Editor's note: Today's entry in our weeklong series of timeless trading lessons comes from one of the most successful money managers in history. If you want to learn why building cash could be one of the best trades you make, read on...
Thursday, December 26, 2013
"I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime."
Of all the brilliant things Jim Rogers has ever said, I believe this one is head-and-shoulders above the rest.
Rogers is one of the most successful money managers in history. He made so much money investing and trading during the 1970s, he left the conventional side of work to travel and run his own money. You can read more about him in the greatest trading book ever, Market Wizards.
In that short quote above, Rogers nails one of the most important factors to trading and investment success: Don't spend your time and energy chasing mediocre trades and investment opportunities. Only move when the odds are overwhelmingly in your favor.
If you follow his lead, you'll probably end up a very successful trader. If you don't, you'll contribute to the bank accounts of those who do follow his lead.
You see, the average market participant always feels like he has to be "doing something." He chases all kinds of ideas... takes lots of "fliers"... acts on all kinds of magazine articles, CNBC shows, and hot tips from buddies. He's always on his phone or computer checking quotes. He usually has a bunch of stocks in his portfolio that are down big... but are sure to "come back."
Not Jim Rogers.
In all his books, interviews, and articles, Rogers makes it clear he spends long stretches of time without having significant money at work in the market. He waits for extraordinary opportunities, where the odds are so far in his favor, the position is like picking up free money. When he doesn't see any sure things, he simply sits in cash and does nothing.
Now, don't get me wrong. There are few 100%-can't-lose trades and investments in this world. I'm not encouraging you to find trades that carry no risk of loss. I'm encouraging you to find trades where the odds are heavily stacked in your favor.
Find the sorts of "extreme" opportunities I've written about before... where the sentiment toward an asset is shifted to one side... where the valuation is ridiculously expensive or ridiculously cheap... and where the market is moving in the right direction and confirming your thesis. These are the opportunities where you can risk $1 and make $5 or $10.
Only then should you commit a large chunk of capital to an idea.
If you're not seeing any extremes, it's best to fight the natural urge to stay busy and make "this might-could-kinda-work" trades. These trades will just distract you, cause stress, and run up your commission bill.
Most older, rich investors and traders will tell you they made most of their money on five or 10 positions they had tremendous conviction in... where it felt like they were simply picking up free money. They'll tell you the other positions weren't worth the time it took to put them on.
To sum up: Be lazy in the market. Don't feel bad about sitting on a big pile of cash, waiting for low-risk, high-reward trades. It's the idea behind "free money" trading. It's the thinking that built and maintained Jim Rogers' wealth. It can do the same for you.
Find more trading advice from the world's smartest investors in these classic essays:
Jim Rogers and Warren Buffett on How to Manage Your Money
Managing your own money is much simpler than most people think it is. Just ask billionaires who made their money buying and selling stocks, bonds, and real estate. They'll tell you what to do.
The 3 Secrets of Self-Made Billionaire Investors
"If you really want to get rich in stocks, three rules are your foundation."
The Price You Pay – Warren Buffett's Biggest Secret
Not only is paying the right price the most profitable path investors can take... but it "is the one thing you can do as an investor that will give you unshakeable peace of mind."
Big gold-miner fund GDX tops a short list of funds down 50%-plus in 2013.
Utilities (XLU) is the only major sector up less than 10% in 2013.
Aerospace giant Boeing is easily the best-performing stock in the Dow Jones index this year... up 83%, including dividends.
Rough year for the "BRICs"... Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI) funds are all in negative territory in 2013.