"Investing is easy if you let it be. You need a plan, and you need to do your homework, but you also need a set of rules. So we went and got one of the best rules in investing" - Rick Rule.
We 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’.
Matthew Gordon: Have you ever heard of a movie 'Being John Malkovich'?
Rick Rule: I have to admit that I am not well versed in popular culture, so the answer is no. In fact, ten days ago, I bought the first television I’ve owned for 35-years, so that'll tell you. So, I apologise, but no.
Matthew Gordon: Today, Rick, we are going to see if we can find a gateway into Rick Rule's brain and learn a little bit more. You've made a lot more money than the young version of you possibly could have imagined, I suspect. What's the plan? Are you going to do a Warren Buffet and keep going until you're 95? In which case, the question to you: is there more to life than just math and investing?
Rick Rule: I think there's a lot more to life than working in investing. I'm looking forward to exploring some of that. The truth is that I absolutely, positively love what I do, and the idea that my life would be complete without working too is a nonstarter. The truth is if you stick with something for a long time and build up know-how, and just as importantly know-who if you have 45-years of context, the truth is that the job gets easier. So, the idea that I spent 45-years learning how to contribute to my client's wellbeing, and then somehow decided to waste that 45-years of experience as a consequence of one or two too many birthdays, is a nonstarter for me. Certainly, you will not see me working as hard in 2021 as you would have seen my work in 1991, but the truth is that given the advantages that I've accrued, an affiliation was brought, as an example, where 200 other people helped me work, experience and context, my suspicion is I’ll be able to get a lot more done now than I did then, even while exploring other avenues in my life.
Matthew Gordon: Have you ever been into philanthropic entrepreneurialism, that kind of giving back? Not just to your clients but giving back to society?
Rick Rule: My wife and I are active philanthropists, with mixed success, frankly. We've had some real successes and we've had some clanking failures. We have a family foundation and we have begun to employ the same discipline in philanthropy that we employ in investing. The most success that we've had, I would say, over the last 30-years, has been in microcredit. Helping build and fund banks in frontier markets that make loans to women entrepreneurs. We've had some striking successes in that regard, and I suspect we'll continue to do that. I've also been active in, what I guess you'd call, libertarian or anarchic-capitalist philanthropy, which is 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. I’m extremely active in libertarian education and outreach. A Foundation for Economic Education. Students for Liberty and Americans for Liberty. International Society for Individual Liberty. That will become an important part of my life going forward. I'm going to do it very much the way I’ve done investing. I'm not going to give unconditional cheques to people. I'm not going to invest in organisations where there isn't a strong leader who writes his or her own cheque. I'm not going to do philanthropy in countries where local indigenous people aren't also contributors. I want to be a partner, not a solution. As you can tell by my answer, this is an important component of my life and I'm looking forward to making it more important.
Matthew Gordon: What are these freedoms about, that you are willing to support? What are people trying to do? What are you trying to do with your philanthropic endeavours?
Rick Rule: Well, that's a very, very large topic. Condensing that, I guess, I would like to see more exchanges between human beings be contractual and voluntary. I would like to see people cooperate with each other on their own terms, not on terms that were prescribed by other people. You know, that's something I’m very, very interested in. I think there are ways to accomplish relationships between people that don't involve laws, don't involve guns, don't involve war, and I'm a huge believer in capitalism. I believe that markets work. I believe that markets are messy, but I believe that markets work when people like the World Economic Forum talk about a reset of capitalism, my recommendation would be that we try capitalism. I don't think the free market's unconstrained by a lobbyist, unconstrained by subsidies, unconstrained, frankly, by extortion and fraud, has ever existed. I'm very interested in helping create a climate where young people increasingly look to voluntary rather than government solutions and interactions with people.
Matthew Gordon: What are the secrets to investing?
