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Junior mining is a people game. In this Gold
Report exclusive, an excerpt from his speech at the Casey Research
Conference, Global Resource Investments Founder Rick Rule advises going for
the big wins by betting on the best teams with the best chances of discovery
using a global counterintuitive approach.
The developed societies of the West are descending and destabilizing.
People have come to believe that they are entitled to live beyond their
means. I'm not an economist or a political scientist, but that perception
leads to some very hard math. How can you add a column of negative numbers
and come up with a positive? It's not a uniquely American problem either.
People in the old Western societies, Canada and Australia suffer from the
same delusion. We are old; we are fat; we are white and we are rich. Our
collective problem was described by my grandfather in the following diddy: "When your outgo exceeds your income, your
upkeep becomes your downfall."
I'm not just talking about a problem of tax receipts or government spending
or entitlements. It isn't that we're collectively stupid. It's that we're
individually stupid. There seems to be a belief in the United States that a
55-year-old auto worker can make $55 an hour because he or she can employ
technology better than a 22-year-old Indian auto worker. I don't think so.
Another problem is that the root causes of the liquidity crisis of 2008 have
still not been addressed. If you have a big problem that manifested itself in
a fairly dramatic fashion and you haven't addressed the causes, do you think
it's reasonable to be afraid of the fact that that probability may reassert
itself? I do.
So, what's the good news? The emerging and frontier markets—societies
where people are un-free are becoming a bit more free.
As they become a bit freer, they become richer. Remember Chinese Communist
Party Leader Deng Xiaoping, who famously said, "To become rich is
glorious." That phrase turned China loose. Make no mistake,
we aren't talking about an unending upward linear spiral. There is plenty of
room for negative surprises. We have seen in places like Libya, Yemen and
California that the road to freedom is uneven. But it is an undeniable force.
So we have descending destabilization of Western societies, which is not good
for commodities. It's not good for anything. But we also have ascending
emerging markets. That is good for resources. When people get more money at
the bottom of the economic pyramid, they buy things made of stuff. A poor
person might trade a thatch roof for a metal roof. He might trade walking for
a bicycle and eventually for a motor scooter. Old, fat, rich people buy a
nice dinner. Maybe we buy an iPod for a grandchild and load it with virtual
songs. All good things, but they are not made of stuff. Selling stuff is what
makes investors rich.
Think about it as two great weather systems coming together. Old, spoiled,
rich and stupid meets this amazing demand for resources. What happens when
two big weather systems collide? Stormy weather, turbulence, volatility. I
think we're going to see volatility on steroids. Volatility can cause strange
things. There's a big up-move on silver right now. We believe in it. Silver
pops up 30%. Then there's that other kind of volatility like in 2008 when
things fell off a cliff. They got really cheap. So, you have to manage your
expectations going forward. There will be more upward spikes and more
down-spikes.
Now, volatility doesn't need to be a risk. It's up to you. Remember this.
Perceptions of the future are set by immediate past experiences. That means
in the near term, as the financial author Jim Dines famously says, a trend in
motion stays in motion until it stops. Today, people buy gold and silver
stocks. They make money and then they buy more gold and silver stocks. We
often confuse a bull market with brains. Markets gain momentum and gain
momentum and gain momentum and gain momentum. We buy a stock for $1.00. The
stock goes to $2.00. What do we do? We double up. Think about this. Is this
rational behavior? No, but it feels good. We're smart. The stock went up. The
sector's good because the stock went up. The higher the prices go, the better
we like it despite the fact that the value is eroding right in front of us.
The contrarian thesis, of course, is to be brave when others are afraid and
afraid when others are brave. It's a wonderful slogan, but it's damn hard.
When a company is selling for half its worth, people complain that it never
goes up. In other words, the fact that it's cheap becomes a curse; a
wonderful curse, from my point of view. Unless, as occasionally happens, I'm
wrong. What's the biggest investment risk out there? Obama? Debt? Nuclear
arms? No. The biggest investment risk you have is to the left of your right
ear and to the right of your left ear. All of my worst financial experiences
were self-inflicted.
The reality is that volatility is good because it represents a series of 40%
off sales. It's up to you whether you take advantage of volatility or whether
volatility takes advantage of you. Common sense is the real determinant, over
time, of whether you will do well. If something doesn't make sense, very
often it's because it doesn't make sense. Financier George Soros made almost
all of his money finding widely-held premises that were wrong and betting
against them. He famously decided in the year 2000 that the United States
society was hubris infected. You remember the spectacular bull market of
2000. We had vanquished the Soviet Union, and everyone thought nothing could
go wrong with America. Soros bet against it. That's the kind of common sense
that will allow you to deal with volatility.
My approach is very simple. It comes down to this: "Hit them where they ain't." Know this: A trade that's popular, a
perception that's popular, an idea that's popular is very likely overpriced.
I've come to prefer underpriced. That's why I concentrate on stuff that's
unpopular. Fortunately for me, unpopular stocks are in fairly good supply.
It's an orientation that has served me well over the long term. Over the
short term, however, this approach can be inconvenient from time to time. One
thing that happens with lonely trades is that when you make a mistake, you
usually make a fairly serious mistake. Your speculative portfolio isn't
trying hard enough if you don't have a couple of positions lose 30% or 40%. I
know this is hard to stomach, but it is true.
So, how do you create a portfolio that flourishes in the face of volatility
when the resource market is no longer cheap? First, create liquidity; have
some cash. It's OK if your cash is bullion, but have some cash. You have to
have cash. When volatility occurs, cash will do two wonderful things for you.
It will give you the courage to act in down markets. It doesn't matter if
stocks are cheap if you can't do anything about it. So, have some liquidity.
Second, remember that in small companies, people make the difference.
Speculate based on ability. Don't be a gold investor or a silver investor. If
you are speculating on exploration, buy Andy Wallace, Lukas Lundin or Ross Beaty. Find
people who have proven track records. When it comes to the junior mining
sector, 90% of these companies are worth nothing. All of the wealth creation
occurs in a very small subset. And, the best determinant of success is the
ability of the people running the company. Doug Casey famously said, "A
lot of the guys in this market, if it weren't for the junior stock business,
would wear a mask and a gun when they went into a 7-Eleven." I can't
stress this enough; this is a people game.
Third, consider the true value of a company. I've heard people say that XYZ
company is cheap because it has a $20M market cap. But the company might only
have $1.98 in the treasury and it is spending $200,000 a month. It may have a
piece of orangutan pasture in Indonesia and a piece of jackrabbit pasture in
Nevada. It is considered cheap because similar scams are priced at $40M. It's
truly insane.
The fourth thing that needs to be in a volatility-optimized portfolio is
discovery. A lot of people right now are trying to bring back tired old
properties. Occasionally they work. But, discovery is where the money is
made. If you're going to speculate, swing for the fence. Betting only on
small operations does nothing to limit risk. I've learned in 30 years that
anything that can go wrong with a big mine can go wrong with a small mine.
Only big mines can make you big money, however. If you're taking a chance
where the most likely expectation is failure, your successes have to amortize
your failures. So look for big successes because you're going to have lots of
failures. That's the way it works.
Good luck.
Rick Rule,
founder of Global Resource Investments (GRI),
began his career in the securities business in 1974, and has been principally
involved in natural resource security investments ever since. He is a leading
American retail broker specializing in mining, energy, water utilities,
forest products and agriculture. Rule's company has built a national
reputation for its specialist expertise in taking advantage of global
opportunities in the oil and gas, mining, alternative energy, agriculture,
forestry, and water industries.
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