For years, Dan has been saying that stocks are overvalued and due for a decline. What about now?
Is it time to buy stocks?
Or should investors wait for the bottom?
Dan opens this week’s episode by addressing the questions he hears most often from listeners. His answer may surprise you.
Next, Dan brings Rick Rule of Sprott Inc. onto the show for this week’s interview.
Rick began his career in the securities business in 1974 and has been principally involved with natural resource securities ever since. He has originated and participated in hundreds of debt and equity transactions with private, pre-public, and public companies.
He is now the President and CEO of Sprott U.S. Holdings, a member of the Sprott Inc. Board of Directors, and founder of Global Resource Investments.
Today, Rick is widely regarded as one of the most accomplished natural resource investors on the planet. During their conversation, Rick shares some of the common mistakes new resource investors make and shares his wisdom in how to avoid them.
Then Dan and Rick discuss the future of gold. Rick gives an incredibly bullish case for the precious metal.
By the end of the episode, Dan asks Rick to leave listeners with one single thought, but Rick goes above and beyond and offers far more. It happens at around 51:30, but make sure you hurry. It’s first come, first serve.
Senior Managing Director, Sprott Inc.; President & CEO, Sprott U.S. Holdings
NOTES & LINKS
1:15 – Dan changes his tune for the first time in years… “I was bearish for three years… but I’m kind of done with that now.” Does that mean Dan is all in on stocks now? Or is there still room for caution?
6:56 – Would you rather buy stocks during the 3 years leading up to the top in February? Or would you rather buy stocks every month of a 3-year bear market? Dan debunks a classic investor’s fallacy.
16:15 – Dan has a conversation with today’s guest, Rick Rule, who has been principally involved in natural resource security investments since 1974. Rick is the founder of Global Resource Investments, the President and CEO of Sprott Inc. and is widely regarded as is one of the leading natural resource investors on the planet.
22:48 – Rick shares a simple key to his success with Dan. “A lot of the success I’ve enjoyed in my career Dan… is finding those serial successful people and backing them.” Then Dan asks Rick who he thinks are the best investors in the resource market are to follow.
31:55 – Rick discusses the top mistake amateur investor make in the resource markets known as the “Got a hunch, bet a bunch” plan. Then he explains how to fix your investing mindset.
36:53 – Rick shares a story about one of his biggest winners of all time “I re-examined my premise, mercifully didn’t sell, in fact, I bought more, and the stock went – over a 5- or 6-year period – from a penny to 10 dollars…”
40:13 – Rick talks current events and makes a bullish case for gold… “Quantitative easing is a function of debasing the currency. Gold does well when investors and speculators are concerned about the long-term purchasing power of their savings in other instruments and debasing the currency without any increase in the underlying economy almost by definition debases the value of the currency.”
45:40 – “Gold and gold related investments will revert to the mean… tripling demand for precious metals and precious metal investments in the largest savings and investment economy in the world.”
51:30 – Dan asks Rick, “if you could leave our listeners with one idea, what would that be?” Rick shocks Dan by giving out his email to the listeners so he can review their portfolios. Send him an email with your resource portfolio with your stock names and ticker symbols to [email protected] to get Rick’s take on your resource portfolio!
57:24 – Dan answers questions from listeners in the mailbag… How does the Fed buying bonds affect investment grade bonds vs low quality bonds? Why are you no longer bearish? Have things actually gotten better in the market since 2017? What’s the first thing you’re going to do once quarantine is over?
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here’s your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I’m also the editor of Extreme Value, published by Stansberry Research. Today we’re going to talk with Rick Rule, easily the smartest investor in the natural resources world. I’m tickled to talk with him particularly at this time when gold seems to be such a wonderful thing to talk about, and he’ll tell us more about it than you ever wanted to know. It’ll be awesome.
We’re also going to talk about where we are in the market in the mailbag today. We got three really good e-mails that all kind of tie things together. And that will be a lot of fun, so stick around for that. But first, I have a few thoughts to share as always. Now recently, of course, as you know, I was bearish for three years. But I’m kind of done with that now.
I’m not saying I’m super bullish like the market is going to go up 20% this year. That’s not the point at all. And in fact, what I’d like to do for you today is clarify where I am today versus where I was until the recent bear market. Let’s face it, a 34% drawdown... I can only call it a bear market. And even the rally since then is a typical slap-back kind of bear market rally.
So here’s the thing... It’s not that I’m predicting stock prices will go up. It’s that I’m recognizing that the environment today is a lot different than it was before things fell apart. So go back to February, go back to the top like around February 12. The S&P 500 traded at 2.4 times sales – all-time record valuation. Anything above two is historically high, and it has been consistently above two the whole time I’ve been bearish.
And people were talking about stuff like Bernie Sanders beating Pete Buttigieg in New Hampshire, and Mary Daly, president of the San Francisco Fed, was saying – she said this February 12 in the Financial Times they reported – she said, “The ultralow three-and-a-half-percent unemployment rate,” she said, “Well, that could be sustainable.” She said, “There’s room to run in the labor market.”
I mean talk about calling the top. I think there’s like 17 million people or more, by now it has got to be more, that have filed initial claims for unemployment at this point. But that wonderful environment where things are expensive in the stock market, more expensive than it has ever been... And everybody is in love with it... And the Fed is saying, “Oh yeah, we got room to run in the labor market, and everything is going to be wonderful.”
I hate that. That’s a terrible environment for buying stocks because everything is overvalued, and the long-term returns stink. We’ve talked about John Hussman’s work on this program a number of times, and that has been his whole point. He says, “Look, the long term, the 10-year returns from here at various points, they’ve been negative. A reasonable expectation if you bought the S&P 500 in February was to not make any money over the next 10 years. Right? Just buy it once and hold it for 10 years and you’ve got less than you started out with. That’s the rational expectation."
And he’s got some more nuance to it. He talks about a portfolio of stocks and bonds and things. But at various times the thing has been so expensive, the stock market has been so expensive, that the reasonable expectation was to not make any money. To me, that’s what I see. When everybody is in love with stocks, I look out to the future and look at the price I’m paying for the earnings that I’m getting, and I just, you know, it was terrible. That is a terrible environment for buying stocks.
