RICK'S RULES
Following this natural resource investment king,
you’ll too be part of the ‘5 percent’
BY DOUG FRENCH

Introducing Rick Rule at FreedomFest, John Pugsley described him as “the brightest of them all.” Rule is not only brilliant; he is witty, erudite and charming. Nobody knows the natural resources sector of investing better, and he along with his clients, have made millions from it. 

Rule shared his wisdom in multiple presentations during FreedomFest, always filling the room with clients of his firm, Global Resource Investments (including this writer). Rule starts every presentation in Las Vegas with the observation that gambling “is a tax on people who are bad at math.” Although he is not a gambler, Rule is a speculator, and when speculating, “luck favors the trained observer.” 

To succeed in natural resources speculation, “you are either a contrarian, or a victim,” Rule said. So while most people’s expectation of the future is based upon their experience in the immediate past, to make money speculating in natural resource stocks you must break from the herd and “make money where they ain’t.” 

Often, it takes one to three years to make money in these stocks. Unfortunately most investors get bored, but Rule says boring is high praise indeed for one of his stock positions. “I’d rather be bored than terrified.” So while Rule buys cheap and waits, he competes against “dumb money” — mutual or hedge funds that are managed by young managers who are terrified to hold a position over a long weekend. He looks to “capitalize on the mistakes of the great unwashed” investors who are “inordinately fond of adjectives.” To invest like Rick Rule, you must “substitute thinking for hoping.”

The cruel facts are that all investment profits are made by 5 percent of investors, while the other 95 percent contribute. To be part of that 5 percent, an investor must invest in companies run by people who have successfully done before what their company is now doing. Investors must put their money with the “four percenters” (20 percent of the 20 percent) that are “serially successful.” 

Rule emphasized his point about making sure management had succeeded in the past at exactly the same endeavor they are now pursuing. “Proctology and dentistry might both be considered medicine, but choosing the wrong one could leave a bad taste in one’s mouth.” 

Mining companies that are “project generators” are a good way to manage the risk in a junior mining portfolio. (Cornerstone and Almaden are companies he owns positions in.) These companies do the exploring for mineral deposits, while other companies pay the freight. Project generators get a percentage of the mine if they are successful at exploration. But other companies’ money is at risk. Investing in project generators is a way to “make yourself the casino owner, not the player.”

Among the investment themes Rule likes right now are the micro-cap Canadian natural gas stocks. These stocks have been demolished due to the drop in natural gas prices and the Canadian government’s change in tax policy in regards to gas income trusts. Rule believes that demand for natural gas will increase dramatically in the coming years, and these micro-caps will be big winners. (G2 Resources is a company Rule owns shares in.) 

Rule loves alternative energy investments in geothermal and low-head hydrology. He made a point that he pounded the table for people to buy uranium stocks back in 1998 and 1999 when uranium and uranium stocks were cheap. Of course, the price of uranium has exploded and the stocks are now what Rule believes to be “the stupidest bubble in resource investing history.” He is now urging speculators to pile into geothermal and low-head hydrology stocks before the billions of dollars of dumb money decide to get in. Also, alternative energy gives investors the opportunity to be on the receiving end of government largess as tax credits and other bennies are heaped on this politically correct sector. (Nevada Geothermal, U.S. Geothermal and Sierra Geothermal are favorites of Rule.)

Rule also likes resource-based financial services companies. These companies benefit as resource companies look to them for loans, stock placements and other financial services. 

Although there are gold and silver mining stocks he likes (“Vista Gold is stupidly cheap,” Rule says), he urges caution. At this stage of the gold market, “people are paying for synthetic sex.” Investors “want to feel instead of think.”

“In this day and age, the ability to monetize human stupidity is greater than ever,” Rule deadpanned. So while your neighbors or your brother-in-law chase the latest investment fads, following Rick Rule will likely make you part of the five percent.