We recently spoke to Mr. Rule as he was preparing to speak at the New Orleans Investment Conference. Here are some highlights from the conversation we had with him, but investors who want to learn more should explore the Global Research Investments Ltd. website at GRIL.net.

Mr. Rule started off with a bold description of the quality that makes a successful investor: “You are either a contrarian or a victim. The choice is yours,” he said.

A contrarian is someone who invests in a way that runs counter to what the most popular investing practices are. A contrarian is someone who discards conventional wisdom to chart their own path. Mr. Rule gave us a brief overview of what it means to be a popular or a contrarian investor in today’s natural resource markets: “Most investors make the mistake of chasing bull markets when, in fact, they should be chasing bear markets. Natural resource sectors are capital intensive and extremely cyclical. As a consequence of that, when a sector is in favor, it becomes highly overpriced and the high commodity prices in that sector drive a decrease in demand and an increase in supply. Conversely, sectors that are out of favor – that have very low commodity prices associated with them – have increasing demand and decreasing supply.”

This might be a lot for completely new investors to wrap their minds around, so Mr. Rule summed it up like this: “When prices are high there’s a self-correcting mechanism and when prices are low there’s a self-correcting mechanism.” So if that’s true, why is it that investors make the mistake of chasing the wrong market? Mr. Rule gave us his theory: “Investors’ perceptions of the future are shaped by their immediate past and they tend to chase high-priced, popular sectors that are set for collapse and they tend to avoid low-priced sectors that are set to soar.”

Rather than buy when everyone else is buying, “investors need to condition themselves to act in a contrarian fashion and that will greatly impact their success in natural resources investing and speculation,” explained Mr. Rule.

Obviously, just buying into a sector because it is unpopular isn’t necessarily a good idea. A contrarian invests in an unpopular sector that will become popular again. Mr. Rule gave us an example: “An example would be in the copper cycle some years ago. The industry average production cost of copper was about eight-five cents per pound and the industry selling price of copper was about sixty cents per pound. The industry was losing twenty-five cents a pound by selling copper and trying to make it up on volume. Many investors looked at that and asked, ‘why would you invest in that sector?’ but smart investors looked at that and said, ‘there is going to be some supply of copper two or three years from now, the copper price has to rise.’”

Then, Mr. Rule extrapolated out the lesson for investors who want to become contrarian (and profitable): “So, buying the best producers in an industry that is in liquidation and likely to improve is the surest way to make money in natural resources. Conversely, when the price of a commodity is already up four- or five-fold and operating margins are in the 50% to 60% level, capital is attracted to the sector and the supply increases fairly dramatically. At the same time, the commodity’s utility to users and fabricators is decreasing so demand is falling at the same time that supply is increasing.”

Mr. Rule’s thinking may make sense, but can be intimidating for new investors. Still, the investors who take the time to understand what he has to say will discover an interesting new approach to investing.

Here’s what an investor should do, said Mr. Rule: “Look at is the most efficient or best players in an industry that feels like it’s in liquidation, because if there is ongoing demand for the commodity, the price will correct.”

We wanted to hear about how Mr. Rule was applying his contrarian perspective in Global Research Investments Ltd. Specifically we wanted to know what sectors, within natural resources, he was considering. He started by telling us: “What is unexciting to the market is exciting to us. The market hates natural gas… we think we’re two years early. We are starting to dip our toes in the natural gas business. I think we’ll be big buyers a year or year-and-a-half from now.”

And there’s more: “We’re attracted to the uranium sector,” he said, “which had all kinds of attention seven or eight years ago and has fallen into deep disfavor. And we’re particularly attracted to alternative energy – I don’t mean the flashy sectors like solar or wind, I mean the workhorse sectors like geothermal and hydro.”

Then he added this interesting piece of insight, admitting that it was unusual even for him: “Interestingly, there is one semi-popular segment that we’re still attracted to because of an odd conjunction of events,” he said, “and that’s the silver sector. The silver price has run a lot but most silver production around the world doesn’t come as a consequence of a primary silver mine but rather is a by-product of a base metal. So we think that silver – despite the fact that it’s popularly priced – still has room to run and we think the shares of silver companies can do well. It’s one of the first times in 20 years that a sector has been popular and is still attractive to us. We think there is a fair bit of running room for some of the silver companies, in particular because there are so few of them.”

So, which of these options is he most excited about? Without hesitation he responded: “We are more excited about alternative energy and natural gas.”

Contrarian investors tend to trade stocks that aren’t in the mainstream, but we wanted to know what he felt about a popular investment like gold and gold-related stocks. His answer may surprise investors: “I’m a large gold stock holder and I’m a large bullion holder. Gold is catastrophe insurance. I don’t hold gold bullion because I hope the price will go up. Instead, I hold it because I’m afraid of other mediums of wealth storage. So the set of circumstances that could cause me to make a lot of money on my gold bullion holdings would inevitably be unpleasant to me and to the rest of my portfolio. So I hope I lose money.”

He continued on to tell us about the only way to trade gold today: “In the 1998 to 2002 period, when gold had almost no followers, it was a riskless trade. Gold at $250 - $270 an ounce was a very lonely trade and fit the contrarian thesis very well. Now, you could not describe gold as a contrarian activity and gold above $1300 an ounce has attracted a lot of attention. The best you can hope for when trading gold stocks is finding companies with relative under-valuations rather than absolute under-valuations.”

We wondered, if investors are so busy clamoring after popular investments – and they’re losing money – why do they do it? Mr. Rule’s opinion should be a wake-up call for all investors: “Too many speculators pay attention to the easy information associated with a company – like the share price – but understanding the price is absolutely useless information if you don’t know what it’s worth.”

“The conventional metric in natural resource investing is Net Present Value calculations,” Mr. Rule said. Then he explained it. His explanation may intimidate new investors but those who take the time to understand Net Present Value will appreciate just how important it is: “If you take a mine with a ten year life-of-mine reserve, and it’s going to produce 100,000 ounces of gold for ten years, the first thing you need to do is determine (as best as you can) the historical operating margin and you schedule that cash flow for ten years then discount it back to its net present value at various discount rates and compare it to a market capitalization.”

Yes, that will take some work, and it’s no wonder that many investors choose the easier (but less informative) method of simply watching the stock price. However, for investors willing to put in the legwork to discover an investment’s true value, Mr. Rule had some other advice, too: “Then you look at the exploration potential on mine site and the exploration potential on trend, and you construct probabilistic models of the net present value of exploration successes at other sites and try and figure out, almost by a Monte Carlo simulation, what the project is worth. Look at the ability that the company has to move itself forward. For example, does it generate enough cash to fund the exploration to continue successes into the future? “

The process may take some time and effort but the result will be worth it, asserted Mr. Rule: “When speculators think about the value and juxtapose that value to the price gives them an incredible leg up against their competitors who may not even know how many shares are outstanding but are attracted to a stock because the price went from thirty cents to forty cents, without any sense of what that means.”

Natural resource investors who want to increase their likelihood of picking good investments might be interested in looking at some of Mr. Rule’s methods.

REFERENCES

Global Resource Investment Ltd: http://www.gril.net

1-800-477-7843

New Orleans Investment Conference: http://www.neworleansconference.com/