That environment died last month with the world record 34% drawdown and this massive recession that we are in the midst of due to the coronavirus shutdown. This is the environment I’d rather be in for buying stocks. I am not saying that the bottom was on March 23. Stocks are going straight up for here. I got to keep reiterating that.
In fact, if I had to guess, I’d say March 23 was not the ultimate bottom, and that the common mistake to make right now that we have this blistering rally is for everybody to think, “Oh, everything is going to be great. We’re going to get a short, extremely sharp recession. We’ll be out of it in three months or five months, or whatever, and then everything will be cool again. We’ll be back to more or less normal.”
That’s probably an unrealistic expectation, I think. Again, I don’t need to think about it. I just need to know that the horrible environment is gone and now everybody is filled with doubts. Before everybody was like, “Oh, wow, maybe I should get back into Apple or something,” Right? Now they’re thinking, “Where is the bottom?” You see, it’s a completely different environment. So I was extremely bearish before, but now I’m just sort of biased towards finding great businesses to buy and hang on to for the next three, five, 10 years.
You see, it’s the difference of what kind of an environment are we in. And I want an environment where everybody is really worried, and there’s a lot of uncertainty. That’s the environment to look for good investments in equities. That other thing, that’s a terrible environment, but that’s gone now. So sure, market is up 20-something percent. Maybe there aren’t as many deals as there were two, three weeks ago. But there are some, and we found the first.
We have a list of 30 stocks that we keep in the Extreme Value newsletter. It’s called the Extreme Value 30... really fantastic businesses. Many of them have never appeared in a Stansberry publication. The one that we recommended recently has appeared before in Extreme Value, and we did really well with it the first time around. And now it’s our first pick in this sort of post-covid world, or mid-covid. I can’t say post because it’s still happening.
So I just wanted to clarify that, in my newsletter I said, you know, that I’d rather – like I asked the question actually... would you rather buy stocks every month, a different stock every month for three years leading up to the top in February, or would you rather buy stocks every month of a three-year bear market? Well, unless you hate money, you’d rather buy them every month of a three-year bear market because that’s when you’re going to get the deals that are going to make you tons of money coming out of it.
If people say, “Well, if you think there’s another bottom coming why don’t you just wait.” You can’t do that. That’s like calling a – that’s the equivalent of calling a bottom. It’s the same thing. If you say, “Well, I can’t call it a bottom, but if I think we’re going lower from here, I’ll just wait.” Good luck to you. Good luck... It’s the identical thing to calling a bottom. You’re saying you know where the market is going in the future, you see?
You can’t call tops and bottoms. All you can do is assess the overall situation and look at the values and see what’s around. You cannot call tops and bottoms, but you can do what I’m doing. If I just buy stocks every month for the next three years, and it's a bear market over the next five, six, 10 years, I’m going to make a ton of money. And that’s how this works.
And as far as the short-term trading goes, you’re on your own, pal. I don’t do that, and I never purported to be able to do it, okay? What I’m talking about is how to work the stock market to your advantage. Ben Graham has this thing in chapter eight of The Intelligent Investor. It’s "The Tail of Mr. Market," right?
You think of the market as being in business with a manic-depressive partner, and every day your partner comes in, and depending on how he feels, he offers to buy or sell. He’ll sell you his half – on days when he’s depressed, he’ll sell you his half of the business at a discount. On days when he’s really excited, he’ll buy your half of the business at a premium. He’s more on the depressed side these days... so it's more like he’s offering stuff at a discount. His days of consistently offering you a premium, I think, are over for a little while.
Now in the short term, if you look at stuff like the CNBC Fear & Greed Index, that thing is over on extreme greed here in the, what is it, second or third week of April, okay? So short term, sure, that’s how it looks. But I don’t do short term, man. And I think most people who think they do short term lose their rear ends doing it, and they’re fools for even trying it. You should do long term if you want to be in the stock market because that’s where the real money is made.
We’re going to talk with a guy today who knows all about that, and I just know he’s going to say something about it. You’ve got to look out. All the people who really know what they’re doing make big money in stocks, and they tend to look out farther. And if you say, “Oh, well what about all these trader guys?” Yeah, you’re not them. “What about all these short-term traders making a lot of money?” Yeah, yeah, I know. I know all about them... You’re not them.
But what you can do is you can easily learn to identify a great business. You can easily do that. It’s not hard. Like, let me ask you, do you think Google is a great business? I do. Google and Facebook together is like the duopoly in online advertising. The thing gushes cash... It just gushes cash. It makes more money than it knows what to do with. And what’s the alternative? There’s no alternative. Yeah, the alternative is Facebook. That’s the – you can go to Google or you can go to Facebook, that’s it.
So, you know, owning a cash-gushing member of a really dominant duopoly that people can’t not do business with it, right? It’s like Microsoft Office. Microsoft is a great business in large part because there’s over a billion people using Office, Excel, Microsoft Word, Microsoft PowerPoint... but it’s really like Word and Excel. You just can’t function in the business world without Word and Excel. Like even if you hate Microsoft, you’ve got to have Word and Excel. So those are great businesses. They’ll gush cash flow, and they have great products. People can’t imagine not using them, etc. So you can learn to do that.
The next thing you can do is when the whole world is vomiting this stuff up, and it’s down 20% or 30%, you can go, “Ah, I know that this is a fantastic business, and it will continue to be one for probably a very long time.” The earnings of Microsoft and Google will probably be higher in five or 10 years than they are today... certainly higher than they are in 2020, I’ll tell you that.
You can say that about a lot of businesses this year, I bet. But if you stick with the best, you can ignore the rest... and you’ll do fine. Buy them when everyone else is puking them up and they’re down 20%, 30%, 40%, 50%. You can do that. You can know how to do that without being a full-time brilliant genius who has been on Wall Street for 20 years or something, right? You can do that as an individual investor.
The other stuff, the short-term stuff, I don’t think you can. I know you think you can, but I don’t think you can. If you just learn to get that conviction about what a good business is and learn to recognize when the thing is on sale at 20%, 30%, 40% discount, then you can make more money than you will know what to do with. But it’ll take you longer.
