By: Tekoa Da Silva
Bull Market Thinking
I had the opportunity this week to reconnect with legendary resource financier and investor, Rick Rule, Chairman of Sprott US Holdings.
It was a fascinating conversation as Rick spoke to the characteristics of market capitulations, of which set the stage, “for absolutely dramatic recoveries”. Rick added that it’s the duty of honest investors to “reorganize their portfolio’s at the bottom”, to ensure they are exposed to the best names in the business, ahead of the inevitable recovery.
Speaking to the capitulation which he’s seen only a few times in his career, Rick noted that, “You go through a period that can only be described as being caught underneath a big set of waves where you’re just sort of rolling and tumbling and falling…That traditionally has given way to a time of low volume where both buyers and sellers are exhausted…in the course of my career, that has been the situation that absolutely positively marked the bottom.”
It is in those ensuing bottoms Rick explained, that investors need to carefully assess their positions, in that, “Those investors who are honest with themselves and reorganize their portfolios at the bottom, selling the worst of the companies, no matter how painful it might be, and redeploying the assets in strong but oversold companies—enjoy returns in the inevitable recovery that can be 250%, 350%, or 500%…If you think about the math, you give back 35% to 50% [on the downturn] and you make 250% to 500% on the upturn. Overall, that’s pretty good math.”
Commenting on gold and numerous other commodities which are now selling below the cost of production, Rick said, “When you have a commodity for which there is ongoing demand…that is selling for less than the cost of production…the outlook is bleak and the industry is in liquidation…When industries are in liquidation…there are only two possible outcomes; One, the commodity price can increase so that the industry earns at least its cost of capital but more normally its cost of capital plus a competitive rate of return, or—there won’t be any more of that commodity.”
This negative pricing environment according to Rick, has ensured that, “the stage is set for an absolutely dramatic recovery.”
As a final comment urging resource investors to remain highly-focused at this time, Rick said, “You’re set up now for the game—It’s just that the game is very tough to focus on…[and] very difficult to see.”