Exclusive: Where Jim Rogers sees the biggest investment opportunities
Jim Rogers is an investing legend, world record holder and best-selling author. And his is a voices in the investing world well worth listening to. Jim> READ MORE
Jim Rogers is an investing legend, world record holder and best-selling author. And his is a voices in the investing world well worth listening to. Jim> READ MORE
Today I’m sharing an article written by my friend Tama Churchouse, who with his father, Peter, runs Churchouse Publishing in Hong Kong. Peter and Tama write The> READ MORE
Have you reached “TGIM” — Thank God It’s Monday — status yet? If you have a job, probably not… you’re probably looking forward to Friday, and less> READ MORE
Markets hate uncertainty. But lots of uncertainty – as there is now – doesn’t mean that markets won’t go up. Uncertainty is more subjective than (say)> READ MORE
Every industry has its own jargon, which people in the industry often use to make what they’re doing seem too difficult for “outsiders” to understand. (Much> READ MORE
It’s an investment cliché that diversification reduces risk. But diversification also means that it takes a lot longer for your investments to make you rich –> READ MORE
Today I’m sharing an article written by my friend Tama Churchouse, who with his father, Peter, runs Churchouse Publishing in Hong Kong. Peter> READ MORE
Markets and economies move in cycles. So do sectors within a market – in a way that's more predictable than you might think. And an easy investment strategy> READ MORE
Jim Rogers is an investing legend, world record holder and best-selling author. And his is a voices in the investing world well worth listening to.
Jim co-founded the legendary Quantum Fund – which generated returns of more than 4,200 percent over ten years – then drove around the world… twice.
He used this investing and travel experience to write several excellent books that blend travelogue, investment insight, and political commentary. Today, Jim is viewed as one of the founding fathers of the boots-on-the-ground approach to investing in emerging and frontier markets around the world. (We highlighted some lessons from Jim’s books here and here… and here.)
Jim also happens to be a fellow Singapore resident. I recently sat down with him for an exclusive one-on-one interview (you can see the entire interview, in video form, by clicking here). Below are some excerpts from this exclusive interview. (This interview took place late last year… but Jim’s insights remain relevant.)
Jim’s big picture approach
Me: In some ways, it’s a very basic question, but I think sometimes it’s very helpful just to take a step back and talk about how Jim Rogers looks at investing in general.
Jim Rogers: Well, I wish there was some simple answer, We’d all be rich… But ideas come from a variety of places for me… Walking down the street, sometimes I notice something different. Something’s happening. Something’s changing.
If I see a disaster in the press, I used to get very interested when there’s a disaster. The Chinese have a word that is weiji, which means disaster and opportunity are the same. That word doesn’t exist in English, but the Chinese have been around a few thousand years. So they know that disaster and opportunity go together.
Chinese for disaster and opportunity
I try to watch governments. In China, for instance, the government is spending huge amounts of money to clean up China. China is filthy… But now I see the government spending a lot of money to clean it up. That leads to opportunities…
And once they pop into my mind, I then have to do a lot of research, obviously, to make sure I know what I’m doing. And I make plenty of mistakes.
Where disaster is meeting opportunity right now
After discussing some markets that Jim feels are in bubble territory (which you can read about here), we moved on to which markets he thought offered good value right now.
Jim Rogers: Well, if I weren’t talking to you right now I’d be buying some Russian government bonds, in [Russian] rubles… Rubles are a disaster. Russia is a disaster. Interest rates are very high. You’ve got 10 percent or 11 percent short term bonds in Russia. [Short term bonds are considered among the safest types of bonds and usually pay very low interest rates.]
I’m not buying any China right now, but if I came across something I would… If I weren’t so lazy I would be finding some opportunities in Vietnam, [which] has a stock market.
Nigeria, Kazakhstan, we’ve opened accounts… because I see potential opportunity. You know, I avoided Nigeria since I was in university. It goes back that far because it’s a disaster, but I think I see opportunities now.
Nigeria: Land of opportunity?
Likewise Kazakhstan. I mean I was bearish in Kazakhstan for 49 years, but I think I see changes taking place there now. Positive changes. I’m sure there are opportunities.
But don’t just take his word for it
I also asked Jim about some of the biggest risks investors will have to deal with in coming months and years. Partway through that part of our conversation, he offered this pearl of investing wisdom:
Jim Rogers: Another very important lesson about being an investor is you don’t listen to me, do what you know. If I tell you to invest in Vietnam and you can’t spell it, you can’t find it on a map, for God’s sakes, don’t go invest in Vietnam unless you know a whole lot about it. So don’t listen to anybody except yourself if you want to be successful. I can tell you some of the things I’m doing but I don’t want you to, nobody should do what I’m doing unless they themselves happen to know a lot about it.
See the full interview
Jim had a lot more to say about investing, how to live a satisfying life, where to travel and his worst mistakes when I spoke to him. You can learn how to see the entire interview by clicking here.
Today I’m sharing an article written by my friend Tama Churchouse, who with his father, Peter, runs Churchouse Publishing in Hong Kong. Peter and Tama write The Churchouse Letter, a monthly publication about investing in Asia, along with a free email called Peter’s Perspective, which you can sign up for here. Today, Tama writes about bitcoin, the (possible) currency of the future, and how you can learn to trade it.
