Rick Rule: Always Buy a Stock for a Reason; Sell if it Disappears

Plus thoughts from Rule on gold, the US economy and the Canadian dollar.

Resource industry conferences are a great place for investors to get information on commodities prices, market trends and stocks. But if you’ve attended even a few such conferences you know that sometimes the information handed out gets a little repetitive.

That’s particularly true in bear markets, where common advice is to look for companies with good management, companies with money in the bank, companies operating in safe jurisdictions — and once you’ve found them, buy low. While that sounds fairly simple, it’s obvious that not every investor is able to translate it into success.

At this week’s Vancouver Resource Investment Conference, Rick Rule, CEO of Sprott US Holdings, got behind the camera to explain where investors tend to go wrong, and, perhaps more importantly, how they can fix investing mistakes when they make them. He also talked about the best way for companies to operate in tough markets, and where the gold price is today.

Key thoughts from Rule include:

  • To pick the right companies to invest in, “people need to ask themselves the nuanced questions, which they seldom do.”
  • Investors shouldn’t be too hopeful. “I always buy a stock for a reason,” explained Rule, adding that if his reason for owning a stock disappears, he “sell[s] the stock very ruthlessly.”
  • Don’t get excited about gold just yet. “Longer term, because I’m nervous about the US economy, I’m fairly bullish about gold. But not in the near term,” Rule quipped.

Watch the video above to hear all of Rule’s thoughts, and stay tuned for more video interviews from the Vancouver Resource Investment Conference.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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This article was updated on March 1, 2016 to include the following interview transcript:

INN: I’m Charlotte McLeod with the Investing News Network, and here today with me at VRIC is Rick Rule, CEO of Sprott US Holdings. Thank you for joining me today.

RR: Always a pleasure, Charlotte. Thank you.

INN: Today I want to focus on how investors can best handle themselves in today’s difficult markets. A lot of people come to VRIC looking for advice on how to choose good companies, and things I tend to hear are, “look for companies with good management,” “look for companies operating in safe jurisdictions,” etc. — it sounds pretty simple, but obviously it’s not. Where are investors going wrong?

RR: I think that the two pieces of advice that you cite are not bad pieces of advice, but people don’t do it. As an example, what would constitute good management? To me, a good manager is somebody who has had success in the past in pretty much the same task that they [have] assigned themself today.

So somebody might describe him or herself to you as a good manager when they had enjoyed success operating a gold mine in French-speaking Quebec in ancient Archean terrain. Today they’re looking, not operating, for copper, not gold, in Spanish-speaking Peru in tertiary volcanics. It’s a very different job. So one can’t … equate the success that they had enjoyed with the task that is at hand today.

What is a safe jurisdiction? BC is said now to be a very safe jurisdiction, [but] people forget the act of the BC legislature 15 years ago, stripping mining concessions away from companies. So what constitutes a safe jurisdiction? People need to ask themselves the nuanced questions, which they seldom do.

INN: So in a perfect world, investors would get their portfolio sorted out, they’d have all these good companies. [But that doesn’t always] happen. What is your method when you have a portfolio with stocks that aren’t so good? How do you weed them out? 

RR: The first answer is on occasion poorly, Charlotte. But going back really to your question. For myself, I always buy a stock for a reason. Speculation involves the answering of unanswered questions, and I will try and figure out the probability of the answer, and try and figure out what a “yes” answer will be worth. If the data begins to show me that I’m not going to enjoy a “yes” answer, I’m going to get a “no” answer, my reason to own the stock has disappeared. And so I sell the stock — very ruthlessly. I have a lot of faults as an investor, but hope is not one of them.

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It’s important for speculators to know also that if you disaggregate your holdings, if you look at everything that you own, that your rational expectation for success on any individual holding is negative, meaning that your winners will be less numerous than your failures. But your winners have to be of a large enough scale that they amortize your losers with room left over for an acceptable rate of return.

Speculators need to discipline themselves in terms of how they manage their portfolio, and they need to employ correct processes and manage their expectations better than they do.

INN: I think a lot of people just don’t do that — there’s a lot of people staying in the market now, I think, in hopes of future payouts? And I know one thing that a lot of companies will say is, “don’t worry. We’re going to get into production when the market turns.” You’ve said in the past that it doesn’t really make sense to do that — but how can companies balance investors’ desire for news with being practical about what can be accomplished in today’s markets?

RR: I look for managers who are so smart and so committed that in truth they look to capital markets as sources of capital, rather than sources of leadership. It’s odd to say that my favorite managers are almost people who ignore me, who use me.

The truth is that operating a company based on the vagaries of what is in fashion in the market at any given period of time is a certain recipe for failure. There are some companies, rare companies that have the skill sets in the deposit where they should go into production. [But] in a market like this [where] the cost of capital is high and commodity prices are low, with the inevitability of a commodity price rise, the correct strategy for most companies is to curtail operations, perhaps acquire other assets at rock-bottom prices and wait for the cost of capital to fall and commodity prices to rise. It’s difficult to convince a management team not to do much and more difficult still to get them to be paid accordingly for not doing much.

INN: Of course, it’s not just companies who are making predictions about the future. There are lots of people here who are doing that, particularly [in terms of] gold, and one thing I hear a lot is [that] it’s a cyclical market. Where are we at now for gold?

RR: Understanding that my crystal ball is cracked and cloudy, my very near-term outlook for the gold price is bad. I see US dollar strength in the first quarter of this year. I’m not a technical analyst, but the gold chart is not a pretty thing. My suspicion is that in the near term, the hegemony of the US dollar and US treasuries stays intact, which will be bad for the gold price. It’s worth noting that if you own gold in most currencies in the world, including the Canadian dollar, it hasn’t treated you badly in the last 12 months. But the US dollar has been very strong.

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We’re at an interesting inflection point, I think. I think if you look at the US dollar and US treasuries in isolation, they’re lousy instruments. But if you look at them in comparison with other lousy instruments — Doug Casey described the US dollar well, I think, as the prettiest mare at the slaughterhouse. So longer term, because I’m nervous about the US economy, I’m fairly bullish about gold — but not in the near term.

INN: Finally, can you talk a little more about the Canadian dollar. How is that impacting gold and companies that are operating up here in Canada?

RR: The Canadian dollar is weak, which is good for domestic operators, and I think it’s going to become weaker. Two things. The highest-margin part of the Canadian economy for the Canadian government is the oil business. One thing that Canada does extremely well is exploit its endowment in Alberta and ship it to the US. And it gets paid less for the endowment, which is very, very hard for all of Canada.

The second thing is that — Americans, particularly right now, shouldn’t be talking about other people’s politics when our own politics are so strange — but electing a guy in Canada … who didn’t have very much of a grasp of arithmetic, somebody who suggests as he did that the budget will balance itself, [is] probably very bearish for the Canadian dollar, which is very good for companies whose costs are denominated in Canadian dollars, but sell their product on the world market in US dollars.

INN: That’s all from me. Thank you so much for joining me today.

RR: Pleasure, Charlotte.

INN: Thank you. Once again, I’m Charlotte McLeod with the Investing News Network and this is Rick Rule.

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