With four decades of experience in resource investing, living through several bear and bull markets, making a fortune, Rick Rule is one of the few people you should really listen to. In this outstanding interview, he explains the most important principle to help investors become successful. He looks back and gives several examples from his forty years career. His most important investor’s lesson is the following:
The lesson that I learned is that natural resource based businesses (commodities) are capital-intensive, and they are cyclical. Bear markets, like we are in now, beget bull markets. Bull markets beget bear markets. When you are feeling terrified, you have to be aggressive; when you are feeling brilliant, you have to sell. If you do not do that, you will be a victim. It is just the way it works. If you ignore the fact that these are capital-intensive and cyclical businesses, you are roadkill on a good day.
“We have not seen the cataclysmic decline that characterizes speculative market bottoms.”
Looking back to 1992, Rick Rule explains how the resource shares went through a spectacular market clearing event. All the hype was leaving the market, and the investor’s opportunities were being constrained. In 1995-1996, when the bear market turned around, the investors’ dollars that came into the sector caused a more violent up-market in the penny gold shares than occurred in the 70’s. The 1995-1996 bull market [in gold shares] was an epic bull market. Rick Rule says: “My hope is that today’s market, which is ugly so far, will end in a cataclysmic sell off. Then we should start a new discovery cycle (which we will) because the upside of a market is in proportion and scale to the downside of a market.”
As an example of the irrational sell-off in the resource shares, Bob Moriarty from 321gold writes how one of his favorite gold & silver miners (Paramount Gold & Silver, PZG.TO) has about 10 million gold equivalent ounces. The NPV of their projects (using pretty conservative numbers) shows a total net present value of $1.4 billion. At today’s market prices, the company has a market cap of $310 million.
Moreover, Adam Footer from Sprott Global Resource Investments points to the fact that too much money came into the sector until 2010, chasing mediocre projects. That bubble has burst, and the good are being dragged down with the bad. “It’s going to be a stock picker’s market. The sector isn’t going up, but some individual stocks will.” There is an opportunity now to build a portfolio of companies that are underpriced because of the generally negative sentiment about the natural resource markets, he adds.
More valuable resources related to this topic:
– Investing In Resource Markets In 2013: outlook & tips
– Lessons From A Successful Investor: Control Your Worst Enemy, Your Emotion