Jim Rogers saddles up

Jim Rogers is known throughout the investment community as one of the most successful hedge fund managers of his generation and a world traveler who collected his observations in a series of popular books — Investment Biker, Adventure Capitalist, and this year, Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market.

Rogers, 62, attended Yale on scholarship, where he majored in history. After graduating, he moved to Oxford, where he studied politics, economics, and philosophy. Following a stint in the army, he got a job as an assistant analyst on Wall Street in 1968.

He knew virtually nothing about the markets. When asked what attracted him to the field given his liberal arts education, Rogers says, “The world was my passion and here was a place that would pay me to understand the world around me.”

As it turned out, his global interests were well-suited to gauging the markets. In 1973, Rogers and George Soros took over a hedge fund they had been managing and changed its name to Quantum. The fund gained more than 4,000 percent during the 70s and forever cemented the reputations of its two partners.

Rogers “retired” from the hedge fund in 1980 at age 37 to, among other things, manage his personal portfolio, teach finance at Columbia University’s Graduate School of Business, and embark upon the travels that provided the material for his first two books: Investment Biker (originally released in 1994 by Villard; re-released in 2003 by Random House) and Adventure Capitalist (2003, Random House).

Rogers’ new book, Hot Commodities, expands on one of the themes he took up in Adventure Capitalist: That a new commodity bull market is underway and China will be at the center of the 21st century, economically and culturally.

In 1998 developed his own commodity index — the Rogers International Commodity Index (RICI) — and in August of that year launched a commodity index fund that currently manages $800-900 million worldwide. Through March 2005, it had gained 216 percent, while the S&P 500 was up only a little more than 8 percent in the same period.

Rogers spoke with us in March during a morning exercise session about commodities and the global economy.

AT: What does the average stock investor who has never traded commodities need to know about this market?

JR: Commodities are simpler and easier to analyze than stocks. Now, I didn’t say they were easy, I said they were simpler and easier.

If there’s too much copper it’s going to go down; if there’s too little it’s going to go up. Copper doesn’t know who Alan Greenspan is — it doesn’t care.

But when you’re talking about stocks, you have to worry about the stock market, government, management, balance sheets, accounting, environmentalists, unions, regulators, competition. You have to analyze 150 copper companies, or whatever the number is. Most people don’t have the ability to do that.

But you’re not going to buy a copper company unless you’ve figured out whether copper is going to go up or down, anyway. So why not just stop there? Your life should be simpler and easier if you stick with commodities rather than stocks.

Natural gas has gone up 300 percent. Enron was a natural gas company and it went to zero. Companies can go to zero. Commodities cannot go to zero. They can go down, but never to zero. If nothing else, investing in commodities rather than stocks should make your life simpler, easier, and less dangerous.

AT: What about leverage? Most futures traders are inclined to use leverage because it’s available to them. Do you think most individual traders should use it?

JR: Sure, you can use leverage, but that’s where the horror stories come from. Or, you can do it like you buy IBM — no leverage or 50-percent leverage. The Yale study (an analysis of commodity performance referenced in Hot Commodities), which assumed an unleveraged portfolio, showed you would have made 300 percent more investing in commodities than in the underlying stocks.

But if you’re a great stock analyst, and you pick the [right] companies, of course you’re going to make more money. If you can pick the three oil companies out of 500, do it. But in the 70s, a lot of oil stocks did nothing even though the price of oil went up 10 times.

AT: Is the automatic corollary that stocks will underperform during a commodity bull cycle?

JR: Historically that’s always been the case. As far as why that happens, forget the theory. The fact is, it always happens. And I expect bonds to be in a bear market for 15 or 20 years. Even if I’m wrong, though, you’re not going to make any money in bonds at 4 percent, that’s for sure.

Historically, stocks and bonds don’t do well in times like this. I don’t think they will. Stocks are definitely high on any kind of historic basis, bonds are a mess.

AT: What do you think is different between today’s commodity environment and the big boom in the 70s and 80s?

JR: There are a few differences. At that time, for instance, the world had made some gigantic oil discoveries in the 60s — Alaska, the North Sea, Mexico. None of that oil was coming on stream in time. But there was still a gigantic bull market in oil — it went up 10 times — even though huge amounts of oil were there and we knew they were there; it just had to come to market.

Today, though, there have been no great discoveries of oil — we don’t have any oil sitting in the wings waiting to come on stream. We have the Canadian tar sands, but that takes tens of billions of dollars and a long, long time to bring on stream. So this time things should be worse, unless somebody discovers a couple of “elephants” quickly. But otherwise…

Another major difference was that the U.S. was a creditor nation in the 70s and our currency was somewhat sound. Now we’re the world’s largest debtor nation by a factor of many, many times and our currency is not sound. There’s going to be a movement away from the world’s reserve currency, and throughout history during this kind of transition phase people have usually looked for something else — usually hard assets.

AT: You wrote in your book that you really noticed a shift in the markets going on in 1998, and that’s when you started your commodity fund. So what’s your guess as to where we are in the current bull commodity cycle?

JR: The bull market in commodities started in early 1999 — I was off by a few weeks. Historically, the shortest bull market I found lasted 15 years, the longest was 23, the average was 18. So, if history is a guide — this is not a prediction — this bull market will last until somewhere between 2014 and 2022.

I have no idea how long it will last. But I do know that bull markets in commodities last a long, long time because it takes a long time to bring new supply on stream.