Buffett and Monger have said this consistently over time. They sit up there on stage every year and Monger says the same thing... and Buffett. One of them always says, “Well, if you’re not in too big of a hurry, it’s easy to get rich in the stock market,” and then they go on to something else. And it’s like the nugget. You can fly to Omaha, hear him say that, and then leave because that is the nugget of gold that they say every year. And it’s true.
All right, and I’m saying this is the time to find good businesses. This is the time to focus on what’s a really great business and to buy it and to put some money to work. And sure, yes, you might wind up down 20% or 30% faster than you ever imagined. So then the question is, how do I get the conviction to hang on to this thing?
Well, I said this in recent episodes, and I’ll say it again because it bears repeating. You get the conviction by understanding and by doing the work. You do plenty of work, plenty of reading, plenty of learning... You learn what a great business is. You get the sense of conviction. And that is the thing... That’s the secret sauce that enables you to hold when the thing is down 20% or 30%. It’s your knowledge. Investing happens between your ears. The more good stuff that happens between your ears, the better you’ll do in the market.
So I hope you understand that when I say I’m bullish, I’m not predicting the near-term direction on stock prices. I’m saying that an environment where there’s lots of uncertainty, and people are really worried, is much better for equity investors who can hold for the long term than one like we had a couple months ago where nobody is worried, and everybody is sure that everything is going to go straight up for ever. That’s a terrible environment. This, by comparison, is a much better one.
I’m going to leave it at that, and let’s talk with Rick Rule now and see what he has to say about natural resources and investing in general.
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Today’s guest is Rick Rule. Rick Rule 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 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.
Mr. Rule is also the founder of Global Resource Investments, president and CEO of Sprott US Holdings Inc., and a member of the Sprott Inc. board of directors. He is a frequent speaker at industry conferences and has been interviewed for numerous radio, television, print, and online media outlets concerning natural resource investment and industry topics. Mr. Rule is frequently quoted by prominent natural resources-oriented newsletters and advisories. Rick, welcome to the program, sir.
Rick Rule: Certainly a pleasure to be with you, Dan.
Dan Ferris: Yeah, it has been a while. We haven’t seen each other in quite some time... And I guess it’s going to be quite some time under the circumstances.
Rick Rule: Well, I look forward to my own escape from the People’s Republic of California and my relocation to Washington. And hopefully that will coincide with our being able to spend more time face-to-face.
Dan Ferris: Yeah. So before we talk about the state of things today in natural resources, and specifically gold, our listeners are just really itching to hear you talk about gold, I’m sure. Maybe you could tell them a little bit about how your career began back in 1974. What made you interested in the securities business, and natural resources of all things?
Rick Rule: Well, that was a long time ago to be honest. You’re taxing my memory, Dan. As I recall, ironically, I was interested in natural resources from a very young age, principally because I like to spend time outdoors, but also because the businesses seemed relatively easy to understand. One consequence of becoming interested in natural resources and finance is that I’ve spent my life indoors as opposed to outdoors, so I suspect that was a mistake.
But that interest, among other things, led me to move to Canada to attend the University of British Columbia. And that was a very fortuitous move. The decade of the 1970s was really a time when resource-based businesses had the wind in their sails. And Vancouver was absolutely the epicenter of the speculative part, the exploration part of the resource business.
So as a young man I had the good fortune to find myself in exactly the right place at exactly the right time, or, so I thought. Through the decade of the 1970s, I made a young man’s mistake, which is to say I confused a bull market with brains. When the market worked and the commodities market crashed, I crashed with it. In retrospect, of course, that was a good thing, too, because it taught me firsthand about the cyclicality inherent in the resource business. That’s probably more of an autobiographical answer than you wanted, but that’s the answer.
Dan Ferris: Oh no, I don’t mind you getting as autobiographical as possible. In fact, I wonder if you’d recall one particular episode that you told me about, about a fellow who you were listening to a presentation and he said, “I know this company is going to do great because I’m going to get this guy named Rick Rule to finance it,” and you had never heard of him before in your life.
Rick Rule: Well, that’s actually a fairly funny story, at least to you and I. I hope your listeners will enjoy it as well. That occurred in at conference that no longer exists, the Boston Mining Conference, and I was a speaker there. And towards the end of the conference, as I was going to the airport, I was out of my war uniform, which is my suit and tie, and in fact, in genes and a polo shirt.
And walking through the exhibit hall, I was accosted by the typical sort of white-shoed promoter who was, you know, basically telling me that his deal was the greatest thing since sliced bread and how aggressive they were going to be with drilling. And I recall asking him, you know, I said, “This is a fairly aggressive program that you’re proposing, sir. How might you finance it?”
And I’ll never forget this as long as I live. He said, “Well, you see, money isn’t a problem for us.” I said, “Really, that’s interesting. How does that work?” Obviously, he didn’t recognize me from the podium. He said, “Well, you see, there’s this really hot west coast broker from California named Rick Rule. And he’s going to finance me.” I said, “Really? I’ve heard of this guy.”
And he said, “Well, here’s the opportunity. You see, the stock is trading at 50 cents, but he doesn’t like stocks below $2. So when we get the stock to $2, he’ll finance it. And then you can enjoy the leverage of Rick Rule's financing and network from a higher price.”
At that point in time, I began to fail in terms of restraining my own laughter. And I got my driver’s license out and showed it to the guy and said, “You know, I know this Rick Rule guy pretty well, and I really don’t like your chances with that follow and financing.” It goes back, I guess, to the old Mark Twain anecdote about the definition of a miner being a liar next to a hole in the ground, at least in certain circumstances.
Dan Ferris: Yeah, of course. Most of these guys don’t even have a hole in the ground. They just have a wish.
Rick Rule: You know, it’s interesting when you say that. The thing that really attracts me, or one of the things that attracts me, to the mining business is the disaggregated nature of success, which is to say a fairly small number of people enjoy most of the success. And what you say is quite true, probably 90% of the listings in the mining business are valueless. They may be trading at a quarter, but they’re worth zero.
And that disguises the fact that there is a small group of serially successful entrepreneurs that generate such astonishing returns that they add legitimacy, and sometimes even luster to a sector that as a whole could be questionable. And a lot of the success that I’ve enjoyed in my career, Dan, has been maybe because I’ve been around so long finding those serially successful people and backing them... particularly backing them during very, very, very tough times, like the eight years that we have just survived.
