Episode #197: Rick Rule, “In Resources You Are Either A Contrarian Or You Are Going To Be A Victim”
Guest: Rick Rule is a leading resource investor specializing in mining, energy, water utilities, forest products and agriculture, and has originated and participated in hundreds of debt and equity transactions with private, pre-public and public companies. He is the Founder of Global Resource Investments, President and CEO of Sprott U.S. Holdings, Inc. and a member of the Sprott Inc. Board of Directors.
Date Recorded: 1/8/20
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Summary: In episode 197 we welcome our guest, Rick Rule. Rick and Meb start with Rick’s background in natural resource investing and Rick getting into his outlook for resources and precious metals.
Meb and Rick dive into some of the forces that he sees influencing gold and precious metals prices including negative yielding sovereign bonds, US budget deficits, and potential reversion to the mean for precious metals investing market share.
Rick then covers some interesting statistics Sprott has observed in investor interest in natural resource investing.
The conversation then shifts to commodities and natural resources more broadly. Rick talks oil and uranium followed by some practical thoughts on portfolio implementation.
All this and more in episode 197, including Rick’s most memorable investment.
Links from the Episode:
- 0:40 – Welcome to our guest, Rick Rule
- 2:04 – Look at the start of Rick’s career
- 4:24 – An overview of the natural resource space
- 7:20 – Impact of interest rates on precious metals
- 14:16 – Demographics and sentiment of the precious metal markets
- 19:50 – Correlation with the crypto markets
- 22:34 – Commodities Rick is focused on
- 30:36 – Approach to investing in natural resource companies and common mistakes people make
- 35:38 – Investing in equities related to natural resources
- 39:21 – Advice for implementing a portfolio in natural resource markets
- 48:20 – Best resources for learning about commodity markets
- 48:55 – The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Benjamin Graham)
- 49:21 – Sprott website
- 50:23 – Offer from Rick to review portfolios at email@example.com
- 52:43 – Most memorable investment
- 56:08 – Best way to connect with Rick; com, sprott on YouTube, SprottGlobal.com, firstname.lastname@example.org
Transcript of Episode 197:
Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Hey, hey, podcast listeners, we got another great show for you today. Our guest is a legend of the resource investing space, where he specialises in mining, energy, water utilities, forest products, and agriculture. He’s originated and participated in hundreds of debt in equity transactions with private and public companies with decades of investing experience. He’s the founder of Global Resource Investments, president and CEO of Sprott U.S. Holdings, and a member of the Sprott, Inc. board of directors. In today’s episode, we discuss natural resource investing and the outlook for precious metals. We cover some of the macro factors that have influenced prices historically and the case for why metals appear attractive in today’s environment. Make sure you stay tuned to hear some of the thoughts about the best practices in portfolio implementation and what to think about in getting involved in this asset class. Do not miss. Make sure you listen to the end where our guest makes the incredible offer to review your own personal natural resource portfolio, make some comments, and even rate your holdings all for free. Please enjoy this episode with Rick Rule. Rick Rule, welcome to the show.
Rick: A pleasure. Thank you for having me, sir.
Meb: I’m so excited and honoured to have you here as a guest in the beginning of 2020, dawn of a new decade, which is great. And I’ve known you for a while, and you started your career in a similar way that I started mine, but in a different world. We both started during a romping bull market. In my case, it was in biotech stocks and internet stocks in the ’90s in the U.S. In your case, it’s a little different world, natural resources. You wanna give us a window into your beginnings?
Rick: Sure. I started in the early part of the decade of the ’70s, which was, of course, a decade that was probably the easiest era in modern history to be a natural resource investor. Over the course of that decade, the gold price went from an admittedly price-controlled $35 an ounce to $850 an ounce. The copper price went from about 25 cents or 30 cents a pound to a buck and a half a pound. The oil price went from $3 to $30. It was truly an amazing time to be in the natural resource-based businesses. And it was during that period of time that I learned, unfortunately, two important lessons. The first is that markets work, and the boom of the 1970s gave way to an epic bust in the 1980s, and I learned all about cyclicality. The second lesson I learned is one that, unfortunately, many young men have to learn, and that’s not to confuse a bull market with brains. By the end of the 1970s, I sort of thought I was God’s gift to investing. And when the commodity prices fell in the early part of the decade of the ’80s, I learned that that wasn’t the case. It was an interesting way to start one’s career.
