Submitted by Sprott’s Thoughts:
Click here to watch Part 2 of Rick’s interview with Real Vision. We summarize the section here.
As they say, what comes up must come down.
In Part 2 of Rick Rule’s interview, Rick talks about the lessons learned throughout the cyclical collapse of the 1980s. Caution was his first lesson. In the lead up to the collapse, Rick’s confidence and efficacy as a young salesman was unmatched by his wiser counterparts, who had the good sense to have some caution when advising clients about the risks and potential rewards of investing in such an environment. Rick was to learn that in a very personal way.
His second lesson, and one which has shaped his investment thesis going forward, was to be wary of what the so-called “experts” were predicting. In the lead up to the collapse, Rick rarely offered his own personal views on where the commodities cycle was heading. He didn’t have to. The Royal Bank, the World Bank, Exxon, and Bank of America all were painting decidedly rosy pictures of the commodities’ pricing. And, in Rick’s words, “they were all idiotic.” The prevailing wisdom was that energy and food prices were going to soar, and Rick was loading up his own portfolio to benefit from that trend.
“People tended to extrapolate trends in motion ad infinitum, ad absurdium.”
So when the collapse finally arrived, every major institution’s public predictions were proven wildly incorrect. They had ignored the fact that markets work, and that incredibly high prices of an item reduce the utility of that item to the end user, which will eventually reduce the price in an ever self-correcting cycle. This is perhaps a timely lesson for commodities investors in 2016.
But for Rick, who had used debt rather than equity to take long positions on commodities, the third lesson left perhaps the most lasting impression: how to pay back high debt loads utilized to make big bets that went south.“I learned that my assets were ephemeral, but my debts were money good.”
By his 29th birthday, Rick found he had a negative net worth in the six-figure range.
How to handle his creditors was another story. “I was very forthright. I communicated really, really well with my creditors, and I made sure they got to know each other.” Their collaboration gave Rick the running room to work with them and, after several years, allowed him to pay off his debt. “I was far too stubborn and far too proud to go bankrupt.” And after indeed emerging from his debt load, he found he had preserved not only his good credit, but his good name. The industry players who had watched him go through that process were impressed, and many of them became staunch backers of his career going forward. It’s no coincidence that Rick is an active creditor and distressed debt investor today.
The full interview may be viewed here.