Unless you’re new to investing, chances are you’ve heard of Jim Rogers. Co-founder of the Quantum Fund, he returned a yearly compounded return of 38% over 11 years (source: Streetstories.com).
He has an air of someone who’s seen it all and done it all. As the sprightly 67-year old father of two relaxes in his chair, we start off the interview with his take on the rally.
Rally Skeptic
The world is flush with stimulus money. And Rogers believes some of it has flowed into the stock market. “Nearly every central bank in the world has pumped out and printed huge amounts of money. Most governments around the world have spent huge amounts of money…the money has to go somewhere, and one of these places is into stocks.”
“This is a very strong rally and a very powerful rally…but I do know there are more problems to come down the road,“ says Jim on the rally. He remains skeptical saying, “(governments) can’t keep doing this forever. I’ve seen powerful rallies like this one and they usually last longer than people expect, including me.”
A strong rally doesn’t mean Jim is staying out of the market. He still holds a position in China, although he isn’t adding to it.
Hold China
“Last October and November the China market collapsed…it looked like panic selling. And you should nearly always buy when there’s panic selling,” says Jim on his position in China.
Since then however, he’s been holding, not adding to his China position. “When something doubles in nine months, I don’t like to jump into a moving train. When you see something that strong, normally something causes a correction if nothing else."
Jim intends to hold for a long time; longer than most investors would consider ‘long term’. “I hope I never sell my Chinese shares. I hope my Chinese shares are held by my children someday. If I’m right about China, in that China is the next great country in the world, I want to own these shares for a hundred years.”
This doesn’t mean Jim is blind to the risks, although he remains strongly bullish on China. One issue that could end the China story is the supply of water. “I’ve been around the world a couple of times and I’ve seen whole societies disappear because the water disappeared. If China is unable to solve its water problem, there’s no China story, it’s the end of the story. They’re working on it. They’re spending billions of dollars trying to solve their water problem. And if nothing else, somebody is going to make a lot of money while they try. But we won’t know for several more years.”
While Jim is holding on to China, one other asset he’s bullish on is commodities. And this time, he’s been buying.
Buy Commodities
Jim’s case for commodities seems airtight. “If the world economy is going to get better, in my view commodities will lead the way out because there are shortages developing of all commodities…if the economy is not getting better, you still want to own commodities because people are printing so much money and in a period of shortages the money is going to somewhere and one of the places will be into commodities to protect themselves against declining paper money.”
Another reason for his bullishness on commodities is his belief that the combined efforts of central banks will result in massive inflation. “Prices are already going up and have been going up for many things. Even the US government that lies about inflation, in their most recent inflationary report…they acknowledge that there’ve been price increases. Overall, energy prices are down and down a lot, therefore they say there’s not much inflation. Go shopping; you’ll see prices are going up.”
The commodities story, Jim believes, still has a long way to go. “I’m not good at market timing, but I do know the bull market for commodities still has a long way to go…everything has to go much much much higher.”
So here’s what Jim has been doing: He’s holding China and buying commodities.
Advice To Investors
As the author of A Gift To My Children: A Father’s Lessons For Life And Investing (published by Wiley), Jim believes that money is an important part of a child’s education. “All children need to learn about money. Everybody needs to understand at least the basics of what to do with money, and if you want to do well, you should learn about investing…unless you’re a monk or a poet or a mystic…money’s going to be significant in everybody’s life.”
To investors, Jim offers this piece of advice: Don’t invest into anything unless you know a lot about what you’re doing. “Jumping around, trying to invest in everything in sight has never led to anybody getting rich. The way you get rich is you find something really good, you focus, you concentrate, you put your eggs in that basket. You watch that basket very carefully. That’s how you get rich. You could go broke, but that’s how you get rich.”
Debt is not always a bad thing. In fact, there are instances where the leveraging power of a loan actually helps put you in a better overall financial position.
The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the less you'll pay in interest over time.