Meb: It’s so funny how history rhymes. Listening to you describe this could just substitute out the industries. And time is, you know, my exact same experience, where, really, coming of age investing during the internet and biotech bubble, thought I was the best trader on the planet, the next George Soros. Fast-forward a year to I’m eating mustard sandwiches for a year because I imploded all my money, you know, investing all these. For many of us and I think it’s probably the best lesson to learn certainly when you’re young and don’t have a lot of money, because you never wanna go through that again. Man, physically painful. All right, so we haven’t done a whole lot on natural resources on this podcast. So, why don’t you give us a lay of the land? You’ve been through some various cycles. As we turn the page on 2019 into 2020, what’s the world look like today? It’s been a bit of a fallow period for a lot of parts of this sector over the past number of years.
Rick: I think it’s important to note, first of all, that there isn’t necessarily a common theme across natural resources investments. The market, if you will, really consists of a whole bunch of different markets, some of which are related. But I think it’s a mistake to expect them necessarily to move broadly in tandem. That said, I think for reasons that we can discuss later in the interview, that the wind is in the sails of precious metals investing, both with regards to the metals, which, of course, performed fairly well last year, and the equities. I would suggest that the broader outlook for natural resources is mixed, attractive in the sense that many commodities are priced below the total cost of production. If your definition of the total cost of production includes the cost of capital for the producer, which I believe it should, and that’s, of course, bullish. But the second factor is, and I’m not an economist, for sure, we’ve been 10 years in an economic recovery, and my own experience in investing tells me that an economic recovery that’s gone on for 10 years is probably long of tooth particularly if you believe that some portion of the reason for the recovery has to do with unusually generous, some would say artificial, credit conditions. So, I think in a very broad sense, the outlook for resources this decade is certainly better than last decade for precious metals in particular. I think the outlook in 2020, 2021 is probably very, very strong. For the rest of the resource-based businesses, I think investing in them depends on the commodity and also on the individual investor or advisor’s own economic outlook.
Meb: The nice thing about listening to Rick over the years, listeners, is that when you talk to a lot of people on whatever their investment strategy or asset class is you may have a gold bug who’s always bullish on gold or, you know, the guy who loves U.S. stocks no matter what. But you don’t necessarily have that. Having known you for a long time, it’s refreshing to hear a little more nuance views. So, we’ll stick on precious metals here for a little bit. It seems one of the big macro influences that has driven gold in the past, is where interest rates are relative to inflation, so what we’d call real interest rates. And this has certainly been a surprise, I think, to a lot of investors and economists over this past cycle, where you have a large fraction of the world that has negative-yielding sovereigns. Maybe talk to us a little bit about how that may have any effect or none or plan to what’s going on with the attractiveness of gold and silver.
Rick: Well, I think you nailed at least half of the precious metals theme. As we speak today, of course, the 8th of January, gold has had a little bit of a move on geopolitical events. At least, that has gotten the credit for gold’s move. My own experience teaches me that price recoveries in precious metals that are due to geopolitical events are very, very, very shortlived. In truth, in my career, the most important determinant in precious metals prices has been global investors’ faith or lack of faith in fiat currencies and in sovereign debt, particularly U.S. dollars and U.S.-dollar-denominated debt. And I would suggest that the current strength in the U.S. dollar is more due to the weakness of its competitors than a real fundamental strength in the U.S. economy. Certainly, if you think about the avoided cost of owning precious metals, that is the yield that you get by parking money in savings instruments, particularly gilts, sovereign credits, seven or eight years ago, that was a real concern to a gold holder. These days, depending on the currency that you’re holding the sovereign debt in, with negative real or negative nominal interest rates, that concern goes away. My friend, Jim Grant, describes sovereign debt as return for a risk and calls gold the good, honest zero. So, in the sense that sovereign debt doesn’t provide the yield that it once did and also the related case that the avoided cost of owning gold goes away, gold becomes more attractive.
But the other concern is less a concern with yield than it is with credit quality. We tend to neglect in the United States that our unbalanced sheet liabilities at the federal level exceed $22 trillion. The net number, of course, is less, only $16 trillion. And the off-balance sheet liabilities, I’m 66, so things like me, social security, Medicare, those numbers, according to the Congressional Budget Office, are about $100 trillion. So, if you look just at the federal level, not of a state level or the local level, you’re talking about $120 trillion in recourse liabilities. We’re servicing this debt with the national income taxes and fees less expenses. The problem is that the income stream is -2 to the tune this year of about $1.4 trillion. U.S. dollar investors are beginning to become concerned about the probability of adding a column of negative numbers that is budget deficits and coming up with a positive sum to satisfy that debt. And I think that that is really one of the reasons why precious metals are beginning to do well, a lack of viable alternatives. Of course, there is fear, too, among investors, fear that the recovery that we are in the midst of is one that’s driven by liquidity rather than solvency. Experience teaches me that liquidity and solvency are very, very different words.
