Happy New Year my wonderful grasshopper friends!

I’m back!

I cannot believe we are ten days into January already. It seems as if just yesterday the Kung Fu Kids were putting out cookies and milk for Santa and making gifts for the family. My favorite is the handwritten card they made me inviting me to a tea party they hosted:

“Helo Mom we wud liik you tow com for tea. I love you Mom you luck verea pritea” (I think that’s “you look very pretty”…)  

Hands-down the best gift I have ever received.

I hope your holidays were filled with love and laughter, too, and that you were able to take at least a small break from the day-to-day craziness that makes up much of our lives.

Thank you so much for your warm and wonderful holiday wishes! I had a wonderful and much-needed break, and I hope you were able to, too. It was lovely to spend so much rare quality time with my family — Kung Fu Guy works like a madman and usually is attached to some screen or another, even on vacation, and lately I’ve been guilty of that, too!

But not this time…we had a relatively “screen-free” break (no iPad/iPhone/iMac/Macbook, and minimal TV since we cancelled our cable a year ago) and just enjoyed each other. Even Kung Fu Grandma flew in from 3,000 miles away to spend three weeks with us, and Kung Fu Guy’s office had its “only once a year” planned shutdown. Bliss.

But I must admit, by Monday of this week I was itching to get back to it…and by “it” I mean YOU!  

Because as lovely as breaks and holidays are, it is also a fantastic feeling to get back into the swing of things, back into a routine, and back to doing what I love, which is helping YOU learn to master your mind and your money so that you can live the rich life you deserve.

So, to that end, today I bring you some QnA’s on some of the most popular articles I have ever written on Kung Fu Finance: the four-part series on “4 Ways Your 401k is Robbing You Blind”.

I have received many, many questions on these, and want to address some of them for you below.

If you haven’t read the original series you can do so here:
Part 1: Fees
Part 2: Trapped Capital
Part 3: The Tax Man Cometh
Part 4: Beat That Horse Dead…Nationalization?

I also did do a teensy-tiny bit of work behind the scenes (or rather, my awesome web development company, enfusionize, did) and you can look forward to an updated look and feel and more user-friendly Kung Fu Finance website and email newsletter very soon.

No more troublesome font issues, floating sharebars in the middle of the page on certain browsers, broken links, and other aggravations…hopefully just a beautiful, clean, simple, modern, easy-to-use-and-access site with information organized into easy-to-find categories.

I’ll give you a sneak preview of the homepage next week…and in fact, here are a few of the new more bold and modern logo options:

Kung Fu Finance kicks boldly into the new year…please let me know if you have a favorite in the comments!

And now…time for the QnA I promised!

Question:

Abramml asks,

Your article on the 401K really struck a nerve with me. I have been upset about the money being held in a 403 B plan, as required by my employer. I have learned to trade selling options and puts, and because I have a small IRA account and an individual investment account, I know I can do a better job than the funds I have been mandated through my work retirement plan.

The real issue for me is that the money is locked into the particular funds without ability to follow on a day-to-day basis, just by the fact that they are funds and cannot be traded until end of day.

When I think about how in 2008-2009, my 403B lost 50% of its value, I was really angry knowing that my retirement was in the hands of companies whose primary objective is to earn their fees and not necessarily create market value in the fund, and that my retirement was being mandated in this way.

Until I took my other accounts and learned to trade (and I am talking a serious commitment motivated by fear of losing everything), I did not realize how time- intensive it would be for most people to manage their own funds.

I spend about 1 and 1/2 to 2 hours a day reading newsletters and evaluating the moves the market made each day. I have the time because I am empty nesting and want to focus on increasing growth and income. But, the reality is that most people don’t have the time or education to pursue their own investing.

Answer:

Hi Abramml,

Thank you for your thoughtful comment and personal story. I think your story is not unlike that of many Americans, and is why I started Kung Fu Finance—to try and help provide that missing financial education (and attempt to make it as fun as possible, so that at least your 1 – 2 hours per day are useful and interesting instead of a dreadful chore!)

And hopefully once educated, you can cut that 1 – 2 hours per day down to 1 – 2 hours per week…a much more manageable time commitment for most people (although if you do have the time and enjoy it, then by all means dive in—I’ve done well selling put options myself and love it, but it’s definitely not for everyone.)

As you point out, unfortunately there are no “quick and easy” solutions to the overall problem of helping people save enough to retire at age 65 or 70 and live on for another 30-40 years. Basic math using the best case scenario says $50,000 / year * 30 years = $1,500,000, and most people do not have anywhere near $1 million in all of their retirement accounts combined, let alone their 401k or 403b.

Conventional wisdom says that if you supplement your individual retirement accounts with income from Social Security and perhaps a nice defined benefit pension plan and good health benefits, you’ll have a decent retirement, and suddenly that $1.5 million is not all “on you” to save.

But this is dangerous thinking to me…it’s leaving your financial future in someone else’s hands.

