Friday, August 29, 2014

Jim Rogers on Investing & How The Markets Work

This is how markets work. Something, a stock, land, or some other store of value, will bump along at a stable price. Eventually something changes the supply-demand balance. The price starts going up because people realize, "Hey, they have a new product," or "The railroad is coming through Smithtown." The price goes up  for legitimate and sound reasons.

There comes a time though, when people buy land in Smithtown only because its price is going up. At that point, my mother calls me and says, "I want to buy some acres, " or "I want to buy this stock."

"Why mother?"

"Well, Jim, its tripled over the past year."

"That`s not the way you are supposed to do it," I say. "You don`t buy it because it`s tripled. You buy it before it triples."

But this is what happens. People see the price going up and know that here is the gravy train that is going to make them rich. The newspaper will have stories about Joe and Sally, how they are now rich because they bought all this land or a few shares of stock in the coal mine. The price now goes up because the price is going up.

This stock or these acres become vastly overpriced. The smart guys who bought early, who bought because their family had lived in Smithtown for a hundred years, they start selling. They realize that this is becoming unsound. It turns out it`s not economical to put yet another General Motors factory here, so new people don`t buy land. The demand tapers off.

For sound economic reasons the price starts coming down. Now we have passed the peak. There are now sound economic reasons for manufacturers to put their factories in Taiwan instead of Smithtown. The price of land goes down and goes down - all for sound economic reasons.

Now comes the time when people start selling because the price is going down. People look back and say, "Everybody knows you should not own land in Smithtown. It`s been going down for 5 years."

Everybody now sells because its the only thing to do. Before there was a buying panic, now there`s a selling panic. People scream, "I don`t care if land is cheap in Smithtown and I can have a mansion there for virtually nothing. Everybody knows its a bad place to invest. Get me out!"

Prices collapse. Everybody knows the price is going to nothing. Panic, the crescendo - that`S when you buy because then it`s all over. It will be a while before things start to come back, but come back they will.

Jim Rogers is a bestselling author, financial commentator and successful international investor. Rogers was a co-founder of the Quantum Fund (considered to be the first truly international fund of its kind) and is the creator of the Rogers International Commodities Index (RICI).