And, finally, I think one factor with regards to both precious metals and precious metals equities is that precious metals and precious metals equities as a class are alleged to comprise about one-half of 1% of the savings and investment matrix of private parties in the United States. That is their market share is less than one-half of 1% of total savings and investment assets. The market share of these same instruments in 1991 approached 8% and the three-decade mean has been between 1.5% and 2%. So, if we take the view that given concerns about the U.S. economy, and in particular the balance sheet and the income statement of our government, and combine that with low interest rates, I’m not suggesting that the market share of precious metals and precious-metals-related assets would approach its 1981 high. I’m just suggesting that a reversion to mean is not unlikely. And were a reversion to mean to occur, then demand for precious metals and precious metals equities would increase by three or four-fold, which is…it’s an interesting possibility that I actually believe is a probability.
Meb: As you look back in history, I mean, this kind of environment we’ve been in of low inflation, low interest rates, like you mentioned, it’s odd to see the U.S. is actually one of the higher-yielding sovereigns out there. If you look at all the countries with similar interest rates, it’s almost universally emerging markets. But contrast to that, when you were cutting your teeth, recently passed away Fed Chairman Volcker trying to tame inflation interest rates in the double digits, you have a whole generation of younger people who’ve really never experienced inflation certainly rising or even higher inflation that’s even moderate. And it’ll be interesting to see how sort of that demographic starts to think about this.
One of the questions I wanted to ask you, you probably have more lines in the water of sentiment of what’s going on in precious metals, we’ll keep the focus there for now, more than anything, tends to be a market where you go through these periods of desperation as well as mania on the other end. And so, two parts to this question, one is where do you feel the finger on sentiment but also with regards to demographics. Because when I think of gold, I traditionally think of the older generation who maybe experienced these inflationary times and understood the role that gold may have played and even their parents’ generation back when we used to have a gold standard, etc. How do you feel the younger generation, whether it’s the millennials, gen whatever, you know, the 20, the 30-year-olds, even 40-year-olds, do they have a different view on that than maybe an older cadre, or is it more nuance in that? So, two parts, what’s the sentiment like, and then, is there a difference in the way people view it based on their age?
Rick: I’ll give you three answers to that. The sentiment around what I laughingly call the hard money constituency is pretty bullish. Now, in fairness, the recovery in gold prices has helped and asking gold bugs whether or not they believe in gold is sort of like asking an evangelical congregation in church whether they believe in God. They tend to be accepted the very worst of times a pretty loyal following. What has been interesting for Sprott in the last year and a half is the amount of interest that we have generated and frankly the amount of money that we have raised from generalist institutional investors both in the United States and abroad. University endowments, pension funds, the idea that precious metals in particular and precious metals equities are an important part and an oversold part of a balanced portfolio is something that we worked five or six years in getting across to institutional clients. And beginning of that 18 months ago, we began to make very substantial inroads. So, at least among institutional investors, both in the United States and in other parts of the world, there is a real newfound interest in precious metals, I think, as a consequence of their nervousness about other asset classes that they think are overbought or, in some other way, risky.
The final part of your question, of course, has to do with broad popular interest in precious metals and in the demographics that are interested in precious metals. We here at Sprott U.S. Holdings looked at the inbound retail inquiries that we got in the final 3 months of 2019. Approximately 2,000 people contacted us, which is an interesting statistic in and of itself. Interest was high. What we found was very interesting. One thing that we found was that 40% of the people who contacted Sprott were outside the U.S., and for that matter, mostly outside Canada. The second thing we found, and I think this is a consequence of doing interviews like this, which are posted online, is that about 65% of the respondees were what most investment advisors would classify as younger investors, which is to say, sub 40. The joke about the gold investor is that the investment class is dying literally, meaning that they are people who came in to the sector already having some money in the 1970s. But this new demographic is very much younger, under 40. The most interesting thing for me personally is that more than 30% of the inquiries that we fielded were female. We have traditionally not seen women interested, as interested in any investment class in the 40 years that I had been in the investment business and certainly not seen female investors interested in natural resources and precious metals.
So, the fact that there is broad-spread interest particularly in precious metal rather than broadly dispersed across resource-based businesses that a lot of this interest is global, that is to say non-U.S., the two-thirds are what would classically be classified as younger investors and that one-third is female suggests that interest in precious metals is broadening in demographics that we haven’t seen interested in precious metals at least as a U.S. investment provider ever.
