Commodity Investing

Jim Rogers: Learn Your History… Commodity Producers Could Rule

He told me to abandon business school and move to Argentina or China. This morning, with so many unusual things happening in the commodity markets, I’m starting to think Jim Rogers could be right. While I’m not sure I’d really make it in Shanghai, I do have an appreciation for South American beaches and soccer…

I can’t say I’d be much of a farmer, but if agriculture and alternative energy production end up half as successful as he says they will be, maybe it’s time to pick up more than just a few shares of John Deere stock…*

On Tuesday, we unveiled the first part of a two-part interview with legendary investor Jim Rogers. Rogers is viewed by many as one of the sharpest minds in global finance. In Part One, the author of A Gift to My Daughters explained the primary influences for his recent book, the signals of a potential bubble in the commodities markets, and why the twenty-first century belongs to China.

In Part Two of the Investment U interview, Rogers explains why Wall Street is in trouble, the risks to America’s natural gas advantage, and the other countries that look like winners in the long-term commodities boom…

Jim Rogers: The Investment U Interview – Part Two

Garrett Baldwin: Jim, you obviously follow the energy markets. Do low natural gas prices in the United States give us a real advantage in the manufacturing sector?

Jim Rogers: Remember that many places have low natural gas prices because natural gas is down, compared to oil, for instance. And if shale gas turns out to be real, and there’s lots of it in the United States, can it be harnessed? There are many problems with it right now, but technology’s always improving and there are fortunes to be made. I expect somebody will figure how to extract all that shale gas in the United States someday. Now whether “someday” is two years or 22 years from now I don’t know. But that’s a great ace in the hole for America.

It helps us now, but our problem is much worse than just high-priced energy. We’re the largest debtor in the history of the world. Not the largest debtor in the world, but the largest debtor in the history of the world. So we’ve got serious problems facing us. I hope that the shale gas works. We can become the largest producer of gas in the world. That would drive energy prices down dramatically. But for all that to happen, it’s going to take years, and will that be enough to save America? Well, maybe after we go bankrupt. That could be what will come to the rescue, that and perhaps agriculture.

Maybe America will have a big rally someday.

Garrett Baldwin: Aside from the massive debts, do you see any other risks to that strategic advantage of natural gas production?

Jim Rogers: Oh, sure. We’re overextended geopolitically around the world. We’re overextended militarily. We’ve got troops in 120 different countries. It’s not doing us any good. We’re making enemies around the world. We have a huge education problem, huge healthcare problem. Our kids wind up like 23 or 24 on the international education exams. Our life expectancy is not even in the top 20 in the world.

We have many, many, many serious problems going forward.

Commodity Countries, Clean Tech And a Nuclear Revivial

Garrett Baldwin: With the commodities boom, we’re looking at production of electric cars and wind turbines and other types of clean tech. What are the commodities that you have your eye on in these sectors?

Jim Rogers: I look at all commodities because all commodities are in a bull market. As far as which one will change energy, there are the agricultural products, sugar and corn, and just about anything can be turned into fuel. Now that causes other huge problems. It causes the price of food to skyrocket. It causes great water problems. The benefit is not great, certainly not from a cost-benefit analysis.

Nuclear power is having a setback right now, but that’s not going to last. You’re going to see a revival of nuclear energy, mainly because the world has to.*

Garrett Baldwin: We spoke briefly about Canada [editor’s note: See Part One]. Are there any other countries that look like winners?

Jim Rogers: Well the obvious commodity countries are Canada and Australia. They’ve demonstrated a reasonable rule of law over the decades. New Zealand, likewise. Brazil has [many] commodities and is reasonably well managed, although the new government looks more and more like the old Brazilian governments that everyone needs to worry about. Anybody who’s got a lot of natural resources, [but only] if they’re well managed. Pakistan has a staggering amount of cotton, but they’re not well managed. Burkina Faso has a lot of cotton, but they’re not well managed. The Congo has a lot of raw materials, but they’re not well managed.

I used to have great confidence in Uganda, but like everybody else, power corrupts. So I’m not sure it’s as exciting as it could be. If you can find well-managed countries with lots of natural resources, you’ll do well. Finding the countries with natural resources is very easy. Get out an atlas or just ask, for that matter. But you’ve got to make sure that the management is going to be good management in the future. If you think that [a country like] Uganda is going to become well managed again, certainly by all means [invest].

Zimbabwe has lots of natural resources. It’s been a disaster. It’s more likely to be [well] managed in the future once Mugabe dies and once you have the resulting turmoil. After that turmoil, Zimbabwe might be a great place to invest because it’s been such a disaster for 30 years.*

Garrett Baldwin: What are the other ways to determine how to invest widely in a nation? You touch on this briefly in your book. For example, a country – relatively unknown to investors – that you named in Ultimate Investor’s Road Trip was Mongolia. How do you go about analyzing a country like Mongolia as a potential investment opportunity?

