Rich like Rick Rule: Seven tips to make you a better investor
Rick Rule, well-known mining investor and president & CEO of Sprott US Holdings, began his career in the securities business in 1974 and has been principally involved in natural resource stock investments ever since.
He has financed numerous exploration and mining companies over his 45-year career and made a lot of money doing it.
Earlier this month, Rule revealed several crucial investing tips in an interview with Stockhead’s Oriel Morrison.
Here are the highlights. Scroll to the bottom to listen to the full podcast.
With regards to a $10,000 to $20,000 investment in securities the due diligence often seems to be ‘got a hunch, bet a bunch’,” Rule says.
“It is inexplicable to me.
“I suggest that the number of stocks in a portfolio should be consistent with the number of hours per month that you tend to spend researching the stocks in your portfolio.
“And by researching the stock, I don’t mean reading inflammatory headlines in the financial press.
“I mean reading annual reports, reading quarterly reports, reading analyst reports – that type of thing.
“If people would own a number of securities which corresponds with the number of hours per month they are willing to spend understanding their securities their portfolio performance would be immeasurably better.”
“One of the services that I offer are portfolio evaluations. If people send me in their mining securities, I rank them 1-10,” Rule says.
“One of the things that struck me is the number of portfolios with a 45-50 stock selection.
“Sometimes I email people back and I ask them – ‘how comfortable are you with this number of securities?’
“And invariably I get the response from them that ‘diversification is a risk management tool.’
“I would suggest that diversification in that fashion is a risk maximising tool.
“Owning 45 positions that you don’t know anything about is a lot riskier than 10 positions that you know well.”
“The 10 bagger, 20 or 30 baggers stocks that I have enjoyed over my career have taken 5-6 years for that price escalation to occur,” Rule says.
“Almost all of them have fallen in price by 50% or more at some point over the journey.
“You have to have the willingness for time to be on your side, and you also have to have the stomach to endure volatility.
“A good example of that has been Warren Buffett’s Berkshire Hathaway.
“In the 50 odd years that he has been the steward of Berkshire Hathaway it has fallen by 50% or more over 18-month periods of time four times.
“Now, if you look at a 50–60-year chart of Berkshire Hathaway the truth is that those 50% declines relative to the whole chart aren’t even visible.
“They were terrifying to live through, but the truth is that over the fullness of time they didn’t matter.”
“If you have bought a company based on the expectation that some positive change is imminent, and then it becomes apparent that the change isn’t going to occur — you must sell,” Rule says.
“Exploration speculators as an example, may buy a company because of an impending drill hole.
“Their hope is that this drillhole will prove the third dimension of a deposit. Inexplicably, the drill hole comes in and doesn’t confirm the third dimension of a deposit.
“If the stock subsequently declined from a $1 to 75c many people would refuse to sell.
“That’s inexplicable behaviour — if the reason to own a stock disappears, the stock should disappear too [out of your portfolio], irrespective of price.
“The first test to be a successful speculator and investor is to admit that you have made a mistake, and sell a stock even if you lose money, to limit your downside.
“I’ve probably had 1000 investors in my career that when we talk about a losing trade they say ‘well, I’ll just wait until I break even’.
“Why would you break even? If the attribute of the company which would cause it to gain value has gone, why would it go back to break even?”
“If a stock has fallen from $4 to 50c you don’t have a hold any more — you have a buy or a sell,” Rule says.
“If you don’t want to sell, why don’t you buy some more? It is surely better value at 50c than it was at $4.
“When I buy a stock, I try to take some cursory notes about:
“For example, I’m buying the large oil stocks right now because they are still somewhat out of favour.
“I personally believe that a portfolio of large, high quality oil companies can generate a 5% dividend yield for me, which will increase at 15% compounded for three years.
“I personally believe that a well-constructed portfolio of oil stocks, in addition to generating a 5% current yield, will likely double in price over the 3-5 year timeframe.
“If during my holding period the oil price were to decline precipitously, as an example, some of my thesis may be in danger of not coming true.
“I would have to revisit my thesis.
“Similarly, if the oil stocks returned to favour, and rather than doubling over the 3-5 year time frame, they doubled within a year – in other words, if my upside expectations were met sooner — I would consider selling sooner.
“So, the way I answer that question is that when I buy a stock, I try to envision the circumstances which would cause me to sell it.
“What expectations do I have?
“What are the probabilities of those expectations being met?
“What sort of $$ do I hope to receive as a consequence of my expectations being met?
“And in what time frame?”
“From time to time, I have added to positions like this,” Rule says
“In 1998, I remember being out at Diggers and Dealers in Kalgoorlie, searching the end of the world for bargains.
“I remember being very interested in the uranium business because everybody else hated it, or just didn’t care.
“And in 1998 in Kalgoorlie, I ran into John Borschoff from $1.5m market cap uranium stock Paladin.
“An unknown company in a hated commodity, led by a passionate, driven human being.
“After a short discussion I did a 10c per share financing for them, with an attached option at 15c. My genius was rewarded with the stock going from 10c, to 9c to 8c, and so on.
“Suffice to say, a year into the investment my 10c piece of paper was trading for 1c, meaning that I was down 90%.
“I revisited my thesis as one must do when one’s faith is tested. I found, frankly to my surprise that my thesis was very much intact.
“I still believed I was right, and that the market was wrong.
“I was able to buy some more stock at 1.5c, and six years later that stock was trading for $10 a share.
“The truth is that Paladin was substantially more attractive at 1.5c per share that it had been at 10c – and I liked it at 10c.
“If you like something at 10c you better love it at a penny.”
“The other lesson, particularly for resources investors, is that you are either going to be a contrarian or you are going to be a victim,” Rule says.
“The truth is that in capital intensive cyclical businesses like mining, 10 baggers happen because you buy out of favour sectors before they return to favour.
“That is very difficult to do.
“I remember three years ago talking to international audiences about the fact that the uranium price had to go up, and uranium stocks were pathologically cheap.
“Nobody cared. They wanted to talk about the sectors that were currently hot.
“Now that the uranium price has doubled, and the shares of uranium juniors are up by 300% — meaning that uranium stocks are relatively less attractive – everybody wants to know about them.
“I believe, frankly, that uranium and uranium stocks have further to go from here, but I also believe the easy money has been made.
“Making money in capital intensive, cyclical businesses means that you must be the contrarian.
“And when they return to favour, when you are feeling smart, you must remember to sell.”