Meb: That’s fascinating. I wonder how much, and just spitballing here, I wonder how much of that Venn diagram of the younger cohort, in particular female, which traditionally in finance, in general…I mean, I think our podcast is like 90% male, same with my Twitter, which is so sad and depressing. But how much of that Venn diagram…I wonder if that interest is sparked or generated by the crossover of interest in the cryptocurrency digital asset wave? Do you think there is some correlation there or totally unrelated?
Rick: No. I think there is some correlation. I think the crypto narrative had a lot to do with questioning the fiat narrative. And I think that a lot of younger investors and speculators got interested in the concept of currencies as mediums of exchange and stores of value and came to understand that precious metals probably fulfilled that role in some ways better than crypto in the sense that crypto is, like fiat, a promise to pay, whereas at least physical precious metals represent payment in and of themselves.
The second thing that is of interest to me and would have made sense or does make sense but I hadn’t thought about before is that in terms of the younger female audience, the easiest subset of that to identify is South Asian females, Pakistani, Indian, Bengali, or Sri Lankan, commonly employed in the technology business, young women with a cultural predisposition to precious metals as a consequence of their South Asian upbringing, a highly educated group of young women with great access to information. I’ve interviewed several of these young women since I didn’t know how I reached them. I was interested in reaching more of them. And I heard a similar story, women in their 20s with technical degrees and things like engineering or programming, very high income, between $150,000 and $250,000 a year, with a cultural predilection to save. Certainly, there is a broader interest among young women in precious metals, too. But this South Asian cohort was something that I had not seen before and something which interests me personally.
Meb: That’s great insight. Before we hop on over to the equity side of the business, are there any other commodities that you pay particular attention to? I’ve heard you talk just about everyone in the past. I’ll let you take your pick, one, two, three, as many as you wanna talk about, but whether it’s oil, platinum, palladium, copper, anything, uranium, anything else on your mind or that you think is particularly interesting or scary exciting beginning of 2020.
Rick: Well, let me talk thematically. I like places that other people are bored with or preferably that other people hate. So I’m naturally drawn, as a consequence of that, to the uranium market for reasons that we’ll talk about. I’m not suggesting, pardon the pun, uranium is gonna explode anytime soon, but it’s certainly a commodity that brings out the contrarian in me, because people hate it. They’re not merely bored by it. I have also made a lot of money over the last 30 years in the water business. It’s a very, very, very boring business, and it’s very difficult to invest in. Taking liberty with one more bad pun, the problem with the water market is it’s illiquid. But it is a sector that has served me well. Finally, I am in the process right now of beginning to divest of a portfolio of passive investments in very high-quality multi-family housing investments that I made about 30 years ago. And I’m placing the money that I’m recovering from those investments in passive investments in very, very high-quality agricultural land in the upper Midwest of the United States.
So, those are areas that attract me. Thematically, what I tend to look for is a commodity that is necessary to sustain the lifestyle that we live and sort of for humanity so that ongoing demand is fairly assured for it, but a commodity that is depressed enough in price that the selling price globally is less than the industry average cost of production, that is to say an industry that is in the process of liquidation where mankind cannot afford to see it liquidated. Because natural resource businesses are so capital intensive and so cyclical, markets work in predictable albeit delayed fashion. And so, you could have a circumstance where a commodity that is absolutely necessary to the way we live is priced below the cost of production. When that occurs, there are only two possible outcomes. Either the price goes up or the commodity becomes unavailable.
So, as an example, two and a half or three years ago, the price of oil was about 40 USD per barrel. Now, the International Energy Agency, who I suspect gets it close, nobody gets it right, suggests that the fully-loaded cost to produce a barrel of oil is about 60 USD per barrel. It’s been coming down with low interest rates, and the technological advance is particularly here in the United States. But at $40 a barrel, that means that the industry worldwide was losing about $20 a barrel and doing it a hundred million times a day, which is to say losing between $1.5 billion and $2 billion a day. That becomes fairly boring. And at some point in time, sustaining capital investments aren’t made, new investments aren’t made, because the industry is losing and not producing what it does, doesn’t wanna grow their loses. In that circumstance, your thought as an investor has to be like this, “Do I believe that five years from now when I go to my garage and turn the key to the right, the car starts?” Because if the answer to that is yes, then you believe that the price of oil is gonna go up. Naysayers, of course, would say, “Well, what about if you have an electric car?” And I would only point out that the electric vehicle share of the gross vehicular market worldwide is fairly insignificant.
