This past week, I had the opportunity to exchange emails with one of the best in the business, Louis James, Senior Investment Strategist for Casey Research. Louis travels the world putting boots on the ground, investigating opportunities for those who subscribe toThe International Speculator. His boots-on-the-ground approach and detailed analysis of the companies that he investigates set him apart from the crowd. Not to mention, he has the ear of one of the legends of junior mining stock speculation, Doug Casey!
Before getting to the interview, I just wanted to share with you a rich source of information that I guarantee you won’t find anywhere else. I’m referring to the books, Totally Incorrect, and Right on the Money, which are collections of past conversations between Louis and Doug.
I can remember waiting eagerly for the Wednesday release of Conversations with Casey, where Louis and Doug discussed speculation, philosophy, and really, just about everything. I found the conversations extremely insightful and learned a lot from their exchanges. In fact, even though I had already read most of them for free in Conversations with Casey, I purchased both books when they were released.
My outlook on the world was influenced by these two men and I’m very grateful for the wisdom that they impart.
Now, without further ado, a conversation with Louis James:
Brian: “Turmoil seems to be the norm at this point in history, so how do you navigate the politicized economy and position The International Speculator portfolio to profit?”
Louis: “Turmoil and the politicized economy are related, but not the same things… There are many sources of turmoil, but whatever the source, it’s generally a bad thing for most investors—and a good thing for speculators. Quick reminder: a speculator is not simply a gambler who throws darts at a stock chart and hopes to get lucky, but a rational observer of the trends in the world, who pits his or her wit against the momentum-chasing masses. That means buying valuable assets that are oversold, and selling assets that are overbought. It’s rational contrarianism (as opposed to ornery contrarianism). So, we watch for ‘turmoil’ to create divergences between price and value, and then act accordingly.
As for the politicized economy, it is both a source of turmoil, and often highly predictable. As Doug Casey likes to say, the one thing you can usually count on governments to do, it’s the wrong thing—not just the wrong thing, but the exact opposite of the right thing. Like taking interest rates negative, punishing the savers who would otherwise accumulate the capital needed for a real renaissance. These actions are bad, in and of themselves, in the sense of being destructive to economies and civilization itself. But they are predictable, and that enables speculators to position themselves for the trends to be their friends.
This is how we choose which commodities and other resources to invest in. As for picking specific stocks, that comes down to due diligence, which is my area. I’ve flown more than a million miles on just the major carriers as I’ve travelled the world to evaluate specific speculative opportunities for our readers.”
Brian: “From the gold price high in 2011 to the end of 2015, the gold market was hit with a historical bear market, dropping the gold stocks from their highs by roughly 90%, in nominal terms. For me, personally, buying companies during this time period felt like catching a falling knife, but I knew I needed to buy what wasn’t popular yet still had value. Now in October, well into the gold market turn around, how does one know when and what to buy, considering some companies are up multiple times from their lows?”
Louis: “I know the feeling. But you did the right thing, especially in 2015 — as everyone can now see. Contrarian investing indeed. As for what to do now that all of the best gold stocks are up strongly, I have two answers. The first is that our old friend turmoil—volatility—has put many of these stocks back on sale again. Not as low as at the bottom in late 2015, but still, there are excellent entry points to many of the clear winners in our space right now, thanks to some entirely normal (after such a rapid rise) consolidation in the gold space.
The second answer is that the 2001 – 2011 bull run was one for the record books, so it’s not surprising that we got a record correction as well. If the current super-cycle were to prove analogous to the great bull market of the 1970s, then 2011 – 2015 would be like the mid-‘70s correction, in which gold retraced 50% and the stocks cratered, just as we’ve seen in the last few years. In this scenario, we’re now heading into the second phase of the bull, which will rise for a number of years, and then go vertical into a true market mania, the likes of which we’ve never seen.
Now, I’m not claiming to know the future. No promises here. But if you think this is what’s coming, then any correction like the one we’re having at present has to be seen as a gift, a great buying opportunity ahead of the mania, even if prices are not as low as at the end of 2015.