Rick Rule: I don't believe that anybody's perceived wants or needs are a call on anybody else's means. If you believe that you have the right to extort the proceeds from someone else's labour, what you're saying in effect is that your perception of the world's needs entitles you to enslave them. I'm not a believer in slavery. I'm not a believer in judicial slavery. I'm not a believer in slavery that only lasts until June, which is to say that the centre extorts 50% of someone's income. I guess the focus of my philanthropy would be that anti-slavery.
Matthew Gordon: Do you think your success, has come from these big moments or is it collective of smaller wins?
Rick Rule: Two things. The money that I now invest sensibly, I made through very aggressive speculation, and they're very different disciplines. As a speculator, you are a success because you work hard and you're successful because you anticipate failure and accept failure as the price of success. In my early stage speculations, which is to say my exploration speculation, particularly in my generative exploration speculation, and to a lesser degree my frontier market speculation, causes me in those activities to anticipate a 75% or 80% numerical failure rate. That is to say, I lose money on many, many, many more starts than I make money on. The great arithmetic is that I lose 25% or 30%, when I lose, and I make 1000% or 1500% when I win. A fifteen bagger advertises an awful lot of sin elsewhere in the portfolio, and of course, needs room left over for an acceptable rate of return. In the investing part of the business, the probabilities are very different.
My upsides aren't the same, but my downsides are much, much different. If you're in the market that's cyclical, I would argue that all of my markets are very cyclical, what you learn is that if you’re a rational investor or a speculative investor, you're almost always early, and I'm early. What that means as an investor is that, if you are in a sector that you see as down and beat up but going to come back, you don't buy the most leverage participant in the sector. You don't need to speculate because the market beta is so strong that if you capture the beta, the alpha looks after itself. So, as an example, I believe that three years from now, four years from now, five years from now, we're going to have an extraordinary rally in oil and gas. At present, I'll be looking to play that by owning Exxon, Chevron, GasCon, names like that. I won't need to be in the sub-100M market cap space because I'll get all kinds of beta in the big names and I'll get a dividend that overcomes the time value of money challenge. As a speculator, of course, I'm involved in a very different game and I would say if I say that my success as a speculator comes from tolerance for loss. I'm not psychologically or financially averse to losing, because I consider it to be part of winning. Many people aren't built to speculate, even if they're very, very wealthy. They can't take the psychological trauma of being wrong three or four times for every time that they're right.
Matthew Gordon: What do you think regular retail investors learn from the way that you behave, given that your business model is different from theirs, if they want to make their own investment choices and decisions?
Rick Rule: I don't think that there is a one size fits all. Sprott probably has 220,000 customers worldwide. My suspicion is that there are probably 220,000 solutions. There isn't one solution. I would ask investors to invest first in their own education and invest in coming to know themselves and their psyche as human beings and make the investment process consistent with their financial needs, their psychological capabilities, and their goals. Many, many, many investors don't understand that the investment process, and more importantly the speculative process, is personal. When I onboard a client, a client that I'm going to be working with, it's pretty odd. The client will spend a lot of time asking me about investments and I'll spend a lot of time asking the client about the client. Once I know more about the client, then I can begin to narrow down an investment strategy that's appropriate to him or her. But so much of this is personal. I didn't believe that when I first started, by the way. When I first started, when I was a young man, like many young men, if you would have asked me what I wanted, I would say, I want to make a lot of money. That's interesting but it's irrelevant. If you don't know what that entails, you don't know how you plan to make the money, why you plan to make the money, what risks you are willing to assume to make the money, how much time it's going to take, what you'll do if it goes wrong, what you'll do if it goes right, you probably won't make any money.
Matthew Gordon: What's their tolerance for risk? What do they say when you're going through this process?
