One of the most dangerous things you can do as an investor is to make money – because of what you might do next. And… has the world’s debt been put to good use? It doesn’t seem that way.
Those are a few of the messages of legendary investor Jim Rogers, who I spoke with at earlier this year (you can read the full interview here).
In the early 1970s, Rogers co-founded the Quantum Fund, one of the world’s most successful hedge funds. After generating returns of 4,200 percent over ten years, he quit full-time investing in 1980.
He went on to travel the world twice times, and wrote a few books about what he saw and learned. Even if you’re not a travel or money junkie and know little about finance, Investment Biker and Adventure Capitalist are two of the most educational and entertaining books you’ll ever read about investing. And they’re must-reads for anyone interested in understanding how global markets work.
I recently re-read parts of Adventure Capitalist, which Rogers wrote in 2003 after a three-year, 152,000-mile (244,600 km) drive around the world, and found a few lessons worth revisiting:
On the danger of making money in markets
Often, the best thing to do in investing is this: Nothing at all (as Jim has said before. And part of doing nothing is holding what’s maybe one of the most hated assets of all: Cash. It doesn’t earn anything, inflation eats away at it, central banks can’t stop printing it, and you’re denying yourself the magic of compounding compounding if you’re holding cash.
But cash is the perfect hedge. You don’t have to worry about the market crashing if you have a lot of cash. And most importantly, it’s there when you find “money lying in the corner,” as Rogers has said.
When debt is good – and bad
“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.”
Around five years after Rogers wrote that, the 2008-2009 global economic crisis delivered what should have been a crowbar-to-the-head message about debt: Too much debt is bad.
But since then, overall levels of debt haven’t declined. Total lending has actually risen – by 40 percent. The world economy owes itself US$57 trillion more than it did in 2007. Total debt – money owed by bank, households, companies and governments – has risen by US$112 trillion, or 129 percent, since 2000.Meanwhile, over the past 25 years, the global economy grew an average of 3.6 percent per year. But global GDP increased 3.4 percent in 2014. Then it slowed to 3.1 percent in 2015. It is expected to be around 3.2 percent this year. Despite all the “stimulus” and escalating debt, the best efforts of central bankers and negative interest rates around the world, global economic growth has – at best – stalled.