We interviewed Rick Rule, President & CEO of Sprott US Holdings and talked about his ‘mantras’ and why they are important. We also discuss philanthropic entrepreneurialism; occasional big wins versus regular small wins; backing inexperienced management teams; The Greater Fool Theory; his agenda; emotional moments; and turning anecdotes into real-life ‘stop-what-you-are-doing-and-listen-moments’.
Rick starts off the interview by talking about his philanthropic enthusiasm and says that he and his wife are active philanthropists and have had mixed success over the years. They have a family foundation and the most success over the last 30-years, has been in microcredit where they have helped build and fund banks in frontier markets that make loans to women entrepreneurs. They have also been active in finding private solutions to what are perceived to be public problems. An example would be private solutions to environmental problems, with groups like Panthera, a big cat conservation group. Rule is extremely active in libertarian education and outreach involved in A Foundation for Economic Education, Students for Liberty and Americans for Liberty and the International Society for Individual Liberty. He believes that will become an important part of life going forward and is looking forward to making it more important.
Investments and success
Rule then goes on to discuss his investments and explains that his success has come from two ways. He says that the money that he now invests sensibly, he made through very aggressive speculation, and they are very different disciplines. As a speculator, you are success because you work hard, and you are successful because you anticipate failure and accept failure as the price of success. In the early stage speculations, in exploration Rule tells us that he lost money in many more starts than he made money on and his great arithmetic is that he would lose 25% or 30% if he lost, and make 1,000% or 1,500% when he won.
Rule goes on to say that there isn’t one solution to investment for regular retail investors and that one size doesn’t fit all. He also believes that the investment process and more importantly the speculative process, is personal and an important part of the process is discussing the tolerance for risk with the investor.
Rule talks about his own success and admits to being very fortunate to working with a lot of people over time who were at least in their own specialty, substantially smarter than himself! He says that he is a good utilizer of human resources and believes that he is a hard worker and very disciplined, which helps. Also, he now understands that businesses are cyclical and that markets worked. That the cure for high prices was high prices and the cure for low prices was low prices.
Investors need to know why they made the investments and work out what their goals are states Rule. They need to work out, what will cause them to declare victory, sell and walk away and what will cause them to declare defeat? He adds that as data changes, and the world changes, that your goals and your plans change, but they need to change proactively.
Rule thinks that it is extremely important to be a ‘nice guy’ and thinks that ‘nice guys’ primarily do win. He believes that people who are concerned about the wellbeing of their employees and shareholders are the ones that do win. It is also important to be happy as a CEO in business and if you are happy and have built a good legacy then you are seen to be investable says Rule and that a CEO should enjoy seeing his or her shareholders and employees prosper.
New Media World
Rule claims that most of the money that Sprott has spent in the last 10-years in conventional advertising has been wasted and that the money spent in investor's outreach and education has enabled them to grow to USD$17Bn dollars under management. Sprott are involved in new media professionally because it works but Rule says that he is also good at it and that teaching, and mentoring are becoming increasingly important to him. In mentoring through social media, Sprott has over 200,000 customers and shareholders and there's simply no way to physically engage with all of them but he can do an interview, which is viewed by say 40,000 people and some substantial number of them will reach out to him. Rule says that he can learn from them and can teach them. He can develop relationships with some of them. This technological platform has allowed him to efficiently utilise his experience and has been a very pleasant circumstance and he will push for as long as he can.
Rule admits that he has been lucky enough to have been involved in those circumstances where the numbers do seem too good to be true but where investments have been incredibly successful on more than several occasions. He knows that if a broad resource class, where the resource is essential for the wellbeing of mankind, is priced at a substantial discount to the cost of producing the stuff, one of two things happens; either the price goes up or the stuff runs out. He says that being behind that investment thesis, just trying to be in the way of something that must happen, has been extraordinary and it has been extraordinary for him in relatively large numbers.
Rule will keep repeating these mantras because they are an extraordinarily efficient communication tool. A slogan sticks in somebody's mind and illustrates the point that you are trying to make. When Rule says the cure for low prices is low prices and the cure for high prices is high prices, people can remember that for a decade and it saves them trying to remember a ten-minute soliloquy. He can give them the ten-minute soliloquy to explain and reinforce the mantras, but mantras are a critical communication tool.
Rule says that Sprott will be building more regular income type products going forward because of the way that they see the market going but also because they are good at it. He comments that if you examine the market period 2011 - 2019, the Toronto Stock Exchange Venture Resource Index, which is the index that Sprott is measured against, lost 88% in nominal terms, and 4 in real terms. Sprott's lending activities on balance sheet generated a 15% compound annual internal rate of return. 15% is a handsome headline return, but when you juxtapose it with an index that lost 88%, you understand that lending is a superior business to equity. Sprott have done extraordinarily well in that business in an institutional sense, but Rule wants to democratise that product. He wants to create the Sprott-branded lending and income product through the mass affiliate. Rule, of course values the fact that the largest institutions in the world can become Sprotts customers with a USD$10M ticket but what he wants is to be able to democratise that so that more ordinary human beings can play the game with a USD$25,000 ticket or a USD$50,000 ticket. That's very, very important to Rule.
Sprott are not loan to own guys, but lenders says Rule and the worst thing that could happen to Sprott is they have to foreclose. Sprott are good lenders, not good operators, and it is bad for their reputation if people think that you are loan to own guys, and not lenders. If a borrower has a wobble, if something goes wrong, and that borrower calls us and says, you know, 'This month's fine, next month looks shaky, January doesn’t look good at all, here's my problem, here's what I’m going to do about it, can you help me?' they'll move heaven and earth for that person. Rule says that Sprott have only had two absolute failures in ten-years, and the sum total of those failures has been USD$3M in losses against several billion dollars in deployments.
As a lender, the most important thing is to avoid loss states Rule. You look to shelter your downside and if you do that, the upside takes care of itself.
Rule concludes that he loves down markets. He loves circumstances where the market is either bored by something or hates something, and where there's a clear path out of it. He enjoys educating people to accept unpopular themes and also likes his ability to network. He likes somebody to come to him with an idea that needs fleshing out and knowing from his database that there are several people that he knows could further that story, who would benefit from furthering it. That kind of thing is enormously fun for Rick Rule!