Read on for the transcript from Rick Rule's speech at the 25th annual Cambridge House VRIC. Event. "You have absolutely no excuse not to make a million dollars or more in this market"
Delighted to be with you all here. As you probably see from the notes in front of you, I'm going to be talking a bit about private placement investing and a bit, generally, about the market that we're in. A show of hands, just for fun, how many of y'all are local? You could tell by "y'all" that I'm not local. So, this is mostly a local audience. That's great. I remember being in front of this audience before some of you were born in 2002 in a market that I see as being fairly similar to this market -- coming out of a fugly, fairly ugly bear market with the writing on the wall for a coming bull market. The message I delivered in 2002 -- one of the few messages that I delivered that turned out to be wholly accurate, by the way, which is why I'm referring to it -- reminds me of what I have to say to you today. Those of you who live in Vancouver and are participating in this market, if you have a bit of capital and you're willing to work then you have absolutely no excuse not to make a million dollars or more in this market. You are in the right place at the right time. The only thing that stands between you and making a lot of money is how you conduct yourself, which is something that's under your control.
[siren]
I guess that was a forward-looking statement -- they're coming for me.
If you exert discipline, but show aggression -- particularly if you work. If you read proxy statements, if you read balance sheets, if you read financial statements -- if you pay attention, however fictional they might be, to 43-101 -- then, in the market that we're in, nevermind the market that's coming, you have absolutely no excuse not to make a lot of money. The opportunities that the rest of the world hopes to avail themselves of in a resources bull market will, in some substantial measure, originate here. Somebody has to be at the ground floor and why not you?
In this circumstance at this point in time, it's unusual that you find yourself in life at the right place at the right time with the right tools. It's up to you, of course, whether or not you take advantage. I like to refer to markets that we are in today relative to markets that we've been in before by recounting a wonderful story from my youth. Some of you might be familiar with Midland, Texas, the epicenter of several US oil and gas booms. I remember being down in Midland in the middle part of the decade of the 80s, after that wonderful bull market that they enjoyed in the 1970s. And I saw a wonderful bumper sticker on a car, it said "Please, God, give me one more bull market. I promise not to waste this one." That's where you are right now. You have suffered -- well, some of you have suffered through a fairly ugly bear market but the rest of you were smart enough to be in businesses that you understood like marijuana for the younger people. Or markets that you didn't understand, like crypto, and got lucky, which is great. You are in the right place in the right time, I think, for this market. My particular topic today is private placements, which is really a technique or way to take advantage of a bull market. What happens in good markets is that private placements become a descriptor rather than a technique -- they come to be regarded as some special way that people like Rick Rule and Eric Sprott do very well and people come to the conclusion that it's private placements, not companies or speculation, that make people money. That's wrong. Private placements make you money if you place money with good companies and they have good fortune at the right time.
Private placements are just another high-tech way to lose money if you don't work hard and make good decisions. The first thing with regards to private placements is to understand them as a tool, a technique, not as a panacea. I have made a lot of money in some private placements. I've lost a lot of money in other private placements. The good thing about private placements is that they allow you to make fairly large bets at one period of time. The outcome, of course, is a function of what kind of bettor you are. I'm going to talk to you today a bit about how to become a better bettor.
Does everybody here know what a private placement is? I'm assuming I'm not talking to the great unwashed. You wandered into the right workshop.
A private placement is a circumstance where you're providing capital to a junior resource company. The most important thing before you worry too much about the price and terms is why you're giving them the money. What are they proposing to do with it. I would suggest to you that every speculative purchase involve your understanding of the unanswered question that confronts the juniors. I regard exploration as research and development. I regard the process of exploration as the gaining of knowledge, the gaining of understanding around an unanswered question, and if a company comes to me and says "Rick, we're doing a private placement for five million dollars and we'd like you to participate." All the normal nice stuff that they say. We want SPROTT on the register and all this kind of stuff. OK, I'm happy to listen. What unanswered question are you gonna answer with five million dollars? What isn't known about your property or your properties that will become known as a consequence of my investment? About 70-80% of the time when I ask that question, the person who has proposed a private placement says to me, "You know, Rick, I've never thought of it in those terms." Which is simply to say from them from their point of view the unanswered question is "Will I be suspended or will I still get paid a salary in 2021?" While that's a valuable unanswered question to them, it's of absolutely no concern to me.