Why you should buy US$100 of bitcoin
By Tama Churchouse
Do you remember the first time you ever bought a stock? I do. I remember being nervous as I drafted and re-drafted that first buy order email to the broker.
I wanted to make sure I got it right. I didn’t want the broker at the other end to see me for what I was, a naïve teenager out of his depth.
I remember I’d come across the term GTC, short for “Good ‘til Cancelled”, an order that is in force until either the stock is bought, or the order cancelled.
So, I threw in a “GTC” at the end of my order for good measure. That way, I thought, he’d know I was a pro.
Over time, buying and selling stocks has become routine. Now it just takes a few clicks of a mouse, and tens or hundreds of thousands of dollars of stock can be bought or sold in an instant.
I used to feel a little surge of adrenaline when I placed an order. But that has long faded.
I bring this up, because recently I went through the process of buying an asset online that rekindled the feelings I had all those years ago as a teenager placing his first stock buy order.
I was a nervous. It wasn’t a small amount of money at stake. But more importantly, it was not a process I’d been through before.
But over the past few months, as I’ve traded a bit more, and gained some familiarity and comfort with what I’m doing, and I’m now at ease at moving around this asset, and trading it.
As the title of this short missive suggests, I’m talking about bitcoin.
A bit about bitcoin
Bitcoin is digital money that is created and held electronically. At the core of bitcoin technology is a kind of super database called the “blockchain.” The blockchain is public and accessible to anyone, just like the internet.
The blockchain contains every transaction in the history of bitcoin, and is constantly growing. When you use bitcoins to buy something, a global network of computers checks the blockchain database, verifying that you own the bitcoins. It’s like thousands of computerised notaries automatically checking, authenticating and guaranteeing every transaction.
This is different from using a credit or debit card. When you buy something with a credit card, a financial middleman, like a bank, verifies every transaction. This takes time, and they charge you a fee for the “service.”
In a bitcoin transaction, the verification and transfer are performed instantly by the blockchain. There is no middleman. A lot of people think that as bitcoin-like technology matures, it will be used to process everything from stock trades to voting. These more efficient, less costly transactions could end up saving individuals and corporations billions of dollars – while making them far more secure.
As the possibility of a bitcoin ETF grows, so does its price
Bitcoin and blockchain are all over the news right now, with bitcoin currently hitting all-time highs, in part on speculation about the possible approval by the U.S. Securities and Exchange Commission (SEC), the American stock regulator, of the first bitcoin ETF.
If the ETF is approved, it’s assumed that plenty of buyers will flock to the ETF, which in return will bid up the price of bitcoins, the ETF’s underlying asset.
I don’t think you should buy bitcoin because you think the price will go up. And I don’t think you should start allocating any meaningful portion of your portfolio to bitcoin either.
But I think you should go out and buy some bitcoin in order to familiarise yourself with how it works and how to trade it.
You see, bitcoin is here to stay. And what’s more, so are cryptocurrencies.
Now is the time to get to know cryptocurrencies
Cryptocurrencies aren’t just alternatives to bitcoin. They’re blockchain-based digital assets created, increasingly, as a means of ownership of a blockchain-based business.
Some of the most exciting early-stage investment opportunities in the months and years to come will come in the form of cryptocurrencies. So if you don’t even know how to buy a bitcoin, you will automatically be at a disadvantage.
Bitcoin is the “on-ramp” to buying these cryptocurrencies.
Let me take a recent example.
You might have heard about Ethereum. It’s a virtual currency network that’s been in the press recently as a wave of top blue-chip I.T. and financial companies (including J.P. Morgan and Microsoft) have announced the formation of an alliance that will use Ethereum for blockchain related opportunities.
Ethereum is up 40 percent in less than 2 weeks.
But if you want to buy Ethereum, you have to buy bitcoin first. Bitcoin is the “reserve” currency of cryptos.
So, it makes sense to understand bitcoin first. And if you just bought US$100 worth of bitcoin, you’d already be well ahead of the pack. Most people I know haven’t taken the time to figure it out yet, but this train shows no sign of slowing down so you should take some time and get on board early.
How to buy bitcoin
There are two things you need to start trading virtual currency:
An “on-ramp” is simply a website where you can convert fiat currency (i.e. U.S. dollars), into bitcoin.
Bitfinex is one I’ve used. You create an account, go through a simple verification process, deposit some dollars, and buy some bitcoin.
The “wallet” is where you store your bitcoin.
Whilst a platform like Bitfinex allows you to trade (along with other exchanges like Poloniex, my favoured exchange), I don’t like storing much bitcoin with an exchange.
I’d rather keep it in my bitcoin wallet. Exchanges can (and do) get hacked. My wallet of choice is Bitcoin Core.
Having spent months looking into blockchain and the cryptocurrency space, I’m convinced that this technology will only grow in scale and opportunity, and being on the outside (and not understanding it) will limit your ability to profit from it.
Going through the process of buying a few hundred bucks of bitcoin, transferring it to a wallet, and maybe transferring it to an exchange to buy another cryptocurrency (say Ethereum) is an excellent way to put yourself way ahead of the pack.
I’m glad I did it.
P.S. “The Truth About Blockchain” from the Harvard Business Review is one of the best articles I’ve read on the topic in recent months – I highly recommend taking a look.