So, I look for commodities that are necessary to the way we live, where the selling price of the commodity is less than the cost of production. That leaves me with an investing scenario where the questions that I ask myself is, “When does it recover?” It’s not an “if” question, it’s a “when” question, and I love those. I believe myself, uranium is a “when” question. I can’t answer the “when” question. But I believe that you have a commodity there where the global cost of production is above $50 a pound, probably closer to $60, and where the product sells at least in the spot market for $27 a pound. Although we all love to hate uranium, we all like the lights to go on. And uranium, even in rich markets or supposedly rich markets like the United States, which could afford alternatives, still rely on nuclear power for 15% of our baseload nationwide. If you believe that in the United States, five years from now or six years from now, when you hit the switch that the lights are gonna go on, you believe in high uranium prices. It’s really that simple. Is it going to happen in 2020? I don’t know. I’m not sure. But I’ve learned to love asking myself questions where the answer begins with when, not if.
Meb: Yeah. You touch on a lot there. I was laughing in the beginning, because we have some farmland in Western Kansas, and it’s been somewhat of a…when you talked about…I forgot the way you said it earlier, but return free risk. The prices of wheat and corn and everything else haven’t been so low in the last few years. It’s like investing in treasuries with a lot more headache, but…
Rick: That’s precisely why I like it.
Meb: Yeah. Well, I got the contrarian bent, too. And so, we’ve done some quant studies over the years that look at asset classes and industries, particularly when they’re down 60%, 80%, 90%, and also sort of fun…another way to look at it is down multiple years in a row, and rarely do you have the big asset classes, we’re talking U.S. stocks or bonds, that go down more than two or three years in a row. But in the industries and in commodities, you certainly can have a really long stretch. And so today that’s a lot of the ag space. But over the past handful of years, we did an article where a few years ago it was asking for coal in their Christmas stocking coal stocks because they have been down multiple years in a row. And the uranium, it just…stocks continue. Difference between the…of course, they’re related. But the price in uranium stocks continue to hit lows, you know. Certainly, on the timing side, we could channel our buddy, Steve Sugar, and say, “[inaudible 00:30:27] uptrend as a good place to be. But, man, a lot of those places are totally bombed out, some down 80%, 90%, but certainly, some interesting spots.
That may be a good segue to talking a little bit about the difference in the commodities themselves and the prices and the natural resource companies. And you guys do a lot… You’ve been doing this a long time. And if there was a single area of the market that I would probably be as a newbie, the least inclined to get involved with because of the hurdle of knowledge but also so many, I think, beginner mistakes, it would be the natural resource market. Talk to us a little bit about your approach and the right approach to investing in natural resource companies, some of the common mistakes that both retail and institutions make, and then your general thoughts there.
Rick: The first thing to understand about resource businesses is the idea that I led off with, which is that they are cyclical and capital intensive. I ask people if they’re considering natural resources to always remember and attempt to employ the phrase that in resources you are either a contrarian or you are going to be a victim. These things get way, way, way oversold, because they’re so capital intensive. If you have $3 billion invested in the copper mine and the copper price goes from $3.50 to $3 a pound, you still sell it, because you need to generate cash. If it goes to $2.50 a pound, you sell it anyway, because you need to generate cash. If it goes to $1.50 a pound, you keep trying to sell copper to win the last-man-standing contest, to stay open when your competitors have to close so that you participate in the rebound. So, these things become way, way, way oversold. And ironically, on an industry basis, when EB to enterprise value appears to be at its worst, that is when the industry as a whole is selling at a very high multiple to cash flow, it’s happening because cash flows are constrained. So, rather than pay attention as a normal value investor would to enterprise value to EBIT, what you have to pay attention to is the cost structure of the company within the industry and then the industry’s cost structure relative to the selling price of the commodity.
Conversely, when the commodity markets recover, the prices go much higher than you would expect in a normal business, because the business is so capital intensive, because the permitting and exploration lead times are so long, that the market doesn’t respond as efficiently to pricing signals as it does in other businesses. As an example, if the market-clearing price in oil is at $60 a barrel but the oil industry has underinvested in sustaining capital investments for 2 or 3 years, the price of oil can easily go through $60 to $75 or $80 before correcting. At that point in time, industry cash flows are gigantic and the EBIT enterprise values can be extremely low when the industry feels cheap from a quantitative point of view, which is often very expensive from a qualitative point of view and vice versa.
The second thing I would say is that participating in the business, I suspect, like any other class of securities, becomes substantially more nuanced. The smaller the market capitalisation, both the risks and the reward get much, much greater as you come down market. And in addition, like other industries, the distribution of information becomes much less efficient. If you care about resource businesses and you’re focused, as an example, say, on Barrick in the gold space, or BHP in the mining space, or Exxon in the oil and gas space, there are probably 50 or 60 cell site analysts that have reasonable access to information and are incented to distribute that information. But if you come in the sub-billion-dollar market cap space, ironically, particularly for solvent companies that won’t have to raise money and pay fees to investment banks, the research coverage and research distribution particularly on the sell side is often nonexistent, and where it does exist or often exists as, if you will, cheerleaders for investment banks rather than as independent sources of information.
