Doug Casey: Education of a Speculator, Part Two

Recently: Doug Casey: Education of a Speculator

Ed. Note: When we left our intrepid hero last week, he was hanging off the edge of a golden cliff…

L: So what did you do after cashing in, in the’80s?

Doug: That’s when I started getting into the mining stocks you now cover. I liked their incredible volatility. But it took me quite a while to really understand the way the game was played. Even though the third thing I wanted to be when I was a kid was a geologist, it took me years to get geologically active, so to speak. But no regrets. It was a great time to get into the field, because there were some fantastic gold stock runs in the’80s, right up to the Bre-X scandal in 1996.

I went out into the field, as you do now, building first-hand understanding for the fundamentals of the business. That’s as opposed to treating these things strictly like trading sardines — which, of course, most of them are. But even so, you can trade them much more effectively if you have a solid grasp of the technical areas of the business. And there’s no book for learning this; there’s really no way to learn how to sort the wheat from the chaff, other than to get out there and apply boot leather, spend a lot of time talking to geos, learn the psychology of the players, and watch the economics of mining companies as they develop.

The’80s were really a period of learning for me, playing around with wins and losses, all of which prepared me to profit from the bull market of the’90s. It’s been a wild ride, with resource stocks cyclically going up 1,000%, and then falling 95% — again and again.

L: Heh. You didn’t have the advantage I had of a Doug Casey who’d done it before and could teach me the ropes — and whose experience I can now draw upon at any time.

Doug: Yes, it really would have been helpful if I’d had a mentor… but I can’t think of anyone back then who could have taught me what I needed to know. If there had been, I sure as hell would have sat at his knee and saved myself a lot of money and aggravation. But all that effort at self-education did prepare me for the 1993—1996 bull market, which was a wonderful, fantastic time to be in the junior mining sector. That was the time when I had the three biggest wins of my career.

L: Ah yes, the famous u201Caccident, scam, and psychotic break.u201D We mentioned those before, in our conversation on winning speculations, but you didn’t really tell the stories.

Doug: Well, the scam was Bre-X, of course. I was introduced to that by my friend Rick Rule, who also introduced me to Silver Standard Resources and several other huge wins I’ve had in my career. The company was coming out with fantastic results from its drilling in the orangutan pastures of Indonesia. At the time, the stock was trading for about a buck, and there weren’t too many shares out. I started buying, and the story just kept getting better, so I started buying with both hands. Who could have guessed that someone was salting the drill core?

I ended up with a very large position, and as I said before, I finally came to the realization, when the stock was trading over $100, that this exploration play had a market capitalization greater than that of Freeport McMoRan, which had already put billions of dollars into its Ertsberg and Grasberg mines, and was paying dividends, to boot. I asked myself what the point of holding on was, couldn’t think of one, and sold on that basis. As you know, the whole thing was exposed as a fraud, and $4 billion of value disappeared.

The accident was Diamond Fields, of which I was a founding shareholder, simply because I was a friend of Robert Friedland’s. I did a second private placement in it later, based strictly on the diamond assets. That was an offshore Namibian diamond play that looked great, as so many of these things often do, but didn’t work out.

The only reason that Diamond Fields went to over $100 instead of near zero is because a couple geologists on a helicopter ride in Labrador, where the company was closing up shop, saw something out the window that looked interesting. They landed on the discoloration, sampled it, and that led to the world-class Voisey’s Bay nickel discovery. It was pure luck those two geos were flying over that place and happened to look down at that time.

The psychotic break was Nevsun, which is still around today and is still active in Africa, as it was back in those days. I did private placements in that stock at $1.00 and $2.00, with full warrants, and rode it all the way up to $20.00, when I sold. I call it a psychotic break because there was a broker in Chicago, now deceased, who, for some reason, went wild and decided to put 100% of his clients’ money into that stock. He personally took it to $20.00, after which it slid all the way back to becoming a penny stock, before this cycle breathed some new life into it.

This all just goes to show that even armed with the best intentions and expert knowledge, sometimes it’s extraneous events that can make all the difference.

