The 75/25 Rule: No Need To Outperform If Market Returns 1200%
The 75/25 Rule: No Need To Outperform If Market Returns 1200% By Albert Lu for Sprott Global
Invest before you speculate was the message Rick Rule, president and CEO of Sprott U.S. Holdings, delivered to a capacity audience at the 45th New Orleans Investment Conference earlier this month.
“We are at, or pretty close to, the bottom of the [gold mining] market in a 40-year context.”
“There’s a newfound … aggressiveness among the investors. There’s a sense that we have been through the worst of the bad times [in precious metals] and we’re coming into good times.”
Nevertheless, Rule stresses caution.
“[The Barron’s Gold Mining Index (BGMI)] shows us that the nine major recoveries we’ve seen have been between 200% and 1200% over compressed periods of time.
“[I]f just capturing the market gives you between 200% and 1200%, the idea that you take a lot of risk to try and beat that is a little silly.”
Rather than increase risk to beat the market, Rule prefers to ease back by allocating 75% of a mining portfolio to, what he calls, the best of the best stocks.
“I suspect that over the course of a bull market you’ll probably give up 20% or 25% of the performance. But you’ll do that by de-risking your portfolio by 70% or 80% … You take substantially less risk to make all or most all of the move.”
So, what separates the best from the rest?
“I would say it’s people,” explained Rule.
“The truth is, in my life, most of the performance that’s been generated to me, and hence to my clients, has come from 10 or 15 people. And you find that the best people always end up building the best companies.”
THERE’S A LOT TO BE SAID FOR EXPLORATION
But despite his cautionary warning, Rule encourages those who can tolerate risk to speculate.
“I’m not suggesting that, for a different portion of your portfolio [—the remaining 25%], you shouldn’t speculate. There are very few ways in the world to add economic value more rapidly than through the drill bit.
“There’s a lot to be said for exploration. There’s a lot to be said for buying very high-quality junior gold stocks that grow at the same time that the market’s ability to appreciate them also grows.”
“The gold narrative, once it gets going, is unusually powerful.”