[MUSIC PLAYING] When I first was in the business, I used to
assume that everybody knew a lot more than I did.
They were educated.
They were experienced and everything.
And so I just assumed they said x, x was probably the case.
It took me a little while, but not too long to figure out they didn't know any more than
I did.
Well, the different answers to that question, I used to work for somebody named Roy Neuberger,
who founded Neuberger Berman back in the '30s.
And Roy Neuberger was an astonishing trader.
He would be sitting there reading the Wall Street Journal, and he would say to me, there's
100,000 shares of IBM on the floor.
Bid 90 and an eighth.
I would say, what the hell was he talking about?
So we'd go to the floor, and sure enough, 100,000 shares of IBM for sale.
I don't know how he did it.
He just had a sense of watching-- that they had the tape in those days, you know?
He just had this unbelievable sense of timing and trading.
He was a remarkable trader.
Now, I'm horrible.
He might have been the best trader I ever saw.
Mike Steinhardt's another great trader, some great, great old traders in the business.
If you're going to be a contrarian investor, which you've been very successful at, and
you've had some epically great calls-- I was in Asia when you started talking about mainland
China, when even lived in Hong Kong, no one thought there was a future for it.
So you've got a record to prove it can be done.
But I think for an awful lot of investors, both professional and people doing it with
their own money, it's incredibly hard to end up with a level of conviction that allows
you to be a contrarian investor.
I mean, how do you develop that level of conviction?
Well, first of all, you just used the term "contrarian."
And by definition, I guess that's right.
I never thought of myself that way.
A contrarian would just say, they're all buying x.
I'm going to sell x.
That's not what I do.
You're an independent investor.
Right.
That's a better way.
I like that.
That's what I'm trying to teach my girls, to think independently, to be curious.
First of all, to be curious, to go and look at that thing that nobody's looking at.
And then to think independently and say, they all say this is terrible, but I know-- it
goes into my brain, and I spin it around, and it comes out that I know this is going
to be good in the end.
When I first was in the business, I used to assume that everybody knew a lot more than
I did.
They were educated.
They have experience in everything.
And so I just assumed if they said x, x was probably the case.
It took me a little while, but not too long to figure out they didn't know any more than
I did.
In fact, they might know less than I did, even though they were experienced, and knowledgeable,
and well-educated.
So I guess that came from experience, I was insecure like everybody else.
But it came from experience that, hey, when I see something like this, it's often right.
Maybe I should do more and more of this.
And I learned that from experience.
Don't think I didn't make plenty of mistakes along the way.
I was just thinking of one of my great mistakes along the way, but that built up my confidence.
Well, for the sake of the-- OK.
Back when it was a time when the market, everybody was bullish, I became bearish.
I put all my money into puts.
And lo and behold, 6 months later, I had tripled my money.
Everybody else-- I mean, it was really a massive bear market, and everybody else was losing
their share.
And on the day of the bottom, I sold my puts.
I mean, bad timing, because it was pure luck.
And I said, OK, I'll wait for the market to rally, and then I'm going to sell short.
I don't want to pay the premium this time at buying the puts.
So I waited for the market to rally, and it did rally.
And I said, 2 months later I waited.
And I sold everything I had in 6 stocks, so short 6 stocks.
Well, 2 months later, I was wiped out.
I'd lost everything.
But the main moral of that story is within 2 years, all 6 of those companies had gone
bankrupt, literally bankrupt.
I mean, I knew what I was doing.
So it's a sizing issue or is it a timing issue?
Well, in that case, it was a timing issue.
I told you I'm the worst trader in the whole world.
I can prove it many, many, many times.
Literally within 2 years, they were all bankrupt, but I went broke first because of my timing.
Jim, how do you know the difference between being early and being wrong?
You teach me that, OK?
I'd like to know.
I'm still trying to learn.
Well, I really don't know either.
I mean, one of the things that has confounded, I think, a lot of us in this 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 that has been unprecedented.
I mean, the only period that I can compare it to would be the late '90s, where just everything
in a certain area went up.
Now, it looks like 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 have been very badly punished.
And even in the case of very good mutual fund investors, people with tremendous track records
like Grantham, Mayo, who've moved to a higher cash position, they've seen massive redemptions
because their own investors don't seem inclined to stick around and see how it plays out.
So both on a personal and a professional level, being early seems to be incredibly painful
and destructive to your business.
It sure can.
If you've got a conviction, what do you do?
Do you wait for a change in momentum?
Do you use moving averages, which is something that I know people have used, and I've used
something myself, which is to wait until the 5 and the 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?
Well, I usually, since I know I'm always early, I make a decision and then wait, and then
just make myself wait a month, 6 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 meet a margin call, which you may have heard from
old-time traders.
If you get a margin call, just don't meet it, because that means something is very seriously
wrong.
Right.
That's your stop loss.
Yeah.
Well, stop losses are usually before a margin call comes.
But I want to go back to something you said.
You're not is experienced I am, obviously, because you're not as old as I am as 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, JP Morgan bought everyday.
Didn't matter.
Avon, Xerox, IBM, they were stocks that always were eternal growth stocks.
And they just kept-- we were short them.
And they just kept going up.
They'd never stop.
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 45 stocks that are above their 50-day moving average, to use technician's kind of
talk.
Everything else is in a downtrend.
So there's a lack of breadth.
And yet the market is making all-time highs.
And so there's a lack of breadth of the market.
Definitely a that of breadth, you know?
What it 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,
drag the average to all-time highs.
Now, that doesn't mean it's not painful if you're short those stocks.
Even if you were-- well, if you short them yesterday, it's OK, because they collapsed
yesterday.
But basically, this has happened many times in market history.
It gets narrower and narrower and narrower, the advance does, until it's just down to
a few names.
And eventually, they crack, too.
That doesn't mean you're going to make it.
No, I told you I shorted 6 stocks once.
They all went bankrupt 2 years later, but I lost everything first.
There's a lack of diversification in having all of your money in 6 shorts, though.
Yeah, but I knew I was right.
OK.
Well, we just started about the time I'd had it, I get that confidence.
I knew I was right, but it was very early in my career.
Well, that's how I learned.
That's how I built my confidence.
Because even though I lost everything, I was right.
And so I learned, OK, it takes more than being right, apropos of this conversation.
It takes a lot more than just being.
Right you have to get your timing right.
You have to get a lot of other stuff.
I always assumed that everybody knew what I knew.
I now know in those cases, nobody knew what I knew, because those stocks went up and up
and up.
There was a company, University Computing.
I shorted this stock at 49.
It went to 96.
I had to cover before that.
But then it went to zero.
Well, I was right.
Big deal.
But that helped build my confidence that I knew what I was doing, but it destroyed my
confidence as far as market time.
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