Nigel – Catching the Swings – Investor Profile
This article is part of our ‘Guru’ series – investor profiles of those who have succeeded in the markets, with takeaways for the private investor in the UK.
You can find the rest of the series here.
Contents
Nigel
“Nigel” appears in Guy Thomas’ Free Capital.
He hails from the mid-West of America, but after an international career now lives in Hong Kong. He was 56 at the time of the interview.
Nigel is another “geographer”, looking at the overall market and economy rather than the characteristics of specific stocks.
Early career
His father’s engineering firm ran into trouble while Nigel was at college. At the start of his career he sent money home each month, which meant he had to learn to be frugal. This became a habit.
He moved into internal audit, which helped him to develop independent thinking. He began trading using the cash advances the bank gave him before business trips.
He charged expenses to a personal credit card, and used the advance from the next trip to pay it off. This left him with a permanent $2K to invest. He raised more by moving to a smaller apartment.
Nigel became frustrated that his bank would not act contra-cyclically, lending less aggressively when asset values were high.
Cycles
Nigel spent almost 30 years working in shipping finance.In 1986 he wrote a magazine article about cycles in the shipping industry, which he then expanded into a book which sold well.
He suggested that shipping markets could be understood as a combination of short cycles lasting approximately 3-5 years, long cycles lasting approximately 16-24 years, and very long Kondratieff cycles lasting 40-60 years.
- The short cycle is driven by interest rate changes and the US business and political cycle.
- The long cycle is the investment cycle (supply and demand from building and scrapping ships).
- The causes of the Kondratieff cycle – if it exists – are unknown.
A few years later he wrote a similar article about oil, with cycles lasting two years, eight years and 30 years, driven by inventory levels, politics and the investment cycle.
His approach of monitoring and anticipating cycles made him sell a London flat in 2001 to buy gold mining shares, then in 2007 switch to Hong Kong residential property for three years, before selling out once more.
Later career
The articles raised his industry profile and he changed jobs to one with double the salary. He began to trade options but wasn’t successful.
He moved to a commodities boutique and invested in a mining firm that listed on AIM.
This gave him an interest for mining companies, particularly small explorers that might be bought out after a find by larger, more highly rated firms.
Unfortunately the late 1990s were a bear market for miners. Luckily, one of his small miners converted to an internet stock, and Nigel sold out at the end of 1999 for ten-times what he paid.
With market valuations stretched, he took a year out writing plays, but couldn’t get one staged. Working with actors restored his love of frugality.
A frugal lifestyle can be creative and dignified … freedom is like income that cannot be taxed.
Full-time investor
At this point Nigel decided to become a full-time investor. He sold his London flat and bought gold and gold stocks.
He attended conferences and fundraising presentations and invested in a series of miners, at $10K to $100K per investment.
He developed a preference for secondary fundraisings (at a discount) in Canadian-listed stocks, as these usually came with warrants.
He gradually spent less and less time in the UK, and moved to Hong Kong.
Trading style
Nigel believes in over-lapping short-term market cycles, and uses these to time his investments in shipping, mining and property.
Everyone is a genius in a bull market, so find a bull market!
But if cycles are irregular in length, how does an investor profit? Nigel believes in monitoring market sentiment and psychology (he has a psychology degree from Harvard).
What other people are thinking is at least as important as what you are thinking yourself. You want to anticipate how other people’s thinking is going to change before they know it themselves.
The duration of a cycle may change, but the story will be the same.
A market doesn’t peak until the majority is convinced it is going to move higher, and it doesn’t bottom until the majority believes it must go lower.
Nigel thinks that commodities, shares and property prices have become more synchronised in recent years, because of the use of the dollar as a “carry currency”:
When dollar interest rates are low, investors borrow in dollars to invest in other assets, and all other assets tend to rise together, as borrowed funds flood in. When dollar interest rates rise, … all non-dollar assets fall together.
This means that markets swing back and forth from a focus on inflation to deflation.
Bulletin boards
Nigel is a very active bulletin board poster: he has around 30,000 posts on one board alone.
I find it isolating working on my own all day. … Participating on a bulletin board can help with humility.
Nigel developed an interest in alternative energy, and started his own bulletin board in 2006 (www.greenenergyinvestors.com) – surprisingly, this lead offered no clues as to his identity. Unfortunately he had to widen the range of investment topics to make the board viable.
Compared to other UK bulletin boards there is a focus on macro topics, and the membership is more international.
Nigel follows the Austrian school of economics, blaming the 2008 crisis on “mal-investment” and unsustainable consumption. He is against Keynesian demand stimulus.
But he also holds Green views and would like to reduce resource consumption.
Investment rules
- Don’t invest more than 5% of your net worth in one company.
- When the share doubles, sell half (returning your original capital), unless volume is still strong.
- Don’t use leverage (debt, CFDs or spread bets)
- junior miners are volatile anyway and the warrants add upside gearing.
- Don’t use stop-losses – these shares are too illiquid, and market makers try to hit stops for supply.
- Use options to hedge (often around 20% of portfolio value).
- Look for confirmation between markets (eg. shipping rates and shipping shares, oil shares and the oil price)
- divergence often means a reversal is imminent, but it could mean that the lagging market presents opportunities.
Conclusions
It would be hard for most UK private investors to follow Nigel’s path.
Tracking market cycles and macro conditions naturally leads to investing in commodity markets (and commodity stocks) rather than general equities.
But the commitment required to focus on foreign-listed junior exploration stocks – including the monitoring of market sentiment via bulletin boards – will be too much for most people.
- This is definitely an area where a little knowledge is a dangerous thing.
- Big bets on a few conviction trades are needed, and most people will prefer to be diversified.
- And there will be periods where there are no new cycles to follow, and the risk of boredom leading to rash actions would be too great for many.
Perhaps the most practical approach is to approach a commodities portfolio in the same way as a momentum / technical analysis portfolio:
- use spread bets / CFDs / options to exploit trends
- allocate no more than 10% to 20% of net worth to this portfolio
For most people, the rewards (in terms of return and diversification) won’t justify the effort required.
But for the experienced full-time investor with a fairly large portfolio, this is definitely an avenue to explore.
Until next time.
Mike Rawson
Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.