Meb: So, if someone’s interested in getting involved in an allocation in natural resource equity world, what’s your general advice to them? Is it something you say, “Look, you either gotta be a total expert or a higher one, or just index it?” Do you say, “Stick to the majors,” or say “Hey, here’s some ideas to follow and just go all in?” Because I know a lot of people that initially get attracted to this sector, get attracted because they wanna speculate and find the next exploration company that’s gonna do 100 bag or having been involved in thousands, tens of thousands of investors over the years. What’s the general advice and specific?
Rick: I think most investors who wanna have a life that is not devote substantial amounts of their time and energy to the resource space should probably construct a portfolio of 10 or 12 or so of the largest and best integrated natural resource businesses in the world and stop. I think that they should probably, if they are disciplined enough, focus on out-of-favour sectors or at least overweight out-of-favour sectors. The idea, as an example, that you would do yourself a timing favour by buying Chevron or Exxon during a period of time when geopolitical tensions are threatening to shut the Straits of Hormuz, probably not a good technique. Conversely, points a time when “The Economist” magazine forecasts the end of the oil business, now that’s probably a very good time to do it. I’m becoming, for those investors, less enamoured of ETFs, too. Although the ETF is a one-size-fits-all vehicle that allows you to capture market beta because it is market beta, too often, the ETFs are conglomerations of good and bad companies. And my suspicion is that a judicious investor, rather than paying for someone to construct a 40-company index that almost, by definition, has 25 lousy companies in it, that investor who sought to buy the 4 or 5 best companies in the sector and simply hold them for 5 or 6 years or until that sector had returned to favour, my suspicion is that most investors would be better off doing that. I am not suggesting that your listeners don’t speculate. All of the money that I now use to invest prudently I got by speculating, in some cases wildly. It’s just that when you speculate, in addition to using your treasure, that is your capital, you have to use your time. And for many speculators who get caught up in the natural resources and particularly the precious metals narrative, the adherence to the narrative becomes so strong that those same investors don’t spend as much time understanding individual issues and the nuances of the companies that they are invested in as they should.
Meb: You touched on something I think is important, we talk a lot about it here, that I think is a major dislocation not just in natural resources but in almost all of investing, where you have so many people that are attracted to an investment and they say they have a long-time horizon, and in reality, it’s like weeks in quarters, I mean, maybe, maybe 12 months. So, you mentioned five to six years. And I think that is really hard even for professionals. I mean, we’ve seen study after study after study that institutions consistently totally get this backwards, too, where they fire the guys with the worst three-year track record and hire the guys with the best and should’ve just stuck with them. Talk to me a little bit about how any insights into tips, hacks, suggestions for holding period, then also under that same umbrella, how to think about it in terms of a portfolio. So, let’s say you have the blessing of a stock that goes boom. It doubles. It triples. It’s a 5X. It’s a 10X that now is most of your portfolio. What do you do about it or most of your natural resource allocation? How do you kinda think about the actual practical implementation once you have a portfolio?
Rick: You’ve asked a lot of questions there.
Meb: It’s the number one worst thing to do as an interviewer, but it follows my train of thought in general conversations, which is to mash your buns in together. But the simple question is practically what sort of advice can you give on real-world implementation of putting this together?
Rick: Implementation is always a challenge. Mike Tyson famously said, “Everybody has a plan till he hit him in their face.” And I think that happens to speculators and investors. They make a plan. Their life or circumstances change. They forget why they made the plan, and they alter the plan. As to time horizons, most investors have a time preference that’s unrealistic. As a speculator, as an example, speculators make their money by trying to predict the outcome of unanswered questions, answering and understanding the outcome of unanswered questions. In technology, that might be, “Is this microbe efficacious for this biotechnology use in software?” It might be, “Will this algorithm solve a problem, an exploration?” It might be, “Does that surface expression turn into a copper or a gold or body?” But the point is that making money in speculation really involves answering some unanswered question. And in order to make the speculation intelligently, you have to have some sense of, A, the probability of the yes answer, but, B, the length of time that will be required to get that yes answer. Most speculators don’t do it that way. Most speculators have a theorem that I’m afraid goes, “Got a hunch, bet a bunch.” And the consequence of that is that their time preference becomes their time spectrum, which is very, very unfortunate. It is ironic that at age 66, while I now have less time on Earth that I had when I was younger, I always think in 4 or 5 or 6-year terms.