L: Which underscores the importance of sticking close to the action, so you’re not u201Cout of the room, out of the deal.u201D

Doug: Just so. Ted Turner supposedly attributes a lot of his success to just going where the action is and letting the law of large numbers work for him. It’s true. You’ve got to be out there. Just running on the 9-to-5 treadmill is unlikely to result in anything other than mediocrity. It also helps not to be too risk averse, not to be intimidated by volatility, to have a contrarian nature, and to be inclined to go places others aren’t interested in.

L: So, since we’ve recorded your three biggest wins for history, it would only be fair to record some of your biggest losses. Care to let one of those out of the bag?

Doug: It’s funny — I tend to forget about those, actually. It’s painful reliving them. Let’s say I try to forget the incidents, while remembering the lesson.

L: It’s just human psychology. You might think we’d want to remember our most painful experiences so as to never make the same mistakes again, but there also seems to be a tendency to push painful things from our minds, to enable us to continue functioning at all. If so, the unfortunate consequence is that people often repeat their worst mistakes.

Doug: That might explain why I’ve lost so much money on private deals. When you put money into a company at its founding, while it’s still private, and it never goes public, you never get an exit, not even at a loss; the money just dies and goes to money heaven. At least if it was good money. [Chuckles]

There are companies I bought decades ago that are, to this day, still not public. For all I know, they never will go public. I won’t name names, but for all practical purposes, this is dead money. So I’m extremely reluctant to buy into private deals, although I can’t help but look at them and still take the plunge occasionally. Some of these things that were deposited with brokers still show up on my monthly statements. Seeing them there is like getting poked in the eye anew every time, so I recently told the brokers just to delete them — the ones I know are bankrupt, anyway.

There’s a lot that can go wrong before a private company gains a listing on a stock market. As well as after…

L: But you still do it. I’ve seen you do it this year.

Doug: You’re right, but the price was really, really cheap, and I knew the people involved. If I have high confidence that the people involved will do what they say they’ll do, that helps — but it still needs to be at fire sale prices.

L: Words to the wise, duly noted.

Doug: I’ll tell you my best u201Cwoulda, coulda, shouldau201D story. The stupidest failure to act in my career. A sin of omission, not commission.

L: Okay, shoot.

Doug: One of the largest publishing companies in the U.S. was started by a friend of mine in 1979. At the time, I was just starting to publish my newsletter, the predecessor of the International Speculator you now run. He said he’d like to publish it, and I said: u201CGreat, because I’m not a publisher and I don’t want to be one.u201D He said he’d sell me 10% of his new company for $10,000, with the idea in mind that that would be the seed capital for publishing the newsletter. I passed on the deal, thinking I was being a shrewd businessman. [Deep sigh.]

Today, I estimate that my 10% share of the dividends would have added up to $3 to $4 million over the years, plus my 10% stake would be worth $5 to $10 million.

L: Wow. But… if you knew your $10,000 was going to be seed capital for the publication of your own newsletter, why on earth didn’t you take the deal?

Doug: Well, I had other offers from other publishers, and they seemed more experienced and stable; they didn’t need capital to get the job done. My friend’s company was private, with no experience in the newsletter publishing business, and I just didn’t think it would work. I was simply, totally, dead wrong about it.

It’s still a private company, but it would be one of the most productive pieces of my portfolio today, had I not been so clever back then.

And I’ve got to tell you that another of my best deals was, and still is, a private company. Believe it or not, it was a placer deal in Alaskau2014

L: You’re kidding!

Doug: No! Talk about all the things you shouldn’t do in investing: it was private, a placer deal, and with people I didn’t know well.

L: Why is it that when you hear of a mining scam, it’s so often a placer deal?

[Ed. Note: Placer mining is the dredging of rivers, sifting of sand-bars, etc., for gold that has accumulated in dirt, gravel, sand and other u201Calluvialu201D matter.]

Doug: The same reason that so few are in public companies — there are just too many X factors. The first thing that happens is that when you get going, your workers see nice nuggets of gold, and those nuggets somehow manage to disappear. More technically, it’s really difficult to estimate mining reserves in a placer setting; the flakes and nuggets are inconsistently dispersed into pods. On the other hand, it tends not to be very capital intensive, and values are easy to recover by simple gravity separation. But that also means most of them have already been played out by prospectors. Placer is a fun thing to play with during your summer vacation, but typically is not commercially viable.

L: So… Why’d you do it?