The purpose of making an investment in an exploration company is to answer unanswered question. It's your job to create an investment roadmap -- a plan for owning the stock. It includes a thorough understanding of the unanswered question, your assessment of the probability of success -- remember that most exploration efforts ultimately proved to be unsuccessful, which is not to say that even in the event of an unsuccessful effort that the stock won't go up, but we'll get back to that later -- and how much time is required to answer the unanswered question. In my experience, if I own a stock to answer an unanswered question the amount of time required to get a yes answer or no answer is between 12-18 months. Many speculators shoot themselves in the foot because they have trauma holding stock over a long weekend when their expectation should be 12-18 months. If you don't give your investment time to achieve your objectives, there's just no particular point in making the investment. That's very important.
What do you think the value of the unanswered question is? One of the things that frequently goes wrong from my point of view is that management teams are looking for small deposits. Occasionally, unfortunately, they're successful! Small deposits make you small money but have big risks. From my point of view the unanswered question has to have sufficient value to overcome the low probability of success and also give me a return on capital employed that I deserve for taking that risk. When you go through all of these factors it's important to determine from your own point of view that the management team associated with the company has sufficient knowledge and sufficient status that you care what they think at all. Let's suggest, as an example, that a manager comes to you and says "I've been a success in mining. I operated and managed a gold mine in Archean terrane in French-speaking Quebec and it was hugely successful. My investors made blah blah blah," whatever it is. The problem is that the task of hand is exploring, rather than producing, in accreted terrane -- 15 million-year-old rocks rather than billion-year-old ones -- in Spanish-speaking Peru, rather than French-speaking Quebec. While the management team may have credibility in some phase of mining, they don't have credibility attached to the task at hand. It doesn't mean that they can't achieve that task. What it does mean is that you have to take their plans and you have to discount their credibility proposing the thesis to answer the unanswered question by their relative lack of expertise. Everybody with me so far? Good.
The next question that you have to ask yourself is this. Let's say that it's going to take you 18 months to answer the unanswered question and that the management team has convinced you that they can get a yes or no answer for four million dollars. Let's say that the G&A for the company is two million dollars. To keep the math simple, four million dollars to answer the answered question and a million and a half dollars in G&A. That's five and a half million dollars total need. Let's assume, just for fun, that this is a typical Canadian junior so current working capital is zero. We're starting from nothing, they're operating on fumes. Let's say that in this private placement, they go out to raise $3M three million dollars. Well, to answer the unanswered question they need five and a half million dollars and they have three of the five and a half. What is the probability that this company can deliver me a yes answer zero? Why would I participate? No reason whatsoever. Are you still with me? This is a process that's very, very, very simple to do. And if you do it over time, particularly in the market that's coming up, you have a high probability of being successful.
Let's talk about a few other things that I'd like you to do understand. This is gonna be a highly unpopular talk because I'm asking you to all do something called work and think -- two things that are extremely extremely unpopular. Most investors want to feel and experience as opposed to work and think, but that's okay -- what you want is irrelevant. What you can have is what's relevant -- that's we're going to talk about.
One of the best instruments of self-defense as a speculator is publicly available documentation. It's all online. You don't have to go anywhere, you don't have to mail for it, it's really easy to get. Look at the company's balance sheet, look at the company's income statement, and look at the company's proxy. This is wonderful stuff. I'll relay an interesting anecdote to you.