Rick Rule: Yeah, there's a bit of resistance. One of the things I like to do is use a visualisation tool that you may or may not be able to identify with. Before the metric, you may remember lumberyards and millineries. They had yardsticks. I ask the prospect to envision the yardstick. Very low risk, very low return is at one inch. Very high risk, very high return is at thirty-six inches. I ask them to describe to me how many inches along that continuum they'd like to go. What I tell them is, ‘Of course what they want is, low risk and high return, but if you bend that yardstick, of course, it breaks. You can't have low risk and high return.’ So, when people ask me my price target for something, I say, ‘Higher but before we go to where we hope it might go, as for me how much you can afford to lose.’ I tell people, as a rule of thumb, that if their target is extremely speculative, 35% compound, internal rates of return and private placements, that if they're going to follow that strategy, they have to be willing to lose 150% of their expected return, which is to say, if you embark on a strategy that could give you 35% compound internal rates of return over time, you need to be willing to lose 50% of your money. And when I ask people what they're willing to lose, rather than what their goal is, we begin to have a rational discussion.
Matthew Gordon: What do you put your success down to? Timing, hard work or your endurance here, or are you just smarter than everyone?
Rick Rule: Certainly not smarter than everyone. I'm not being humble with regards to that. I have been very fortunate to both hiring partner with a lot of people over time who were at least in their own specialty, substantially smarter than I. I would suggest that I'm a very good utilizer of human resources. I may be the best hirer of geologists that I ever met. If I had a secret, that would probably be one. I'm a very hard worker and I'm extraordinarily disciplined, which helps. Another thing that helps is that early in my career, we talked about this before, I didn't understand that cyclical businesses, that markets worked. That the cure for high prices was high prices and the cure for low prices was low prices. The consequence of that is that I experienced, in my late 20s, a real financial setback, which is to say I went below zero. There's no personal circumstance that can teach you a lesson about markets quite as well as losing everything that you have, plus more.
I would say that the third thing that has really helped me is, what I laughingly call, know-who. I've been a reasonably good identifier of top-notch entrepreneurs, early in their careers, and I backed them, in fact, became indispensable to them, and that's something that I’m continuing today. I'm always looking for entrepreneurs in their late 20s-early 30s, where they have the brains, they have the determination, they have the ethics, but they don't have the following. I allow them to borrow mine, to the benefit of my following. I guess the final thing, we talked about this too. I was about 30 when I decided I wasn't going to worry about making money. What I was going to do was worry about enjoying what I was doing and worry about adding value. When I started concentrating on creating utility for other people, within a quarter, I started making what were, for the son of a single, working schoolteacher, like really incalculable amounts of money. Now, it isn't really that I made huge amounts of money, it's that my calculating skills weren't too advanced then. My expectations were low but that's really, I think, an important driver. My financial success and also my enjoyment of what I do.
Matthew Gordon: What are the big things that people really need to take note of to ensure that they don't put themselves in the position that you were in or some of the people I was talking about, find themselves in?
Rick Rule: I think for every investment an investor makes, that he or she needs to write down why they made the investment. What their goals are. What will cause them to declare victory, sell and walk away? What will cause them to declare defeat? Now, it's important that as data changes, and the world changes, that your goals and your plans change, but they need to change proactively. You can't change a plan if you don't have a plan. I agree with you, is an example, What we do, an illustration, I agree with you that we're in oppression levels, bull market. What would cause me to change my mind? What would cause me personally to change my mind would be if the US budget deficit closed to 1% of GDP, or if the interest rate on the US ten-year treasury was 250-300 basis points positive. Or, if the market share or precious metals and precious metals related assets in the US market exceeded 3%. The market share of precious metals and precious metals related assets could exceed 3% if we had negative real interest rates, and it wouldn’t change my premise because the market share would deserve to be above 3% but a circumstance where the factors of, I think, propelling gold higher and hence gold stocks higher, have at least brought quantitative definitions. I keep in my mind, the series of quantitative goalposts that I monitor and to the extent that the market begins to approach those goal posts, I need to become more cautious. Markets are pernicious pricing signals, that is to say a rising market justifies the narrative that caused us to participate in the market. So, as prices go up and the opportunity becomes arithmetically less attractive. It becomes psychologically more attractive and the consequence of that is that you have to guard against your own hubris and against the seductiveness of being right and increasing equity prices.