We discussed earlier in this interview the fact that I’m exiting some passive investments in multifamily residential. Those investments were made in ’90 and ’91 and ’92. And I suspect that the investments that I’m making now in grain and bean land in the upper Midwest will be investments that I will hold for at least 10 years. So, let me say that in terms of time preference. I think it’s important when an investor makes an investment or for that matter a speculation that they be honest with themselves and probably write down the reasons why they strapped on the position, what their goals are for that decision, what the unanswered question is if they’re speculators, what will cause them to sell the stock. Basic business plan, if you will. In my life in speculation, always tried to ask myself, “What’s the unanswered question? What will cause the value of this company to increase and hence hopefully the stock price to rise? What will be my estimate, my approximate estimate, because you’ll never get it right, as to what the market response to a yes question will be? What are my three biggest risks, and what should I be looking for for signs that those risks are manifesting themselves in the investment? And at what point in time will I declare that investment a success then sell it and ride on?”
Sometimes, frankly, in natural resources bull markets, particularly when people are interested in exploration stocks, I might buy a stock for a dollar based on the expected outcome of some exploration proposal. And the market will be excited enough about the potential of the exploration that the stock will get bid to the price that I thought it might get after a successful effort. In other words, my dreams come true before the question has been answered. In those circumstances, I will always sell stock at least enough to get my remaining position for free but very often the whole position. Similarly, in speculation, if I buy a stock with an expected outcome and my early warning system, that is the news events that I monitor to give me some sense that my speculation will be unsuccessful, if they start to flash, what that means is that my reason to own the stock has gone away and the stock must go away. Too many speculators buy a stock at a dollar, say. The stock falls to 60 cents, and they say, “Well, I’m gonna sell it when it goes back to a dollar.” The problem with that thesis is the stock has no reason to go back to a dollar. Best to recover 60 cents than to see the stock go to 0 in my book.
Meb: One of the biggest mistakes we see investors make, you just detailed, but people spend like 99% of the time on the decision to buy and almost nothing at the time of the decision on a plan on how to eventually sell. We see that all the time in the fund world. A classic example, when someone makes an allocation, you hear it a lot, where they’ll say to the manager or the strategy or whatever, “Hey, I’m really disappointed. I don’t understand why this fund or strategy is doing so poorly. I’m gonna sell it.” Almost never will you ever hear, “Hey, this fund is actually doing way better than I expect. I’m concerned, and I’m gonna sell it, you know.” Right, it’s because people, the way they think about it, they don’t plan it out ahead of time. And I think a wonderful exercise, and we also talk about this a lot in the podcast with just your life financial planning, being a CFO of your household of writing down a plan for your portfolio for any outcome. Inflation 10%, deflation, gold at 5,000, gold at 100, stocks going up another 50%, stocks going down, all these outcomes on how you rebalance, how you think about it I think is usually instructive to at least think about it and hopefully put pen to paper, because you’ll have a little higher compliance.
I was also laughing when you made the Mike Tyson, because there’s a billboard that’s been in LA on the highway near my office for I don’t know how long. It’s advertising Mike Tyson’s new cannabis ranch in Nevada. So, maybe we’ll have to update the quote to be something like, “Everyone had a plan until they went to Mike Tyson’s ranch and smoked a bunch of pot and sat on what’s supposed to be the longest, lazy river in the world.” I don’t know when it opens, but it’s gonna be, I’m sure, a sight. A couple quick questions and we’re eventually gonna have to let you go. You’ve been very gracious with your time. So, say when someone wants to get up to speed, you guys offer a ton of education and videos at Sprott. But what are some general resources, it could be books, conferences, people to follow, anything that you think would be helpful, people that really wanna cannibal into your world of natural resources and investing?
Rick: Well, your audience will be familiar, I think, with the first reference I’m gonna give you, but I think it’s important, and it isn’t specific to resources. For most investors, whether they’re new investors or old investors, simply reading “The Intelligent Investor” by Ben Graham and then attempting to employ the lessons will improve almost everyone’s investment performance. I need to remind myself of that fairly constantly to avoid making the mistakes that Graham jokes about. The second circumstance is self-serving really. As you suggest, there’s about 200 hours of educational material on the Sprott website. And the price to access that is excellent. It’s free.
Meb: Do you guys still call it the mining college?
