Today i was lucky enough to catch up with Rick Rule again. We talked about some specific Uranium companies, the Uranium sector, and the biggest lesson Rick learnt from his early days as an investor. Enjoy!
Hi Rick. Well, welcome to The Next Bull Market Move. How are you today?
I’m fine. Thank you for having me back on.
No problem. Last time we talked, we were in London at the Mines and Money conference in December. Now it’s the end of 2016 and I just wanted to know has there been anything you’ve learnt or anything that’s changed within your investment philosophy throughout this year? Has anything surprised you?
Well, of course you learn every year as you’re actively engaged in the business. They say that history never repeats but it rhymes. I think what we learned in 2016 among other things with regards to precious metals of course, was the old lesson that a bear market is the author of a bull market and the bull market is the author of the bear market.
What surprised me in 2016, of course in the first half of the year, was the suddenness and the dimension of the move that we enjoyed in the small gold equities. Then, of course, the inevitable breathing spell. It’s difficult for people who haven’t grown up in the business, as I guess I have, to understand that markets that go up a hundred or 120 percent can decline by 35 percent and in fact must decline by 35 percent. I’m not sure I learned that lesson. I just think I re-experienced it for the fourth or fifth time.
That’s a great point. For investors in general, most investors aren’t successful. Buying low and selling high is very easy to say but very hard to do. Why do you think this is? Do some people need a certain temperament or is it just experience?
I thought about that long and hard. There are a few elements in most people’s personalities that have been described relatively well by certain branches of social scientists. One is that we consider ourselves to be fact seekers, sort of objective consumers of information, pulling data from all over the universe, modeling it wisely and coming to correct conclusions.
That’s not what we are, actually. We actually tend to attract data that supports our existing paradigms and prejudices. We’re looking more for reinforcement and fact than we are for challenge. That’s the first thing and I’m not excluding myself in that by the way. I find myself battling confirmation bias literally everyday that I study, which is a different way of saying everyday.
The second factor that I think is important is that our time frames are necessarily, I guess, short. Meaning that rather than putting things in very long term perspective, our expectations of the future are set by our experience in the immediate past. Our experience in the immediate past, if it’s bad causes us to be weary. If it’s good, it causes us to be aggressive. That’s why bear markets go on longer than they should and why bull markets go on longer than they should.
You can know, empirically, that a market is attractively priced, or even cheap, but if your expectations proceeding 18 months was that you’ve been punished for every move you make, although you have a rational expectation of success, you have a fear that’s justified by your more recent experience. I think those factors probably account for an awful lot of most people’s failings, particularly in cyclical industries.
That makes perfect sense. When we met in London, you recommended a book for me that was Security Analysis by Benjamin Graham. I’ve been slowly digging my way through it. I’ve got a couple of quotes from the book that I’d like to read to you and I just want to hear your comments on the quotes.
It’s always advantageous to have quotes from Graham read to one. Particularly early in the year.
Okay great. This is about intelligent speculation, and Benjamin Graham says ‘This is the task of a risk that appears justified after careful weighing of the pros and cons.’ And then he says that unintelligent speculation is ‘Risk taking without adequate study of the situation.’
The part that struck me about that quote was the ‘adequate study’ and I was curious as to how much adequate study do you take in terms of financing a company or especially with a younger company or younger CEO, what do you look for in terms of the studying in that regard?
Well, two comments on that. In the first instance, it’s important to know about Ben Graham’s past. His father died when he was quite young and the family grew up in an economic circumstance that would be best described as penury. While my own upbringing was far from luxurious, I didn’t grow up in the extreme deprivation that Ben Graham did.
The consequence of that is that I was more willing to accept defeat. In other words, I was more willing to make a mistake in the pursuit of larger gains, perhaps because I was able to. Where he became a university professor and as a consequence, his poverty extended for a fairly long period of time, I became an entrepreneur at university and the consequence of that is that my cash flow allowed me to be more aggressive than Mr. Graham.
I think what he says is accurate however. The decision between whether to conduct more investment style operations in one’s life or more speculative style operations in one’s life has a lot to do with how hard one is prepared to work.
Warren Buffett likes to say, if he can’t know enough about a company in spending 15 minutes studying it, it is too complex for what he does for a living, which I think is very very intelligent advice. Sprott by contrast exists in a much more speculative realm and the consequence of that is that we spend millions of dollars per year, literally millions of dollars per year, doing geological, geophysical engineering, financial and legal due diligence.
I think really what it comes down to is what part of the business attracts you relative to your competitors and, very much as Mr. Graham suggested, how much work you’re willing to put into it. For me, I find the work pleasant. I would do it for free if it didn’t pay so well.
That leads me onto my next question about a couple of recent financing's that Sprott was involved with. The companies involved were Goviex Uranium and Deep Yellow limited. I’ve noticed that in those companies, you’ve worked with those people before in the past or they’ve been successful within the uranium market in the past. I assume this is no accident. Could you comment on that?
I’m attracted to the uranium space particularly because almost nobody else is. I found, even in my declining years, I could win the hundred meter dash if I’m the only contestant who shows up at the starter’s line. There’s very little interest in uranium on a global basis.