For years we did that more or less successfully—we could rely on that “three-legged stool of retirement” (Social Security, Defined Benefit pension plan, Personal Savings).

But today, Social Security is bankrupt, defined benefit pension plans are obsolete, and that leaves us with personal savings…meaning we have to take care of ourselves.

We are undergoing a generational (and demographic) shift in how we think about and plan for retirement. Just as we moved from the Industrial Age to the Information Age, we also moved from an age where people stopped working at age 65 (primarily because they physically needed to—jobs in the Industrial Age were more physically demanding) to an age where many people can work into their 70’s and 80’s.

But many cannot…there are still many jobs that require quite a bit of physical strength, and other jobs that people simply do not find soul-fulfilling and so are ready to do something else once they hit that magical retirement age.

I could go on and on, but in short, there are no easy solutions, and you are doing the right thing to grab the reins of your financial future in your own hands and do your best to learn how to manage and grow your money.

Question:

Zeke asks,

The law is to begin withdrawing at age 70 1/2 yeas old. The question is what
is the best method and how much to withdraw. Another question is that if I have several IRA accounts what is the best way to comply with law?

Answer:

Hi Zeke! Regarding how much to withdraw, the IRS dictates the minimum for you—they have several publications and worksheets to help you determine how much you are required to take out each year by law. One such worksheet is:

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Required-Minimum-Distribution-Worksheets

So if you are age 70 and have $100,000 in your IRA, you are required by law to take out $100,000 / 27.4 = $3650 that year. You of course also have to pay taxes on that (assuming it is not a Roth IRA) and so if you are in the 28% tax bracket you’ll see approximately $2628 of that.

That is what you are mandated to take out by law—the rest of the decision of how much to take out depends on your personal situation. You want to take out what you need to live on, but not so much that it will bump you into the next higher tax bracket. It can be quite a science, and I definitely recommend talking with your qualified tax professional before making your decision!

As far as the best method, that again depends on your personal situation and your investments—which investments should you sell? That depends on which investments you have in your 401k/IRA to begin with, why you bought them in the first place, what you think their prospects are for the coming years, how they’ve performed over the past year, etc.

If you have multiple IRA’s, the required minimum distribution is based on your total amount across all of your IRA’s. So if you have $50,000 in one IRA and $50,000 in another IRA, you need to take out $3650 (as we worked out above) from either one of them, or some from each IRA to equal at least $3650.

Definitely consult with your tax advisor before taking any action (the rules are slightly different if you have not rolled your 401k’s into separate IRA’s and they are still considered “employer plans”.)

I hope this makes sense! The rules and restrictions are frustrating—one of my big beefs with 401k’s.

Question:

Doreen (name changed to protect privacy) asks,

I am 68, single, in good health, own my home and have 250 K in a 401K that
at some point must either be taken in a lump sum or a designated $ amount
each year until it runs out.

If I take the cash I pay income tax on it immediately even if I put it into
a Roth. To avoid being taxed as a “rich person”, which I am not, I could roll it over into an IRA and take it out as I need it and pay at a lower tax rate.

I am considering using the money for a) purchasing $125 k of real estate per
The Palm Beach Letter’s advice, b) buying into a continuing care retirement community (where assisted living and nursing care are included in the purchase price and monthly fee) – maybe 175-250 K for the housing unit or c) possibly an annuity.

Your comments on the use of the money would be appreciated as well as the
best way to minimize taxes.

Additional background:

I am reluctant at this age to get into the landlord business.

I feel too young to go into a CCRC, yet it’s important to go while you are
independent to make friends. (The availability of transportation and
activities are appealing, yet I have not found a facility that meets all of my
requirements.)

With an annuity I am concerned about inflation and the longevity of the
company that sells a policy.

I have another 250 K mostly in IRA’s. Should have gotten out of IRA long ago.

Answer:

Hi Doreen, I have to insert here that I am not a “registered investment advisor” nor licensed to give personal advice, and in all honesty, even with the information provided above I would hesitate to do so simply because I just don’t know enough about you…it is such a personal decision!

It’s difficult to even advise you on which is the best from solely a tax perspective, because I just don’t know enough about your personal situation, and that is only a portion of the decision you are making.

From a tax perspective, you can roll your 401k into an IRA without paying any taxes now—this would not be considered a “lump sum distribution” as long as you follow the rules and do it properly (it’s not difficult).

However, you are not avoiding paying taxes—just deciding to pay them later instead of now. With your new IRA, you will need to take out your required minimum distributions starting in 2 ½ years, once you reach age 70 ½ . If you have $250,000 in the IRA and are 70 ½, in year one (based on the IRS chart above) you will need to take out $250,000 / 27.4 = $9,124 that year. That will be taxed as ordinary income to you that year so you will owe taxes on that depending on your tax bracket (e.g. if you are in the 28% tax bracket, you would receive $6569 after taxes).