I suspect that over the last 45 years, had I confined myself to just investing with what I considered to be the 10 finest people that I know, I would have worked twice as hard and made twice as much.
Dan Ferris: Interesting. So at this point in your life, is that where you are then? Are you really just sort of focused on those folks, or do you find that basically impossible to do, which I would certainly understand?
Rick Rule: I think about a year from now that’s precisely what I’m going to do. I think my role inside Sprott will come to be a maybe senior messenger... but also relationship manager. I think that there are groups that we have traditionally done business with, the Lundin family as an example, that we will focus on. There are mercifully serially successful groups in disparate parts of the globe that I think at least I will focus on.
Sprott will probably have several focuses, not least of which would be our exchange-traded physical precious metals trusts and also our lending business. But for me personally, to answer your question, my suspicion, at age 67, is that I can’t be all things to all people. So I’ll try and do what I do best, which is support the best of the best, particularly in hard times.
Dan Ferris: Right. And probably of the best of the best, you named Lundin, but the one who probably are listeners might be most familiar with, because he sort of made his way into the mainstream via Steve Jobs, is Robert Friedland.
Rick Rule: Certainly Robert Friedland is a phenome for any of your listeners who have access to Steve Jobs, the authorized Jobs biography, you’ll find 25 pages on Robert Friedland, which is absolutely fascinating and well worth the read. What is – well, many things are interesting about Robert Friedland to me. First of all, he is just unbelievably smart and unbelievably hardworking.
He’s difficult to compete with because he comes into the game with so many tools, but he has also been serially successful. He, or teams that he has formed and supported, have discovered, by my account, five world-class deposits, which is to say that he by himself has been as successful in the exploration business over 30 years as Rio Tinto and BHP, the largest mining companies in the world.
Robert has been particularly successful, I think, at attracting and supporting, and unencumbered by bureaucracy, absolutely world-class geologists, which I think is one of the secrets to his success. And you know, Dan, when these people become successful, they become beneficiaries of the classical sort of magic circle. Successful people attract capital at a lower cost and a capital-intensive business. That’s quite an advantage.
They actually get to see better prospects and properties than their competitors because the people who have originated the prospects know that these people have lower cost of capital. And they get to attract the best people because the people know that they will be supported intellectually. And that people like Robert Friedland will be able to sustain exploration efforts during hard times, which is a critical advantage in a cyclical business.
So it isn’t just that Robert is smarter and more tenacious than his competitors. Because he has been successful, he gets to run the 100-meter dash against competitors, but he gets to start on the 25-meter line, which is a hell of an advantage.
Dan Ferris: Yeah, well put. Well put. Another one who I spent some time with is a guy named Ross Beaty, who is also just extraordinarily successful.
Rick Rule: I’ve known Ross Beaty since university. I’ve done business with him since 1986. It’s tough to say enough good things about Ross. He's very smart. He's, by the way, extraordinarily generous, but he isn’t generous from the public company's purse. He spends his own money rather than yours. He has also been serially successful, and he has also built an incredibly dedicated, incredibly loyal group of former employees, now partners.
If you think about what he has done, the original Equinox of course sold to Hecla, Pan American Silver, which I’m proud to say we did the initial financing on at 50 cents, went as high as $45 and is probably the premiere silver company in the world. He has just had success, after success, after success.
The most astonishing success, of course, in terms of return on capital employed was his building Lumina Copper. In the last ugly downturn in the copper business, he went out to raise some money from people, mercifully the initial money from me, and purchased six or seven copper deposits that weren’t economic at the then prevailing copper price, sort of 80 cents a pound, knowing that they would be extremely valuable at $2 a pound, and believing copper would go to $2 a pound.
If my memory serves me correctly, the initial private placement we did in Lumina was at about 50 cents. And if my memory serves me correctly, the final breakup of the company, he sold seven assets all separately, and then he sold the royalties on all of them. If my memory serves me correctly, the total liquidation price was $160 a share, so 50 cents to $160 a share.
I would be misleading your audience, Dan, if I pretend that I held all of my 50-cent stock to $160 per share. That isn’t the way it works. But that’s my problem not Ross’ problem. You can see why I’m attracted to him. And you can see why I’m still attracted to what I call optionality – the idea that you buy big deposits that aren’t economic at current prices and hold on for dear life if you believe that the commodity is underpriced, so that you can sell in sunnier times.
Dan Ferris: Yeah, that holding on for dear life... that has become a problem for a lot of folks these days as we sit here in the middle of April 2020, hasn’t it?
Rick Rule: You know, it’s very odd, Dan. I’m sorry to be reflective again. But at age 67, when I have less time left on earth, I’m more patient. I guess it’s because I’ve been through so many five-year time frames in my life that it doesn’t seem daunting to me. It amuses me that young successful people that I know in their 30s seem to have trauma holding stock over a long weekend when they have all kinds of time left. And the old guys who I know like myself, those few who have been really, really, really successful, always seem to invest for the five- to six-year time frame.
My suspicion is that time arbitrage, that is aligning your preferences with the reality of the investments that you’re making, is one of the most important determinants of success. Some people believe that because they want something to happen in the near term that their wants are somehow germane, and they’re not.
Dan Ferris: Yeah, I’ll say. It’s an interesting skill, though, isn’t it, that just that ability to hold? I’ve found in my life that level of conviction, you have to have a level of conviction, and it seems to be based, with me anyway, on the amount and luck willing, you know, the amount of good work that we do on an idea. And if we do enough really good work on it, we’ll have the conviction, and we’ll be able to hold.
And I think the average person out there who wants that short timeframe, you know, they think their want is meaningful, they just won’t, or can’t, or don’t know how to do enough work to get that kind of conviction. It makes you wonder why they ever get near mining stocks, or even stocks to begin with doesn’t it? I mean...
Rick Rule: Dan, I think you’re preciously correct. People pay slavish attention to the price of a stock, but the price is ephemeral information if you don’t have an opinions to value. Unfortunately, many people’s technique is "got a hunch, bet a bunch." In other words, they fall for the narrative. Very often people don’t know how many shares are outstanding, so they don’t know what the market cap of the company is. They don’t know what the balance sheet looks like, so they don’t know what the enterprise value is. How can they have a sense of value when all they focus on is the price?