Matthew Gordon: How do the young bucks get in and how should we treat them? What do you look for when you see a team that have never built a mine?
Rick Rule: With regards to the in-bucks, I never back them with client money. I back them with my own on occasion. I'm much more willing now to lease my money than my reputation. An example would be Zach Flynn, who was predicted to be an overnight success. I knew Zach's father, now deceased. He was a very good friend of mine, very well. If I don't know somebody, and people that I know well don't know somebody, they have no way in the door. They need to become successful with their uncle's money before they are successful with Rick's money. If there is community consensus, that is to say, if you know, Robert Friedland is going to write a cheque and Ross Beaty's going to write a cheque, the club are all going to write cheques to back some young person, and this person in American football parlance is going to be the ball carrier, he's going to have a very, very solid big, beefy bite in front of him, I’ll probably play. But I won't play with Sprott's money. I won't play with the client's money. I'll just play with my own money, because in that case, the overwhelming probability is a failure. The successes are extremely gratifying.
Matthew Gordon: We have a lot of companies come on here and go, 'Hey, Uncle Eric's put some money in our company, it must be right. It's an indication that there's something there, but it's a bet. It's not an investment.
Rick Rule: Eric has a skillset that I don't have, and he has a level of confidence that I don't have, which is why he's financially wealthier than I am. If you were to ask Eric today about the gold price or the silver price, he would give you a higher price that the price that exists today, and he's absolutely confident in that. He's a pretty good chartered accountant and one would discount his forecasts at your own risk. But that's not how I invest. The gold price to me is the gold price I see on the computer, or at least the forward strip. Secondly, Eric has a journalist sense that's uncanny. Eric has the understanding of the ability of a story to capture the popular imagination. I told you earlier, I have no television for 35-years, and I can't dress without my wife's assistance, so the idea that I would be as tuned into popular culture and the power of the narrative as Eric, is a nonstarter. What Eric and I share, and probably to a greater degree than I, is the tolerance for loss. The willingness to lose 20% or 30% or 40% in hopes of making 1,500% or 2,000%. Eric and I are very similar in that regard and he's much more aggressive that I am.
Matthew Gordon: Do you think nice guys can win in this industry?
Rick Rule: I think nice guys primarily do win. I think that people who are concerned about the wellbeing of their employees and shareholders are the ones that do win. I can't imagine a nicer set of people than Ross Beaty, Bob Quartermain, Pier Lagrange, and although he's prone to throw temper tantrums, Robert Friedland has been extraordinarily philanthropic, extraordinarily generous and he takes an almost religious comfort in the wellbeing and success of his employees. So, yes, I think in every circumstance, nice guys are the ones who win.
Matthew Gordon There's an interesting conversation around the psychological nature and breakdown of CEOs. Not just in mining, but across the board, you know.
Rick Rule: I've known some very, not nice guys, both on Wall Street and on Main Street. When I look back, yeah, maybe a couple of them bought nice houses, nice cars, maybe even big yachts, probably financed three divorces, but I don't see them building a legacy. I don't see them, in my experience, being happy, which I think is important. Importantly, I don't see them as being investable, if I have a CEO that doesn’t take joy in seeing his or her shareholders and employees prosper, what I see is a lone wolf. I see somebody who’s deprived themselves of the very network advantages that have made me successful and, well, I feel sorry for them. I have absolutely no interest at all in risking my clients' fortunes behind somebody who is going to be, more likely than not, the author of their own failure.
Matthew Gordon: What do you feel about this new media world that you exist in, and why are you doing it?