Jim Rogers: Well, I don’t know… You do a lot of reading. [As much as you can] read, anyway. I came from a generation that knows about reading. You have to read, research, do your homework – call it what you will, who knows what the terms will be in our lifetime. But whatever the terms are, you have to read lots of sources. Relying on one source is not terribly good.

Now there are thousands of sources on the internet. You have to find some you can read and verify the accuracy. But whatever you do, read various sources and then synthesize in your own head. I’m sure you’ll be able to find plenty of people who will say the sky is blue, others who will say the sky is purple, the sky doesn’t exist. You’ll find lots of views and you have to synthesize by doing your own homework to see what color the sky really is. Make your own judgments and invest accordingly.

Garrett Baldwin: You recommend in the book that your daughters learn new languages, and you state that it’s important for investors to do research in other languages. You’re pro-Mandarin. Are there any other languages that you think will dominate business in this century?

Jim Rogers: My children and I are focusing on Mandarin and English. My youngest daughter is learning Spanish and Portuguese. If I were going to round it out, I would start with Spanish or Portuguese from there. If you spoke Mandarin, Spanish and English, you could probably deal just about anywhere in the world. Spanish is a romance language and that will help you understand the other romance languages. Clearly you’re not going to be able to go everywhere and do anything, but there are bound to be Chinese speakers or English speakers or Latin-romance language speakers just about everywhere you go.

The Financially Bankrupt United States Tertiary Education Bubble

Garrett Baldwin: We talked earlier about schools, about universities, particularly MBAs. We just had a serious financial crisis and there’s been a lot of blame in the United States that’s been thrown at business schools for following a shareholder [one overly committed to short-term profits and stock owners]. Do you see management education changing in the long term?

Jim Rogers: I said before that one of the bubbles I see in the world is tertiary education in the United States. It’s bankrupt financially and probably other ways besides financially. Business school is basically a waste of time. Most of what you learn is inaccurate and incorrect. Learning things like efficient market theory and some of the other gibberish that they keep putting out and Black Scholes…

All that stuff is totally wrong.

Those poor kids who’ve spent a couple hundred thousand dollars going to business school – not only have they spent a lot of money, but the stuff they learned was wrong. It was inaccurate. Yes, it’s got to change. It’s got to change dramatically.

I certainly was telling students not to go to business school. If you want to spend a couple hundred thousand dollars, I would urge you to go down and short soybeans one day or start your own business. I tell you, you short soybeans a couple of times, you’ll learn more doing that than you could in 10 years at business school.

If you spend your time and money in the real world, you’re probably going to learn a whole lot more than what you would at business school, most of which is wrong.

To give you an idea, in 1958 America graduated 5,000 MBAs a year. In 1958, America was the richest, most powerful country in the world. There wasn’t a number two. Now we produce over 200,000 MBAs per year, and that doesn’t include all the MBAs in other countries. There are tens of thousands in other countries. Everybody else has jumped on this MBA bandwagon.

So MBAs are a dime a dozen at a time when finance is coming under more and more pressure from governments economically, financially and every other way. So MBAs are a terrible waste of time, energy and money. You should take your couple hundred grand and start a business. You’ll learn a whole lot more even if you go bankrupt and lose everything, then you will at business school.

Masters of the Universe… Throughout History

Garrett Baldwin: In the book you state that in the 1960s, General Motors ignored the warning that “the Japanese were coming.” If you looked at the sectors today, is there a warning that you might extend to American companies? Or are we past that point of no return in the globalized economy?

Jim Rogers: Finance. Throughout history, we’ve had long periods when the financial types were masters of the universe. And we’ve had long periods when producers of real goods were in charge. It would be very hard for most of your readers to comprehend that in the 1950s, 60s and 70s, Wall Street and London were total backwaters. Virtually nobody went there or even thought about it as a place to go.

Along came the bull markets in the 80s and 90s. And now there are hundreds of thousands of MBAs cranked out every year. And this is at a time when governments are coming down hard on finance, at a time when there’s staggering debt in the west, staggering amounts of competition with all the MBAs. So finance is going to be a terrible backwater again and the producers of real goods are going to be the places that are in charge.

I tell people frequently not to get an MBA but to become a farmer or a miner or whatever. I’m dead serious about it. People have no concept of history. Nobody bothers with history. Everybody thinks history started the day that they could start watching television or read the newspapers, but that’s not the way the world has ever worked. So finance is under great bubbles. There are great places to avoid going forward. The United States is certainly in decline. The U.K. is going into decline. European countries are in trouble.

After Any Great Success, You Should Be Very Worried…

Garrett Baldwin: I just want to conclude with two quick questions on life and your attitude toward it. One of the little anecdotes at the end of your book, you say always eat something before you go shopping in order to prevent yourself from purchasing things that you don’t want or just to satisfy particular cravings that you have at the time. Is there something that an investor should do similarly before he or she jumps into a particular market?

