Many investors believe that, with volatility at record lows and valuations at record highs, a major shock is imminent. However, these same investors have been burned by uncooperative markets, as an expected selloff has yet to materialize.
Rogers said he stumbled into his first job on Wall Street, but ended up falling in love with it because it allowed him to “follow the world and know about things.”
He added that, over his investing career, Roger's has learned that he has a tendency for his calls to be early. So now when he makes an investment decision, he waits six months before buying.
SD: How do you know the difference between being early and being wrong? Because -
JR: You teach me that, OK? I'd like to know. I'm still trying to learn.
SD: I really don't know, either. I mean, one of the things that has confounded, I think, all of us in this most recent unprecedented rally - I mean, it's not unprecedented in history, but the sort of things that have gone up and the level of volatility we've had that's been unprecedented. The only period that I can compare it to are the late 90s, where just everything in a certain area went up. Now it was almost-- at least in the States, it's almost everything across the board. And there have been plenty of people who've wanted to short the FANGs, to short some of the tech stocks, to short some of these very expensive blue chips. And they've been very badly punched.
And then even in the face of very good mutual fund investors, people with tremendous track records like Grantham Mayo, who have moved to a higher cash position - they've seen massive reductions, because their own investors don't seem inclined to stick around and see how it plays out. So both on a personal and professional level, being early seems to be incredibly painful and destructive to your business.
JR: Sure can.
SD: So if you've got a conviction, do you wait for a change in momentum? Do you use moving averages, which is something that I know people have been used, and I've used something myself, which is to wait until the 5 and 20-day diverge, and that gives you a signal that momentum's coming out of a trade? Or do you just need to size it to a degree which you can be persistent?
JR: Well, I usually - since I know I'm always early, I make a decision and then wait, and just make myself wait a month, six months, whatever it happens to be. And I'm still too early. I'm still too early nearly always, because I make the decision too soon, I realize. So maybe I better start making the decision later in life. Sometimes, you just have to throw in the towel. Especially on the short side, you have no choice. If they're just racing against you all the time, you can sit there and meet the margin calls all day long, but one of the old adages is, never beat a margin call, which you may have heard from old-time traders. If you've got a margin call, just don't meet it, because that means something is very seriously wrong.
SD: Right, that's your stop loss.
JR: Yeah, well, stop losses are usually before a margin call comes. But I want to go back to something you said. You're not as experienced as I am, obviously, because you're not as old as I am, is what I'm saying. But I remember in the early 70s, there was something called the Nifty 50, and they were 50 stocks that everybody - the JP Morgan bought everyday. Didn't matter. Avon, Xerox, IBM - they were stocks that always were eternal growth stocks.
And they just kept - we would short them, and they just kept going up. They never stopped. Polaroid-- that was another. And they just never stopped going up. Everything else stopped going up but those Nifty 50, which would be something like the FANGs today, or maybe in the late 90s, some of the other kinds of stocks. So this has happened before in market history. They eventually crack, there's no question.
And to today, if you look at the S&P 500, for instance, in the US, I think there are only 40 or 45 stocks that are above their 50-day moving average, to use technician's kind of talk. Everything else is in a downtrend. And yet the market is making all-time highs.
SD: And so there's a lack of breadth in the market.
JR: Definitely that lack of breadth. What is that - over 90% of the stocks are in downtrends. 10% are in uptrends, but they're big companies. And since the S&P is capitalization weighted, those 50 stocks, 40 stocks, whatever it is, dragged the average to all-time highs.