P.P.S. Would you be interested in me providing an onscreen recorded demonstration of how to buy, move and trade bitcoin and cryptocurrencies? If so, please reply and let us know. If there is enough demand, then I am happy to create a simple step-by-step video and walk you through it.
Have you reached “TGIM” — Thank God It’s Monday — status yet? If you have a job, probably not… you’re probably looking forward to Friday, and less excited about Monday. But if you have a career, work could be the most rewarding part of your life. This week, Mark Ford explains why he thinks they’re different and walks us through how he transitioned from a job, to a career. According to him, it doesn’t matter how old you are or what you currently do – anyone can say goodbye to those Monday blues.
Do You Have a Job or a Career?
By Mark Ford
Most people have jobs. They go to work each morning dutifully, do their best to execute their duties, come home tired, and look forward to weekends and vacations.
They do this to make ends meet, hoping something better will come along. And better things do come now and then, along with setbacks. But the drudgery continues. Week in. Week out. 40 years pass. Life has been half miserable. But it’s time for retirement.
Retirement is getting out of job jail. No more hated work. It’s now time for relaxation and fun.
As it turns out, retirement today is this: After giving up a fairly well paid full-time job, you take on several poorly paid part-time jobs (without benefits) to pay for your ever-increasing retirement expenses.
It doesn’t have to be that way. You can spare yourself the misery by ditching the job early on and replacing it with a career.
What’s the difference?
You work a job to make money. You work a career to build something you value. A job is something you do to make money. A career is a life’s vocation.
With a job, you are always thinking about the time you won’t be working. With a career, you are always thinking about it even when you aren’t working.
The reason for this is a matter of focus. A job looks inward: “I do this to make me money.” A career looks outward: “I am building something that others can appreciate or use.”
The litmus test for determining whether you have a job or a career is this question (suggested to me by Gary North many years ago): If you could afford to, would you do it for free?
Is one better than the other?
What I’m saying is that you shouldn’t work for money. You should work on having a career.
If you don’t like your work but are doing it because you have to support yourself and/or a family, start working on a Plan B. Plan B is titled: Doing Something I Care About.
Satisfaction comes from doing something you care about. And if you can make money for 40 years doing something you care about and creating something that has value to others – you have a career!
Measured in quotidian terms, having a career can be challenging since you are constantly focused on the work, and the work sometimes does not go as well as you might want. But even when the work is frustrating, it involves you in a way that is somehow satisfying. And when the work goes well, there’s nothing like it.
On a personal note…
Okay, so maybe having a career is better in terms of leading a richer internal life. But how does that help? If you have a job now, can you transform it into a career?
Well, it may depend on what you are doing.
I have worked as a writer and editor for about 40 years. For more than half that time, writing was a job for me. I did it to make money. I worked hard at it, did it well and did make a lot of money, which was great.
But I never really enjoyed the “job”. In fact, I was sometimes embarrassed by the writing I was doing. At times it felt cheesy and even manipulative.
That changed when I was 50. I changed my priorities. Making money wasn’t even on the list.
I began writing about topics I valued, like art collecting, language and literature. I was also writing movie scripts, short stories and poems.
Before, the “purpose” of the writing I had been doing was to sell products and services and thereby make a lot of money. After, the purpose of my writing was to teach readers what I had learned about making money. It was the same topic, but the intention was different. It had moved from me (inward) to them (outward).
So that is the first and main thing. But there are requirements for your work to be a career:
The work should be challenging. It should require the best of you – your intelligence, your intuition, your stamina, and your care. Ideally, it should require both knowledge and skill and thus give you the opportunity to learn and improve forever.
It should produce things or provide services that are enjoyable and/or useful to other people. This adds a social component to the experience.
It should be accretive. That is, the value of the goods or services you produce should increase as your career continues. (For example, I feel like the writing I’ve done on entrepreneurship, as a whole, is greater than the sum of its parts. One day I’d like to assemble all my writing on that subject in a course or multivolume library.)
What do you do if you can’t make a career of your job?
Not everyone can make a career out of his or her job. An architect certainly could. Instead of designing commercial crap for the highest bidder, she could gradually develop her own style, one that she likes and that would serve users, and she could produce work over her lifetime that would endure for generations.
But what if you work on an assembly line or have a mail route or spend your days balancing ledgers?
In theory, I suppose you can. One of my great friends transitioned from sculptor to lighting designer and made his living that way, but never considered that he had made a change. In his mind, he was still an artist and still developing his craft. He’s gone now, but there are many times when I see a lighting “effect” and think of him.
But let’s say that you can’t imagine how to make the change. And yet you are going to keep your job because you need or want the money.
Does that mean you have to miss out on a rich life?
I don’t think so. You can have a rich life by adopting an avocation.
A career, as I said in the beginning, is a lifetime vocation. An avocation is literally a side vocation, something you do outside of your job that can present you with all the benefits of a career.
For example, Wallace Stevens, one of the great American poets of the 20th century, made his money working as the vice president of insurance company The Hartford. His life in the office was boring but his life as a poet was immensely rich. When he won the Pulitzer Prize, people in Stevens’s office didn’t even know he wrote poetry.
You don’t need to be a Pulitzer Prize winner to have an avocation. There are hundreds of them available. You could become a poet, an artist or an art collector. You could learn to cultivate Bonsai, build fine furniture or make your own movies. But not everything you might want to do “on the side” can qualify as an avocation.
