Sprott US Holdings chairman Rick Rule says the current bear market will be remembered as “the good old days.”
Rule, a well-known contrarian investor who has made his personal wealth from investing in commodity bear markets, explained his reasoning at the recent Prospectors & Developers Association of Canada (PDAC) conference.
“Many of you know my thesis, those who are old enough don’t need to be reminded of it, you’ve lived it … natural resource businesses are extremely cyclical and extremely capital intensive. And as I reminded you prematurely last year, bear markets are the authors of bull markets,” he told a roomful of attendees, without specifying when the bull market would return. “I’m old enough and smart enough not to answer when,” he said.
Rule noted he struck gold in the great bear market from 1989 to 1991, after recovering from the financial hit he took in the bear market from 1982 to 1983.
He described the ’89 downturn as a “truly cleansing market,” as many junior companies went under. “There were a dozen or two dozen companies a week getting suspended. While that was a horrible thing for the people — who were frankly stupid enough to have ever bought them — and a horrible thing for the people that relied on them for a living, it was a wonderful thing for the market as a whole,” he said.
“The truth is so many companies went to ‘company heaven’ in the early part of the decade in the ’90s that there was literally a shortage of paper in 1993.
And if you were looking for something to buy with a straight face in ’93 or ’94, you’d have been looking back to 1990 as the good old days, because stuff were so, so, so cheap.”
For example, Aber Resources, which explored for diamonds in the Northwest Territories and eventually discovered the Diavik mine, was selling at a huge discount to cash at that time, Rule said.
By the bear market of 1998 and 2002, Rule said stocks were again cheap and that he aggressively accumulated positions, pointing out that in 2005 and 2006 he gave a similar speech where he highlighted the opportunities in the 1998 to 2002 bear market.
While acknowledging that the “malaise we are in” partly owes to the carelessness market participants showed in the last bull market, Rule says there are good buying opportunities in the current market.
“In my experience, the recoveries are proportional to the discounts, and in that regard, I want you to think about some simple arithmetic. I was told the other day the TSX Venture Index is off by 83% in nominal terms … but we all know the index is bullshit. We all know the worst companies get kicked out of it. So it is really down in real terms by 90%. A sector that is down by 90% is precisely 90% less risky. It has precisely 90% more opportunity.”
The narratives that existed in 2011, including the U.S. government’s growing balance sheet liabilities and the growing global population, still exist today, Rule said, adding that now, the market is just no longer overpriced.
“Those [2010 and 2011] markets were fairytale markets. There was no discipline with regards to how we invested … and part of the bear market we are in today is a reflection of the stupidity we exhibited in the bull market that preceded it,” he said. “And we call those the good old days. But these are the good old days.”
He pointed out there are companies, without specifying, that are selling at a 40% discount to the cash in the treasury, noting this opportunity didn’t exist in 2011.
“Those of you who allocate your capital wisely, the way you allocated your capital in 2002 and 2001, will five years from now will look back at this PDAC and say that at least in terms of equity pricing opportunities, those were the good old days.”
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