years everybody else will recognize as a positive change."
Investing is easy. Just buy a cheap stock then hold it forever, profiting as the company grows and the stock price rises. But as every investor knows, it's not that straightforward.
(A low stock price doesn't mean a stock is cheap. Shares that trade for $100 can be cheap -- and $3 shares can be expensive. A stock's valuation -- like the price-to-earnings (P/E) or price-to-book value (P/B) ratios -- is what determines if a stock is cheap or not. For instance, if its P/E is low compared to other stocks in the same sector, or compared to its historic levels, it can be considered cheap.)
A cheap stock may be cheap for a very good reason. The company might be facing management problems, poor use of investment capital, low return on assets, or it might be operating in a sector that's in the midst of a long-term decline. If any or all these are an issue, that cheap stock might be a value trap and should be avoided.
But if there is a catalyst for change -- like better management, industry change, regulatory shifts -- that same value trap could become a great undervalued investment.
2. When Doing Nothing Is Best
Rogers: "The way of the successful investor is normally to do nothing -- not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up. That is how you invest. You wait until you see, or find, or stumble upon, or dig up by way of research something you think is a sure thing. Something without much risk. You do not buy unless it is cheap and unless you see positive change coming. In other words, you do not buy except on rare occasions, and there are not going to be many in life where the money is just lying there."
Individual investors have the luxury of time. Unlike the so-called "smart money," or professional money managers, whose compensation is tied to short-term performance, individual investors can be patient. They can wait for a great investment to show its true value over time.
Of course, everything you own comes with an opportunity cost. But unlike the smart money, there is no need to be quick to sell a cheap stock if it takes longer than expected to see big gains.
So, like Rogers said, we can afford to take our time finding money just lying in the corner. Recognizing these opportunities isn't easy and takes some practice. But to seize the opportunity, the key is to have some capital available to invest.
These two ideas have helped Rogers become a legend in the investment world. They can help your portfolio as well.
Rogers has also avoided a lot of common investment pitfalls by keeping his emotions out of investing. Learn how here.
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Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.