Rick Rule: Most of the money that Sprott has spent in the last 10-years in conventional advertising has been wasted. The money that we spent in investor's outreach and education has enabled us to grow to USD$17Bn dollars under management. Professionally I do it because it works. I'm also good at it. That helps. In my declining years, which by the way I hope are further off, teaching and mentoring are increasingly important to me. As an example, I'm replacing myself as a portfolio manager across many of our products, simply because my management style requires basically 10-years of duration, and at age 67, I can't with a straight face promise 10-years duration. So, mentoring managers is increasingly going to become more important to me. Mentoring, with regards to social media, if you look at Sprott with, I don't know, 200,000, 220,000, 230,000 customers and shareholders, there's simply no way to physically engage with all of them, irrespective of my age. But I can do an interview with you, which is viewed by 40,000 people, some substantial number of them, 400 or 500 or them will reach out to me. I can learn from them. I can teach them. I can develop relationships with those who I should be developing relationships with. This technological platform, coming to this stage in my career, that is the fact that technology has allowed me to more efficiently utilise my experience and my gifts, has been a very pleasant circumstance to me and one I'm going to push as hard as I can for as long as I can.
Matthew Gordon: When you see numbers in front of you which look too good to be true, are they invariable too good to be true? You've had a few hit them out of the park moments, but not every day of the week, right?
Rick Rule: Mercifully, I would say there have been 25 or 30 circumstances in my life, in the speculative side, where the possible number - not the probable number but the possible number - was extraordinary, and where, as hard as I tried to disabuse myself of my premise, that the data made greed prevails and proffer. In those circumstances, you know an example would be Lumina Copper. Ross and I visited information about Lumina Copper. I think the Copper price was $0.70/lb, and I remember thinking the incentive price for Copper at that point in time was probably a $1.50/lb, which meant that Copper could probably go to $2/lb, $2.25/lb before the industry could increase supply enough to meet pricing signals. We were able to buy billions of pounds of Copper in the ground that wasn't economic at USD$1, but would be wildly economic at USD$2. I had to confront the fact that, despite the fact that I thought the Copper price had to go up, that I wasn't God, that I didn't control the fact that the Copper price went up, nor could I control the timing in which it did go up. So, I had to tolerate failure but the numbers I had in mind, similar to the Paladin numbers I had in mind in Uranium’s case, were very, very, very large and they were handily, handily exceeded. As I say, as a speculator, I've been lucky enough to have that circumstance.
Now, mind you, over 45-years, I've had that happen to me 30 times. In the investment business, for the last 30-years, I've been statistically more successful, financially maybe a little less successful, but 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. Being behind that investment thesis, just trying to be in the way of something that has to happen, asking oneself questions where the answer begins with when, rather than if, has been extraordinary for me and it's been extraordinary for me in relatively large numbers.
Matthew Gordon: These mantras have stuck with you for a reason, is that right? Is that why you keep repeating them?
Rick Rule: I keep repeating them because they're an extraordinarily efficient communication tool. A slogan sticks in somebody's mind and illustrates the point that you're trying to make. When I say 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. I give them the ten-minute soliloquy to explain and reinforce the mantras, but mantras are a critical communication tool.
Matthew Gordon: Do you get frustrated by some of the games played in this market?
Rick Rule: One of the reasons why mentoring is important to me is that, well, I can't change the world, I can attempt to change the fortune of the Sprott numbers and I can attempt to grow the Sprott numbers by educating investors in how to protect themselves from themselves. But we're in a circumstance now where a coalition of good promoters can get behind a lousy property, spend USD$700,000 or USD$800,000 of financial public relations and raise USD$20. Then they salary over five years. It has always been that way in bull markets. Do I like it? No. I think it's disgusting. Am I going to be able to do anything about it? No. Not at all, other than helping a class of investors learn how to exert discipline, help them to understand that work is more essential to success than greed or aggression. That type of thing.
You know, I'm actually getting somewhere. These portfolio rankings that I have done for your audience and others, I've now graded over 15,000 portfolios and I have been able to educate people by focusing on something in my communications with them, that's of critical interest to them, which is to say their own fortune. I can do very broad-based lessons in a discussion like this, which has some impact on somebody, but when I send them back 1 through 10 rankings of their own portfolio, 1 being best, 10 being worst. I comment on companies, well-conceived scam, head for the hills, there's something about that strikes a chord with somebody. They might like it, they might not, but they focus on the lesson much more intensely, because it's their own fortune and I'm very proud of the work that Sprott has been able to do this year, by helping educate people. it's of course been enormously financially rewarding for Sprott as well. So, it's nice to do well by doing good.