The truth is that money is made on the delta between price and value over time. And I would say that 95% of the people who participate in public markets don’t know that simple fact. Scientists often tell you that the harder they work, the luckier they get. And that has certainly been my case. When I have developed an opinion as to value, that has enabled me to do things like buy stock when they go lower.
You’ll remember Warren Buffett’s – one of Warren Buffett’s famous discussions – where he said that you shouldn’t buy a share of stock if you wouldn’t be delighted to see it fall in price by 30% after you bought it so that you could buy more, relying on the same work that you had originally done.
Now I must tell you, I’ve been tested with that thesis dozens of times. But being confident enough in the value that when the share price declines, you’re happy as opposed to sad, is one of the determinants of what makes a successful investor over time. I would say the second is familiarizing yourself with the fact that you are going to make some wrong choices, accepting defeat as the price of success, individual defeat as the price of success, particularly with regards to speculation.
Buffett talks about this a lot. Buffett talks about the psychological effect of failure. And the truth is that the occasional or the more frequent failure tends to make people defensive in market declines when they ought to be becoming aggressive. All of this talks, however, around the theme that you mentioned. If you’ve done work on an investment, and you have a sense as to its value, and you have a sense as to the probabilistic value that you will see three years from now or four years from now... it’s the delta between the price and the value where money is made.
And the harder you work, the more certain that you can be about those valuations, understanding that you’ll never get it exactly right.
Dan Ferris: Man, I wish I could just sort of put all that into a syringe and inject it into all the listeners. That would be nice.
Rick Rule: Well, I think the serum is age. It comes to you through experience.
Dan Ferris: Yeah, and it’s not all very pleasant either, is it?
Rick Rule: No. But you know what? It's pleasant over time. I’m not trying to say I relish my mistakes, but the truth is that most of the big mistakes I’ve made have been, at least after the fact, handy. Let me give you an illustration of – and by the way, this wasn’t a mistake. This was a stupid success.
I remember in about 1998, understanding that the uranium price had to go up, it just had to go up. Uranium was selling well below the cost of production, yet at that time generated 18% to 20% of the baseload power in the United States. And that meant that either the price of uranium had to go up to the cost of production or the lights would go out. Those were my two choices, and I decided that it was unlikely that the lights would go out.
And so I was looking for uranium stocks to buy, and I chanced upon a $1.8 million market cap Australian company called Paladin. And I won’t tell you all the reasons why I was delayed with Paladin, suffice it to say I was. And I bought a bunch of the company on my behalf and on behalf of my clients. And I remember we did a private placement of the company to the dime.
All well and good, it went up to 12 cents. I thought I was smart. 20% ahead in a market that nobody cares about, but then 11 cents, 10 cents, nine cents, eight cents, five cents, you know, all the way down to a penny. So I was rewarded for my brilliance by seeing the stock decline from 10 cents to a penny.
If you have a 90% decline in a position, you don’t have a hold. You have a buy or a sell. You have to reexamine your premise. And this is where the delta between price and value comes in. I reexamined my premise, mercifully didn’t sell, in fact, bought more. And the stock went, I’m not kidding, Dan, over five or six years the stock went from a penny to $10.
This is instructive on many levels because if you’re asking yourself a question that begins with the answer "when," you’re asking yourself a good question. That question was, when would the uranium price go up? You didn’t have to ask yourself if it would go up because that question was answered. If the price didn’t go up, the lights would go out. So it was going to go up.
The second thing is it talks about the difference between price and value. And the third is the importance of occasionally rechecking your premise and not being afraid to be right. That’s a rather extreme example, but it seems to be that extreme examples get the message across to a broader audience.
Dan Ferris: No, it’s a great example, yeah. So let’s talk about what’s happening right now in the world, which is shut down because there’s a pandemic making its way around the world. And this has affected – well, we could talk about the shut down as a separate issue, but we won’t do that.
This has, of course, impacted every asset on the planet, and it has inspired people almost daily. I see predictions of this or that asset is going to soar, it’s going to tank, it’s going to soar, it’s going to tank. And that’s kind of an ideal environment to me because there’s high uncertainty, so I know there’s opportunity somewhere.
But can you give me a general view on gold right now? I’m expecting you to say the wind is in your sails. I think you said that on LinkedIn recently. But is that the – that’s the general view of yours, correct?
Rick Rule: Yeah, so I have to say that in this case the answer begins with "if," not "when." But I believe that in terms of probabilities, the gold price goes higher, and the precious metals equities go much higher. The thesis goes like this... In each of the prior bull markets that we’ve seen in gold in my career, which now goes back to the early 1970s, it hasn’t been the crisis itself that’s moved the gold price. It has been the policy response to that crisis.
And the policy response to the covid-19 crisis, and also the crisis, frankly, of the fact that we had been through a 10- or 11-year recycle from the – pardon me, recovery from the 2008 debacle, sidebar, a 10-year long recovery is, in my memory, very long in the tooth, means that the policy responses, which are being followed by governments and central banks, are predictable and invariably good for gold.
The first is, of course, that we’re in the midst of a liquidity crisis, and what governments do, rather than having a market clearing event, is they add liquidity to the system. They have this thing called "quantitative easing." If you and I did quantitative easing, that would be called "counterfeiting," but the fact that they do it makes it exalted, rather than a felony.
Quantitative easing is a function of debasing the currency. Gold does well when investors and speculators are concerned about the ongoing purchasing power of their savings in other instruments. And debasing the currency, that is adding large amounts to the currency in float without any increase in the underlying economy, almost by definition debases the value of the currency, and hence, the expectation, the future purchasing power in that currency.
The second, because I think that gold moves not just contra to fiat currencies, but more particularly contra to faith in sovereign debt, particularly U.S. sovereign debt. The next policy response will be to further damage the balance sheets of sovereign debt issuers, particularly the United States government. And those balance sheets are already a bit challenged. As you and I have noted in interviews before, the on-balance sheet liabilities of the U.S. government exceed $23 trillion, or $17 trillion net of the Fed balance sheet.
The off-balance sheet liabilities are more scary. They exceed $100 trillion, according to the congressional budget office. So we the people at the federal level owe each other $120 trillion, which is a very, very, very large number. And when I say, "we owe each other," that’s not strictly speaking true. The spenders owe the savers $120 trillion. The problem is that the spenders are numerous and vote, and the savers are scarce. So that’s a bit of a problem.