You are allowed to take out more than the RMD, but that would depend on your tax situation—on whether or not taking more would bump you into a higher tax bracket or not.

If you want to take $125,000 and purchase rental real estate with it, you can certainly do that—I’m unclear whether you want to roll your 401k into a self-directed IRA and purchase the real estate inside of that entity or whether you mean to liquidate part of your IRA and purchase the property outside of the IRA.

You can do either, and they both have tradeoffs. With the self-directed IRA, you can buy much more real estate, because you will have access to your entire $250,000, but you must follow the rules set by the IRS very closely to make sure your real estate purchase is qualified (you cannot use it for personal use, etc.). But that could be an attractive option for you—you would have to pay income tax on the rental income you withdraw from the IRA, but you can buy a LOT more real estate for $250,000 than you can for ~$175,000 outside of your IRA.

You can also liquidate your 401k and purchase rental real estate, but as you mention, you will take a HUGE tax hit for doing this, particularly because you have such a large sum of money to liquidate…assuming you have no other income whatsoever this year you would be in the 33% tax bracket for a single person and would pay $43,482.50 + 33% * $71,350 = $67,028, so that would leave you with $182,972 (again, assuming this was your ONLY income). (From the IRS tax table—you pay 25% on your income up to $178,650, then 33% on every dollar over that amount, and that will most probably increase to 35% in 2013).

Ouch.

If you are not terribly interested in being a landlord or investing in real estate, that might not be a great option for you. Real estate can be very lucrative, and you don’t “have” to be a landlord necessarily (you can hire a property management company to deal with a lot of the day-to-day management)…but you still will need to research locations and properties, pound the pavement and find some good property options, make offers on properties, get financing (unless you want to pay all cash), interview property management companies, etc.

Some people absolutely love that process, while others don’t. It truly depends on you and what you will enjoy. Real estate can be wonderful, but it’s definitely not a “hands off” investment, even with a property management company, and particularly for a beginner.

You’ve done a great job of laying out your options and seeking advice, and I think that financially you understand the various options between taking the lump sum and tax hit now vs. later, buying real estate, buying into a CCRC, or buying an annuity.

All of them have their tradeoffs…perhaps buying rental real estate inside of a self-directed IRA might be a new idea for you (in which case I encourage you to investigate that—it could be great for you IF you decide you are interested in real estate), but the rest I think you already understand.

It really comes down to YOU, and what will make YOU happy in the future, and unfortunately no one can advise you on that better than you. You don’t seem terribly excited about real estate or about moving to a CCRC—I would ask yourself what would get you truly excited about your future? (I find “happy” doesn’t motivate me enough to make any decisions or do anything—instead, think about what will truly excite you in your retirement!)

Good luck—I wish you a tremendously rewarding and lovely future!

________________________________________

That’s it for today! Have a fantabulous Friday and please let me know if you have any more 401k questions for me — I’ll post Part 2 next week!

I hope your 2013 is off to a kick butt kung fu start! Much more to come…

To your financial success,

— Kung Fu Girl

I wish you a beautiful, magical, joyous holiday filled with love, peace, and joy!

My dear friends, I am shutting down for the holidays (but only for the holidays…I will be back with lots to share with you in the New Year!)

As a beautiful mentor of mine says, my sweet Kung Fu Kids need me to stop looking at my computer and look directly at them for awhile, and my soul needs the same. Kung Fu Guy is on an exceedingly rare break from his own work (a “planned shutdown”) and the Kung Fu Kids are off from school, so I am taking a rare family holiday and hope that you have the opportunity to do the same and spend some beautiful time with your loved ones.

Happy Holidays from the Kung Fu Kids!

A million prayers that peace and love carry you and your family joyously into the New Year!

Happy holidays and much love to you and yours,

— Kung Fu Girl

“Spanning the globe to bring you the constant variety of sport… the thrill of victory… and the agony of defeat… the human drama of athletic competition… This is ABC’s Wide World of Sports!”

So began the intro to a famous ABC show during my childhood years, ABC’s Wide World of Sports. It was broadcast on Saturday afternoons when I was growing up (I believe it officially folded in 1997).

Here’s a 30-second clip of the intro…

http://www.youtube.com/watch?v=w1FWG0WziRU

This show was *awesome*, yes, even to a girl, because it wasn’t “boring old sports” (my apologies to you football-loving meat heads out there! And M Go Blue! But ahem, I digress…).  

What was so cool about the Wide World of Sports was that it gave you a glimpse into really exotic sports you had never seen nor heard of before, like

• Jai-alai (Spain, Mexico, Brazil)
• Surfing
• Demolition derby
• Rodeo
• Olympic sports,
• and much, much more!

This show rocked because it exposed you to much more than just “the usual” sports and gave you a glimpse into many other exciting and fun sports you could try (or at least watch, if you were not the rodeo type, per se).  

And because I am one of those “voracious to collect absolutely every possible experience I can get my hands on before I die” type of people, I loved the Wide World of Sports!