Matthew Gordon: Are you going to be building more of these regular income type products going forward, because of the way that you foresee the market going?
Rick Rule: Yes. Also, because we're good at it. 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. We have done extraordinarily well in that business in an institutional sense, but I really want to democratise that product. I really want to create the Sprott-branded lending and income product through the mass affiliate. I of course value the fact that the largest institutions in the world can become our customers with a USD$10M ticket. What I want 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 me.
Matthew Gordon: What sort of multiples do you look at in that scenario? No one wants to be chasing that scenario because the red book value and the sales process is costly, it takes time, I get it, but it must be part of the consideration?
Rick Rule: Well, certainly in every loan we make, we know, or at least we have a good idea who we can sell the asset to if the borrower robs us and doesn't pay us back, we're asset-based lenders. We're making loans to companies with no visible means of repayments if the project doesn't work, and if we have the good strategic sense, if we're underwritten it well and if we know who our go-to will be if our borrower fails, we don't lose money. Remember, and I'm sure you know this but some of your listeners won't, the worst piece of debt is better than the best piece of equity on any individual balance sheet. I've learned that you can take away a substantial part of the upside, if you take away damn near all my downside. Now, that isn't to say that I'm not an aggressive speculator. I am. But those allocations come out of different pockets for me.
Matthew Gordon: There's got to be a tough guy under there which goes, I tell you what, I'm not sure whether these guys are going to be able to repay or not but right now?
Rick Rule: We're not loan to own guys, we're lenders. The worst thing that could happen to us is we have to foreclose. Two bad things happen. We become operators rather than lenders. We're good lenders, not good operators, and the second thing is it's bad for our reputation if people think that your loan to own guys, and not lenders. It's bad for your reputation on the street. 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?' We'll move heaven and earth for that person. If we don't get a call and we don't get a cheque, our response is very different. I don't mean to be a tough guy, but my job is to get it paid back.
Matthew Gordon: But if they're not producing, if they've got no cash flows, if they have not been able to go to the market. What happens then?
Rick Rule: I think we've had two absolute failures in ten-years, and I think the sum total of those failures has been USD$3M in losses against several billion dollars in deployments. The truth is that our absolute default registered minimums. Probably 40% or 50% of our loans experience technical default at some point in time in the long term. I'm not trying to say we encourage it but we're certainly familiar with it and we certainly understand how to engage in corporate support or if need be corporate triage.
Matthew Gordon: Are there cases where because you've issued a loan, the underlying assets were significantly more than the loan, are you still going to be up on the deal.?
Rick Rule: Well, not usually better because you have to leave something in place for the people that brought you the loan. We need to receive the compensation that we've agreed to receive. If a loan becomes riskier, if it becomes extended, if it becomes reschedules, that's okay but we need to be paid for that too. Compensation above the compensation that's been agreed to be compensation that we need, although sometimes we take contingent compensation. Warrants would be an example, and sometimes those have been extremely pleasant for us. The most important thing is to avoid loss. As a lender, you look to shelter your downside. If you do that, your upside takes care of itself. It's a lovely business in that regard.
Matthew Gordon: When are the moments when you can get passionate about investing?
Rick Rule: I love down markets. I love circumstances where the market is either bored by something or hates something, and where there's a clear path out of it. I like educating people to accept unpopular themes. I really, really, really like that. I also like my ability to network. I like somebody to come to me with an idea that needs fleshing out and me knowing, from my rolodex, specifically a dated term, my database I guess is the term now, that there are several people that I know that could further that story, who would benefit from furthering it. That kind of thing is enormously fun for me.
Matthew Gordon: Thank you very much for today. Wise words indeed, as always.
Company Website: https://www.sprottusa.com/