Veteran investor and world traveler Jim Rogers' new book, A Gift to My Children: A Father's Lessons for Life and Investing, will be published by Random House on Apr. 28. BusinessWeek investing reporter David Bogoslaw spoke by telephone with Rogers, who now lives in Singapore with his wife and two young daughters (ages five and one). Here's what he had to say about investing, the financial crisis, and lessons learned.
In your book, you advise people to thoroughly educate themselves about a subject before they ask for advice from reputed experts so that they can truly evaluate the worth of the advice. How practical is that for investors who aren't professionals like yourself?
The people you're describing should not be investing at all, unless they invest in things they know a lot about. If you're an auto mechanic, you'll know much more about your field than anyone on Wall Street ever will. You'll know when new products or processes are coming out. Those people can get extremely rich by just staying with what they know. It could be products that go into cars, like tire companies, or glass companies, rather than [only] auto companies. They shouldn't try to compete with Warren Buffett.
So you reject the advice about diversified portfolios?
Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued [for making bad investment choices for clients]. Henry Ford never diversified, Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket.
You can go broke diversifying. Ask anyone who's diversified in the last three years. They've lost money. Nonprofessionals are always jumping around, thinking they have to do something. If they have a big success, they think they need another one right away. That's when hubris sets in at its worst. That's when people really should go to the beach. It happens to me too.
You believe there is a need for more restrained spending and a higher savings/investing rate in the U.S.—closer to what you observed in China two decades ago. But economists warn that if everyone opts for higher savings at the same time, it will kill consumer spending completely and hamper economic recovery.
You'll never see America save one-third of its annual income [the way the Chinese once did]. Even Japan is down to a 15% savings rate. America should increase its savings rate. Thirty years ago, America was saving 9% or 10% of its income.
The reason we're having this crisis is everyone borrowed too much. The idea that you can solve a period of horrible borrowing and spending with more borrowing and spending is not going to work. We've had the worst credit excesses in world history, mainly in the U.S. You can't end a problem like that with no pain. Somebody's got to suffer.
You've been very vocal in criticizing the government policy responses to the financial crisis. Doesn't the Lehman example show how much harm would have been done if the government had allowed other big financial institutions to fail?
It would be better to let some of them fail now, rather than wait for six or eight of them to happen all at once. The system can recover from bankruptcies. After Lehman went down, the stock market didn't really collapse right away. It happened a month later, but people started blaming it on Lehman in hindsight. We've got to have some pain. Even if AIG (AIG) and Fannie (FNM) and Freddie (FRE) and Lehman all went bankrupt, it cleans out the system.
South Korea went through this in the late 1990s. They didn't have anyone to bail them out, and they had to go through the pain. Sweden did it in the early 1990s, Mexico did it, Russia did it. The list goes on and on. Competent people take over the assets from incompetent people and rebuild from a solid base.
You've spoken a lot about the 21st century belonging to China and the investment opportunities there. As the Chinese middle class grows, do you expect a big change in Chinese savings habits as they become more able to afford consumer goods?
Look at Japan's and Korea's extremely high savings rates. Those have come down as those countries have become more prosperous. China is developing [social] safety nets now. When you have safety nets, there's less reason to have very high savings. That will happen in China as well.
China is maybe one fifth the size of Europe's economy. China can't save the world, no matter what they do. They are investing in their own economy and have huge reserves and huge savings, The World Bank has predicted that in 2020, China will be the world's largest economy. But the World Bank has never been right about anything. It could well happen in the next 10 or 20 years, but on a per capita basis probably not within my lifetime, unless the U.S. really collapses and China really booms.
Do you think the up cycle for commodities has farther to run?
If history is any guide, we have further to go. The only sector of the world economy where the fundamentals are getting better is commodities. Farmers can't get loans for fertilizers [which is constraining crop supply]. It takes 10 years to open a new mine. Stocks peaked in October 2007 and commodities kept going up until July 2008.
If the world economy is going to revive, commodities are going to lead it back up. If the world economy is not going to revive, commodities are still the place to be—especially with governments printing so much money. Look at the 1970s. The world economy was in the tank, but commodities did very well. We have supply constraints. Oil production is declining.
How are you investing in commodities?
I use my indexes [he created the Rogers International Commodity Index in 1998] because my lawyers won't allow me to buy individual commodities because I'm always talking about them in public. Most of my indexed products use futures, Ultimately, you'll be buying futures, even if you buy an ETF or ETN.
Your favorites are agricultural commodities?
The prices historically are still very depressed, compared with most other commodities. I bought all commodities recently, but I probably bought more agriculture than anything else.
Can you share an example of an investing insight your experience on the ground in foreign countries has given you that most economists and top-down strategists miss?
Crossing into Botswana by motorcycle, there was no hassle from guards at the border. It was perfectly efficient and straightforward. I filled out forms and nobody asked me for bribes. In the country there was no black market for the local currency. There were real roads and real hotels and stores with real products in them. When I got to the capital, there were real traffic lights and office buildings. I did more homework and found that Botswana had a huge trade surplus and a balanced budget, compared with many other countries. There was a democracy where they have elections and a stock market. It's been one of the greatest stock markets in the world for the past 20 years.