So…I am very excited to report to you that there is ALSO a very wide world of investing available to you!

YES! There is more to life than just the U.S. stock market. (Awesome!)

Just for starters, there is gold, and silver, and oil, and soy, and corn, and foreign currencies, and foreign stocks, and bonds, and real estate (timber, anyone? Uruguayan farmland? tax liens?), and businesses, and private lending, and SO MUCH MORE…a veritable Wide World of Investing!

And it’s all available to you.

Pretty awesome, no?

But as you begin to discover these options and decide which is best for YOU, you need to take a sort of “survey” class in investing and speculating opportunities…you need to watch the Wide World of Investing (ahem, here on Kung Fu Finance!) each week and determine WHICH of these fun, exotic, exciting, potentially lucrative investments is best for YOU.

Which do YOU think are fun? (and potentially lucrative…) Which ones resonate with YOU? Do you think YOU could make money at it? What does it truly take to make money in a specific exotic investment? Do you think you could do it successfully, or at least learn enough about it to speak intelligently with a trusted advisor / expert in that area?

Let’s find out!

Today, I bring you a recent interview that I did with the amazing Rick Rule, Chairman of Sprott USA, who is an A#1 resource speculator and savvy investor as well. Rick has many areas of expertise, but he is most well-known (actually famous) for being an incredible expert in the exciting, exotic, and potentially extremely lucrative (although HIGHLY SPECULATIVE) area of natural resource speculation.

Rick was gracious to sit down with me a week or so ago and talk with me about all things resource speculating, including:

• The difference between investing and speculating
• How speculating is like smart shopping (and how to be a great shopper)
• An overview of the natural resources markets and how they work
• A concise explanation of how to separate the wheat from the chaff with junior mining companies
• Mining basics…what is the difference between a resource and a reserve and why should you care? And what do “measured”, “indicated”, and “inferred” mean (and again, why should you care)?
• When in those above processes are takeovers most likely to happen, and how can you spot potential targets?
• What is a “bankable feasibility study” and a “preliminary economic assessment” and all of the other tools and documents that mining companies use to “prove” their worth?
• The importance of understanding price vs. value, and how to determine value in the resource sector
• Why you shouldn’t get all of your information from the mob
• The qualities you must (and must not) possess to be a competent natural resources speculator
• His opinion of oil & gas investing and markets
• His opinion of and how to buy and store (yes, store…) physical uranium(!)
• …and much more…
• (Did you know Rick used to be a boxer? Find out what he says about learning to take a punch…)

I hope you enjoy our interview as much as I enjoyed sitting down with Rick! He is truly a wealth of knowledge and if you ever get a chance to meet him and talk with him in person, I highly recommend you do so. Not only is he a “wicked smart” guy (as we say here in Northern California) and of course an extremely savvy investor and speculator, but he’s also a great man to boot.

Have a fantastic weekend, and please let me know what you think in the comments!

And thank you very much for reading and being an awesome Kung Fu Finance subscriber and community member!

To your financial success,

— Kung Fu Girl

KFG Interviews Rick Rule, Chairman of Sprott USA, Inc.

Susan Fujii:

Hello. This is Susan Fujii with Kung Fu Finance, and I’m here today with Rick Rule, Chairman of Sprott USA and a very knowledgeable and experienced resource investor.

I’m grateful to be here with you, Rick. Thank you.

Rick Rule:

Thanks for the opportunity, Susan.

Susan:

Thank you. So we last sat down together about two months ago, and we talked about the Junior Resource Investing Market and how we did as a whole. Right now I am introducing my subscribers to what I term the “wide world of investing and speculating.”

We have been talking about all the different options you have as an investor when you’re just starting out– you can do real estate, commodities, currencies, resources, stocks, bonds, et cetera.

So, as you are an expert resource investor, I’m hoping you can share with us a little bit about why resource investing or speculating. Who is it good for and who is it not?

Rick:

I guess we should begin by segregating between investing and speculating.

Investment, from my point of view, is the allocation of capital with the expectation of a certain return on capital employed.

Speculating involves taking more risk. You’re trying to generate higher rates of return, but you’re not talking about expected rates of return: you’re talking about speculative rates of return. So an investor may be a person or an entity with a risk tolerance that’s substantially lower than a speculator.

A speculator is somebody who’s taking substantially more risk in anticipation of substantially higher returns. There is room in the resource business for both investors and speculators. We’re at a conference here that is clearly speculative, and so I’m assuming that from the point of view of most of your listeners, that we should confine ourselves, if you will, to the speculative ghetto.

Susan:

Yes! Let’s do so.

Rick:

Fine, fine. So the first thing about speculating and resources to understand is that the business itself is capital intensive and extremely cyclical. I think I told you in the prior discussion that we had that my slogan for that in resources is that you are either a contrarian or you are a victim.

