The numbers don’t lie; just ask Rick Rule, the president of Sprott U.S. Holdings.
In a recent interview with Maurice Jackson, Rick explains that out of the roughly 250,000 to 300,000 people involved in mining exploration, the majority will never be involved in the discovery of a single mine. This despite spending most of their life at it—an incredible fact.
Yet there are others, the serially successful, who have been involved in 10 or more discoveries each.
Many value investors have given up on their strategy over the last 15 years amid concerns that value investing no longer worked. However, some made small adjustments to their strategy but remained value investors to the core. Now all of the value investors who held fast to their investment philosophy are being rewarded as value Read More
Who are they? And what makes them so special?
It’s quite simple actually…
Interview Highlights (edited for readability)
Maurice:You know, Rick, you’re noted for a number of famous quotes and there were two in particular that are germane for today’s discussion, which are “to separate the wheat from the chaff” and “to have courage and conviction.” Listeners will note that I’ve stated before I’ve made the error of understanding the macro-picture of why I need to invest in the sector and I used a buckshot approach in selecting companies in that sector. But as we will discuss today, it’s not the name, not the sector or the commodity, it’s the people. Rick, can you expand on the narrative on my remarks?
Rick Rule: Sure, Maurice. Assets are basically latent until a person or a group of people turns them into wealth. That makes good common sense if you think about it. And it also makes good common sense that some people are better at certain things than other people. An example would be if you’re looking to put together a good basketball team, it would be useful to get a couple of 7-footers, you know, people closer to the basket.
And the truth is that in any field of human endeavor, some people succeed better than others. So, surrounding yourself with a team or more properly for this discussion, investing with people who have been serially successful and importantly serially successful in tasks that are relevant to the tasks that they are involved in now. It’s probably more important than any other single variable.
One example would be that I think there’s something like 4500 or 5000 operating mines in the world and there’s probably 250,000 or 300,000 people involved and looking for them. What that simple statistic tells you is that most people are—although they work most of their life at it, never involved in the discovery of a mine. But then you have other people who have been involved in discovery of 10 or 11 or 12 of them. You just have people that are serially successful, and those people stand to have 2 or 3 standard deviations better performance than the run-of-the-mill participants in any given activity, which is enormously important from statistical viewpoint.
Maurice: In reference to statistical viewpoint, can you discuss further Pareto’s Law and how it applies to this discussion?
Rick Rule: Sure. I think the first name was Vilfredo. Pareto was an Italian social scientist who documented what is in common parlance known as the 80/20 rule. The 80/20 rule, of course, is where 80% of the utility in a given activity—some people would give it work—is done by 20% of the population base. It’s important to note when considering the 80/20 rule, two important facts, the bell curve which is really what it describes actually has two lips, which would suggest that in a population base of 100 people, 80% of the good work is done by 20% of the population and 80% of the bad work or, if you will, the aggravation is done by another 20% of the population. So in the first instance, Maurice, you want to hang out with the good 20 and you want to avoid the bad 20.
Another interesting piece of information is that if the population base is large enough, the performing and non-performing lips, those 20% that we talked about, both the good and the bad lips, if they were exposed to the same performance dispersal curve again, you would see that the lips would conformably align, meaning that 20% of the 20% generated 80% of the 80%, or more appropriately, 4% or 5% of the population base would generate in excess of 60% of the positive utility and another 4% or 5% would generate 50% or 60% of the negative performance.
What that tells you is that to the extent you can in your investing activities, you segregate the management teams that you’re considering investing with and try and confine your investing activities to the best of the best, understanding that 5% of the population base will generate well in excess of 60% of the economic returns.
Maurice:You know, that 5% you’re referring to are the serially successful. What names resonate in that category?
Rick Rule: You know, Maurice, I’ve been fortunate enough in my life to manage to invest alongside, I don’t know, 12 or 15 of those. Some of the names that come immediately to mind are the Lundin family, both Adolf Lundin, who is now deceased, and his two sons, Ian and Lukas. All of them are serially successful. Robert Friedland whom we’ve talk about before, my friend Bob Quartermain, a different friend Bob Kaplan, Ross Beaty. You know, mercifully in my life, I’ve been lucky enough, I guess, to hang out with a lot of the serially successful people and I’m lucky enough to be able to continue investing with them often today.
Maurice: What attributes have you noted amongst serially successful people?
Rick Rule: One I would say is incredible determination. The ability to see a project through and not quit no matter what the adversity is. You know, Maurice, almost every time that I’ve been involved in a company with a singularly successful and serially successful person, that company has fallen in price dramatically, probably a couple times while I’ve owned it.
I’m thinking about it now and many times, an example would be Silver Standard Resources, which we enjoyed a run from $0.75 to $45 with Bob Quartermain. Twice during the period of time we owned that stock, it fell by 50% and twice Bob fought through adversity and brought the company back ultimately as I say, taking it from $0.75 to $45. So, certainly dogged determination is important.
The other thing—or another thing that I’ve noticed about serially successful people is that they’re almost pathologically curious, curious not just about what they’re doing but curious about a whole range of things. They are, of course, very intelligent but I wouldn’t say that being incredibly intelligent determines conclusively whether or not somebody is going to be successful. Rather, the application of intelligence through curiosity and determination I think matters a lot.