But it’s not all or nothing. Gold is a ‘safe haven asset.’ Our world is awash in turmoil, as you say. That means that demand for safe haven assets may fluctuate, but it’s not going away any time soon. And that’s as solid a trend as any today. So I’m a buyer on market weakness, whether or not we get the gold mania Doug Casey has predicted.”
Brian: “Warren Buffet says, ‘you must learn from mistakes, but they don’t have to be your own.’ Generally speaking, when investors or speculators lose money in the junior market, do you think there’s a commonality in their approach? If so, where are they going wrong?”
Louis: “I could write a book on this. The short version would be that most investors are too emotional to buy low and sell high. They buy because everyone else is buying—the asset is in the news, it’s exciting—and pay way too much. Then the market turns, and panic, selling because prices are falling drastically, which means they get terrible exit prices and lock in losses. They end up buying high and selling low.
You can’t just buy something because it’s cheap, of course. Buying ‘pet rocks’ after the market for them crashed in the 1970s was a bad idea. But if some necessary good, like copper, say, and it’s selling for less than the cost of production, you know that prices will rise, sooner or later, no matter how hated copper might be as a commodity. That was the case 15 years ago. It’s the case for uranium today, by the way. It’s not the case for gold, but all the fundamentals that Buffet doesn’t understand (because he sees gold only as a regular commodity, like pork bellies or coffee, and doesn’t see its function as a financial asset) point towards higher gold prices for years to come.
But I digress. The point is that successful speculation takes a great deal of courage. Frankly, most people just don’t have it. And that’s a good thing. If it were easy, everyone would do it and there would be no profit in it, no such thing as a contrarian opportunity, in fact. So the biggest mistake is actually to fail to get a good measure of one’s self. One must know one’s tolerance for risk and one’s ability to stay a difficult course. Ignorance or misjudgment in this area is fatal.”
Brian: “Generally speaking, what can speculators do to set themselves up for success in the junior resource sector?”
Louis: “Readers may not like it, but the best answer is self-education. I’ve just argued that speculation takes a great deal of courage. Where does one find such courage? Well, apart from one’s character to begin with, courage comes from condition—from knowledge. The more one studies and understands the sector one is speculating in, the more confident one can be of one’s reasoning and speculations. Great speculators like Doug Casey and Rick Rule never stop learning.”
Brian: “Personally, I feel that investors need to pick financial products that fit with their investing personas. Meaning, you have to match your risk appetite to the type of product you’re purchasing. In your opinion, what type of persona is well suited for The International Speculator? For those with a lower than average risk appetite, does Casey Research offer any products that would be beneficial? What about a higher than average risk appetite?”
Louis: “Yes indeed. There are as many personalities as there are people, so it’s hard to answer. In general, people who are bullish on precious metals, but can’t afford to risk much on wealth generation and are therefore more focused on wealth preservation (with exposure to the upside in gold) would likely be better off subscribing to the Casey Resource Investor. CRI focuses on the bigger, more stable companies in our sector. The typical International Speculator reader is more interested in wealth generation than protection, and is willing to take risks to do so.
Oddly enough, the ‘higher risk’ International Speculator delivers high average gains, but only for those who have the courage to see the trades through. Those who panic and sell during the fluctuations can lose a lot more than if they went with the safer companies in CRI.”
Brian: “Finally, I’m an avid reader and often have several books on the go at any given time. Right now, I’m reading The Black Swan, by Nassim Nicholas Taleb, and Titan: The Life of John D. Rockefeller Sr., by Ron Chernow. Do you have any favourite titles that you’d like to share, or maybe some that you’re reading now while travelling?”
Louis: “Right now, I’m reading Red Notice by Bill Browder. It’s a fascinating and very well written account of very Casey-like contrarian investing in Russia, after the fall of communism. And speaking of Casey, I have to say that Doug’s new novel, Speculator came out (frankly) much better than I expected. It’s a great page-turner, but based on Doug’s experiences as a speculator, and as educational as it is entertaining. For those of a more philosophical bent, Neal Stephenson’s Anathem is the best book I’ve read in decades.”
NOTE: Red Notice, Anathem and Speculator are available on our Amazon affiliated book store right now, check them out here.