We had an intern, that's corporate-speak for a slave, that we had it's brought some years ago and we gave this young person a task to pull at random 25 issuers from TSX-V resource companies and look at the balance sheet and income statement over five years. I actually tricked this poor intern. I said, "I know what I want you to find but I'm not going to tell you because I don't want you to play to me, I want you to use your mind and look at these financial statements." I actually had nothing in mind. I just wanted to see what they came up with! This intern came to me and said, "OK. Rick, I think I got it. I said, "What do you think you've got?" What they got was that general and administrative expenses in these 25 juniors consumed more than 60% of capital raised. Less than 40% of capital raised went in the ground. If you are confronted in that circumstance with somebody that comes to you and pitches you a private placement saying that they're penny-pinchers, experienced explorers, and all of this, what I think you can relate to them is this. For the notoriously inefficient major mining companies take a joint venture from a junior, if they put a million dollars in the ground then they may allocate $120-150 thousand dollars for general administrative expense. These TSX pretenders were spending 60-65% on general and administrative expense. If you are confronted with a circumstance where the junior who proposes to raise your money, historically, has spent 60% of the money raised on general and administrative expense you employ what Americans call the Nancy Reagan defense: "You just say no."
The other thing that you can learn from these publicly available documents is whether or not the management team believes what they're telling you there's nobody in a better position to understand the value proposition offered up by a company than the current management team. If you look at the shareholdings of the current management team and look at how they acquired them, you will understand to some degree of certainty how confident they are in the affairs of the junior. I listened to a presentation this morning where a guy was telling me how cheap his company was -- he had a three million dollar market cap and I asked him how much of the stock he owned. He replied, "I'm not a rich man." Well, that's an interesting pitch to begin with -- somebody who has worked 25 years in their career and hasn't built up enough wealth to own a substantial portion of a three million dollar market cap is probably not somebody who's a particularly good steward of capital for an old fat rich guy like me. Why would I bother?
If you haven't done anything for you, why would I care? Or, if you have done something for you and this deal isn't a good enough proposition for you then why would it be a good proposition for me?
I've told you a bunch of bad stuff about private placements but let's look at some good stuff about private placements. I'm going to talk about equity private placements. Many of you know that I'm I prefer debt private placements, but those usually aren't available to you. Equity private placements, however, if you're in Vancouver are broadly available. Why do you do them? Well, first of all, timing. If you enter into good private placements, you are providing capital to answer unanswered questions. The fact that the company is doing something that has the potential to unlock value, by its nature, takes you out of circumstances where companies are doing nothing for a year or two. Or three. If companies are coming to you and all they want is working capital, you better believe in the optionality associated with the deposit they have or else you stay away. By its definition, intelligently constructed private placements that are answering timely unanswered questions assist you in applying capital and taking advantage of time value of money. Something good or bad is likely to happen as a consequence of your investment.
The second reason to participate in private placements is you are often able to buy a meaningful position in a stock at a price that you've negotiated. You don't have to go into the market. If you're a fairly large private placement investor taking on, say, $200,000 worth of stock in a skinny stock, then you can move the stock yourself 12 or 15 percent the wrong way for you as an acquirer. Trying to build a position in a private placement, price is already set and you get a big position.
The most important reason to do a private placement is the warrant. The single most important reason to do a private placement is a warrant. The warrant is the right but not the obligation to buy more stock at a fixed price over a fixed period of time. Put more succinctly, the warrant gives you the ability to retroactively profit again from those rare "yes answers" to unanswered questions. Everybody get me with that? This is really important.
If you provide the capital that answers an unanswered question and you take a stock from $1 to $5 then that, in and of itself, is extremely pleasant. But, if in addition to having the stock go from $1 to $5, you have a warrant that's exercisable at $1.50 then you made $4 on the stock and you made $3.50 on the warrant. You turned a five bagger into a seven bagger or an eight bagger. If you understand that in a portfolio sense the expectation in exploration is failure, but the money that you make on the winners is outstanding enough that amortizes the losers, then the difference between success and failure to speculators that have the ability to avail themselves of private placements really has to do with warrants. When I look at the outperformance of my own accountants -- personal accounts -- in the period of 1995 to 2010, I thought the out-performance of my accounts had to do with my genius or my timing. Wrong. Really, 85% of the out-performance had to do with warrants. There were circumstances where I had big warrant packages in companies that became very, very successful and the rewards that I generated as a consequence of that -- let's just say they amortized a lot of sin elsewhere.
