When Jim Rogers was in his early 30s, he was invited to dine in a fancy Manhattan restaurant with a bunch of successful investment managers. Since those were the early years of Quantum Fund, a hedge fund co-founded and co-managed by him and George Soros, it was a big deal to hobnob with these fellow wizards. In the throes of male bonding, the host asked each guest to recommend a stock.

The names of various growth stocks were confidently spewed till Rogers named Lockheed Corporation. (The company later merged with Martin Marietta to become Lockheed Martin.) The polite ones raised their eyebrows at this plebe. Bruce Waterfall, one of the few at that time to run a hedge fund, smirked and stage-whispered “Who buys stocks like this?”

Rogers was understandably embarrassed. It was his first dinner with this group of elite investors who got together once a month. And his pick was scorned.

Not for long though. Lockheed appreciated 4,000% from 1973 to 1983 and Rogers made a killing on it.

Way back in October 1973, the Yom Kippur War took place when a coalition of Arab states led by Egypt and Syria launched a surprise attack on Israel. Yom Kippur is the holiest day in Judaism and is a national holiday. Naturally, Israel was caught on the back foot.

Moreover, the war was a shock for the technologically superior Israeli forces. The Soviet-supplied missiles used by the enemy took a heavy toll, particularly the SA-6. The latter was a self-propelled, low-to-medium altitude, surface-to-air missile, known as SAM. According to experts, it would fly out parallel to the desert floor then very accurately pitch up at the target without leaving a smoke trail. It is widely acknowledged that the Israelis suffered heavy losses of aircraft during this war, though the exact number lost to specific SAMs is not clearly documented.

Rogers’ style was not to get preoccupied with what a particular company is going to earn the next few quarters. He would set his sights on how broad social, economic, and political factors would alter the path of an industry. So when it became news that Israel was on the defensive and that some of its military technology was antiquated, a thought struck him.

Israel’s prime supplier of weapons was the U.S. Did that mean that American technology was antiquated as well? If that be the case, would the Pentagon not spend millions to ensure that its hardware was not obsolete considering that the USSR had superior technology?

This thesis held scant appeal to most because the Vietnam war was coming to an end, spending on defense was being curtailed and defense firms were not on solid ground. They were considered pariahs by stock analysts. Rogers was undeterred. He began to keep a special eye on the industry. He travelled to Washington to converse with Pentagon officials and defense contractors across America.

The U.S. Defense Science Board conducted a study of the war and concluded that in any future conflict, American planes would “have a real challenge getting through air defenses.” The board recommended development of a new kind of bomber that would evade the SA-6, by being essentially invisible to its supporting radar.

By mid-1974, the boys at Quantum Fund began scooping up defense stocks, some of which were selling for a dollar or two. The focus was on United Aircraft (now United Technologies Corporation), Northrop and even Lockheed despite being threatened with extinction. Though Lockheed was bleeding profusely, the firm was cutting off a huge money-losing division and was starting to focus on new technologies.

Soros and Rogers knew that all these companies had major contracts that, when renewed, would provide fresh earnings over the years. They also noted that the modern battlefield was fundamentally changing and the new arsenal would be sensors, laser-directed artillery shells and smart bombs (which were guided to their target by laser beams). It would only be a matter of time before defense spending took a dramatic upswing.

They were bang on. President Ronald Reagan initiated a programme to revitalise U.S. defenses. The spending was not to be financed with tax increases but by borrowings and running a budget deficit. As a lesson from the Yom Kippur war, the U.S. began to develop radar stealth technology. The result was the Lockheed F-117, the world’s first stealth aircraft.

The biggest beneficiaries of this development were stock holders of defense firms.

In his book Street Smarts, he notes that in 1980, after a decade in which the S&P 500 rose 47%, the Quantum portfolio was up 4,200%. He referred to that period as the “glorious and exciting years; we had gains every year.”

