Rick Rule’s Primer on Contrarian Speculation
In an interview with Louis James, Rick Rule provides an excellent summary of what contrarian speculation investment is and makes a powerful case that the current metals climate means gold stocks are the play to make.
[If you weren’t present at this timely summit, you can still learn the details of Rick’s current investment strategy, plus much, much more. Get the actionable advice and economic perspectives and insights of 31 financial luminaries to make sure you don’t miss the opportunities ahead.]
Louis James: Ladies and gentlemen, welcome. Thank you very much for tuning in. We are at the Casey Research Summit – the reality check on the recovery of the economy. One of our luminary speakers who is always at our events, Rick Rule, is with us here now. We’d like you to give us the quick tour of your talk today and we’ll go from there.
Rick Rule: Sure. My role here wasn’t to do economics; that’s not what I am. I am a speculator, and so I talked about where we are in the context of where people are with their own portfolios – in particular portfolios that are junior-resource centric – which is what I think most of your audience was interested in.
Louis: Right.
Rick: And my point was that there were some good forces in the market: lots of cash on the sidelines; some good work being done; and basically a good market for resources as a consequence both of population growth and demographic growth at the bottom of the economic pyramid, and in terms of historical supply constraints. And there were some bad factors in the market: excessive debt in the system; way too much government interference; very large social takes on a global basis, beginning to impact extractive industries. And there were some truly ugly factors – the ugly factors in particular being poor corporate as opposed to share market performance, and the unfortunate truth that probably 80% of the junior resource stocks on a global basis are valueless. So the sector itself is in perma-decline. Although the performance – as you know from being affiliated with Casey – of the top 10% of the sector can be extraordinary. It often serves merely to focus attention on the worst companies in the sector. And then I went on to say: “This is the set of circumstances that exists, now what can we do with this?”
The fact that the market has fallen, by some estimates, by half suggests by other estimates that the market is approximately half as risky as it used to be. Price has taken care of some of the risk that existed in the market before.
The second factor that we need to take into account on a going-forward basis is the fact that the industry itself didn’t finance as aggressively last year as they did the year before, but although they didn’t raise new capital, they didn’t stop spending. I call this financial roulette. The issuers are engaged in this rather circular exercise, which is very risky: They’re spending money to attempt to get results, to generate excitement, to raise their share price, to raise money. So they’re spending money to raise money, which is a very, very risky strategy.
Most of the issuers will need to come back to market this year, and they’re coming into a market that’s in total disarray. The buyers that existed for the last 10 years – the small hedge funds and the open-ended hedge funds – are facing massive redemptions as we speak, so rather than being a source of new capital, they’re a source of the selling that you see weighing down the market. We are going to have to, as investors, invest with a view to a different buyer on a going-forward basis, and the companies who are issuing equity are going to have to find a different class of buyer for the new financing. So we’re in a time of real change and real turmoil – and hence a time of real opportunity.
My suspicion is that with so many issuers having to access the market and so few market participants that have the capability of differentiating between good and bad issuers, that just as the bad issuers were swept up with the good issuers in 2010, the good issuers are being swept out with the bad issuers in 2012. It’s my supposition that for investors who are willing to work hard, take advice, and segregate viciously in terms of allocation of capital, that this will be the best private-placement investment period that we have enjoyed since 2002.
Louis: Okay, so this is one of the key takeaways: This is the year for private placements. You put that quite eloquently. A more simple way of summarizing it is that there are going to be a lot of desperate guys out there and they’re going to be offering a lot more attractive terms – to people who are willing to wait for that to come to them. That’s a good thing.
For the nonqualified investor out there – for the more general person – can you talk a little bit about being a contrarian or being a victim? Because right now there are a lot of people out there that I am… I don’t fear a lot, but I’m afraid that a lot of good people are about to become victims just at the moment that they should be taking advantage of opportunities.
Rick: I think that’s accurate. I’ve been in the business now 35 years, and I have seen these periods several times. I guess this is going to be one of your first descents into one of these things; and it is tragic. Some very, very nice people use their heart rather than their head and sadly they buy in periods like 2010. They buy at the top and sell at the bottom. That’s the nature of things. There’s no requirement that that be the nature of things, and I suspect that your audience self-selects more towards better performers because they’ve chosen to invest the time and the money to get recommendations from Casey Research, and in fact, in many cases do further research themselves. So I suspect that the universe that you’re familiar with will be less victimized by this than others, but they certainly won’t be immune to it.
Emotions run through all of us, myself included. It is very important to bear in mind specifically what you said. I have said for many years that you’re either a contrarian or a victim. It’s a nice catch phrase, and it’s also true. This is a cyclical, capital-intensive business. There are long periods that are required to address supply-demand imbalances both ways; and so market declines last a long time. Market advances can also last a long time and be very, very dramatic.
What’s important is that good markets are for selling and bad markets are for buying; it’s counterintuitive. Your perception of how events will play out in the future is determined mostly by your experience in the immediate past; and if the last three investment decisions that you’ve made have rewarded you – if you feel good about your precepts – you begin to do something natural, which is confuse a bull market with brains, and you begin to become very aggressive. If your last three decisions – irrespective of whether they were well thought out – haven’t played out so well, you become cautious. What you need to do is teach your brain to overwhelm or overrule your heart and understand that cheaper is better and more expensive is less good. It’s difficult, but it must be done. Many things that are rewarding are difficult.
Louis: Very good. Okay, so resources are broad; are there any focuses within that? Are you more interested in metals, precious metals, oil and gas – what’s your favorite flavor right now?