Because the business is capital intensive and cyclical, when things are very bad in the business and you are in a bear market, you are setting up a bull market. The low pricing begets high pricing. Markets work and markets are more important to understand in resources than in other sectors, precisely because they’re so capital intensive.

As an example, if the copper price goes up because it takes a long time to bring additional copper supplies online, and because there is a lot of capital involved in bringing copper resources online, it takes longer than in other industries for the supply to react to demand, and you have these protracted booms.

But the boom itself begets a bust because over time the high price of copper causes consumers of copper to conserve and causes producers of copper to expand supply, and after the boom has turned into bust, it takes a longer time to liquidate the bust because of the enormous amount of capital already employed in the business.

Producers will produce for substantial periods of time below the total cost of production, in hopes of recouping some of the capital employed. So the system goes from boom to bust, to boom to bust. To be successful as a natural resource investor, you have to make your brain overwhelm your heart. You have to buy on the bust and sell on the booms.

When you feel smart, when you have been successful as an investor, it’s a key to you. It’s the market’s way of saying “sell.” When you feel confident, hit bids. When you are terrified, get out your checkbook. That’s the first thing that speculators need to know about natural resources, and this is a lesson that’s probably suitable to speculators across many, many, many market sectors.

The truth is that people are terrified, of course, of bear markets, but if you have speculated over time, as I have 35 years now, what you come to learn is that bear markets are simply sales. We’re having this discussion in San Francisco two blocks from Union Square, one of the greatest retail shopping districts in the United States.

And the metaphor that I used in my speech yesterday before this body was, if the better shoppers in this audience — who were invariably, of course, women — were walking down Union Street or Market Street and there were two different stores, each side-by-side, and one had a big sign in the window.

If it said, “Full Price All the Time, Never a Discount,” and the next store had a sign on the window that said, “Spectacular Spring Sale, All Goods 50% Off,” which store would you normally go into?

Susan: Half off.

Rick: The store with the sale is the bear market store.

Susan: Yes!

Rick:

The other one is the bull market store. So you have to make up your own mind — would you rather buy goods on sale or would you rather pay full price? The reason why investors or speculators don’t do this is fairly simple to understand during — well, in all investing environments your expectation of the future is set by your experience in the immediate past.

And in a bull market, a wonderful thing happens, except that it’s pernicious: you confuse a bull market with brains, when even your mistakes make you money. When you sell a stock, you are eager to redeploy the money first of all, because you want to make money but also because you have the psychological ratification for having won.

In bear markets, a different set of situations takes place. You sold some stock, you lost the money, you’re nervous about redeploying the money even though the assets are cheaper. Another parable that I use to describe this — and this is apocryphal — but I talk about a traditional California couple that comes into our old office complex, which was set in a regional shopping center.

And because this is a traditional shop center, when the couple comes into the center, the wife would go in one direction to the super market, and the husband would go in the other direction to the stock brokerage, and I realize that this is sort of sexist story but bear with me because the women win in the end.

The wife goes into the super market and she finds a brand of tuna on sale that she’s familiar with, and her family likes tuna. The tuna is $2.00 a can, and so she’s reasonably happy with that price and she buys three or four cans of tuna.

The husband comes into the brokerage firm, and he hears about a stock that’s selling for $2.00 a share and he’s reasonably familiar with it. He read it in one of his investment newsletters, and so he buys himself a thousand shares at $2.00 a share. Both of them return home reasonably happy, but not ecstatic with regards to their purchases.

Two weeks later the couple comes back, and the wife goes in the store. Her family has consumed the tuna. She’s looking to replenish her supplies of tuna, as well as other things, and she notices that the same tuna has been marked up to $4.00 a can; nothing has changed — there’s no more tuna. It’s not a different brand, but the $2.00 tuna is now $4.00 tuna.

She’s outraged. After giving the store manager a piece of her mind about price gouging, she, under protest, buys some canned chicken. The husband, meanwhile, has come to the brokerage firm and sees that his $2.00 share, with no change of the fundamentals of the company, is now selling for $4.00 a share.

He’s ecstatic! You buy stocks that go up. He buys himself another thousand shares at $4.00, happy that the stock went up. Both go home, him ecstatic with his good fortune and her furious as to the price gouging that she experienced at the hands of these merchants. Two weeks later they both come back, she having exhausted the chicken, and he powered by greed.

And they come back, and she goes into the store under protest and she notices that other housewives have reacted to the high price of tuna fish the same way the she has. They’ve boycotted, and the store is packed pillar-to-post with tuna fish: “Special, $1.00 a Can.”

Susan: Aha!

Rick:

Nothing has changed. She’s delighted. She buys so much tuna fish that her car is dragging at the back in the trunk where all the tuna fish is, and the husband comes from the stock brokerage firm and sees that this $2.00 stock, now $4.00 stock has become a $1.00 stock and he sells his entire holding in disgust.