The uranium business treated me extremely well at the beginning of the last decade, the last time nobody else cared. The macro picture goes something like this. The world is producing uranium at a fully loaded cost, including cost of capital, at about 60 dollars a pound and is selling this stuff at 20 dollars a pound, which is farcical. The industry is losing something like 40 dollars a pound on 150 million pounds a year, which is distinctly unpleasant.
The price has to rise but we don’t know when the price is going to rise. We know it will, we just don’t know when.
I had found in 40 years in this business that asking myself questions where the answer begins with when, not if, is an important way to guarantee my success over time, and so it is with uranium.
I think the pace of the increase in the uranium price will have very much to do with the pace of Japanese restarts, although there are many other factors. The pace of Japanese restarts will govern the price escalation in the intermediate term in Uranium.
Nobody, including the Japanese, knows when that will happen. Most competitors of mine have no tolerance for such large unanswered questions with regards to timing but I have learned that I do.
In the second instance, having to find uranium as being attractive, how do we define speculative targets? Well, as you suggested, doing business with people we have done business with in the past so that our knowledge of their competencies, in-competencies and expectations is very important.
John Borshoff ran Paladin in the last cycle and I was his first backer in that cycle which was extremely lucrative. Private placement at 10 cents led, as it often does, to an immediate price collapse down to a penny. A refinancing and then the most memorable romp of my life as the stock, in four or four and a half years, advanced from a penny to 10 dollars.
Interestingly, that circumstance, the construction of Paladin, occurred in a set of circumstances very much like we enjoy today. I found it and John Borshoff, a person who I know and respect, involved in a task where he has been successful at precisely the task at hand that confronts him now. I’m not asking him to build a uranium mine, something which I think he’s unsuited to. I am asking him to assemble, at very low cost, a group of assets that will be economic when the uranium price returns to a price where the industry is solvent.
In the case of Goviex, very different situation. Govind Friedland is a very bright young guy, son of Robert Friedland, who is both a friend and a serially successful entrepreneur over time.
Well, Govind doesn’t have material success in uranium in his background. He has access to one of the most dynamic entrepreneurs in the planet, in his father, and he’s backed on the other side by the Lundin group, people who I have done business with since 1975.
He has assembled a range of assets that, first of all, are in an unpopular commodity, uranium. Secondly, in an unpopular continent, Africa. It is a company, at the time we financed it I think had a 20 million dollar market cap, and they had projects in that had seemed cumulative prior expenditures in the 400 to 450 million dollar range. I was buying successful expiration assets for two or two and a half cents on the dollar, something which strikes me as an attractive bargain.
Definitely. I’ve got one more question and it’s about any mistakes within your career. Is there any regrets or mistakes within your career that you’d like to share? I imagine the bigger the mistake, the bigger the lesson?
I don’t believe, even at your relatively young age, that you have enough time on earth to catalog all of my mistakes. I would say that the first dramatic mistake I made in my life is the most instructive for your readers. I came into the business in that great bull market of the 1970s, when the gold price advanced from 35 dollars an ounce to 850 dollars. The oil price advanced from three U.S. dollars to 35 dollars.
I mean, you know, pick a resource economy, they all went to the moon. Of course all the great thinkers in the world, Jimmy Carter, Jeremy Rifkin, the club of Rome…if I sound sarcastic it’s because I’m sarcastic, extrapolated trends in motion to illogical conclusions. It was a malthusian decade and if you lived through it, you will remember quotes like, that by the year 2000 the oil price would be 200 dollars a barrel and 30 or 40 millions a year would be starving to death.
We all, at that point and time, myself included, forgot that markets work. The whole narrative of the 1970s, because I was involved in the resource business and it was pro-resource business, was useful to me. The problem was that I confused a bull market with brains.
I thought the fact that I was successful during a period when commodity prices went crazy presaged a much more general success. When the commodity prices collapsed in the 1980s, I learned just exactly how smart I was, which is to say not very. I forgot that markets work. In truth, in cyclical business like resources, what you learn, and our politicians should note this, the cure for low prices is low prices and the cure for high prices is high prices.
The after math of the 1970s was that a very young man, a very successful man, a man filled with hubris and a man who became quite wealthy well before his time got taken down several pegs to the point where in the early part of the 1980s, I went from being a very wealthy young man to having a negative net worth, an experience which actually served me and my clients very well in the 35 years that followed.
Thank you for sharing that Rick. Okay where’s the best place for people to reach out to Sprott and how can they get in contact with you and your services?
I think the best place for people to reach out to Sprott is to go to our website.
While it may not be a marvel of website construction, there’s 200 hours of instructional material on the website. There is also the Sprott blog, Sprott’s thoughts, where you get the best ideas from the Sprott organization from our friends around the world and I guarantee that your readers will get their money’s worth because it’s absolutely free.
Well, thank you very much Rick and thank you very much for your time yet again.
My pleasure. Best of the season to you and to your readers.
To find out more information about what Rick and his team are doing, please contact your Sprott financial advisor or go to http://sprottglobal.com/
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