In addition, of course, to being curious, diligent, determined, they have to be very hardworking. We’ve learned through various social scientists that somebody becomes an expert at something with the application of 10,000 hours in whatever discipline that they choose to succeed in. That would seem to be the tipping point in terms of development of expertise if somebody is going to develop the expertise. And if you have somebody who works 2400 or 2500 hours a year, that person is going to become successful. He or she is going to acquire the expertise, pardon me, sooner and more certainly than somebody who’s work schedule is more leisurely, which most people’s are.
The other thing that I have found with serially successful people who develop excellent reputations which brings money to them is that they are invariably honorable, honest people. I’m not trying to say that serially successful people don’t exaggerate on occasion even to the extent that they tell what I laughingly call preemptive truths, which means that their self-confidence is so boundless that sometimes they act as though something that they are certain will take place has already taken place, and you must guard yourself against that enthusiasm. But in my experience, serially successful people do not lie and they act honorably in every regard. Certainly the serially successful people that I know have been extremely honorable people.
Now, moving on, in talking about how you can identify and identify with serially successful people, I would say one thing is that the responsible sources of information, yourself included but also newsletter writers, brokers, and others should and often do make it their business to describe serially successful people in the context of describing companies. And it’s important to note, Maurice, that serially successful doesn’t mean generally successful, but rather it refers to success particularly at the task at hand.
An example would be somebody who has been a successful biotech entrepreneur who suddenly migrates into software or natural resources. There’s no guarantee that the success that he or she enjoyed in one sector of the market will give them the ability to successful in a sector of the market where they have not yet generated the expertise and experience that made them successful initially.
And, in fact, you need to refine this a lot more directly in order to profit from serially successful people. An example in mining, Maurice, which you’ve heard me use before is that someone who describes their success as having taken place operating a gold mine in Archean terrain in French-speaking Quebec. While they may have been successful and would suggest to you that they’re a mining magnate as a consequence of that, maybe less successful if the task at hand is exploring rather than producing, for copper rather than gold, in tertiary volcanics rather than ancient Archean rocks, in Spanish-speaking Peru rather than in French-speaking Quebec. While both activities are related to mining, the truth is that the skillsets that are involved in both tasks are so different that success in one may hold no promise for success in the second.
And it’s important too, Maurice, as you suggest to look at the success in the company not nearly in terms of the major ego, the CEO or the largest shareholders, but also look for serially successful people on that team. Has the chief financial officer been successful in the past raising the capital and allocating the capital that’s required for the task at hand? Do the directors who are providing, if you will, adult supervision for the company have success in guiding companies in the past? Are the exploration personnel in mineral exploration successful in similar rock packages in similar terrain with similar mineralogy? In other words, is their expertise applicable to the task at hand? Are the people who have selected the various constituencies, the various working people, suitable for the task at hand? Are the major shareholders behind the company, the sort of involved people, people who have been successful in the past in financing a company to its ultimate success? Or are they merely paper-hangers, they’re stock-traders? All of these things are important.
And one’s ability to assemble facts with regards to human resources in addition to physical resources and financial resources will have a big leg up on their competitors who either don’t have the expertise or haven’t even thought about this type of human test.
Maurice: Investors want to know what is attracting your attention in the space right now.
Rick Rule: Well, I’m pretty generally attracted to the sector, Maurice. I have been surprised with how well the base metals, industrial materials and energy markets have recovered this year. That took me a bit by surprise and I’m tempted to say it’s been a little head fake. I had expected the second to be really bombed out this year. And to be able to have the advantage of despair in the market to make some investments, I still suspect that that’s going to happen this year. I look forward to being in the energy and industrial materials sector, but the truth is that the market is ahead of itself.
You’ll recall, Maurice, that last year in the first half, the precious metals markets particularly the precious metals equities markets went in a tremendous tear—the metal up 20%, the equities up in excess of 100%. Mercifully for me, we’ve seen those markets sell off by 30% or 35%, which makes them, of course, 30% or 35% more attractive. So, I would suggest that if the market conditions that we’re seeing right now persist that I will be involved in financing—private placement financing both on the debt and equity side, precious metals explorers, developers, and junior producers. We’re seeing a lot of opportunity there and we’re seeing a market where the investing community is discouraged, meaning that we don’t have as much competition as we, otherwise, would which is something that we like.
We will certainly look to out-of-favor sectors in commodities this year where we expect the sector to do well in the 2- or 3-year timeframe but where our competitors are discouraged by the current market action. We normally, Maurice, as you know, invest for the 2- or 3-year timeframe attempting to outcompete other people whose timeframes are much shorter. And mercifully for us, many of the hedge funds that we compete against have a 90-day horizon in what’s really a 3- to 5-year business, meaning that they sort of unilaterally disarm when they compete with us.
So we’ll be looking to deploy capital in 2017 where we’re looking to harvest that capital in 2019 or 2020. Exactly which opportunities become the best opportunities are something that we’ll be able to tell you in retrospect, of course, by the end of the year.
Article by Sprott Money