My point is simply that if we bought financial assets the same way that we buy clothes or cars or other assets, we would all be better speculators. What bear markets are, are sales, plain and simple. Bull markets are for selling, bear markets are for buying, just like tuna fish.

Susan: And so right now, we are in a bear market.

Rick:

Right now I would suggest that we’re in a bear market. If you compare and contrast the market capitalizations and certainly the psychology of the crowd in this conference between 2010, which was the bull market, and today, you’ll see that goods are on a 50% off sale.

People who were desperate to buy stocks at $2.00 are beginning to want to unload them at $1.00. Completely irrational activity. Wonderful from my point of view — I love taking the backside of that trade, but I feel sorry for them.

Susan: Right. So continuing with our shopping analogy…

Rick: Yes, ma’am.

Susan: If we are looking at this, say there are what, 4,000 junior explorers? There are at least, maybe 300 here?

Rick: Yes, ma’am.

Susan: How does one go about distinguishing which brand, shall we say, is better than another? What are some good questions we could ask or what do we need to do to educate ourselves and pick the best ones?

Rick: That’s a very long discussion, but I’ll try and short circuit it as much as I can.

Susan: Thank you.

Rick:

The first thing involved in speculative exploration is to understand that it’s not an asset-intensive business actually. It’s like a research and development business. A management team is answering unanswered questions associated with a piece of ground that may or may not hold a mineral deposit, so the most important thing, initially, is not the property. It’s the people.

What you need to determine when you speculate is, first of all, you want to do business with people who have been successful, hopefully serially successful in the past, and importantly, you want the disciplines that their training is in and that their successes have occurred in to be very, very, very similar to the undertakings that they’re proposing that you finance today.

An example would be someone who comes to you and says, “I have been a success in mining because I operated a gold mine in Archean two-billion-year-old rock terrain in French-speaking Quebec,” but this person proposes to explore for gold in tertiary volcanic, 15-million-year-old young rock in Spanish speaking Peru.

Although both endeavors have a lot to do with mining, they are so completely unrelated to each other that the skill sets that this gentleman boasts about achieving success in are completely unrelated to the activity that he proposes to engage in.

You have to have the common sense to understand that just because someone has been successful in some endeavor related to mining, that doesn’t mean that this person has any of the capabilities and education that would cause he or she to be successful in this particular endeavor.

So the first thing that one must do is, in interviewing management, attempt to ascertain from the management what unanswered question they are trying to answer, and then match the skill sets of the management team to answering that question.

It’s very, very important when you analyze a junior exploration company to look at the key personnel, the management and the directors, and ask them why they were chosen, what role they play in the company, how the board interacts with management, and why that management team — both members of the board and members of the executive team — believe that they are the right team to answer the unanswered question.

The second thing we do is we examine the question itself. If the proposal is, as an example, that there is a smallish, sort of high-grade copper or gold deposit, in other words where a “yes” answer is of limited value, avoid it. This is a high-risk business. If somebody is engaged in a high-risk business for a low internal rate of return, why should you trouble your wallet?

Many of these companies are engaged in activities that, even if they got a yes answer, would not make anybody any money. You want to know that, relative to the risk you take, if you got a yes answer, which is improbable, that you would get a disproportionate reward.

With regards to the question, what happens in exploration is that the management team has a piece of ground, and they propose a thesis. They say this piece of ground might have a — let’s call it “porphyry copper potential” — and their belief is that, based on the existing data that they have, that there’s a reasonable probability that with some more work, they can prove this thing to a higher degree of certainty.

In — and this is in very rough fashion — in the beginning of the discussion, you have to say, “What evidence do you have? Explain to me, as a layperson, why I should believe that this property has porphyry copper potential?

Susan: Yes!

Rick:

“Do you have a surface geo chem anomaly? It would be nice, in a copper porphyry, if you could show me some grab samples that had copper in it. You know, a wonderful indication of copper is copper. Is there copper mineralization or indications of porphyry in the district? Are there technical analogs?”

And if you are reasonably certain, if the management team is skillful enough that they can explain to you as a layperson, in English, why the thesis that they have is supported by data on the ground, as opposed to, by their wish to get you to buy stock, then you can proceed. You say,

“So, how do you propose to test this thesis? Explain to me what the first unanswered question associated with validating this thesis is. Tell me how you propose to get that answer. And tell me two more things: tell me what happens if you get a ‘no’ answer. Does that sterilize the whole property?

“Or, if you get a ‘yes’ answer, what is the next question that is proposed? In other words, what is your business plan?” You will learn, when you ask companies at a conference like this, that fully half of them have no business plan. It is though they were here in San Francisco, they were attempting to go to Marin, and they set off walking south.

Susan: Right. [laughs]

Rick: They have no hope in hell of getting somewhere without a plan, which is a map.

Susan: Right!

Rick:

But assuming that you like the people and that the people’s skills are appropriate to the task at hand — and that the thesis that they propose is supported by facts on the ground and that the plan that they propose to utilize to test the thesis is all okay — the third thing that you have to do is apply common sense in a financial sense.