Although they may be activities you are happy to do without compensation, going to the movies, reading books or smoking pot don’t qualify, since they do not present the other benefits you can get from a career. They don’t challenge you to learn and grow. They don’t provide a social benefit. And they have no accretive value.
Hobbies such as golfing, playing poker or tennis may qualify on two counts (something you are happy to do for free and something that you can learn and improve on), but they do not provide social value or leave a body of work that can be enjoyed by others after you are gone.
Like a career, you can determine if an activity is an avocation by asking yourself:
Markets hate uncertainty. But lots of uncertainty – as there is now – doesn’t mean that markets won’t go up.
Uncertainty is more subjective than (say) volatility, or stock market valuations, or the price performance of assets. To most people, uncertainty is a feeling, rather than a concrete thing.
But three American academics developed a way to measure uncertainty. And according to their gauge, uncertainty is close to an all-time high. The Economic Policy Uncertainty Index quantifies uncertainty by measuring the frequency that words such as “uncertainty,” along with “economy” and other keywords relating to government policy appear in major newspapers and U.S. government reports. This straightforward approach is surprisingly useful.
The U.S. Economic Policy Uncertainty Index, shown below, has spiked four times over the past 16 years: At the time of the September 11, 2001 terrorist attacks; during the collapse of Lehman Brothers and the start of the 2008 economic crisis; with the United Kingdom’s vote to leave the European Union in June 2016; and with the U.S. presidential elections in November, when it hit its second-highest ever reading. (The gauge saw abnormally high levels in January 2017.)
Uncertainty, markets, and economies
The creators of the Uncertainty Index found that spikes in the index foreshadow a dip in economic performance, including investment, employment and economic output. It’s also related to stock market valuations, as reflected by the price-to-book (P/B) ratio, which measures a company’s share price compared to the value of all its net assets.
If the price of a share (and the overall market value of a company) declines while its book value remains the same, the P/B ratio would fall. The average P/B ratio tends to dip whenever the Uncertainty Index spikes. That’s an indirect way of saying that higher levels of uncertainty are bad for stock markets.
Uncertainty also affects trade, in a very direct way. A recent World Bank analysis pointed to higher levels of economic policy uncertainty as an important factor in the decline in growth in world trade last year. Higher levels of uncertainty in 2016 may have cut trade growth by 0.6 percentage points – which would have accounted for three-quarters of the difference in trade growth in 2015 and 2016.
Low fear, high uncertainty… and strong markets
However, global stock markets don’t seem to have gotten the message. Despite higher levels of uncertainty in recent months, the S&P 500 has appreciated about 5.7 percent year-to-date. Meanwhile, the MSCI Asia ex-Japan index, is up 10.1 percent in 2017 so far. The broader MSCI World index is up 5.1 percent.
You might think that high levels of uncertainty would lead to high levels of fear in markets. But right now, that’s not happening. As we wrote last week, the so-called “fear index” of U.S. stock markets is around its lowest levels since 2007.
The “fear index” is the VIX index, which is a measure of anticipated market volatility. The VIX is based on option prices of individual stocks in the U.S. S&P 500 index. When investors expect more price fluctuation (that is, for prices to bounce around more), the VIX goes up. And volatility is greatest when markets fall.
Does a low VIX reading point toward an imminent market top? Not necessarily. The current low levels of the VIX only indicate that optimism and complacency are high among the largest investors in the S&P 500 index.
How to prepare for the unknown
In the meantime, it’s smart investing to prepare your portfolio for higher levels of fear – and falling markets. Uncertainty doesn’t dictate fear, but markets can’t whistle through the graveyard forever.
Recently, I wrote about one way to insure your portfolio against this risk. And just last week we released the latest issue of the Asia Alpha Advisory, where I explain in a lot more detail why gold is the best insurance for your wealth… why it’s going to go up… and how to buy it. If you’re not a subscriber…
If you’re not already subscribed to the Asia Alpha Advisory, and you’d like to learn more about how you can benefit from it, simply send an email to [email protected] and I’d have one of my team members revert to you.
Every industry has its own jargon, which people in the industry often use to make what they’re doing seem too difficult for “outsiders” to understand. (Much of the banking industry is based on this!) Business, of course, has its own language too. But to many people – including Mark Ford – those who use that jargon are talking themselves right out of a job.
He had been strongly recommended for the job. And so, when I got on the phone with him, I was expecting a sharp, take-charge guy. Instead, I got this:
“I’ve been involved in strategically important roles with communications companies for 25 years. Throughout, I’ve focused on my core competencies, building brand recognition, and interfaces with key personnel.”
To which I responded: “Huh?”
He went on…
“It’s been a personal paradigm of mine that quality control and dynamic leadership are essentials in today’s globalized business environment, and that’s what I feel I can bring to any company I work for.”
I had already made an initial assessment: This guy was a fraud. But to give him a chance to redeem himself, I tried to keep the conversation going.
“So,” I said, “what, exactly, have you been doing all these years?”
I could almost hear him thinking “What kind of dummy am I dealing with?” But this is what he said:
“Bringing in a bottom line and achieving optimal results have always been goals that resonated with me.”
“That’s enough,” I thought. “I can’t take any more.”