Doug: It seemed like a good idea at the time… famous last words. Actually an old friend, who did know the people, urged me to. And — not that this is an excuse for doing something goofy — it wasn’t much money. Sometimes it’s better to be lucky than smart, although that’s no way to invest.

Anyway, I got into this deal for $20,000, back in the early’80s. That $20K got me 200 ounces of gold over the years, which is still on deposit with a major broker to whom they shipped it. They stopped producing in 2001 at the bottom of the market, when it was just uneconomic, but it’s going back into production soon, so I may still get even more gold without putting another penny into the deal.

L: That’s more than ten to one on just the gold they’ve dividended to you so far.

Doug: Yes. The $20k was tax deductible, since it went directly into expenses. And the gold is tax free until I sell it — which I have no intention of doing until there’s a better place for the capital. Perhaps U.S. stocks when dividends are in the 6—8% range.

The Golden Rule: Safe ... Jim Gibbons Best Price: $1.99 Buy New $12.75 (as of 04:30 UTC - Details)

But actually there’s another one, an opportunity brought to me by Jim Gibbons, a longtime subscriber who started a company called Seattle Shellfish. In spite of the fact that I’d grown to hate private deals, Jim’s project looked good, so I invested some money. It’s still private, but it’s paying me about 30% per year in dividends, and they’ve been increasing. Incidentally, he’s just written a book with a lot of insights that are especially relevant now: The Golden Rule: Safe Strategies of Sage Investors.

L: Sounds like a love-hate relationship you have with private companies. How does one even start to make a rational decision in that environment?

Doug: Well, they could start with my friend Arthur Lipper’s book, The Guide for Venture Investing Angels: Financing and investing in private companies.

I’ve had a lot more losers than winners investing in private companies, but almost everybody does. You just hope that the occasional winner is big enough to make up for the losses, plus give you a worthwhile risk-adjusted return. What that means is trying to go only for deals that, in your subjective opinion, have 10—1 potential. Better yet, try to negotiate for some type of security, to reduce your downside risk. A study of Arthur’s books, and he’s got several, is a cheap education.

L: Sounds like one I need to read, with so many students sending me business plans. Any other painful lessons learned to share?

Doug: Like I said, I seem to have pushed most from my mind… But maybe I should also say that some of my biggest winners have been outside of the world of gold stocks and mining, and in the world of real estate.

L. Ah, yes, real estate is the other great passion of yours we’ve talked about, aside from poker, which we’ve also talked about.

Doug: Spain was a good example. I bought real estate in southern Spain before Spain joined the EU — and I recommended doing so in the newsletter. That worked out very well indeed, not just because of the influx of tourists and money from Northern Europe, but because the dollar was much higher back then, making it cheaper to buy all kinds of things for giveaway prices. All of Europe was relatively cheap at the time. I also bought in Hong Kong during a China crisis. Same in Argentina — but crises there come quite often.

L: I’d guess any trend-watcher who was paying attention could have guessed that after Generalissimo Franco took his long-overdue exit from our weary world stage, things must have been at or near a bottom for Spain.

Doug: That’s right. Another u201Cwoulda-shoulda-couldau201D story in real estate is that I was in South Africa looking at beachfront property back in about 2000. It was very cheap at the time, because the rand was about twelve to one against the dollar (because the price of gold and other metals was down). Had I done that, I could have made ten-to-one on some of those beachfront properties during the following boom.

L: So why didn’t you?

Doug: I didn’t want to live in South Africa. The problem with many foreign real estate deals is that if you’re not going to be there and watch over things, you just don’t know what is going to happen. You get squatters, you get rapacious town councils, and so forth. It’s always messy, but it gets out of hand if you’re not there, or frequently there. Anyway, gold and gold stocks were so cheap, I thought that was a better place to be. So, there are a lot of big ones like this that got away…

L: Like that castle you could have bought in Rhodesia during the war for $85,000 — you told that story in our conversation on real estate.

Doug: Sure, but things can go wrong just as easily as they can go well, if not easier. Twenty years ago, I was talking with John Templeton, at his office in Lyford Cay, about real estate, and he told me about how he bought some land in Costa Rica back in the early’70s. That was a smart move on his part, because Costa Rica was very cheap back in those days. But his lawyer, who was an ex-vice president of the country, managed to defraud Templeton. The master at this game lost $200,000, which was a lot of money back in those days — incidentally, I’d even met the guy who took the money. So you just have to be very careful about making long-distance investments in real estate, especially if you’re not going to use them personally or stay close to them yourself.

