The Gold Market and Investment Strategies: An Interview with Rick Rule
This article summarizes an interview with legendary investor Rick Rule, focusing on the gold market, investment strategies, and risk management.
The State of the Gold Market
Factors Driving Gold Price Increases
Rick Rule believes the rising gold price reflects a decline in confidence in fiat currencies, particularly the US dollar. He notes the US dollar has decreased by 10% against a basket of other currencies this year. Although he expects the dollar to remain stable against other currencies, he anticipates a substantial decline in its purchasing power over the next 10 years.
Gold's Long-Term Performance
While recent interest in gold has surged in the last 18-24 months, Rule emphasizes that the nominal price of gold has increased by 9% compounded annually for the past 25 years.
Portfolio Strategy and Risk Management
Liquidation of Speculative Positions
Rule mentions liquidating 25% of his portfolio, specifically in companies with market capitalizations under $250 million. This allowed him to recover his acquisition costs and eliminate his downside risk. He acknowledges that his situation differs from most investors who entered the gold equities market more recently and don't have the same level of gains to protect.
Shift to High-Quality Assets
With half the proceeds from those sales, he purchased physical gold and shares in high-quality companies like Franco-Nevada, Wheaten Precious, and Agnico Eagle. While expecting the sector to perform well, he believes the speculative market is overvalued.
Overcoming Fear of Missing Out (FOMO)
Rule emphasizes that he is not impacted by FOMO. He only invests within his area of expertise (precious metals, natural resources, and conventional financial services). He has a greater fear of making mistakes and sees ample opportunities within his areas of competence. FOMO is described as "one of the great investing sins."
Managing Unrealized Losses
Rule believes fear stems from ignorance. He emphasizes the importance of understanding the value of a company, not just focusing on its price. He shares a story about investing in Paladin Resources when uranium was heavily undervalued. The stock initially fell dramatically but eventually increased significantly. He states that money is made on the difference between price and value or expected value.
The Importance of Time Preference and Persistence
Backtesting revealed that the average holding period for a "tenbagger" (a stock that increases tenfold) in his portfolio was five years. Over 90% of his tenbaggers involved a 50% share price decline during his ownership. This highlights the need for patience and persistence.
Determining Company Value: A Process
Management Team Assessment
For smaller companies, Rule emphasizes evaluating the management team's track record and whether their past successes are relevant to the current task.
Liquidation Value Analysis
He stresses determining the probable liquidation value of the company to measure downside risk. He aims to buy assets with a liquidation value significantly higher than the market capitalization, especially in bear markets.
Identifying Unanswered Questions
In speculative companies, the key is management's ability to answer unanswered questions about the company's potential. Investors should determine what a "yes" answer would be worth in the future, how the thesis will be tested, how long it will take, and how much money is needed.
Aligning Time Preference
Matching your investment timeframe with the time needed to answer the key questions is critical.
Sell-Side Discipline
If the reason for owning a stock disappears, sell regardless of the price. Losing 30% is better than losing 100%.
Education and Discipline for Retail Investors
Investing in Education
Rule recommends the following books:
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Economics in One Lesson by Hazlitt
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The Intelligent Investor by Ben Graham
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Securities Analysis by Ben Graham
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Human Action by von Mises
He also advocates for rudimentary accounting knowledge to understand balance sheets and income statements. He suggests that the number of stocks owned should correspond with the number of hours per month devoted to understanding them.
Common Mistakes
Rule identifies the following common mistakes:
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Not doing the necessary research.
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Being anti-contrarian (buying high, selling low).
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Having a time preference unsuited to investing (thinking in weeks or months instead of years).
Gold's Outlook and Central Bank Behavior
Gold as a Hedge Against Government Policies
Rule believes governments' addiction to printing money and weaponizing the dollar are driving foreign central banks to stockpile gold. He cites the US government's seizure of Russian assets and extraterritorial enforcement of US policy.
US Treasury as a "Lie"
He recounts a conversation with a foreign investor who described US Treasuries as a "deep and liquid lie" due to concerns about US debt and deficits.
Diversification into Gold
Central banks are not diversifying into each other's currencies, but rather substituting gold for dollars. He suggests gold could increase threefold or fourfold over the next 10 years, while gold equities could increase even faster.
Rick Rule's Educational Resources
Rule offers several ways to engage with his expertise:
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Rule Investment Media: A website where users can list their natural resource portfolios for a free ranking.
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Rule Classroom: A free online learning platform with extensive instructional programming. A paid subscription grants access to proprietary content and the ability to ask questions directly.
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Boot Camps: Quarterly online courses focused on specific topics like silver, uranium, or gold. They offer a money-back guarantee if participants actively participate and don't feel they received their money's worth.
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Rule Natural Resources Investment Symposium: An annual event (live or online) offering comprehensive investment insights, also with a money-back guarantee.
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