“I’m sorry to do this,” I said, “but I have to jump off the phone now to handle an emergency. I enjoyed talking to you. I’ll be sure to look at your resume and get back to you if something comes up that meets your qualifications.”
And with that, I bid farewell to this young man and any chance he had of ever working for me.
In their book Why Business People Speak Like Idiots, authors Fugere, Hardaway, and Warshawsky say there are three reasons executives—and people applying for management positions—sometimes speak like this.
1. Their focus is on themselves rather than on the person they’re speaking to. ”When obscurity pollutes someone’s communications it’s often because the… goal is to impress and not to inform.”
2. They fear using concrete language because saying exactly what they mean can make it hard to wiggle out of commitments. “Liability scares [some people], so they add endless phrases to qualify [their] views, acknowledging everything from prevailing weather conditions to the 12 reasons we can’t make a decision now.”
3. They want to elevate and even romanticize their thoughts and deeds because they are afraid they aren’t impressive. They do so by using lofty language that disguises the mundane truth.
They are afraid to appear ordinary. Their solution is to attempt to bamboozle everyone they speak with—and particularly those with power.
This is a very bad strategy.
In a job interview, it makes the interviewee look pompous and vacuous—two traits any sensible employer wants to avoid.
When applying for a job, only two things really matter: What you know (your skill set) and who you are (your integrity). Pretending to know things you don’t is a waste of your time because you will soon be found out. Getting tossed into the street after only a few weeks on the job is both embarrassing and an ugly blemish on your work history.
You can demonstrate your good character by being honest from the outset. Be candid about what you know and what you have done. But make it clear that you are confident you can quickly learn to do anything that is required of you.
In granting you an interview, your future employer is trying to find out if you can help him solve his problems and grow his business.
He isn’t looking to be impressed. He’s looking for someone who can make his life easier by doing a great job. Your job during the interview is to sell yourself as being that person.
And the first rule of successfully selling yourself is to make sure you’ve got the basics down pat:
So how do you do all that?
Before the interview, study the business in detail. It isn’t enough to know what sort of products it produces and its “mission”—things you’ll find on its website’s home page. You have to dig deeper.
You must understand why its products are unique (if they are), what sort of customers it targets, the kinds of offers it uses, the media it buys, etc.
What you’re looking for is an insight into the core knowledge of the business—an inside view of the strategies it uses to grow and profit every year.
And while you’re looking for that, you should think about the problems the business is likely to encounter. Because solving those problems, in one way or another, will be your job—if you’re hired.
If you can do this detective work on your own, great. But if you can’t, there’s nothing wrong with calling ahead. Ask the person who’ll be interviewing you where you can go to learn more about the business. If he’s looking for a superstar (as he should be), he’ll be impressed you want to spend time preparing for the interview.
The bottom line is this: When it comes to winning a job, the conversation must be about how you can solve existing problems and provide future benefits to your new employer… not how wonderful you’ve been (or think you’ve been) in the past.
It’s an investment cliché that diversification reduces risk. But diversification also means that it takes a lot longer for your investments to make you rich – since your well-performing ideas will be diluted by your not-so-great ideas.
Investment legends George Soros and Warren Buffett have made billions, in part, by putting a lot of money into ideas that they believed in (as has Jim Rogers, as he told me).
Below, my friend Mark Tier shares a fresh perspective on risk and how you can reduce it through specialisation – not diversification.
Ever had your bank, broker, or financial planner ask you to fill out one of those risk assessment forms so they can determine your risk profile?
They ask questions like:
Do you want to make a lot of money?
Well, of course. Duh.
They recommend a portfolio of high risk stocks.
Are you willing to take a lot of risk?
Of course NOT!
They put you in the “risk averse” category and recommend a diversified portfolio.
What is risk? And what will make you rich?
A portfolio of high risk stocks means you have pretty much an even chance of making money—or losing it.
Might as well toss a coin.
A diversified portfolio means having tiny quantities of a whole bunch of different investments. If one of them goes up (or down) ten or twenty times, the effect on your net worth is almost zero.
Either way, there is no guarantee whatsoever that either of these investment strategies will make you rich. Indeed, as Fortune magazine once put it,
“One of the fictions of investing is that diversification is a key to attaining great wealth. Not true. Diversification can prevent you from losing money, but no one ever joined the billionaire’s club through a great diversification strategy.”
Nevertheless, these two options reflect the Conventional “Wisdom” about risk—that high profits are correlated with high risk, and vice versa.
If this is true, how can it be that Warren Buffett, George Soros, Carl Icahn, Bernard Baruch, Peter Lynch, Sir John Templeton, and other well-known investors and speculators have regularly beaten the market over most of a lifetime?
Presumably, they followed the “high-risk strategy,” and somehow managed to avoid significant losses.
The reality: absolutely not. Every single one of those investors I’ve mentioned are risk averse.
Their first priority is Capital Preservation.
To quote Warren Buffett:
So how would Buffett, Soros, et. al. answer the following question from HSBC’s risk assessment form?
On the whole, which of the following best describes your investment objective?
You can only click on one of those five answers. This question follows Conventional “Wisdom,” which means that it is impossible to be risk averse and beat the market regularly over time.
(You can see the HSBC risk assessment questionnaire, here.)
