Doug Casey on Education of a Speculator, Part Two

(Interviewed by Louis James, Editor, International Speculator

[Ed. Note: When we left our intrepid hero last week, he was hanging off the edge of a golden cliff…]

L: So what did you do after cashing in, in the ‘80s?

Doug: That’s when I started getting into the mining stocks you now cover. I liked their incredible volatility. But it took me quite a while to really understand the way the game was played. Even though the third thing I wanted to be when I was a kid was a geologist, it took me years to get geologically active, so to speak. But no regrets. It was a great time to get into the field, because there were some fantastic gold stock runs in the ‘80s, right up to the Bre-X scandal in 1996.

I went out into the field, as you do now, building first-hand understanding for the fundamentals of the business. That’s as opposed to treating these things strictly like trading sardines – which, of course, most of them are. But even so, you can trade them much more effectively if you have a solid grasp of the technical areas of the business. And there’s no book for learning this; there’s really no way to learn how to sort the wheat from the chaff, other than to get out there and apply boot leather, spend a lot of time talking to geos, learn the psychology of the players, and watch the economics of mining companies as they develop.

The ‘80s were really a period of learning for me, playing around with wins and losses, all of which prepared me to profit from the bull market of the ‘90s. It’s been a wild ride, with resource stocks cyclically going up 1,000%, and then falling 95% – again and again.

L: Heh. You didn’t have the advantage I had of a Doug Casey who’d done it before and could teach me the ropes – and whose experience I can now draw upon at any time.

Doug: Yes, it really would have been helpful if I’d had a mentor… but I can’t think of anyone back then who could have taught me what I needed to know. If there had been, I sure as hell would have sat at his knee and saved myself a lot of money and aggravation. But all that effort at self-education did prepare me for the 1993-1996 bull market, which was a wonderful, fantastic time to be in the junior mining sector. That was the time when I had the three biggest wins of my career.

L: Ah yes, the famous “accident, scam, and psychotic break.” We mentioned those before, in our conversation on winning speculations, but you didn’t really tell the stories.

Doug: Well, the scam was Bre-X, of course. I was introduced to that by my friend Rick Rule, who also introduced me to Silver Standard Resources and several other huge wins I’ve had in my career. The company was coming out with fantastic results from its drilling in the orangutan pastures of Indonesia. At the time, the stock was trading for about a buck, and there weren’t too many shares out. I started buying, and the story just kept getting better, so I started buying with both hands. Who could have guessed that someone was salting the drill core?

I ended up with a very large position, and as I said before, I finally came to the realization, when the stock was trading over $100, that this exploration play had a market capitalization greater than that of Freeport McMoRan, which had already put billions of dollars into its Ertsberg and Grasberg mines, and was paying dividends, to boot. I asked myself what the point of holding on was, couldn’t think of one, and sold on that basis. As you know, the whole thing was exposed as a fraud, and $4 billion of value disappeared.

The accident was Diamond Fields, of which I was a founding shareholder, simply because I was a friend of Robert Friedland’s. I did a second private placement in it later, based strictly on the diamond assets. That was an offshore Namibian diamond play that looked great, as so many of these things often do, but didn’t work out.

The only reason that Diamond Fields went to over $100 instead of near zero is because a couple geologists on a helicopter ride in Labrador, where the company was closing up shop, saw something out the window that looked interesting. They landed on the discoloration, sampled it, and that led to the world-class Voisey’s Bay nickel discovery. It was pure luck those two geos were flying over that place and happened to look down at that time.

The psychotic break was Nevsun, which is still around today and is still active in Africa, as it was back in those days. I did private placements in that stock at $1.00 and $2.00, with full warrants, and rode it all the way up to $20.00, when I sold. I call it a psychotic break because there was a broker in Chicago, now deceased, who, for some reason, went wild and decided to put 100% of his clients’ money into that stock. He personally took it to $20.00, after which it slid all the way back to becoming a penny stock, before this cycle breathed some new life into it.

This all just goes to show that even armed with the best intentions and expert knowledge, sometimes it’s extraneous events that can make all the difference.

L: Which underscores the importance of sticking close to the action, so you’re not “out of the room, out of the deal.”

Doug: Just so. Ted Turner supposedly attributes a lot of his success to just going where the action is and letting the law of large numbers work for him. It’s true. You’ve got to be out there. Just running on the 9-to-5 treadmill is unlikely to result in anything other than mediocrity. It also helps not to be too risk averse, not to be intimidated by volatility, to have a contrarian nature, and to be inclined to go places others aren’t interested in.

L: So, since we’ve recorded your three biggest wins for history, it would only be fair to record some of your biggest losses. Care to let one of those out of the bag?

Doug: It’s funny – I tend to forget about those, actually. It’s painful reliving them. Let’s say I try to forget the incidents, while remembering the lesson.

L: It’s just human psychology. You might think we’d want to remember our most painful experiences so as to never make the same mistakes again, but there also seems to be a tendency to push painful things from our minds, to enable us to continue functioning at all. If so, the unfortunate consequence is that people often repeat their worst mistakes.

Doug: That might explain why I’ve lost so much money on private deals. When you put money into a company at its founding, while it’s still private, and it never goes public, you never get an exit, not even at a loss; the money just dies and goes to money heaven. At least if it was good money. [Chuckles]

There are companies I bought decades ago that are, to this day, still not public. For all I know, they never will go public. I won’t name names, but for all practical purposes, this is dead money. So I’m extremely reluctant to buy into private deals, although I can’t help but look at them and still take the plunge occasionally. Some of these things that were deposited with brokers still show up on my monthly statements. Seeing them there is like getting poked in the eye anew every time, so I recently told the brokers just to delete them – the ones I know are bankrupt, anyway.

There’s a lot that can go wrong before a private company gains a listing on a stock market. As well as after…

L: But you still do it. I’ve seen you do it this year.

Doug: You’re right, but the price was really, really cheap, and I knew the people involved. If I have high confidence that the people involved will do what they say they’ll do, that helps – but it still needs to be at fire sale prices.

L: Words to the wise, duly noted.

Doug: I’ll tell you my best “woulda, coulda, shoulda” story. The stupidest failure to act in my career. A sin of omission, not commission.

L: Okay, shoot.

Doug: One of the largest publishing companies in the U.S. was started by a friend of mine in 1979. At the time, I was just starting to publish my newsletter, the predecessor of the International Speculator you now run. He said he’d like to publish it, and I said: “Great, because I’m not a publisher and I don’t want to be one.” He said he’d sell me 10% of his new company for $10,000, with the idea in mind that that would be the seed capital for publishing the newsletter. I passed on the deal, thinking I was being a shrewd businessman. [Deep sigh.]

Today, I estimate that my 10% share of the dividends would have added up to $3 to $4 million over the years, plus my 10% stake would be worth $5 to $10 million.

L: Wow. But… if you knew your $10,000 was going to be seed capital for the publication of your own newsletter, why on earth didn’t you take the deal?

Doug: Well, I had other offers from other publishers, and they seemed more experienced and stable; they didn’t need capital to get the job done. My friend’s company was private, with no experience in the newsletter publishing business, and I just didn’t think it would work. I was simply, totally, dead wrong about it.

It’s still a private company, but it would be one of the most productive pieces of my portfolio today, had I not been so clever back then.

And I’ve got to tell you that another of my best deals was, and still is, a private company. Believe it or not, it was a placer deal in Alaska—