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Important Investing Lessons From The Expert

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Important Investing Lessons From The Expert

You’ve probably heard of George Soros, the investment magnate and one of the world’s most famous investors.

Within investment circles, his co-founder of the Quantum Fund, Jim Rogers, is equally respected and renowned.

Many see him as a legendary figure.

Read on for lessons from the man himself.

Why listen to Jim?

Well, in case you don’t know who he is, here is a little about him:

  • Earned his loyal investors returns of a staggering 4,200% over his last ten years as an investment manager (he retired in 1980)
  • As mentioned before, he co-founded the Quantum Funds, founded in 1973 and which grew to be one of the most successful funds ever: based in the Cayman Islands and Curacao
  • He is also renowned for his books that appeal to audiences outside of finance, for their humor and interest stories (he has traveled extensively since retiring from finance)

One of his books, Adventure Capitalist, was written after clocking up 150,000 miles driving around the world.

In it are many valuable lessons.

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If a stock is right, hold it forever

Rogers believes that buying things and holding them forever is a good method.

The success he has had in investing has typically come from very cheap and undervalued stocks.

The silver lining of buying cheap is that you won’t lose much, even if your bets are wrongly placed.

They are low risk and have a high return potential.

The graph below shows the responses received from holding stocks over time, compared with other investment targets:

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Having said this, buying cheap on its own isn’t enough.

If this were true, investing would be easy.

You need to buy cheap, but also buy in something in which you see improvements on the horizon.

Something that will become common knowledge in the next few years or decades, but that you latched on to before anyone else.

That is the key to successful long-term investing.

Seeing trends like the rise of middle-man platforms like airBnb or Uber, or earlier things like the rise of DVD and the fall of Betamax; having enough wisdom to know what major shifts will occur in the next few years, and having the guts to stand by your predictions.

Luck probably helps too, but the best investors have proven themselves adept in forecasting trends.

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Things aren’t always this straightforward though

Prices are relative.

The same price may be expensive for one stock and cheap for another.

Stocks are more elusive and ambiguous if you don’t know your stuff, and you can get caught out by looking at price alone.

For example, a share that trades for $100 could be cheap for what it is, and similarly, something trading for a few dollars per share could be expensive depending on what it is.

What needs to be looked at is a stock valuation, measured in either price to book, or price to earnings ratios.

A low price to earnings ratio (P/E) compared to other stocks in its sector or the historical levels recorded would be considered cheap.

And you also have to think about the reasons why a stock might be cheap.

Research and industry knowledge are critical here. Things to consider include:

  • Where the company is facing management problems, be it interpersonal or structural
  • It could have invested capital disastrously and could be seeing evil returns, or just seeing a general low return on assets
  • The sector the company is in: if it is a declining industry doesn’t be surprised to see low stock valuations with no bright future for growth

These issues can lead to a situation which investors call a ‘value trap.

It is when a stock appears like a good deal because of its comparatively low price, but once bought the investor realizes they been sold a pup.

However, at the same time, a value trap can turn into a golden egg.

For each of the problems mentioned, there could be a silver lining, such as (respectively):

  • Improved management thanks to individual ability, which is hard to predict: venture capitalists are renowned for their capacity to assess individual aptitude and character, as such assessments are integral to success
  • The capital could see a turnaround thanks to favorable tax changes, reduced regulation, increases in value of certain assets due to outside factors
  • The industry could pick up again: some manufacturers to see strong, sharp recent growth after decades of decline are the vinyl industry and artisan breweries

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The graph shows how it the industry has gone from virtually a flat-lining to a pickup in recent years (though still far from its dominance in the seventies).

Sometimes you just have to do nothing

Though knowing when this is the case is the key to being a successful investor.

Being too energetic and eager is a sure way to lose money.

Rogers says that the active investor normally does nothing until they see opportunities spring up.

If money is lying there, of course, you go and pick it up.

But don’t buy the treasure chest to find it empty inside.

Of course these opportunities come along few and far between, and so the key is seizing them when they present themselves.

But even so, you stick to the first piece of advice, which was buy cheap and when you predict positive change on the horizon.

The important thing that you need to remember is the advantage you have from your position.

As an individual investor, you are not constrained by time, targets or client demands.

Short-term performance can be disregarded for the long-term objective, whereas a portfolio or fund manager belonging to multiple clients will not have this luxury.

Final Word

Remember that every investment has an opportunity cost.

Don’t sell hastily if you don’t see short term gain from a cheap stock.

Relax in the luxury of time that has been afforded you as an independent investor.

Keep capital available for those moments when opportunities present themselves to you.

Have some leeway to move towards the money lying in the corner, if you will.

The advice from Rogers has led to his legendary status among investors and rightly so.

Following these pieces of advice should help you move forward in the investment industry.

 

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