HSBC even illustrates range of returns of those 5 options with this picture:
Here, in a nutshell, is the Conventional “Wisdom” on risk—presented rather sneakily.
The purple bars are a little longer than the green ones, implying that each “strategy” will be profitable despite the risk. And that profitability will be about the same as the 9-11 percent long term average return on stocks—about the same as an index fund—regardless of risk.
Personally, if these are my choices, I’ll take the index fund and go on vacation.
If the successful investor’s first priority is:
a. Capital Preservation
and at the same time, his primary objective is:
b. High capital appreciation
he wants to choose the impossible—according to the Conventional “Wisdom.”
Which implies that:
1. It’s impossible to beat the market; and,
2. Buffett, Soros, Lynch and others cannot exist.
And it’s quite true that if you’ve succumbed to the Conventional “Wisdom,” it will be impossible for you to beat the market.
However, since Buffett, Soros, Lynch, et. al. do exist and have beaten the market, something is obviously wrong with the Conventional “Wisdom”.
And what’s wrong is the conventional view of risk.
The conventional view is right—when you DON’T know what you are doing.
What risk really is
Consider something you probably do just about every day: get behind the wheel of your car.
Are you taking a risk?
The answer, of course, is yes. Some idiot can always do something that will involve you in an accident. So let’s rephrase the question to:
Are you taking the risk of causing an accident?
If you’re over 25, the answer to that question is probably not. By that age—at least according to the insurance companies—you have enough driving experience to be a pretty low-risk driver (to the insurance company).
If you think back to when you first got your learner’s license, how would you have answered that question?
No doubt, as teenagers think they are immortal, your answer would have been a more emphatic “No!” than it would be today.
Looking back, you now realize that at age 16 you were an almost unguided missile threatening the life and limb of everybody else on the road.
What about this guy?
Is HE taking a risk?
“God, yes!” I can hear you thinking.
But the fact is: we don’t really know. What we’re really feeling is: “If I were hanging off the edge of a cliff by my fingernails I’d be taking a risk.”
I don’t know about you, but I’d have fallen off long before anyone could have taken a picture like this. Assuming I ever got that far up the cliff.
But if this guy is an experienced mountain climber then he’s certainly taking far less risk than you or I would be. Perhaps no risk at all. He certainly looks pretty confident to me.
And why might he be confident? Because if he’s an experienced mountain climber then he knows what he is doing.
The truth is: risk is contextual
Risk is a function of whether or not you know what you are doing.
To quote from the legendary investor Bernard Baruch (who sold all his stocks before the crash of 1929):
“It is unwise to spread one’s funds over too many different securities. Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues.”
So if diversification, as Buffett puts it, “is protection against ignorance” and “makes little sense if you know what you are doing,” how can the Master Investor make above average profits—nearly all the time?
Simple (though far from easy): he specialises, and within his circle of competence looks for what’s called a High Probability Event.
As this picture shows, a High Probability Event is an investment with a low risk of loss and a high “risk” of profit.
And how does he find a “high probability event”?
By specialising in a tiny market niche, becoming expert within it—and spending almost all his time scouring that niche for a low-risk opportunity.
And when he finds one, he buys as much as he can.
The Master Investor puts all his eggs in a handful of baskets—and watches the baskets.
To put it another way, the Conventional “Wisdom” on risk is just plain wrong.
For instance, imagine our investment professional advising Bill Gates at the beginning of his career:
“Software and computers. Boy! Nobody knows whether they’ll ever amount to anything. You stand to lose your shirt. Think about a sideline with a steady income stream—supermarkets, to take one example—just in case.”
or Warren Buffett:
“You know, Warren, investing is a risky business. Everybody knows that. Perhaps you should think about diversifying into giving bridge lessons or something else, to be on the safe side.”
We both know that such advice is totally ridiculous.
Every successful business person succeeds by specializing. We both know intuitively that diversifying in business—starting two or more companies in totally different markets at the same time—is a recipe for disaster.
He who diversifies his activities—whether investing or in business—is a Jack of All Trades and Master of None.
The grass Is NOT greener on the other side
At dinner one night I met an investor named Larry, who’s basically a one-man venture capital fund, specialising in biotech. Hearing Larry talk about the profits he’d made, the lady sitting next to me, Mary, said: “I’ve been thinking I should do something in the stock market. Maybe I should look into biotech.”
I asked what she’d invested in before. She’d been a real estate agent in New York for many years and had recently bought two condominiums that had since more than doubled in price.
All her friends and everyone she knew in the real estate business had urged her not to buy them because of the litigation and internal disputes that were tearing the almost-bankrupt condominium association apart. The low prices the condos were selling for were used as evidence of them being a lousy investment.
She knew better. That “these things will pass.” As they did.
I said to her: “Why do you want to know about biotech? Why should you even look at the stock market? You already know how to invest and make money.
Why not do more of what you already know?”
For a moment, she sat there in a kind of stunned silence. And her face, her whole demeanor changed. The penny had dropped.
Mary already knew her wealth-creating niche.
She just didn’t know that she knew.
What do you know that you don’t know you know?
Creating wealth is the result of specialisation. Putting in that 10,000 hours to become a Master instead of a Jack of All Trades.
How to find what you know that you don’t know you know?
Go through your “money history.” Make a list with two columns.
Column #1: where I’ve made money.
