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Market Wizards: Interviews with Top Traders by Jack D. Schwager

March 24th, 2009

Jim Rogers – Buying Value and Selling Histeria

Rogers is another legendary trader having co-founded  the Quantum Fund with partner George Soros in 1973.   This was another one of my favorite interviews.  What struck me is that Rogers insisted that he was not a trader.  In fact, he said that he was a terrible trader, but was instead a long term investor driven by buying value and selling hysteria.  When he enters trades, he enters them with a goal of a long term holding period of years, not days or months, or minutes.  Rogers’s comments have a note of common sense and rare clarity. I think this style evolved after getting wiped out a few times when he first started trading (the common theme among all these great traders).

Rogers must have a great deal of conviction before he puts on a trade.  He says that one of his best rules of investing is to do nothing, absolutely nothing, unless there is something to do.  He says that most investors always have to be playing.  They always have to be in the ‘game’.  They have a great deal of trouble just sitting there and waiting for something new to develop.

My favorite quote from Rogers is:

I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.  I do nothing in the meantime.  Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.”  No, you don’t.  You should sit there until you find something.  Trade as little as possible.  I wait for a situation that is like the proverbial “shooting fish in a barrel.”  It is better to do nothing and wait until you get a concept right.

Rogers likes to go against hysteria.  He looks for gaps up or gaps down to identify cases of hysteria.  He says that just about every time you go against panic, you will be right if you can stick it out.   Regarding bull market tops, he says that whenever you hear of kids a few years out of school making lots and lots of money, that’s when you know you’re at a top.

Rogers says to never assume the markets are rational.  He says that anything can happen in the market because there are a lot of people in the market who don’t understand what is going on.

Rogers has a very good point about turning points in the market.  He says, “Generals always fight the last war. Portfolio managers always invest in the last bull market.”  Investors shouldn’t invest in whatever worked during the last cycle.  Be aware of change.  Buy change.  Great investors should stay flexible and alert and be willing to buy or sell anything.

Rogers also says its important to read the commodities pages in the Wall Street Journal to get a sense of where the market is headed.

On trying to get out of a losing position, Rogers talks of a time he got caught in a terrible position.  He was long Japanese stocks during a week when Japanese stocks dropped 20 percent.  He says that you can’t just liquidate at a time like that.  He says that you have to figure out first if you are right or wrong.  If you are right, then you should just endure the pain and wait for the market to ‘right’ itself from the hysteria.  If you are wrong, then the first loss is the best loss and you should just get out immediately.  Whenever you are trapped in a wrong way bet, this is a good rule to follow.

An axiom that he follows is to fade central bank actions.  For example, when government measures are implemented to counteract a trend, there will usually be a sharp rally or correction in the direction of the government.  Rogers says these government induced movements are temporary and should be faded.

Rogers also says that its important to always recognize that the market is nearly always wrong.  It often just takes time to realize that its wrong.  He says to never follow conventional wisdom in the market unless it is economically justified.  He says you must only buy trends that you anticipate going on for years.   He says that you shouldn’t buy a market just because it goes up, or sell a market just because it goes down.

In the interview Rogers comes back to the same philosophy over and over again.  He says that most investors will make 50% two years in a row and then will lose 50%.  He says the best thing to do is to wait for something to come along that you know is right.  Then take your profit and then just wait again.

Rogers says that he typically only makes 3 to 5 trading decisions per year and that he just stays with them.  When he says this though, he basically means that he’ll make multiple trades around the same core position.  For example, taking profits and buying pull backs of a core position that he is convinced of.

A summary of Jim Rogers investing guidelines include:

  1. Buy value.  If you buy value, you will not lose much even if your timing is wrong.
  2. Wait for a catalyst.  Bottoming markets can go nowhere for a very long time.  Avoid tying up your money in a dead market.  Wait for a catalyst to change the market direction.
  3. Sell hysteria.
  4. Be very selective.  Wait on the sidelines until the perfect trade makes itself apparent.  Don’t trade just to trade.
  5. Be flexible.  Be willing to trade long or short and in various markets.
  6. Never follow conventional wisdom.  Conventional wisdom is rarely correct and should be faded when the trends begin to change.
  7. Know when to hold and when to liquidate a losing position.  Don’t liquidate into hysteria if your long term tenants are still correct.  But if your tenants are incorrect, take the loss immediately.
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