You have to apply a little bit of mathematics. What you say next is, “So, I’m with you so far, and you propose to do X, Y, Z, in a preliminary sense to test your thesis. How long do you suppose this will take?”

Maybe the answer is, “Twelve months.”

“How much money will this take?” Let’s suppose they’re going to drill some drill holes.

“This will take five million dollars.”

“What are your general administrative expenditures like, on an annual basis?”

Let’s say the number comes back “a million and a half dollars.” Say, “Okay, so to get the answer that’s going to add some value to me, you need to spend six and a half million dollars. If you don’t have six and a half million dollars, I’d never get my answer, right?”

Susan: Right.

Rick:

“How much money do you have in the treasury?”

“A million and a half dollars.”

“Oh. Well, you have to spend six and a half million dollars and you only have a million and a half dollars. That means the probability of you answering my question is zero. Why would I buy a stock, if I have a zero probability the ‘yes’ answer?

“Oh! You’re going to raise another five million dollars. How much dilution are you going to give up? Who are you going to sell that stock to, and how are you going to convince me today that, that money is going to come into the treasury tomorrow?

“Because if you can’t convince me that you have enough money to get me a yes answer, you aren’t going to get me a yes answer, and I’m not going to make any money.”

Susan: I had a conversation like that just an hour or so ago [Laughter] with someone who shall remain nameless.

Rick: Right.

Susan: But it was very interesting. Another thing that was interesting about this discussion is the man mentioned something about they had found or they had thought they had found, based on a few drill holes, some metal underneath the ground, very exciting, that was inferred, and I was wondering if you could talk about the difference between inferred and these different classifications.

Rick: Sure.

Susan: I thought, “It’s inferred? You mean, you don’t know?” [Laughter]

Rick: No, well. No, inferred… inferred is a very, very, very accurate phrase.

Susan: Okay.

Rick: There are accepted words to mean things, in terms of resources and reserves.

Susan: Okay.

Rick: And the first differentiation that we should have is probably between resource and reserve.

A resource is an indication of mineralization that may or may not be economic. A reserve is an indication of mineralization that you believe can be exploited economically. In other words, a reserve is something that you have reasonable expectation of making money on.

Susan: Yes!

Rick: A resource is something that you hope to upgrade to a reserve. Resources are generally classified as, first of all: measured, then indicated, then inferred.

A measured resource is a resource that’s been drilled off on tight enough centers that you can tie together the mineralization between your data points between these drill holes with a high degree of certainty.

And you measure the depth of the hole by the distance between the holes, and you understand roughly how many cubic meters or how many tonnes of mineralization you have that has been measured.

“Indicated” may mean that you stepped out rather than 20 meters, 50 meters, and so you have mineralization in hole one, and you have mineralization in hole two.

But the distance between the holes is broad enough that you only have indicated mineralization. You haven’t measured the mineralization because there could be a blank spot in between the holes, both of which are mineralized.

Susan: Ah.

Rick: “Inferred” is a lesser degree, entirely. It might be all the way outside of the ellipsoid. You might be — imagining is the wrong phrase — but you might be supposing that the mineralization extends beyond the extent of the furthest drill hole from the center.

Part of the goal of exploration is to take inferred mineralization and make it indicated, and take indicated mineralization and make it measured, and after you have measured it, do the requisite economic studies to take your resource into a reserve category.

Susan: Got it!

Rick: That is a very, very, very preliminary discussion, so don’t take this one to the bank.

Susan: Okay, okay. No, that’s interesting, though. Now is there a general rule of thumb, or two or three, about when in the cycle is a good versus not so good time to speculate?

Rick: I don’t understand the question.

Susan: Say we’ve got all the way to measured. Is that a good time? Should we wait for the feasibility study? We hear talk about these bankable feasibility studies. Could you explain a little bit about the difference in the…?

Rick: Rules of thumb are very dangerous. One thing that happens is, as a style of investing proves itself and becomes popular, companies that fall into the categories established by that style of investing become overpriced.

And so you may be in a market cycle like we were in — in the mid-80s, in the last discovery cycle that we were in — where grassroots exploration was solidly in favor. If grassroots exploration is in favor for a year or a year and a half, the price of companies engaged in grassroots exploration gets so high as a consequence of their popularity that the thesis loses its value.

Susan: Okay.

Rick: So as an example, as we speak, one of the things that we think is particularly attractive in this market are companies that have early stage indications of being reserves.

Companies that have completed a document called a Preliminary Economic Evaluation, this is the first of the third-party documents that are required to really understand the deposit. It goes from there to Pre-Feasibility Study and from there to Bankable Feasibility Study, and this process may take two years or three years.

The arbitrage between the values established in the Preliminary Economic Assessments and the Bankable Feasibility Studies — or put in different fashion — in a different fashion, the discounts from the valuations established in the Preliminary Economic Assessment are the deepest that I’ve seen in 30 years in this business.

