Eugene Fama and other renowned economists have long argued that neither individual nor professional traders can consistently beat the market. However, there are a few legendary traders that prove that beating the market is indeed possible. Many analysts might attribute their success to highly sophisticated trading strategies or divine intervention, but their method to their success is usually much more mundane.
We recently had the privilege of interviewing Jim Rogers, one of the most successful traders over the past century. Both amateur and seasoned traders can learn a lot from Rogers as they create their own trading strategies. Rogers states that traders can beat the market by specializing in trading securities in industries or asset classes where they are experts. If you aren’t familiar with Rogers, we have provided a brief background on him, so that you can better appreciate the feedback he offers.
Jim Rogers is a Trading Success Story
Rogers is widely regarded as one of the greatest traders of the 20th Century. He began his career on Wall Street shortly after graduating from Yale. However, Rogers quickly realized that working for an investment bank wasn’t the path to true financial freedom, so after three years of working at Arnhold and S. Bleichroder, he and Soros left to start the Quantum Fund.
In 1977, Rogers became a millionaire at the age of 35. Four years after making his first million, Institutional Trader magazine called Rogers “the world’s greatest money manager.”
Rogers success can largely attributed to his unique strategy of focusing on placing highly leveraged trades based around global macroeconomic events. While critics find some of his investing practices controversial, Rogers is also recognized as a trading success story.
Rogers’s Advice for Aspiring Traders
Rogers is unquestionably one of the greatest traders in the world. However, he consistently warns other traders not to follow his advice. He states that traders should find a system that works for themselves rather than following the same roadmap of any other traders, including him.
However, Rogers has provided some great lessons that every trader can benefit from. Here are some of his tips that both amateur and professional traders should follow.
Buy Low and Sell High
Even the most inexperienced traders understand that they should buy low and sell high. Unfortunately, cognitive dissonance typically prevents traders from following this seemingly basic and crucial principle.
One of the biggest reasons that traders fail to buy low and sell high is that they can’t gauge the direction of a stock or commodity price. Rogers said that traders need to identify extremely cheap assets and learn to tell when the prices are going to increase.
This is one of the reasons that he is currently avoiding U.S. stocks. Last month, he wrote on his blog that the U.S. stock market is higher than any year since 1929, which means that there are few opportunities for traders to make a return. In fact, he has predicted that a major stock crash will occur in the near future, which will force the Federal Reserve to inject money to stimulate it.
Rogers recognizes that undervalued markets offer many more opportunities. He is currently investing in the Japanese and Chinese stock markets, because they are currently 60% below their all-time highs.
Invest in What You Know
Whenever people ask Rogers’s for investing advice, he tells people to invest in what they know. Everybody has a wealth of knowledge about something, so they should buy in industries where they can understand trends better than the average trader.
“If you are keen on cars, read everything you can about the automobile industry,” Rogers says. “You will know when something is about to happen that constitutes a major, positive change.”
Here are a couple of ways that Rogers has put this idea into practice:
- Rogers invests heavily in the energy sector. He has a professional background in the sector and founded The Rogers Global Resources Equity Index, so his expertise has enabled him to forecast trends in the industry before other traders, which allowed him to beat the market. This is consistent with his belief that people should invest in what they are experts in.
- He invests a lot of money in Asian markets. Since Rogers lives in the Philippines and has visited Russia, his firsthand experience with these economies gives him a large advantage over other traders. He once made a fortune shorting the Russian ruble, but recently said that he is considering buying the currency, because he believes that President Putin is taking the country in the right direction. His unparalleled knowledge of Russia clearly gives him a different perception of the country’s economy than other traders.
Everyone is an expert at something, so Rogers argues that they should use their special knowledge and skills to gain an edge in the markets.
Understand How Markets Work
Rogers said that markets often behave irrationally longer than traders remain solvent. Traders must learn to discern real world market behavior from the trends they expect the market to follow. You may be able to successfully predict the direct of the market, but you will still lose money if you can’t ride the market out until it is time to close your positions.
Rogers learned this the hard way when he first began trading and tried short-selling six companies. Rogers accurately predicted that these companies would eventually go bankrupt, but they rose in value for several years before that. While his prediction was right, Rogers got wiped out when the value of these companies rose and his broker made a margin call.
In a discussion with Hard Asset Trader, Rogers said that he still feels he isn’t good at market timing. However, he has learned the importance of keeping maintaining enough capital to wait out the markets until it is time to close his positions.
The most important thing is to avoid being overleveraged. Rogers said that markets do stupid things, so you will need to have enough of a reserve to make sure that you can wait out those periods.
How do traders know if they are overleveraged? Traders themselves are their own best barometer of that. Rogers said that traders that spend the entire day following changes in the market instinctively know that their margin is too high. These traders are highly anxious, because a small shift in the wrong direction can wipe them out.
He started stating that traders were overleveraged several years before the financial collapse, but few traders heeded his warnings. Rogers actually began shorting U.S. equities and debt in 2006, because he recognized that the Federal Reserve policies had created a financial bubble that would burst within the next few years. He continues to urge other traders to avoid repeating these mistakes to avoid facing similar financial catastrophes.
Rogers states that traders need to thoroughly understand market behavior and the impact of Federal Reserve policies before playing in the markets.
Spend Less Time Investing
Paradoxically, Rogers claims that the best way to be a better trader is to typically spend less time investing. “”Most successful traders, in fact, do nothing most of the time,” he states.
The biggest mistake is that many traders become cocky after they make a lot of money. They may become overly convinced of their abilities, which can lead to them making some very poorly informed decisions.
Rogers feedback comes from personal experience. Around the time he started trading, he tripled his money in three months. He then got careless and was wiped out in two months after trying to short sell after a market rally.
Rogers told us that Hubris led to him making very bad decisions, so other traders shouldn’t do anything unless they are absolutely sure that they are making the right move.
Most stock brokers focus heavily on diversification. Major brokerage firms such as Fidelity and Vanguard focus on top-down hierarchal approaches to investing. However, Rogers argues that diversification is a bad practice for growth traders.
“If you want to make a lot of money, resist diversification. Brokers promote the motion that everybody should diversify. But that is mainly to protect themselves. The way to get rich is to find what is good, focus on it, and concentrate your resources there. But make very sure you are right,” he states.
Rogers attributes his track record to his ability to understand some markets and industries very well and focusing on them exclusively. He encourages other traders to follow similar practices.
Traders Should Find Any Strategy that Works
On the surface, most of the advice Rogers has shared may seem very simplistic. However, it is also worth its weight in gold for all traders.
The biggest takeaway from our interview with this legendary investing guru is that there isn’t a single path to success. He said that traders will need to follow the strategies that work best for them. For example, while Rogers doesn’t have any experience with algorithmic trading, he said that traders that have a knack for it should absolutely use it if it works for them. If they wish to become a trading success story themselves, they should be confident in their own strategy rather than listening to tips from their broker or other financial professionals.
Who is Jim Rogers?
Jim Rogers is a lifelong entrepreneur and trader. He founded his first business at the age of five selling peanuts. In 1973, he partnered with George Soros to found the Quantum Fund, which has become one of the most successful hedge funds in the world.
Rogers has justly earned a reputation as an investing genius. Between 1973 and 1983, the value of the Quantum Fund increased 4,200%, a return nearly 100 times larger than the S&P. The fund returned 3,500% by the time that he retired.
What is your favorite part of Jim Rogers’ story? Share your thoughts below