Jim Rogers: I would say one lesson we all need to learn is that after you’ve had a great success, you really should be very worried. Let’s say you sell and say you’ve made 10 times on your money. You should be extremely worried. You should close the curtains, not read, look at the TV, or anything because that’s when you’re full of hubris, arrogance, confidence. You think, “God, this is something easy,” and you’re desperate to jump around to something new. You should do your very best to avoid making another play until you’ve calmed down a lot. Just wait. It’s a very dangerous time for any investor.

Likewise, if you take a huge loss and there’s a big panic and things are dumped on your head because you’re overextended or wrong for whatever reason, calm down, don’t say, “I’m never gonna invest in stocks again or commodities or whatever.” That’s the time you really should be willing to invest again if you can gather together some capital money. The investments can be terribly emotional. You have to figure out a way to control your emotions and deal with your emotions if you’re going to survive in these markets.

My advice is that, most of the time, most investors should do nothing. They should look out the window or go to the beach. You should wait until you see money lying in the corner and all you have to do is go over and pick it up. That’s how most investors should invest. The problem is we all think we need to jump around all the time and be jumping in and out and that’s not good.

We think we have to have investments. No, we don’t. If I said you could only have 25 investments in your whole lifetime or if there was some way to limit you to 25, you would be extremely careful. You wouldn’t be jumping around doing all sorts of strange things. Patience is what most investors need to learn. You don’t have to be doing things all the time. Most of the time the best thing is to do nothing. You just sit with what you have as an investment and let it ride or sit and wait until you see someone sitting in the corner.

Most of the time – unless you’re a short-term trader and great at it. I’ve known some spectacular short-term traders. But for most investors, unless you’re one of those guys, then you should just do nothing. Do nothing. If you’re an investor, do nothing except re-examine what you have, and if you’re not investing, just continue to look until you find something.

The One Thing You Need to Understand to Become Successful

Garrett Baldwin: I want to conclude with this question because this statement, I think, stood out above everything else in your book. You wrote that you were once a great baseball fan but now you know little of the game. What has life taught you about finding new interests and others that were once of great importance but tapered off in your lifetime?

Jim Rogers: My daughter and I were talking just this morning about how people in my life who I’ve been extremely close to, saw 10 times a day when I was in college for instance, and I haven’t seen them in decades. Bob went one way and I went another. For some reason the next thing you know it’s 25 years later or 40 years later or whatever. You should understand that that’s going to happen. It’s part of life. She was disappointed about one friend of hers she was very close to when she was five. I mean, now she’s seven, so it’s not very significant in her life although she does seem to think it is right now.

It’s going to happen. One of the best things a person can study is history. Everybody – I tell students all the time what should be studied and I tell them to study history and philosophy, which they of course hate. They say, “Oh no, I want to be rich.” I say, “If you want to be rich you should study philosophy because history will teach you that everything is constantly changing.” No matter what it is you know today, it’s going to be totally different in 10 years whether it’s your life, your friend’s, your job – who knows?

But everything that you know is true today. Goodness knows in 15 or 20 years you will have totally forgotten about it. And you pick a year. Look at 1900 and look at the world 10 years later – 15 years later. Pick 1910, 1920 – you pick the year and you’re astonished at how everything that people thought and knew was true in 1920 was totally false by 1930, 1935, 1940. Everything at a personal level, at a professional level, international level, national level, etc. One needs to understand this about everything one is looking at today in your business, in your personal life, in your professional life. That’s one of the most important lessons that people have to learn because the world – and life – is very unstable, even though we all think we have a stable life.

No, we don’t. Everything changes. It has changed and will continue to. The way you become successful is to understand that and capitalize on it. And when you sit here looking at something now, say, “Well, wait a minute.”

For instance: Myanmar. I’m very bullish on Myanmar.* Right now everybody thinks Myanmar’s a disaster. It’s to be avoided. Well I’m convinced that in 20 years, we’re all gonna look back and say, “Oh my God, look at Myanmar.” Or look at North Korea. another place I’m extremely optimistic about. There are places that if you say the word Myanmar to most people, they think you’re unclean. They think something’s wrong with you. But that’s because it’s conventional wisdom.

I’m trying to explain to you that it’s not. It’s going to change. Everything’s going to change.

So prepare yourself and you’ll have great success.

Garrett Baldwin: The book is A Gift to My Children: A Father’s Lessons for Life and Investing. The author, Jim Rogers. Jim, thank you so much for your time.

Jim Rogers: Thank you.

That concludes the two-part Investment U interview with Jim Rogers.

Check back next week when Marc Lichtenfeld interviews Don Luskin, Chief Investment Officer for Trend Macrolytics, on his views of gold and silver, his favorite plays in the market and the future of the U.S. dollar… Until then,

Good investing,

Garrett Baldwin

*Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

Editor’s Note: This two-part conversation with Jim Rogers centers on his experiences both as an investor and as, he defines it, a “citizen of the world.”

You can read Part I here: Jim Rogers: Long Agriculture, Short Bonds and… Soccer?

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