Here is an interesting piece from legendary investor Jim Rogers, who is renowned for calling general secular market tops and bottoms, and as well as cycles:
“In 1980, the price of a barrel of oil had risen alarmingly, and long lines of frustrated motorists sat fuming at every petrol pump in the United States. Newspaper articles appeared daily that bemoaned the permanent shortages in non-renewable fuels, and every learned expert on Wall Street and in academia was certain that oil had to rise from $40 to $100.
Interest rates had risen alarmingly and investors were in a panic over high inflation and labour unrest. There was a sense that the US was slipping as a world power and that shortages in all sorts of goods were permanent; indeed, that the world was running out of everything.
True, the supply of oil was smaller than the demand for a while in the 1970s. But with the rise in prices had come the inevitable rise in production. There were more drilling rigs, more money pouring into holes in the ground in the Gulf of Mexico, the North Sea and South America, and more young people deciding to study geology as a career. By the mid-1980s, though, the bottom had dropped out of the oil market and prices collapsed.
Even in 1980, the iron law of supply and demand still held, as common sense suggests it must. If there is more of an item for sale than there are buyers, the price goes down; if there is less, the price goes up. There may be time lags, but it always works like this.
The smart investor learns to listen to the popular press with an ear tuned for panic extremes. At market tops, the tune will run: “This time it’s different from all other times. Trees will continue to grow and grow and grow. Buy yourself a tree and watch it reach 50ft, 100ft, 1,000ft. This is an investment you put money in and forget.”
At bottoms, the song will become a dirge. Prices are severely depressed. Every company with any sense is getting out of the market. It has only a marginal future. Words as “disaster” and “doomed” and “dead” will be used to describe such a market, and the alert investor will hear them clearly without a newsletter to advise him or a call from his stockbroker.
It is an old story. Today, news articles trumpet the stock market is the ideal place to increase assets over the long term. Indeed, the Dow Jones index just now is over 6,000. But, 15 to 20 years ago when it was under 1,000, Business Week ran a cover declaring: “Stocks are dead.”
(Some investors claim they are able to profit by following the opposite tack from Business Week’s covers: they sell when the magazine declares something is a good investment, and buy on the something-is-dead covers.)
In all markets, supply and demand are rising and falling constantly, hurtling from one extreme to the other. To an investor with the right ear and eye, fortunes are waiting to be made.
Is it easy? No. Does it take work? Yes.
How, then, can you time when to buy and when to sell? It is difficult. Note, however, that all large bottoms are alike, whether they be in the wheat, stock or property markets, and that the same is true for tops.
Pick any previous top or bottom, anywhere, any time, from the beginning of time until now. When you study it, the conviction of certainty of all the participants – at the extreme top and the extreme bottom – will be startling.
As well, watch who is going into, and who is getting out of, a business. At bottoms, many who have been in the business for a long, long time will be leaving in droves or “diversifying”.
At tops, those who have little or no experience will crowd in.
As a classic example, US Steel bought Marathon Oil at the top of the oil boom in order to diversify. But it should have stuck to the business it knew and bought mini-mills, which have turned out to be solidly profitable even as oil fell.
As another example: remember all the farmers and labourers who ran west in the gold rush? Often, in earlier stock market tops, many doctors and dentists gave up their practices to enter the financial community.
At the top of the 1980s’ hotel-building boom in China, professors fled the security of the university to work as bellboys. The pay in tourism was so much better and the future so much rosier.
It is learning to listen to the gloom and doom at bottoms and question it, and to the exultation at tops and question this as well, that makes a sharp investor. It does not take esoteric knowledge or an MBA degree or some mystical skill.
Read the newspapers, watch the television news – and think. It did not take a financial genius to see that when US farmers were going broke in the 1980s, and singer Willie Nelson was conducting Farm Aid concerts to raise money for them, that some sort of bottom was establishing itself.
It helps to have a sense of history of the public markets, too, and the library is full of books about their rise and fall, something which is driven by mob psychology. That is, tops and bottoms are creatures of extremes. They rise above all rational expectation and hang there, and they fall farther than common sense suggests.
The smart investor – the one who does not consider himself a financial genius but trains himself to analyze the newspapers and television and to pick tops and bottoms by the extremes in the public’s attitudes – learns to buy fear and panic and to sell greed and hysteria.”
– JIM ROGERS
From: The Book of Investing Wisdom – Edited by Peter Krass