Bear markets good; Bull markets bad.

THE CONFERENCE CALLER: In his opening keynote address to the Gold Investment Symposium Sprott Global Resource Investment chairman Rick Rule said he liked Bear Markets as they present great opportunities for buying bargains.

“At any point in time Bull markets feel good and Bear markets feel bad, but…in terms of building wealth the opposite is the case,” he said.

“The thing I am having trouble with in this whole discussion is the disconnect and price response.

“The only thing I can say is that disconnect is real, and it is a great opportunity.

“I would call it a sale.”

 

Rule compared buying resource company shares to shopping in a large department.

Why is it, he offered, that people will enter a department store seeking to buy consumer items at discounted prices, yet they will not buy shares in the same manner.

He labelled these stores, selling their wares at heavy discounts as Bear Market Merchants, drawing in customers in droves by offering products at a much lesser price that what they were selling for weeks, in some cases, days earlier.

“Bear Market Merchants say, ‘Price five years ago, five dollars – today 37 cents’,” he said to support his assertion.

“Bull Market Merchants sell at the highest price all the time, claiming prices may be higher next week.

“No deals for investors, never – none.”

Rule makes an interesting point. It is odd, with physical assets, investors prefer to pay less and with financial assets prefer to pay more.

Rule said the reasoning behind this is that when buying the financial assets, people feel they are buying something that is currently valued in the marketplace and in turn they become vendors of that valuable commodity.

“What doesn’t change is the nature of markets – what changes is the nature of investors’ responses,” he explained.

“If we can begin to manage our response we can begin to understand that, despite the fact we are terrified [of the state of the market] right now and that we want to sell – what we need to, if we want to make money, is to buy.”

Of course, this isn’t the first Bear Market the world has experienced and, if the investment community is really going to be honest with itself, it will definitely not be the last.

“For many of you this is not your first rodeo, you have been through this before,” reminded his audience.

“Many of you in the room will remember the Bear Markets of 1982 through to 1986, 1998 to 2003, and others

“Those of you who do remember these will also recall the bargains available – some of you took advantage of them – and those of you who remember the price response of the better assets you bought in the worst markets will understand what I’m talking about.

“It is easy to understand it intellectually, but it is tough to deal with the reality,

“But, just like in 1984 – we aren’t going to have the end of mining, we aren’t going to have the end of energy – we are not going to have the end of resources.”

Rule stressed the point that markets are cyclical beasts and that although we have already endure three years of the current run, he predicted there could be a couple more in store.

“The point is that you have been through the pain, so you might as well hang around so you can enjoy the gain,” he said.

He spoke of the 1998 – 2003 Bear Market, which he said, after experiencing a couple before, he was prepared for.

By 1998, Rule said he understood what a Bear Market was all about and that it was a time to employ capital aggressively, to hang on with your finger nails and teeth and ride the resultant market up.

“My 1998 and 2000 partnerships – in a seven year time frame – generated 69 per cent compound annual rates of return,” he said.

“Does this mean I am a better investor that Warren Buffet?

“Of course not. It means I recognised a Bear Market and tried to pick the best companies that I could – I bought them aggressively, I financed them aggressively, and nature took care of the rest.

“When people think through the pain they feel in a market like this, they forget how much they enjoyed the gain of a Bull Market.

“It’s very important to understand how you experience the pain.”