Rick: Yeah. We have the mining investment college there. We have a discussion of ore bodies from a nontechnical point of view so that you can begin to understand what the words mean. There are probably 60 instructional videos by Sprott U.S. Media with many commentators, myself included. And it’s important to know that all that stuff is free, which is a really good start. What tends to happen with curious speculators is that they will see a theme in one of the videos, and then they’ll begin to research that theme themselves individually online, which is really a good thing to do. Probably, the most practical applied help that I can give your listeners is an offer that I love to make, which is if your listeners are already natural resource investors or speculators, if they email me a copy of their publicly traded natural resource investments, email it to me at email@example.com, I will rank those portfolios, at least the companies I know, on a 1 to 10 basis, 1 being best, 10 being worst, and comment on the stocks where appropriate, and email those rankings back to investors on a no-obligation basis. That’s a really, really, really good way to start. I like to have my own portfolio ranked by people I trust so that it causes me to think differently. It’s important if somebody takes advantage of that that they include both the names and the symbols in the text, not as an attachment. Our security people here don’t like me opening attachments from strangers.
Meb: That’s an incredibly generous offer, listeners. Rick, I’m gonna apologise, because you’re probably gonna get about 1,000 emails. But an incredibly generous offer for someone who’s been involved in this space for multiple cycles and decades. And like I mentioned earlier, there is no other industry where the importance of probably being a people business and knowing some of the best operators versus also it’s a world where, you know, it’s filled with people who are maybe not the most ethical and moral operators and fraudsters, etc. Being able to separate the two is probably, in no other sector, important. So, be respectful of Rick’s time, you guys, but take him up on it. That’s a very thoughtful offer.
Rick: I really enjoy the process, Meb. So, bring it on.
Meb: We like doing the same although, listeners, I’m definitely not making this offer. So, don’t email me. But we often review new client portfolios on funds and investments, and often, they’re pretty good. But a lot of times, simply avoiding the really, really, really bad basic mistakes is equally as important. And by the way, those resources, we’ve read and listened, and downloaded a lot of what Rick’s talking about. We’ll add them to the show notes, mebfaber.com/podcast, for listeners. So, you’ll have all the links, etc. From someone who’s been to… I can’t even count or pronounce the countries looking at properties all over the world, we like to ask guests on the show what their most memorable, it doesn’t have to be best, it could be worst, it could be neither, but most memorable investment over their career has been. Do you have one that comes to mind?
Rick: Well, my most memorable investment is probably investing in…investing is a wrong word, speculating in 1999 in the uranium space, which was ridiculously oversold. It was my best contrarian call, certainly. But it was also instructive, because I was way early, first of all. And although I was right, the sector fell sort of uniformly 30% or 40% after I made my investment. In fact, my finest investment, my best investment…no, my best speculation fell by 90%. When that happens, you have to re-examine your precept, which I did. And after having fallen by 30% or 40%, I had a 5-company portfolio. The worst company in the portfolio, the worst, increased, this is hard to believe, 22 times. The best did substantially better than that.
Probably, the most interesting trips that I have taken… As you point out, I’ve gone to a lot of countries to look at exploration projects or development projects, or mines or oil fields. Probably, the most interesting visits that I have made have been to places like Congo, really, really fractured societies, post-conflict societies. Sometimes you use the word “interesting” in an odd sense. And certainly, my early visits to Congo were more tragic than anything else. But if you want to experience the world outside yourself, the stranger the place that you go, the better the experience you have. And by the way, what I would call industrial tourism, that is going to places not as a tourist but really as a participant in their economy and a participant in their society and seeing the things that they think are important or interesting for you to see is a much better experience from my point of view at least than being informed by National Geographic or Condé Nast or something like that.
Meb: It sounds like a second career for you, Rick Rule, tour guide. I, for one, would love to listen to a podcast or read a book about all your stories. It’s like the Jim Rogers version of natural resources all over the world. It’s gotta be fascinating. I imagine that would go on for many hours, many hundreds of pages. So, that’s a to-do list for you this decade, Rick. I would love to hear some of those stories.
Rick: Well, the podcast would be good. I don’t think I’ll be a tour guide. The idea I take people to Northeastern Congo in a war zone is not something I’ll probably do.
Meb: Yeah. Rick, it’s been a lot of fun. Where can people learn more? We talked about it a lot already, and we’ll add them to the show notes, but just a real quick reminder. Best places to find you, what you’re up to, what’s going on in your world?
Rick: Best place to find me is either www.sprottmedia.com or Sprott Media at YouTube or at our website, www.sprottglobal.com. But the best way to get specific information from me about what your listeners are most interested in, which is their own portfolios, are, as I say, to email me those portfolios at firstname.lastname@example.org.
Meb: Awesome. Rick, thanks so much for taking the time today.
Rick: Always a pleasure. Thank you.
Meb: Listeners, we’ll add the notes to the show notes, mebfaber.com/podcast. You can subscribe the show on iTunes, Breaker, or anywhere good podcasts are found. Thanks for listening, friends, and good investing.