L: Hm. Speaking of real estate, I heard a story about you that perhaps you can verify for me. I heard that when you started speculating in mining stocks, you’d actually been wiped out, or had very little cash at any rate. So you took out a second mortgage or something on a house you had in Vancouver, and that became the seed capital for your current fortune.

Doug: I forgot about that — it’s true. I bought that house in West Van, which had 900 feet of really beautiful waterfront, for just under a million Canadian, when the Canadian dollar was about 65 cents U.S. I sold it at the beginning of the 1993 bull market, because I was really tight after the late’80s bear market, and I just really needed the cash more than I needed a big fourth house. So I sold it for C$2.3 million, when the Canadian dollar was at about 83 cents. Today, the house would go for about C$15 million, with the Canadian dollar at near parity. At this point I definitely would urge its owner to hit the bid — whether he needs the money or not. Vancouver property is riding for a fall.

L: That explains a lot. I always wondered about that story, because you always say that people should never risk money they can’t afford to lose on mining stocks — u201Cthe most volatile stocks on earth.u201D So it seemed strange that you would have gone deep into hock to gamble in the market. But you didn’t; you liquidated a non-core asset and remobilized your gains. You missed out on more gains on the house, but that move provided the capital for the three biggest wins in your career, which you just told us about. Sounds like a great move to me.

Doug: Another lesson learned that this brings to mind is that whenever I’ve made big gains in the market, I’ve made it a habit to invest the profits I’ve scraped back off the table into something that can’t dry up and blow away.

L: Hence the emphasis on real estate.

Doug: Yes, though real property has carrying costs, and it’s illiquid. That’s the bad news. The good news is that it — usually — stays where you leave it. That’s another advantage of salting away gold coins; you don’t tend to liquidate them.

L: [Chuckles] So noted. Any more lessons learned?

Doug: Well, I don’t regret much in life, but the things I really regret the most, even more than the big losses I’ve taken, are the opportunities I’ve let slip through my fingers. It happens to everyone, and you shouldn’t regret it too much, but they sure do smart. In most areas of life — not just investments — it’s not the things you did that you regret, but the things you failed to do.

But investment-wise, for example, some friends of mine were founders of Digital Switch some 30 years ago. I didn’t really understand the implications of the switch, no pun intended, from electro-mechanical to purely digital switching, so I passed on what could have been a huge amount of money.

The founder of AOL was also a friend of mine — I actually used to work for him at one point, when I was in the brokerage business. He made a billion dollars on AOL, another boat I missed. Coming close but no cigar hurts sometimes.

L: So what’s the lesson to be learned from that? I bet there are even more deals you were quite right to pass up.

Doug: Lots and lots of bad deals I didn’t get in on, for sure. Which re-emphasizes the necessity of looking at hundreds of deals — just so you can afford to walk away from 99% of them. I’ve got to plug Marin Katusa here at our energy division. He is an exceptional judge of private companies, and he does look at hundreds of deals of all kinds. And he actually does walk away from 99% of them.

One more thing, I don’t think it’s possible to overemphasize the importance of a having voracious mind, of letting your curiosity run wild, into every subject and to every part of the world. To be a good speculator, you should have the broadest and deepest range of knowledge possible. If I had known more, I wouldn’t have missed Digital Switch or AOL — it was my own ignorance that cost me those opportunities.

I said before that it’s good to be lucky — but luck favors the well-prepared. For speculators, that means having the widest range of experience and knowledge possible, so you can see an opportunity for what it is when it comes knocking.

L: Hence our company motto: u201CIntensely Curious, Focused on Facts.u201D Great stories, Doug, thanks for sharing them.

Doug: My pleasure. My guess is that this decade is going to feature some of the most volatile markets in history. That’s a very good thing for those who are prepared and know what to look for.

As Doug said, for a successful speculator, passing up on unsound opportunities is just as important as getting into the sound ones. And Marin Katusa, chief investment strategist of Casey’s Energy Division, is a true master at both. It’s no coincidence that of 19 recent stock picks of his, 19 were winners… a 100% success rate. Learn more about Marin and how you can profit from his skills.