Sprott Asset Management USA Chairman Rick Rule shared with me his most essential insights to investing in natural resources. In a previous post, I related why Rick views the exploration industry as the “research and development” side of mining.
So how does this affect our investment strategy in the natural resource sector?
“We have established that exploration is a knowledge business,” Rick begins, “and that a small number of sector participants generate the overwhelming majority of the industry’s economic success. These two realizations are key to improving your chances of success.”
“This type of market is an example of what social scientists term ‘Pareto’s Law,’ or the ‘eighty-twenty rule.’” The rule holds that eighty percent of the work is accomplished by twenty percent of the participants. The really productive people are the top 20% of those top 20%, and the worst are the bottom 20% of the lowest 20%: “In a large enough sample, the ‘lips’ of the bell, the outlying 20% on both extremes, can be run through the same performance dispersal curves. Thus 4% of a population contributes in excess of 60% of the utility associated with a class of tasks, while a very different 4% of the population contributes 60% of the disutility.”
Rick believes this concept is highly valuable when applied to the mining industry. In order to pick the winners, he says, you must have the ability to view the entire field as a spectrum. Each management team will fall somewhere on the spectrum – most around the average – but those on the higher end of the bell curve become exponentially more valuable. So investors should seek to determine the quality of the management team independently of the value of the current project they are undertaking.
“The key for investors is.....
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