We propose to service this national debt, Dan, with the national income, the federal income, which is taxes and fees less expenses. The problem is that that number, the annual income, was a $1 trillion negative last year and probably $2 trillion negative this year. Your listeners will understand the problem I have with the concept of adding a column of negative numbers and attempting to come up with a positive sum, which is to say that the balance sheet is bad and it’s getting worse, which is of course good for gold.
The balance sheet of the borrower is lousy. It presents credit risk. And finally, of course, there’s the return calculation, the coupon on sovereign debt. The policy responses that we’ve talked about include maintaining artificially low interest rate. So if you’re saving in T bills or T bonds, Treasury notes, whatever it is, Treasuries, what you have is a circumstance where the currency that you’re saving in is being debased. The balance sheet that you’re lending against is being debased, and the reward that you’re offered for taking the risk is going down.
They proposed now to pay you 60 basis points on the 10-year bond in a currency that the congressional budget office says is being debased by 1.6% a year. The arithmetic here is not good. This is probably the first promise that your government will keep. If you give them money for 10 years, they absolutely promise to give you back less than you gave them. Our mutual friend, Jim Grant, refers to this as "return free risk."
And so I would suggest to you that gold is engaged in a war with return free risk – a war that gold can likely win. I’m not one of these who says that we’re going into a major economic catastrophe, and the dollar is going to disappear, and gold is going to emerge victorious. What I’m saying is that gold is going to lose the war against the U.S. dollar much less badly.
The final thing that I’ll say about the gold market, or gold pricing, is simply this, but I think it’s an interesting tidbit for your listeners... A major bank published a study a year and a half ago saying that the market share of precious metals and precious metals investments, securities, and debt comprise between one third and one half of 1% of investments and savings products in the U.S. market currently. That is their market share is less than one half of 1%.
There weren’t figures available, but in 1981 they estimate that the same number approached 7%. More importantly, they said that the three-decade median and mean were approximately 1.5% to 2%. So I’m not suggesting that gold will predominate. What I’m trying to say is that I believe that gold and gold-related investments will revert to mean, which suggests that their market share will go from below one half of 1%, to some point between 1.5% and 2%, in other words tripling demand for precious metals and precious metals-related investments in the largest savings and investment economy in the world. And I think that’s very bullish.
Dan Ferris: It sounds crystal clear. It sounds – you make it sound positively simple and easy even, which is very valuable, I think. It cuts through a lot of the noise.
Rick Rule: I didn’t mean to do that. I didn’t mean to do that. What I meant to do is make it sound more likely than not... probable as opposed to certain.
Dan Ferris: Okay, probable as opposed to certain. I guess what I’m saying is simply that there is a lot of noise in the world right now. There is – well, there’s always a lot of noise about gold and stocks and everything today more than ever, but I think you present a clear picture is all I meant to say.
Rick Rule: We try.
Dan Ferris: Yeah. So it sounds to me like if one had the same view as you do, and thought similarly and wanted to behave similarly, they would get to know the very best people. They could do a number of things. They could hold physical metal, which is always nice to do, and they could also do research into these very best people, the Robert Friedland’s and the Ross Beaty’s, and there are several others I’m sure you could name and figure out what they’re doing and do it right alongside them... just by their stocks and watch them work.
Rick Rule: Yeah, I think there’s three things. I think that almost every investor and speculator that I know would be well-advised to own physical gold or physical gold surrogates. My favorite surrogate, of course, would be the exchange trade at Sprott Physical Precious Metals Trust on the New York Stock Exchange. But I’m – really, it’s less necessary that you own my product than you own some physical metal, or some security just in the same way that you own life insurance, auto insurance, and house insurance. Think of it as social insurance.
The second thing is beyond insurance for investing. The gold stocks really haven’t moved relative to the gold price, which is consistent with markets that I’ve observed in my life. The gold moves because of the insurance buyer, the fear buyer. And the best gold stocks move because of investors. Investors want to see the impact of the gold price on first the income statements and then the balance sheets of the gold stocks.
And so the gold stocks traditionally lag gold in terms of the move by six to nine months. Dan, I have a fascinating chart from Barron's magazine. It’s a 45-year gold index chart. The reason I use this... it’s a very inclusive index, and it’s a very long-range chart. And, as you know, I’m no technical analyst, but the information in the chart is fascinating.
It shows, first of all, the periodicity of market bottoms, like the one that we had been through in the period of 2011 until today. Historically, this is a very, very, very long oversold bottom, corresponding with lots of confidence in the economy. So that’s the first thing to know. It shows you that we are approaching the bottom at the bottom, or off the bottom of a very, very, very long oversold decline.
The second thing that the chart shows is that there have been eight cyclical rebounds from oversold bottoms in the last 45 years. The weakest of which, if I read the chart correctly, showed 180% index gain. That isn’t to say an individual high performing stock, but rather the whole index gained 180%. The best gain was 1,200%. Over periods of time the short as 13 months and as long as 42 months.
I think that that information accompanied by information that the gold price is more likely than not, in my opinion, to go up, and the gold stocks haven’t themselves kept pace with the metal, makes a compelling case for investors and speculators to look at the gold equities. What someone does with that information really depends on the individual investors' or speculators' preference and needs.
The truth is that some investors would be well-advised not to pay attention to those serial outperformers that I talk about, and rather buy the best of the best gold mining companies, content not to outperform a market that is, at least judging on past performance, going to give them somewhere between 180% and 1,200% gain. You know, why outdo that?
But the truth is that if you go down the quality scale, that is if you get into the more speculative parts of the market with the part of your portfolio that you think is appropriate for that, there is the chance to generate substantial alpha. And the way that you generate that alpha is precisely by confining yourself to dealing with the best of the best people.
Dan Ferris: All right, I hope everybody was taking notes on that one. So we’ve named some of the best of the best people and the general strategy here. We’ve actually come to the end of our time. And I ask all my guests this same question at the end, Rick, and I’m very curious to see how you handle it. If you could leave our listener with just one thought today, what might that be?
