FutureMoneyTrends.com: Greetings and thank you for joining us at FutureMoneyTrends.com. I’m here at the Casey Summit in Tucson, Arizona with legendary investor and speculator Rick Rule of Sprott Asset Management. Rick, thank you for joining us.
Rick Rule: Always a pleasure, thank you for having me.
FutureMoneyTrends.com: Rick, I’d like to start off with some querstions that came from our subscribers. I asked them to submit questions they’d like to ask wealthy individuals, so these aren’t necessarily going to be about resources, some of them are about stock trading, but the first question is: Could you do it again? If left with nothing, could you become a millionare, and overall, how do you think you would do it?
Rick Rule: Absolutely. There are opportunities in every circumstance, and opportunities in every market. A good speculator is an entrepreneur, and an entrepreneur finds a need that he or she believes they’re equipped to fill, and fills it. I think one wonderful example of that was Aristotle Onassis, a young Greek boy in Turkey, and they were picking all the Greeks out of Turkey. At ten years of age, he supported himself and his family by buying packs of cigarettes, 20 cigarettes, and selling the cigarettes singly in traffic in Istanbul. In any set of circumstances, somebody who applies themselves to serving a market need, serving others and profiting by servicing others, can make money. This market or any other market. Absolutely I can do it, absolutely you can do it. Absolutely the person who asked the question can do it.
FutureMoneyTrends.com: What are some business sectors that you see as opportunities for young people today?
Rick Rule: Well, certainly speculation, for one. What I do. There’s lots of volatility in the market, there’s lots of risk in the market, there’s lots of need in the market. But really, what I would ask a young person to do is to focus on their passion. Something that you enjoy doing. I mean for myself, I’ve probably never worked a day in my life. That’s strictly speaking not true, I guess. But I get up in the morning, I can’t wait to get to work. It’s not a chore for me, it’s a passion for me. As a consequence I do it well, and as a consequence of doing it well, I make money for other people. I will tell you this, the surest way to wealth, irrespective of what your passion is, is to find a way to make rich people richer. Rich people value money, and rich people don’t mind spending money to make money.
FutureMoneyTrends.com: And they’re looking for investments.
Rick Rule: It’s odd, but rich people end up being much more generous. They’re thought about as being stingy or greedy or something like that, but in my experience, that’s far from the truth. Find a way to service rich people or to make rich people richer, and you will make money. But what’s important is not to follow the money but rather to follow your passion. Because in following your passion, you’re gonna deliver utility. And the way that you make money is by delivering utility. Money is the surplus of the utility you create over the utility you consume. That’s what it is. And if you create a lot of utility, almost irrespective of what you spend, you’ll make a lot of money.
FutureMoneyTrends.com: This is a common question, and it’s gonna be a fastball down the middle for you, but it is a very common question for people. Why did the mining companies sell their products for less than the cost of production? Why not just say no, hold them, or stop producing? In other businesses, you just wouldn’t do that.
Rick Rule: That’s a great question, and there are actually two answers. One, it’s an extremely capital intensive business, so if you have a billion dollars stranded in the mine, one of the temptations is to win what’s called the last man standing contest. You know that the price is going to turn and you want to stay alive longer than the other guy, so that you participate in turn. And of course shutting down a mine and reopening it is very expensive. You have to cost whether or not losing money on an ongoing basis is or is not more expensive than shutting down and restarting a mine. The second thing is that many people in the mining business actually don’t believe in their product. You’ll notice that in the silver business there’s only one silver company in North America that owns much silver. Most of them keep their working capital in U.S. dollars. So one of the things that happens, one of the great unspoken sins of the mining business is that many people in commodity based businesses don’t believe in it, and they operate the business for the salary. They’re not shareholders. And for them, they’re interested in what is called real yield, which is the yield to the managers, not the yield to the shareholders. And of course, they keep those businesses open for very different reasons, so they can pay their country club dues and the private school tuitions for their kids.
FutureMoneyTrends.com: It’s a kind of scary thought though, because the mines ultimately will be depleted.
