One of the most dangerous things an investor can do is to make money -- because of what he might do next.
And... it doesn't seem all the world's debt has been put to good use.
Those are two of the messages from legendary investor Jim Rogers. (I spoke with Jim personally earlier this year, and you can read the full interview here.)
In the early 1970s, Rogers co-founded the Quantum Fund, which went on to become one of the world's most successful hedge funds. He quit full-time investing in 1980 after making returns of 4,200% over 10 years.
He then traveled the world twice and wrote a few books about the lessons he learned. Even if you aren't interested in traveling or investing, Investment Biker and Adventure Capitalist are both entertaining and educational reads. They're must-reads for anyone interested in understanding global markets and how they work.
I recently re-read parts of Adventure Capitalist, which Rogers wrote in 2003 after a three-year, 152,000-mile drive around the world. I found a number of lessons that are all the more relevant today. Here are two of them:
On the Dangers of Making Money in the Market
"One of the mistakes that many people make in the stock market is buying something, watching it go up, and thinking they are smart. They find themselves thinking it is easy. They take a big profit and immediately go looking for something else. That's the time they should really do nothing. Self-confidence leading to hubris leading to arrogance -- that is when you really should put the money in the bank and go to the beach for a while until you calm down. Because there are not many great opportunities that are ever going to come along. But you do not need many if you do not make many mistakes."
As Rogers has said before, sometimes the best thing to do is nothing. And sometimes doing nothing means holding cash.
Cash might seem like a terrible investment -- it doesn't earn interest, it gets eaten up by inflation, central banks can just print more of it, and holding it can mean you miss out on the power of compounding.
That said, cash is the perfect hedge. Holding cash means you don't have to worry about market crashes. And it's there to use when, as Jim Rogers said, you find "money lying in the corner."
The Pros and Cons of Debt
"There's nothing wrong with borrowing huge amounts of money -- as a country, as a family, as an individual -- as long as you're putting it into productive assets, building for the future. In the nineteenth century, the United States borrowed stupendous amounts from all over the world, mainly from Europe. We were a gigantic debtor nation. We put the money into productive infrastructure such as railroads and factories. And by 1914 we got our payoff. We became a creditor nation for the first time in our history. We then became the world's largest creditor nation and the most powerful country in the world. We borrowed all that money, but we invested it wisely. But if you borrow a lot of money and buy Rolexes and Porches and big houses... you are not going to thrive long term."
Rogers wrote these words about five years before the 2008 global financial crisis. That crisis should have been the not-so-subtle hint the world needed that too much debt can be a very bad thing.
But overall debt levels have only climbed since then. In fact, total lending has gone up by about 40%. The world economy now owes itself $57 trillion more than it did in 2007. Total debt, including money owed by households, companies, banks and governments, has risen by $112 trillion since 2000. That's a 129% increase.
Over the past 25 years, the global economy grew by about 3.6% per year. Growth decreased to 3.4% in 2014, then 3.1% in 2015. It's expected to be about 3.2% in 2016. So, even with all the "stimulus" spending (that is, skyrocketing debt) -- as well as central banks' best efforts and negative interest rates around the globe -- global economic growth has slowed down.
Is all the extra debt being put to good use? Is the money being spent on productive assets, or (in the words of Rogers) on Rolexes and Porsches and big houses? It seems to be the latter.
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.