Although it may seem logical to plunk down every available dime to cut your interest payments, it's not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning.
Also, don't pour all your cash into a home if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate, you can always refinance later if rates fall. Use our calculator to determine how much you might save.)
A 20 percent down payment is traditional and may help buyers get the best mortgage deals. Many homebuyers do put down less - as little as 3 percent in some cases. But if you do, you'll end up paying higher monthly mortgage bills because you're borrowing more money, and you will have to pay for primary mortgage insurance (PMI), which protects the lender in the event you default.
For more on financing a home, read Money 101: Buying a home.
When it comes to paying for your children's education, allowing your kids to take loans makes far more sense than liquidating or borrowing against your retirement fund. That's because your kids have plenty of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. What's more, a big 401(k) balance won't count against you if you apply for financial aid since retirement savings are not counted as available assets.
It's also unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.
Your best bet is to save what you can for your kids' educations without compromising your own financial health. Then let your kids borrow what you can't provide, especially if they are eligible for a government-backed Perkins or Stafford loans, which are based on need. Such loans have guaranteed low rates; no interest payments are due until after graduation; and interest paid is tax-deductible under certain circumstances.
For more on educational financing, read Money 101: Saving for College and "Beating the Financial Aid Trap."
Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it off the lot. It also depends on how much cash you have on hand.
If you can pay for the car outright, it makes sense to do so if you plan to keep the car until it dies or for longer than the term of a high-interest car loan or pricey lease. It's also smart to use cash if that money is unlikely to earn more invested than what you would pay in loan interest.
Most people, however, can't afford to put down 100 percent. So the goal is to put down as much as possible without jeopardizing your other financial goals and emergency fund. Typically, you won't be able to get a car loan without putting down at least 10 percent. A loan makes most sense if you want to buy a new car and plan to keep driving it long after your loan payments have stopped.
You may be tempted to use a home equity loan when buying a car because you're likely to get a lower interest rate than you would on an auto loan, and the interest is tax-deductible. But before going this route make sure you can afford the payments. If you default, you could lose your home. And be sure you can pay it off while you still have the car since it's painful to pay for something that has been consigned to the junkyard.
Leasing a car might be your best bet if the following applies: you want a new car every three or four years; you want to avoid a down payment of 10 percent to 20 percent; you don't drive more than the 15,000 miles a year allowed in most leases; and you keep your vehicle in good condition so that you avoid end-of-lease penalties.
Whatever route you choose, shop for the best deals. Remember, it's in the car dealer's best interest to finance at the highest rate possible, so look at what you'll pay overall, not just the monthly amount. If you tell your car dealer you can spend $400 a month, you could end up with a new car for $400 a month based on an uncompetitive interest rate.
Link: http://money.cnn.com/magazines/moneymag/money101/lesson9/index3.htm
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Strangely, buying a car is a good debt. However, in Singapore context, it seemed warped as our cars can only last us for 10 years before our COE expires. Furthermore, I guess our parking fees in the long run may even be more expensive than the car itself! Imagine the season parking fees in Capital Towers is $350 per month!
Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. That's one metric mortgage bankers consider when assessing the creditworthiness of a potential borrower.
It's far too easy to spend more than you can afford, especially when you pay by credit card. The average U.S. household with at least one credit card carries nearly a $10,700 balance, according to CardWeb.com, and personal bankruptcies have hit record highs in recent years.
Of course, avoiding debt at any cost is not smart either if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money you do borrow.
Good debt includes anything you need but can't afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.
Bad debt includes debt you've taken on for things you don't need and can't afford (that trip to Bora Bora, for instance). The worst form of debt is credit-card debt, since it usually carries the highest interest rates.
Sometimes the decision to borrow doesn't hinge on how much cash you have but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense.
Link: http://money.cnn.com/magazines/moneymag/money101/lesson9/index2.htm
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I will put what they claim as a good debt in a short while.