Rick Rule: That’s correct. And one of the things we’ve been able to do very frequently in fairly bad markets, has been to buy deposits that aren’t economic at that price point very cheaply and do nothing with it. Doing nothing is a wonderful investment strategy in the right market. And when the commodity price returns, sell the deposit whole, at higher prices. One of the odd things about the mining business is that we tend to, as an example: In the gold business. Take gold from a hole in the ground called a mine, spend a bunch of money on it, and then put it in a hole in the ground called a vault. And one of the things that people in the mining business need to consider doing is buying out of the money, commodity deposits, when prices are low, and doing something that’s hard: nothing. And then when the commodity price returns to the point where the deposit’s economic, sell the deposit whole to a developer. It’s something that we did with Silver Standard, we took Silver Standard from a market cap of 3 million dollars to 2 billion dollars. It’s something that we did with Pan American Silver, it’s something that we did with Lumina Copper, it’s something that’s worked very very well for us for twenty years.
FutureMoneyTrends.com: I’m sure people are going to be curious, the silver miner that you made a reference to that possibly saves in silver you were saying?
Rick Rule: Endeavour Silver is a mining company that listened to its shareholders, and decided since they had working capital that was surplus to their current needs — working capital is never truly surplus — but surplus to their current needs. But rather than store all of that working capital in Canadian and U.S. dollars, that they would store some of their capital in silver. Their rationale, which I think is a good one, is that their shareholders were attracted to them because they were attracted to silver, and turns to listening to the constituency, who were ultimately their bosses, their owners, their shareholders, it would be prudently polite to store some of their working capital in silver. We would prefer, of course, at Sprott, being believers in precious metals in particular, that public companies that have surplus working capital. Working capital that is waiting on investment, we would prefer they store some of that working capital in precious metals. A: because we think that precious metals in any recognizable time frame will outperform fiat currencies, but also because it evidences respect for the owners of the company, which are of course people that are attracted to precious metals.
FutureMoneyTrends.com: What is your criteria for selling a stock? And this is a good question because everybody out there is always recommending to buy something, but nobody ever really talks about selling.
Rick Rule: That’s a very good question. We try never to buy a stock without having a plan as to what would cause us to sell it. So as an example, in speculative stock, I’m not a fan of investments in stock, but speculative stocks, which I think is what most of your readers are interested in.
FutureMoneyTrends.com: Junior mining companies.
Rick Rule: Yeah, and junior mining companies, that’s pretty simple. You buy a junior miner because you think they’re gonna answer an unanswered question, and you try to figure out what the probability of a yes answer is, and what the value of a yes answer is. So there’s three possible scenarios. One is that they don’t get a yes answer, they get a no answer. You sell the stock. If you bought the stock at a buck because you think the answer to an unanswered question is going to be positive and take the stock to three dollars, but you get a no and the stock goes to 70 cents. Too many people say well I can’t sell because I’ll lose money, the stock is going down. I’m gonna wait till I break even. Well, why would you break even if you got a no answer? So if you get a no answer to the unanswered question, irrespective of you’re up, down, or sideways, you sell the stock. Your reason to own the stock is gone, the stock has to be gone. The second possibility is that you can get a yes answer and your price expectation has been met. You buy a stock at a buck in anticipation of a yes answer and you think that the yes answer will take the stock to $3 and that’s what happens. Your plan has been fulfilled. Declare victory, take the money and move on. The third situation is that you can get a yes answer but your price expectation isn’t fulfilled in which case you believe that the stock is undervalued; or that yes answer sets up another question that has, from your point of view, a favorable risk-reward program. At that point in time you have to sit down and rethink your goals. Rethink your strategy with regards to the stock. So, in recap, you sell the stock if your goal has been met. You sell the stock if your goal hasn’t been met. You don’t sell the stock if your goal has been met but your price expectations aren’t met.
FutureMoneyTrends.com: Okay, I think everyone, a lot of people are in category three, question three. Many objectives have been met with these mining companies. Some of them have gone to commercial production, but their share price has just been demolished.
Rick Rule: Well it may be that many people that don’t have enough experience in terms of the value that’s created by yes answer, have unrealistic price expectations with regards to the value of a yes answer. I think one of the reasons probably that Eric Sprott and myself have been more successful than most investors is we’ve done a very good job of hiring technical people who help us first of all, understand the probability of a yes answer, and second of all understand the value of a ‘yes answer’. In that case more science than art…