What makes Jim Rogers a great investor

By Larissa Fernand |  18-12-17

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.

Next: Three guidelines that have helped him be a winner

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