Rick Rule: Well, I’m going to leave your listeners with an incentive, Dan, rather than a thought. Any of your listeners who care to contact me personally are invited to do so. And in order to give them incentive, I’m not going to give them investment advice because I don’t know them, but what I will do is if they e-mail me personally with their natural resource portfolios – it’s important to have both the names and the symbols in the text of the e-mail – if they send that e-mail to me at [email protected], I will rank the companies in their natural resource portfolios one to 10, one being best, 10 being worst. I will comment on those companies where I think my comments might have value. And I will include the 45-year Barron's Gold Mining Index chart, and also 100-year commodity chart, and send it back by return e-mail.
I’ve done this for about 3,000 investors over the last six months. And the truth is, learning about the way investors think and act has been extremely useful for me. And I think really the best form of investor education that I can give, rather than doing sort of esoteric discussions, is a discussion of individual investors' own portfolios because the lessons seem to hit closer to home when they involve people’s own money and estates.
Dan Ferris: Wow. So, Rick, could you just give us that e-mail address one more time?
Rick Rule: Rankings@sprottglobal.com. Remember that I’m 67 years old, so no fancy attachments that our security won’t let me open. Names and symbols in text please.
Dan Ferris: All right. Wow, that is an incredibly generous offer. I really hope the folks listening take advantage of it. You should know there are thousands of them out there, so you might be swamped, but thank you.
Rick Rule: In my declining years, Dan, this process of sort of mentoring and education is just increasingly gratifying to me. And I have found that you teach lessons the best based on individual circumstance. And this is the best tool that I have found in 40 years of attempting to do investor education in terms of getting the messages across.
And I have to say, the gratification that I’ve gotten from people’s responses to my rankings has been fun. It’s pretty obvious to me that in several hundred occasions, at least, people felt that they benefitted from the process and were very thankful for the lessons that we were able to teach.
Dan Ferris: Excellent. Gosh, thanks so much for that, Rick. And I certainly hope that you and I will – I certainly hope we’ll be able to do this again sooner rather than later.
Rick Rule: As you know, Dan, I don’t like talking much about popular culture, or movies, or anything. I love talking about investments, and I love talking about investments with you. So at any point in time when you think a discussion with me would be valuable for your listeners and readers, I look forward to it.
Dan Ferris: Excellent. Thanks. It’ll be soon, I promise.
Rick Rule: Thank you, thank you, and be, be, be safe.
Dan Ferris: Oh yeah, you too. Do the same.
Wow, I certainly hope that you guys will take advantage of that. I was totally blown away by that. I wasn’t expecting Rick to do that, and I’m really glad he did. And this is like sending him your resource investments and having him rank them. This is like sending your stock portfolio to Warren Buffett.
You won’t do any better than this. You won’t get access like this to anyone who is anywhere near that good and willing to spend that kind of time. So man, I hope you do it. It’s an incredible offer. It just blew me away.
All right, let’s move on and see what’s in the mail this week.
Dan Ferris: Hey guys, you want to have a lot of fun? Go online to www.investorhour.com and look up episode 132 of the Stansberry Investor Hour. It’s from December 12, 2019. It’s called, "Where Do Fang Stocks Go From Here?" I talked about the art market first. It was a lot of fun.
We looked at a crazy, crazy thing that happened in December in the art market, and then we looked at the 10 most expensive works of art. And we talked about who was buying them and how much they cost, but then we used that insight and we went on and we talked about why market valuations in the stock market were looking increasingly toppy and increasingly risky. And I was explaining why I thought reality was going to catch up with investors and catch up with the stock market.
And of course, since then, reality has caught up with us all. Episode 132, December 12, 2019 investorhour.com. I think you’ll have a lot of fun listening to it, and you’ll get some insight into why we were thinking the way were thinking back then and maybe into what’s going on now. Check it out.
All right, the mailbag is where you and I get to have a conversation every week. And you write into [email protected], and I read every single e-mail you send me, every word of every single e-mail. And I respond to as many of them as possible, can’t do all of them, but I do as many as possible, and you and I get to exchange ideas this way. This is often my – I’m not kidding you folks – this is often like my favorite part of my workweek.
Today we have a bunch of good stuff. The first one is from Vaughn M. And Vaughn M. says, “So, anecdotal interesting story. Friend gets e-mail saying she can skip three months of mortgage payments and decides to read all the fine print. She assumed that meant she would still accrue interest and her final payment date should she not pay ahead what would get pushed out. She was surprised to learn that she could skip three payments, but that was due as a balloon payment after the three months were up.”
“So that sounds like the security is holding that mortgage which showed that she was not delinquent until she failed to make that balloon payment, and then it would instantly go three months delinquent. April, May, June, second-quarter close. Balloon due July or August. Nothing that surprising to me other than the system itself creating a lack of visibility of the growing problem until it’s potentially very big, guessing same for auto loans.”
And then he has a little paragraph here about how Porter mentioned this problem before. Vaughn M., thank you for that Vaughn M. Yeah, that sounds about right to me. And I noticed already, even without this phenomenon in play, millions of people are now delinquent on their mortgages. So yeah, there’s a big bad problem brewing there, and it’s, you know, you know what the story is here...
This is the Federal Reserve versus the mortgage-backed securities market. And the Federal Reserve has infinite ammunition to keep the values of those things up. Now, I’m not saying it will use infinite, but I think we saw in 2008 and 2009, they can have a heck of an impact.
So I am loathed to draw conclusions here about what this will look like. We know what it would look like if there were no infinite amount of ammunition to throw at the MBS market, right? We know what that looks like. That looks like a lot of bad mortgages and a lot of people declaring bankruptcy. But with that, I’m not going to predict anything... But I’m glad you wrote in and identified that.
Next one is from Sheldon S. And Sheldon S. says, “Dan, I’d appreciate your time and effort in educating me. I’m having trouble trying to get my head around the Fed buying bonds. How does that effect investment grade bonds like those found in the investment grade ETF LQD,” he mentions, “And the same question with low-quality bonds, JNK. Yahoo shows LQD's yield is 3.41% at the April 9 close, and JNK at 6.24%. These appear to be attractive returns. If the Fed buys ETFs, won’t that drive the price of those ETFs higher? And if that is true, buying them before the Fed steps in seems like a reasonable thing to do. What am I missing? Thanks, Sheldon S.”