The other thing that I want to talk to you about with regards to private placements -- the warrants help here -- are selling strategies. The first part of the selling strategy is the same whether you buy the stock in a private placement or not. If you understand that, whether you know it or not, you are speculating in the answers to unanswered questions then, when you appear to get a no answer or you are certain to get a no answer, the reason that you own the stock is gone. When the reason to own a stock is gone, the stock must be gone. This is the biggest fight I have with investors.
Investors will transfer-in a laundry list of stocks to me, 30 stocks, 40 stocks, 50 stocks is common. We review them. Let's start at the top Amalgamated Aardvark -- that's got a lot of a's in it. The speculator says, "So, Rick what do you think about Amalgamated Aardvark?" I say, "Well, you know, until right now I was blissfully unaware of the existence of Amalgamated Aardvark. What do you think about it?" They say, "Oh, well, it's terrible." Well, why don't you sell it? "Well, I can't sell it." Why can't you sell it? "I bought it for $4 and it's at 50 cents. If I sell it, I'll lose $3.50." I have to stop them and say, "No, you've already lost three dollars and fifty cents. The question is what are you gonna do with the last two quarters?" You get it.
When the reason to own a stock goes away the stock must go away.
People say, "Well, I'm gonna wait till it goes back to what I paid for it." Why would it do that? If the answer to the unanswered question -- if the circumstances that creates value goes away then why would it go back? Accept your loss, drive on. Losing 30% is a drag, but it beats the hell out of losing 75%! And that's where you're headed if you don't take the 30.
In a good market, like the one that we're moving into, there's a different circumstance that's equally pernicious. If the stock goes from a buck to two bucks, but nothing has changed in the company then arithmetically the company is half is attractive. A company that had a $20 million dollar market cap that goes to $40 million dollars with nothing happening in the company is precisely half as attractive, arithmetically. In my particular case, if I buy a private placement and the price expectation that I have in place is achieved before the unanswered question is answered -- in other words where the anticipation of the yes answer is strong enough that I get the reward that I had anticipated -- I always sell enough stock that I get the placement for free. You follow that?
I'll help you remember it. This is called the point of no concern. That's when you have all your scratch back. That's different than the point of no-return, which is where you lose your money. A circumstance where a stock achieves your expectation without the question being answered is the most wonderful of all circumstances. Get your cash out of harm's way. Similarly, as I say when the reason to own a stock goes away, the stock must go away.
I like to exercise my warrants with proceeds from sales. I don't like to double down in circumstances unless the exploration information that I have is so good that I'm prepared to buy stock out of the market. Everybody understand that? If you're playing the game, if you're a trader, then don't double down by exercising warrants. Use the proceeds of sales to exercise the warrants and keep your own risk under control. Now, an interesting thing happens when you do a private placement and you get a "yes answer" but your price expectation isn't met. That is, if everything went right but the stock didn't go up. Those are rare circumstances. You've already done the work, you've already established the value in the stock and see it is undervalued. In this situation, you have to swallow, wipe the sweat off your brow, and buy more stock. When you get a yes answer and that yes answer proposes a different question and the stock is legitimately undervalued -- these are hard, but they're really gifts. You've already done the work, now all you have to do is allocate the capital.
A different circumstance would be your price expectation has been met and you get a yes answer. Now what you do is repeat the whole process. Go back to the management team, say "OK. With the data that you have now, what's the next an unanswered question?" As that famous American investor Janet Jackson of the Jackson family said, "What have you done for me lately?" It's important that you understand that this whole proposition, this whole path of adding value, is answering a series of unanswered questions. You can tell I'm excited about this. I'm really excited for all of you that live in Vancouver. The opportunity that you're gonna have to employ this knowledge over the next three years -- if you don't make a bunch of money, boy, don't complain to me! You're in the right place at the right time. Thank you all.
What a speech! Classic Rick Rule. Find more at ceo.ca/RickRule