Column #2: where I’ve lost it.
If you’re like Mary, always looking for “greener grass,” you, too will probably be surprised when you identify your circle of competence.
And as long as you stay within that circle of competence, you’ll know what you are doing.
Beware: making money can be boring
That’s a statement that qualifies for Ripley’s “Believe it or Not”!
But—think of any successful business you’re familiar with. McDonald’s, for example.
How does McDonald’s make money?
By doing the same thing over and over and over and over and over again. Each repetition of those “billions served” adds a penny or a dollar to the bottom line.
But those pennies pile up into BILLIONS. Of dollars.
It’s thrilling to do something new and different. But when it comes to money, excitement takes you outside your circle of competence, which is usually hazardous to your wealth.
When tempted by the latest hot “tip” look in the mirror and repeat, until the temptation passes: “If I want excitement I’ll go skydiving.”
Mark Tier the author the bestselling The Winning Investment Habits of Warren Buffett & George Soros; Understanding Inflation; and How to Spot the Next Starbucks, Whole Foods, Walmart, or McDonald’s – BEFORE its Shares Explode (coming out in August this year). He’s also written a free ebook: How to Make More Money By Sitting on Your Butt, which you can get for free, here.
Today I’m sharing an article written by my friend Tama Churchouse, who with his father, Peter, runs Churchouse Publishing in Hong Kong. Peter spent decades as the Head of Asia Research and Regional Strategist at Morgan Stanley in Hong Kong, and is a fantastic source of stories and insight on investing in Asia. He’s a frequent guest on the major financial news networks, so you might have seen him or heard his market insights before.
Tama began his career in the trenches of the banking world – and here he explains why bond duration can make “safe” U.S. government Treasuries as risky as emerging market stocks.
Peter and Tama write The Churchouse Letter, a monthly publication about investing in Asia, along with a free email called Peter’s Perspective, which you can sign up for here.
Treasuries – that is, U.S. government bonds – are as risky as emerging market stocks.
Many investors would call me crazy for saying that.
At the very least they’d ask what the “catch” is.
But this is no play on words.
When I say emerging market stocks, that’s exactly what I mean… Russia, Brazil, China, South Africa, India, Mexico, Malaysia, Thailand… bona fide emerging markets.
And when I say Treasuries, I mean U.S. government bonds… backed by the full faith and credit of Uncle Sam. And with no leverage, before you ask.
So how can these two asset classes possibly be equally risky?
Emerging market stocks are widely acknowledged to be one of the most volatile asset classes you can own.
Just look at the performance of MSCI’s emerging market benchmark index in the chart below. It fell by 35 percent from April 2015 through early 2016.
In fact, since 2010, emerging markets have experienced corrections of 18 percent (twice), -12 percent, -17 percent, and -35 percent… it’s been a rough ride.
Before I explain further, let me turn to Vanguard.
Founded in 1975 by Jack Bogle, and with nearly US$3 trillion under management, it’s one of the biggest global fund management companies.
Vanguard offers a suite of very low-cost ETFs, across a range of asset classes.
In trying to assist individual investors, the company designates a risk level to each ETF.
All ETFs are categorised from 1 through 5, with 1 being the least risky, and 5 being the riskiest.
First let’s look at Vanguard’s FTSE Emerging Markets ETF (New York Stock Exchange, ticker: VWO).
With roughly US$61 billion of assets, its top 5 country allocations are as follows: China, Taiwan, India, Brazil and South Africa.
Not surprisingly – given the volatility of emerging markets overall – Vanguard rates this as a risk level 5 ETF.
Now let’s take a look at one of their U.S. Treasury ETFs for comparison.
The ticker is EDV on the New York Stock Exchange.
As I mentioned, it is composed purely of U.S. Government bonds. It currently holds 77 of them.
It’s pretty cheap as well, charging an annual expense ratio of 0.07 percent.
And it’s also designated by Vanguard as a Risk level 5 ETF… the highest possible.
Because it’s the Vanguard Extended Duration Treasury ETF.
This ETF holds “Separate Trading of Registered Interest and Principal of Securities”, otherwise known as STRIPS.
First introduced in 1985, STRIPS are U.S. Treasury bonds that have carved out the interest and principal payments into individually tradeable securities.
For example, a 30-year Treasury can be broken down into 60 semi-annual interest payments, and a single principal payment at maturity.
STRIPS are zero-coupon bonds (bonds that don’t pay interest but are issued at a discount to face value). And what Vanguards Extended Duration Treasury ETF does is focus on long-dated zero-coupon bonds (STRIPS). STRIPS normally mature at terms up to 30 years.
The truth is most investors simply don’t spend much time on fixed income (i.e. bonds) at all.
How much airtime do CNBC and Bloomberg devote to fixed income versus the equity market? It’s fractional.
As a result – in part based on our experience at Churchouse Publishing – a large number of readers don’t have good understanding of fixed income risk. But credit and interest rate risk are the two of the biggest risks that investors need to consider.
Now, credit risk is easy enough to understand.
We intrinsically understand the difference between lending to the U.S. government by buying their bonds versus buying those issued by, say, an Australian mining company.
But when it comes to interest rate risk, things become a little less clear.
The duration of your bond portfolio is a key determinant of how much risk you’re exposed to.