Sheldon, I think the only thing you’re missing here is that this is a speculation on the Fed buying these things. This follows right on the previous question that Vaughn M. asked. Think of what would happen without the Fed buying, and then ask yourself if you’d buy this stuff in that event. And then ask yourself, “Okay, if you can buy it, how long are you going to hold it?”
Is this a trade? Are you expecting to make 10% in a month or something? What is it you’re expecting? Are you expecting the Fed to keep those things paying you a 6% return forever? You see? You’ve got to take that next step. And in this case, I think you’ve got to think what would it look like without the Fed. And you have to entertain that scenario as some kind of a probability.
And again, I’m not going to make conclude – I’m not going to draw conclusions and make predictions about these things. I want you to think about it yourself.
Next one is from Ben S. He says, “Dan, thank you for continually providing interesting content for us to think about as we go through these volatile times. Do you have any thoughts on what has been driving the market to rally so sharply in the past week? Jobless claims continue to skyrocket. There has been no real talk of ending the quarantine, and yet the markets were up from April 6 to April 10. I can only assume it’s due to the trillions of Fed notes being forced into the system. Thoughts?”
And then he finishes up saying, “What’s the first thing you’re going to do?” He mentions that he lives near me and he says, “What’s the first thing you’re going to do when quarantine is over. Thanks again, Ben S.”
Last question first. I think I’m going to get my butt down to the gun range. I should probably do it now. We have an outdoor one nearby. That would probably be safe, but that’s what I’m going to do. I need to get down there and sharpen up my marksmanship. And I’m going to go out to dinner hopefully, you know? That will be a treat.
As far as your other question, you know, why is the market rallying. Look, yeah, okay, so there’s the event and there’s the policy response to it as we heard in today’s interview, right? So why is the market going up? I’d rather not even try to answer that, but I will say this. We had a 30% – actually a 34% drawdown quicker than it’s ever happened. Then we’ve got this lightening rally, which as we speak is around 22% or 23% off the bottom for March 23 off the closing price there.
So far, I mean it’s a blistering rally. I mean this is all happening at a world record time. So with that qualification this is classic bear market behavior. Bear markets are insanely difficult. In fact, the whole like blow-off top through early bear market territory is really always insanely untradeable and difficult. And I did this for Extreme Value readers.
It was some years ago, like maybe two, three years ago, we went through, and we used the example of Apple in the blow-off top and afterwards of the dot-com era, right? The dot-com boom, blow-off top, and bust. And we noted how crazy volatile and insane it was in trying to trade the stock was just ridiculous, you know, trying to take short-term profits either on the long side or the short side... just crazy.
Can you imagine getting short any time in the past week or two here? Just insane, right? You were just blown out. Yet, you can still classify this action as classic bear market action.
So I’m going to read the next question because all of these, kind of, are stuff I’m thinking about lately and stuff I talked about in today’s opening monologue. So the next question is from Andrew P., and he says he’s an Extreme Value subscriber. “Hi, Dan. Longtime listener and echo others positive feedback. Certainly miss Porter’s tirades, but love you at the helm and appreciate hearing your thoughts.”
I get a lot of that. We love to hear Porter’s tirades, but we appreciate hearing your thoughts, too. And I’m just going to read his last paragraph. He says, “You were bearish going back to some point in 2017. The S&P continued to rally, and you continued to be bearish, and how the S&P has fallen back to its 2017 levels.” You know, approximately.
“So my question is, why are you no longer bearish? Have things drastically improved since you started being bearish that you believe the S&P should be at higher levels than it was then? In my opinion, things have only gotten worse, and there’s a lot more froth that needs to come out of this market. Look forward to hearing or reading your thoughts. Extreme Value subscriber, Andrew P.”
Okay, so I’m just going to repeat what I said at the beginning. There’s the way things looked before it all fell apart, right? Before the top which was, what, February – I think it was February 12. And then there’s the way things look since, since we had a 34% drawdown and a slap-back rally of mother of all slap-back rallies here.
Okay, these are two dramatically different environments. And like I said at the beginning, just take yourself back before all this, you know, last three years. Everybody felt great, everybody thought it was wonderful. I was complaining that it was a crappy environment for investing because the values weren’t there to get you good long-term returns.
Now it’s what everybody else thinks is a crappy environment, but we are starting to find some of the values to get good long-term returns. And I mean some of them, like, appeared and disappeared pretty quick here. But if I had to guess, I’d say they’ll probably be back, and we still have a couple that we’re interested in in Extreme Value. So that’s my viewpoint.
It’s a bad environment when everybody is in love with it, and it’s a better environment when people are scared of it, okay? That’s the answer. And also just you named- you said, “Well, if we’re back to 2017 prices why aren’t you still bearish like you were back then?” Admittedly, we’re looking at a huge drawdown in sales and earnings and the economy and everything, right? This is going to be a horrendous second quarter... probably a horrendous third quarter.
I’m not saying I know how long this goes on, but if we just used the trailing 12-month levels as our benchmark, we’re at 2020 levels, right? It’s not 2017 anymore. Businesses are at their 2020 levels of sales and earnings and everything else, and that’s what we’ll be looking at when the other side, if we get a horrendous bear market for the next, what, one, two, three years, however, I don’t know. That’s what we’re looking at, you see?
So that’s why some of these things, they’re trading at 2017 price levels, but you know, 2016, 2015, 2014, whatever valuation, some of them. Hope that’s clear. That’s all I want to say about that because I did talk about it at the beginning. But that’s another episode of the Stansberry Investor Hour.
I hope you enjoyed it as much as I did. It’s my privilege to come to you this week and every week. And if you really want to just run through the archives, they're at investorhour.com, every single episode we’ve ever done. And every single episode has a transcript. The latest transcript might take several days to appear, but there always is a transcript for every single episode. Just click on the episode, scroll all the way down, and that’s where the transcript is. I still get e-mails about this.
Even better, go to iTunes. Subscribe to Stansberry Investor Hour and click "like." When you click "like," lots of other folks like you notice, and they tune in, and we get to have an even better discussion in the program. So just go to iTunes, subscribe to Stansberry Investor Hour, and click "like."
All right, that’s it. Thank you very much. I look forward to talking to you next time. Until then, bye bye for now.
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