AT: What commodities or sectors do you think are looking particularly attractive?

JR: Well, they all do. But as is the case with everything else, you research the things that haven’t moved up very much — sugar, orange juice, cotton, soybeans. This is where the opportunities are, if you ask me.

AT: China played a central role in your book. I think you said you’d be surprised if their currency wasn’t unpegged by 2008. What are the major implications of China keeping their currency pegged or letting it float?

JR: Right now, it means you cannot freely convert your renmimbi into other currencies. That would change, so you could change your renmimbi into any other currency, just as you can the U.S. dollar right now.

Since their currency always trades tied to the U.S. dollar, it means if you own it you can’t make or lose any money compared to the dollar. Once it becomes convertible, it will either go up or down against the U.S. dollar depending on what the market does.

My view is that it will eventually be going up. One effect, of course, of their currency going higher is their goods will cost more. So in theory, other countries will be more competitive because the price of [Chinese] goods will be going higher when translated into U.S. dollars.

It doesn’t always work that way, especially in China’s case, because, for instance, that means the things they buy — such as oil and copper, which are still priced in dollars — will be going down compared to their currency. So it’s not as simple as it looks.

Even if [the renmimbi] goes up, I would remind your readers that the Japanese yen has gone up 400 percent against the U.S. dollar over the past several decades, yet the Japanese still have a balance of trade surplus with the U.S. So it’s not going to have near the effect, certainly in any short period of time, that many people in Washington D.C. hope for.

AT: When you developed your own commodity index, what flaws did you find in the existing ones that you wanted to correct?

JR: I looked at all the indices and I found none of them were any good. The CRB index (Reuters-CRB Futures Price Index) gives orange juice and crude oil the same weighting. What the hell kind of index is that?

The Goldman Sachs Commodity Index is 74 percent energy and it changes wildly. Livestock has been anywhere from 6 percent to 26 percent. Energy has been anywhere from 44 to 75 percent. And Goldman Sachs, bless their hearts, if something goes up, they buy more. Nobody reading your magazine invests that way.

And these indices were all very U.S.-centric. None of them had rice — even though more than half the people in the world eat rice every day. I had no choice but to come up with my own index. I wanted something that’s transparent and constant.

I don’t know if mine’s the best. You can look at it yourself and make your own decision. It may have flaws but it’s sure better than the rest of them.

AT: Do you disseminate data for your commodity index?

JR: It’s on Bloomberg and Reuters everyday. (He pauses to email some charts of the index — see Figures 1 and 2.) The fund was started Aug. 1, 1998. That’s why the charts I’m sending you start on that date — that’s when the fund started with real money.

AT: Were the travels you’ve taken and written about in your books instrumental to your perspective on commodities?

JR: No. Of course, in my travels I saw the various things that were going on, but I pulled the trigger on this fund in August 1998, and I set out on my most recent round-the-world trip at the end of 1998. When I went, I saw that things I expected, were happening, so it just reinforced what I already thought. Seeing the world will help you and teach you some of this, but it’s not just seeing the world that’s made me realize these forces were underway.

AT: You’ve talked about the fact that there are bound to be corrections — “bumps in the road.” Do you see anything, with regard to China being the driving force, that could really upset that apple cart?

JR: I don’t see much to indicate China would have a permanent setback. In the 19th century, the U.S. had 15 depressions and a civil war — and virtually no human rights and horrible corruption. And we did a pretty good job.

I see setbacks like that coming in China (pause). I guess the world could come to an end, but the world coming to an end would be good for commodities — that and selling short. War is good for commodities — it’s not good for anything else.

I guess I could be wrong about China, but I don’t think so. But I would remind you that in the 70s we had a great bull market in commodities even though economies around the world were in the tank. The U.K. was one of the five largest economies in the world and then they went bankrupt — they had to be bailed out by the IMF (International Monetary Fund). But there was still a gigantic bull market in commodities because supply went down faster than demand.

You can have a bull market when there’s no supply. I use lead in the book as a teaching point. Lead lost its two greatest markets — gasoline and paint — and demand dropped horribly. But lead is at an all-time high because supply went down faster. So bad times don’t preclude a bull market if there is no supply on the horizon.

AT: Thinking from a buy-and-hold stock investor’s perspective, it doesn’t seem viable to think about holding a commodity position for years and years. Buying something cheap is one thing, but how do you get out of positions?

JR: I hope it’s the same way you do with stocks. When it’s time to sell something, you sell it. Just because you’re going to be retiring in 20 years doesn’t mean you buy a stock and never sell it for 20 years. If something were going wrong, you’d want to get out.

With every investment, you must do your homework and stay on top of it. The idea that there’s anything you can buy and not worry about for 20 years is some madness they invented on Wall Street. No serious investor would think about that for a minute.

Do your homework. This book was written not only for professionals but for the public as well. As you mentioned, most people don’t know much about commodities, but they’re sure a lot easier — I didn’t say they were easy — than everything else.

That Yale study I mentioned showed that since 1959 you’d make more money in commodities than in stocks, and you would have had a better inflation hedge. All these people who say stocks are always the place to be haven’t even done their homework. That’s hype — not reality.

Twenty-five years ago most people in the world could not spell “mutual funds” and had no idea stock markets even existed. That changed. There are now 40,000 mutual funds worldwide for stocks and bonds. I have found only four worldwide for commodities. This has a long, long way to go.