Duration, which is measured in years, tells you how long it will take for the interest payments generated to repay the invested principal. Duration will indicate the approximate change in price of a bond for a given change in interest rates.
Because zero coupon bonds offer the entire payment at maturity, they always have durations equal to their maturities. So therefore their durations are higher than coupon bonds.
If your bond duration is 5 years and interest rates rise by 1 percent, the price of the bond falls by approximately 5 percent (and vice versa).
The duration of say the iShares 7-10 Year Treasury Bond ETF (New York Stock Exchange; ticker: IEF) is around 7.63.
And the Vanguard Extended Duration Treasury ETF (New York Stock Exchange; ticker: EDV)?
The duration is 24.5.
So for every 1 percent move in interest rates, you can expect roughly a 25 percent price move in your ETF.
That’s why a portfolio of U.S. Treasuries can be just as risky as emerging market stocks.
With the U.S. Federal Reserve in the midst of raising rates, it’s worthwhile checking out the duration of your fixed income portfolio – and making sure you know how much interest rate risk you have on the table. Because just because something’s a bond, it doesn’t mean it’s any less risky than – say – emerging market stocks.
Markets and economies move in cycles. So do sectors within a market – in a way that’s more predictable than you might think. And an easy investment strategy that’s produced outstanding results over the past 10 years suggests the sectors that will perform the best in 2017.
Last year, we found that an Asia investment strategy of buying the worst-performing sector of the year at the beginning of the following year – and then holding it for 12 months – resulted in an annual average return that was more than double the return of the index. The strategy suggested that Asia’s energy sector –the worst-performing sector in 2015, falling 21 percent – would lead the way in 2016. It wound up rising 5 percent (compared to the 2 percent decline of the Bloomberg World Asia Pacific Index) and was the second-best performing sector for the year.
What does this strategy say for 2017?
Avoid a common investment pitfall through rotating sectors
As an investor, it’s easy to follow the herd and buy the stock that’s been rising for a long time – because it feels like it’s going to continue to rise. This is called the status quo bias, which is when we tend to think that things are likely to remain the same – because our most recent memory is of them being a certain way. Investors buy a stock that’s been steadily rising in price because they expect it to continue going up. Investors expect a bull market to continue because, well, the market has recently been rising.
But markets are like seasons; they move in cycles. They all rise and then they fall, and then they do it all again. Just as you wouldn’t buy shorts as autumn approaches (even though everyone else has been buying shorts all summer), you shouldn’t buy into a sector just because it’s been going up for a long time.
This is how to rotate your sectors
Sectors of the stock market do better, or worse, each year as their component stocks perform well, or perform poorly. The chart below shows the performance for each sector of the Bloomberg World Asia Pacific Index by year.
Each year’s best-performing sector is highlighted in green, while the worst-performing sector is highlighted in red (the overall index’s performance is the first row). So, for example, in 2014, the index rose 11 percent, while the consumer discretionary sector was the market’s worst performer, with a 3 percent decline. The financial sector was the best, with a 23 percent gain.
One thing that’s clear is that the best performers don’t stay on top for long – and there’s a lot of movement between the best- and worst-performing sectors. In a number of years – for example, 2007 and 2008 – the year’s best-performing sector was the previous year’s worst-performing sector.
Use this sector rotation strategy
We back tested this strategy for Asia’s stock market sectors: Buy only the worst-performing sector of the year at the beginning of the following year (for example, buy the worst-performing sector of 2009 as of the first day of trading of 2010), and hold it for a year. Do the same thing at the beginning of the following year, and so on.
As shown in the graph below, over the past ten years this strategy has outperformed the Bloomberg World Asia Pacific Index by a huge margin: It’s generated an average annual return of 13 percent, compared to 6 percent for the index.
In 2016 alone, the worst-performing sector in 2015, energy, was the second-best performing sector. While the index was down 2 percent, the energy sector was up 5 percent.
So what does this mean for 2017?
The worst-performing sectors in the Bloomberg World Asia Pacific Index in 2016 were the utilities and health care sectors. They were both down 9 percent, compared to the 2 percent decline in the index (and a 7 percent return for materials, the index’s best-performing sector).
Does this mean that health care and utilities will perform well this year? History shows that investing in last year’s poorly performing sectors generally makes sense. If you’d want to follow this, the Mirae Asset Horizons S&P Asia Ex Japan Healthcare ETF (which is traded in Hong Kong, ticker: 3153) would be an easy way to invest in Asia’s health care sector, although it excludes Japan (and Japan is part of the Bloomberg World Asia Pacific Index). (The ETF is small and thinly traded, however.)There is no similarly simply way to invest in Asia’s utilities sector. Buying a basket of the largest utilities companies – which include CLP Holdings (Hong Kong Exchange; ticker: 2); Korea Electric Power Corp (Korea Exchange; ticker: 015760); and Hong Kong & China Gas Co Ltd (Hong Kong Exchange; ticker: 3) – would be one (expensive and difficult) way. These three stocks comprise only 13 percent of the utilities sector of the Bloomberg World Asia Pacific Index.
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Legal disclaimer: The insight, recommendations and analysis presented here are based on corporate filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. They are presented for the purposes of general information only. These may contain errors and we make no promises as to the accuracy or usefulness of the information we present. You should not make any investment decision based solely on what you read here.