Jim Rogers needs little introduction.
He’s the man behind the Quantum Fund – one of the most successful hedge funds of all time. Jim is an investing legend, best-selling author and Guinness World Record holder. So when he speaks, smart investors listen.
We’ve spoken to Jim before about his most valuable lessons for investors and his thoughts on the market (see here, here… and here).
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And very recently,, Jim spoke to Real Vision Television about his career… where he sees new opportunities (and dangers) in global markets… and why he wouldn’t want a millennial at the helm during a financial storm.
Here are some of his most interesting insights…
Nothing lasts forever
The U.S. bull market in equities has left some investors with egg on their face. It has caught out even some of the smartest fund managers… those who shorted the most popular and best-performing tech stocks in the market – Facebook, Amazon, Netflix and Google (known as FANG).
Those stocks just keep on rising and show no sign of slowing down… and investors who sold too soon can do nothing but sit and watch (or purchase them again for more). But Jim has seen this all before. He’s lived through more than a few bubbles and bull markets.
And the FANG stocks going gangbusters now have a lot in common with a group of American equities known as the “Nifty 50” back in the 1960s and 1970s. This “eternal growth” group included companies like Coca-Cola, General Electric, IBM, Polaroid and Xerox. It seemed like they would go up forever. But eventually, they cracked.
“Everything else stopped going up but those Nifty 50, which would be something like the FANGs today, or maybe in the late ‘90s [during the dot com bubble], some of the other kinds of stocks. So this has happened before in market history. They eventually crack, there’s no question.”
The lesson here is that nothing lasts forever. The stocks that seem like the ultimate must-own, can-do-no-wrong, nothing-can-stop-them stories… they’re not invincible. And only owning the FANG stocks could lead to big losses in your portfolio when a crash comes. That’s why it’s so important not to put your eggs all in one basket.
Why now is a good time to get “less passive”
Regular readers know that, broadly speaking, we’re big fans of exchange traded funds (ETFs). ETFs are simple, low-cost and over time, passive ETFs that track a major benchmark index, like the S&P 500, tend to outperform most individual investors (and most professional fund managers).
But at a certain point, if too many investors follow the same benchmark, the benchmark becomes the tail that wags the dog.
For example, the continued flood of money into index-tracking funds is having a big impact on overall market liquidity. And it’s also distorting the valuation of stocks that are in the indices.
Just consider… Vanguard Group (one of the world’s largest investment companies) now owns at least a 5 percent stake in 491 stocks in the S&P 500… that’s up from just 116 companies in 2010. And Vanguard now owns almost 7 percent of the entire index, according to the Financial Times.
And since 2009, clients at Bank of America have dumped US$200 billion worth of individual stocks… and bought US$160 billion worth of ETFs instead. ETFs now make up 24 percent of trading in U.S. equities… that’s up from 20 percent back in 2014, the Financial Times reports.
In short, as we’ve written before, passive investing could be undermining basic market principles – that good companies’ share prices should rise in value as their businesses grow, and bad companies’ share prices should go bust.
And not all ETFs are good… but there is an upside too…
Some, like these ETFs in Vietnam, have a terrible record of tracking their benchmark index. Just because an ETF says that it tracks an index, it doesn’t mean that it will deliver on that promise.
And tracking error is just one of the risks that come with investing in ETFs. As the ETF market has grown, providers have developed more exotic – and risky – products to stand out in this increasingly crowded field.
Jim Rogers also sees some risks in ETFs (more on that in a moment). But he says the trend towards ETFs also creates opportunity, as more money going into passive investing means that investors are missing out on stocks that aren’t included in major indexes.
“[ETFs are] simple. They’re easy. It’s magnificent how easy they are. But therein lies the problem… Now there’s a magnificent opportunity for somebody. I’m too lazy. But if somebody can just take the time to focus on the stocks that are not in the ETFs, there must be fabulous opportunities in those stocks because they’re ignored. And some of them have got to be doing very, very well. And nobody’s buying them because only the ETFs buy stocks.”
And owning ETFs when the market eventually crashes could lead to big losses.
“When we have the bear market, a lot of people are going to find that, ‘Oh my God, I own an ETF, and they collapsed. It went down more than anything else.’ And the reason it will go down more than anything else is because that’s what everybody owns,” he says.
As Jim says, most people don’t even care what’s in these ETFs.
“There are plenty of very badly constructed ETFs, but nobody knows what’s in them because it’s so easy to pick up the phone and say, buy the Japanese ETF. They don’t care what’s in it. They don’t know and they’re not going to find out until they’re going to find out eventually when it’s too late.”
Not to give you the wrong impression… ETFs are still a great option for regular investors looking for reliable gains over the long-term. But don’t just follow the crowd. Make sure you know what you’re buying (start by asking yourself these three questions). And keep in mind, only buying ETFs could lead to more risk and mean missing out on the chance of life-changing gains up for grabs in far-flung markets around the world.
Why Jim owns Japanese ETFs
Buying ETFs isn’t popular only with average investors. The Central Bank of Japan has also bought up all the stocks in ETFs. But that’s exactly why Jim owns Japanese ETFs.
“The reason I own them is because I know the Japanese central bank is buying. And I know all the Japanese brokers are buying them. Don’t think I have some great insight here. I’m just telling you.”
Jim says buying Japanese ETFs will work… until it doesn’t.
“It may have stopped yesterday for all I know. I don’t think so. I’m not selling. But I suspect that – I know the Japanese market is going to have a gigantic collapse down the road. Whether it’s next year or the year after I don’t know. Everything works until it works. But even though I’m being a little bit of a greater fool by owning Japanese ETFs, it’s because I know that’s what everybody else is doing.”
The thing to remember when you buy Japanese ETFs, or anything else, it to follow a stop loss strategy. It’s the key to avoiding big losses. And it’s an important strategy for any portfolio.
Try to remember these ideas the next time you invest, they could lead to some big opportunities – and help you avoid some big losses.