Doug Casey on Education of a Speculator, Part One

(Interviewed by Louis James, Editor, International Speculator

L : Doug, a lot of our readers have asked for you to tell some war stories – what were some of your biggest wins and losses, and what were the lessons learned?

Doug: Well, it may not all fit neatly under the rubric of "Lessons Learned," but I can tell you about some of the specific experiences that have shaped my career. There have certainly been some great deals and terrible deals that I've been in – and just as many of both that I've failed to get in.

L: It's all part of what Victor Niederhoffer would call The Education of a Speculator.

Doug: Vic's an old friend of mine, and his book by that title has some important insights. Although he's mainly a short-term trader. I prefer to only buy things I can hold on to for a few months, if not a couple of years. It gives you enough time to be right. And doesn't clutter your mind up with random noise and fluctuations.

L: Indeed; let the trend be your friend. Okay then, where do we start?

Doug: We've already told the story about my Ferrari business, in our conversation on cars, but that was my first business deal, so I do recommend reading it to those who haven't yet.

L: So, when you got out of the hospital, did you dive right into another deal?

Doug: Actually, I decided to start really educating myself at that point. Among other things, I read Harry Browne's seminal book, How you can profit from the coming devaluation, and that led directly to my first big score in the market. I read that book in 1970, and I bought gold coins. More important, as it turned out, is that I bought gold stocks and had a wild ride from 1971 to 1974. I made a lot of money, in percentage terms at least, since I was just out of school and had almost no capital to start with.

I then launched my second business venture—

L: Wait, wait… There was a big slump in gold in the mid-‘70s. Are you saying you bought early, before Nixon closed the gold window, and then sold at the top of that first surge, realizing gains before the slump?

Doug: Yes, I did. But it's not as heroic as it sounds – I had no crystal ball. I sold near that interim top to invest in my second business, which was a company to market precious metals to the public. I have to say that I learned more painful lessons on that deal than I did crashing the Ferrari. Not only did I lose all the money I had built up, but I lost a bunch of money I didn't have. It took me years to dig myself out of that hole. I never declared bankruptcy, but I had significant negative net worth for some time.

L: That brings up an interesting point. You're a libertarian, and libertarians believe in the sanctity of the contract. That being the case, are there any moral grounds under which a libertarian can declare bankruptcy? There were times in my past when I was pretty deep in the red as well, and I couldn't bring myself to file for bankruptcy, even though it would have taken a great pressure off me. I'd made promises, and I just couldn't break them.

Doug: I completely agree with that, and that's why I didn't declare bankruptcy. I've always considered bankruptcy to be the act of hiding behind the state for the purpose of defrauding your creditors. It may be legal, but it's unethical; there's increasingly only an accidental overlap between what's legal and what's ethical. But most debt today is owed to banks. I have to wonder, with the banks increasingly becoming creatures of the state, if the morals involved haven't become inverted in today's world.

L: It could be a moral positive to borrow money from the government and then declare bankruptcy to help hasten the state's own demise?

Doug: [Chuckles] Could be. Inflation is well known to corrupt a society's morals in many ways. It's a dangerous thing, a slippery slope, to start rationalizing why one needn't make good on debts. But that's what's happening all over the U.S., with people walking away from their mortgages and their credit card debt, and declaring bankruptcy in record numbers. It's a trend that's going to end very, very badly.

What the state has done by increasingly insinuating its tentacles into every aspect of life is to completely corrupt society. Both the intended and unintended consequences are going to be ugly, because it blurs the morality of daily life. It's entirely perverse that defaulting on debts can even be considered as a good thing, and inversions like this are proliferating.

L: We should do a conversation devoted to ethics – someone sure needs to. But let's go back to the ‘70s. What happened next?

Doug: Well, I had to dig myself out of that hole, so I redoubled my efforts to earn money. One of the things I did to earn money at the time was to write my first book, The International Man.

L: And thus was born a guru …

Doug: Well, it was Crisis Investing, a couple years later, that really put me on the talk show circuit. The other thing I did back in the mid-‘70s was to become a stock broker. Have I told you the story of how I managed to buy precisely at the very bottom of the mid-‘70s market trough?

L: No, please do.

Doug: I became a stock broker in 1976, which was fortuitous timing for someone who liked gold stocks. So, I'm sitting there at my office in Washington DC, and I got a call from a guy – his name was Elmer – who impressed me as being one of these rich good old boys. I talked to him about what I thought would be good investments for him, and he said, "I'll come into town and put a little bit of money with you." The way he talked, I thought "a little bit of money" was going to be several hundred thousand dollars, at least.

When he came in, it turned out that he was an average Joe who rode in on a bus and really didn't have any money to speak of. But I put a portfolio together for him, worth about $2,500, which included a thousand shares of a stock called Grootvlei, a thousand shares of Bracken, and several hundred shares of Anglo American Corporation of South Africa. Because gold had fallen almost 50%, from $200 at the end of December 1974, Grootvlei and Bracken were penny stocks – substantial producers, but with high cost and short-life mines – that were each yielding indicated dividends of about 50 to 75 percent. Even Anglo was yielding something like 15%.

L: Those are pretty amazing dividends.

Doug: It's incredible what you can get in dividends alone when a market is at a bottom – something people seem to have totally forgotten about today.

At any rate, the day Elmer came in happened to be the day that gold hit its absolute bottom for that cycle – $103.50, if I recall correctly – and also happened to be the very same day there were big riots in Soweto that made headlines in the U.S.

So, Elmer gets hit with these two things at the same time, calls me back up and says he wants to cancel his order. I said: "Elmer, this isn't Woolworth's. You can't really take the merchandise back." But rather than paying me for what he ordered, he hung up the phone on me.

Having entered the orders for the stocks the previous day, I had to ask myself what I would do about it. It was something of a revelation to me – it was clear that I was dealing with a typical member of the public, a representative of their mindset. I figured he must be the perfect contrary indicator. In today's terms, I had to ask myself if I was just talking the talk, or if I was willing to walk the walk.

So, I journaled those stocks I bought for Elmer into my account and held them until I sold in 1980 or thereabouts. By then, I was getting several times, annually, what I paid for them in dividends alone. It was a fantastic hit, at least in percentage terms.