Besides betting on defense stocks during this period, they shorted the Nifty-Fifty when banks and mutual funds were scrambling for them, even though some stocks were trading at 100x or 200x earnings. (The Nifty Fifty refers to the 50 popular large-cap stocks on the New York Stock Exchange in the 60s and 70s. They were regarded as solid buy-and-hold stocks and are credited with propelling the bull market of the early 1970s.)

They even shorted the pound sterling and gold. Back in the late 70s, geo-political crisis across the globe, including the Russian invasion of Afghanistan and the Iranian hostage crisis, pushed the price of gold to amazing highs. After touching $850/ounce in January 1980 it began to tumble and stayed in the $300-500 range for most of the 80s.

In fact, at a party in the mid-70s, he was asked by the hostess what he did for a living. He told her that he worked on Wall Street which elicited the response “Oh, you must be suffering”. (This was a natural response since the stock market was floundering.) To which he promptly retorted “No, things are great. I’m short.” The hostess did not get it.

Investing is hard work.

He told Financial Times in an interview that as he was not smarter than most, he was willing to work harder.

A trait that held well for him was his willingness to examine conventional wisdom. If everyone thinks one way, it is likely to be wrong. If you can figure out that it is wrong, you are likely to make a lot of money. He spoke about General Motors in the 1960s when a GM analyst went to the board of directors with the message: “The Japanese are coming.” Being the world’s most successful company, they ignored him. Investors who did their homework sold their GM stock – and bought Toyota instead.

He looks for “something” that is very cheap, where a positive change is taking place. Then he does enough homework to make sure he is right. According to the New York Times, he spent 6 years looking for the right home. In 1977, when the real estate market collapsed, he picked up a home on New York’s Riverside Drive for $107,300. Three decades later, he sold it for $15.75 million.

When his bet on Helmerich & Payne, a contract drilling company, paid off, a friend attributed his success to luck. Lucky? If you want to be lucky, do your homework. Rogers invested when business was bad but understood that the fundamentals were right. The due diligence paid off, not luck.

Stay focused.

Invest only in things you know something about. The mistake most people make is that they listen to hot tips, or act on something they read in magazines. Most people know a lot about something, so they should just stick to what they know and buy an investment in that area. That is how you get rich. You don’t get rich investing in things you know nothing about.

In A Gift to my Children he narrates an incident where some smugglers in Namibia, Africa, sold him a diamond “worth” $70,000. Since he picked up on their desperation, he bargained them down to $500. A fabulous deal. When a diamond trader in Tanzania saw it, he told him it was a glass bead. Lesson: You may know the value of diamonds, but you need to be able to tell a real one from a fake.

Invest time. Collect all available information. Research every detail. If you merely dabble in knowledge, you are gambling, not investing.

When you buy shares, you sit and wait. But the world is constantly changing and the stock price will keep jumping. Constantly confirm your research. Are your insights still valid? Remain observant. Continually reevaluate whether your initial decision was correct.

Stay with what you know. Do not jump around. Invest rarely and in a concentrated way. The downside is that if you are not as smart as you think you are, you could lose everything.

Stay grounded.

There’s nothing like a bull run to make people think they are smart. He once remarked how people mistake a bull market for brains.

When you see many people being unrealistic. Stop and make an objective assessment of the supply-and-demand equation. This basic principle will bring you much closer to success. In one of his books, he reminds the reader about the change in supply and demand in silver. It tumbled from $50 in 1980 during its mania to under $4 a couple of decades later.

This entire year, in various media, Rogers has been cautioning investors at large that a market collapse is coming. All big bull markets end in a bubble. All bubbles look the same. There are no rules in bubbles. During a bubble, everyone thinks what is happening is quite rational. And prices will continue to rise. The price of a stock goes up because the price is going up. In an interview with Forbes this year, he quoted Templeton: “the most dangerous words in the investing world are “it is different this time.” It is never different. I am not the first person to figure this out.”

Stay grounded. Don’t get ahead of yourself.


Larissa Fernand is the editor of the Morningstar India website.

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