Susan: Wow.

Rick: Which tells me that in the next 18-24 months, some of these companies will be taken over. The reason for this is, as time progresses between the Preliminary Economic Assessment and the Bankable Feasibility Study, two good things happen.

The supplemental exploration work that takes place in the two or three-year period between the publication of these two documents usually makes the deposit bigger. In other words, they usually find more mineralization through additional drilling, and as they do internal infill drilling, more and more and more mineralization gets upgraded from inferred, to indicated, to measured.

And the market pays much more for measured than they do for inferred, so two wonderful things happen in the course of this. But the most wonderful thing happens after the feasibility study because the feasibility study is the final third-party document and this is when the takeovers happen.

They happen because the independent directors of the acquirers lose a lot of legal liability because if a mistake happens, they say, “We didn’t make the mistake. The third-party engineers and the Bankable Feasibility Study made the mistake.”

Susan: Ah!

Rick: So the arbitrage that we see in place now is buying preliminary economic assessment companies that fit fairly rigorous economic models at substantial discounts to the values established in the early studies, and we intend to hold these things through the upgrade in value, expecting them to be taken over at fairly substantial premiums in the final Feasibility Study.

Now this is a very suitable style of speculation for me, because I’ve done this for so many years that I’m completely unconcerned by the prospect of having to hold the stock for two years or three years through various market cycles. Many speculators that have less confidence in their analytical ability have trauma holding stock over a long weekend.

Susan: [Laughter]

Rick: From my point of view, when we have established economic mineralization and we can buy this mineralization at a discount, the outcome that we’re looking for is a win outcome, and I have come, in my declining years, to prefer “when” outcomes to “if” outcomes.

I am much more willing to take the time risk than I am the existence risk that most people take in speculation. If this thesis is right and if I make a lot of money with this thesis, in 18 months or two years everybody will be doing what I’m doing now and the valuation arbitrage that I’m taking advantage of now won’t exist.

There will be some other technique that is then unpopular in the market, which will expose me to the values that I believe are present in the arbitrage that I see today.

Susan: Okay. That makes a lot of sense. How about speaking from the investor or speculator persona, him or herself? What qualities do you think someone should acquire if he or she is to be a successful natural resource speculator? I am imagining that not everyone may be perfectly suited for this…

Rick: Most people are not.

Susan: Okay.

Rick: It requires a lot of discipline.

Susan: Okay.

Rick: Most people aren’t disciplined.

Susan: Right. [Laughter]

Rick: It requires a pathological dislike for the term “hope.”

Susan: Okay.

Rick: This is a data centric business, and it’s a probability centric business. It requires intense curiosity. You are competing against a whole bunch of other investors, and you have to work hard, and the only way you can work that hard is if you like it a lot.

And it requires a certain cynicism. One of the charming things about the exploration business is that the probabilities of success are fairly low, so that the population of people who engage in it are incurably optimistic.

When I was in university 30-some odd years ago, we learned that the probability of any mineralized anomaly, meaning any prospect becoming a mine, was about one in 5,000, and so a geologist may go through his or her career 20 years, 30 years, 35 years drilling holes and never finding a mine.

Susan: Wow!

Rick: This type of person, in order to continue in this business, has to be really, really, really optimistic, and when you are interviewing this type of person and you are questioning them about the possibilities or probabilities associated with their current mineral exploration theory, it is very difficult not to be swept up in their enthusiasm.

Because if they weren’t enthusiastic, they’d be pumping gas or doing something else.

Susan: Okay.

Rick: So I would say that a “degree of cynicism” may be the wrong phrase, but certainly an intellectual discipline that doesn’t allow you to become emotional with regards to your decision.

The most important thing that’s required, however, is a high personal tolerance for failure, because the nature of the exploration business is that if you buy 20 exploration stocks over a two-year period, you will lose money on 10 or 12, depending on whether you bought them in bull markets or bear markets.

You’ll break even on a couple and you’ll make money on a couple, but if you’ve chosen wisely, one stock or two stocks out of 20 will go 10:1, or 15:1, or 20:1. So what happens, of course, is that your winners have to amortize your losers, and they have to leave enough money made left over to make a profit.

Many people can’t stomach the preponderance of losses: they don’t have the personal tolerance for loss to understand that accepting small losses is the price that one pays to enjoy a big gain.

And people who aren’t temperamentally suited to this — in other words, people who aren’t dispassionate enough to want to make money as opposed to have the ego gratification association with being “right” on a more frequent basis — would do well to avoid speculation.

When I was young, I boxed and I boxed a lot, and one of the things I learned in my own style is, I had to take some punches to give some punches. That was the nature of what I did, and that’s precisely the way you have to be in speculation. You have to take some punches to land some punches. That’s the way it works.

Susan: Okay, and it sounds like…

Rick: In Kung Fu, you might not have had to do that, but…

Susan: Oh no, definitely. [Laughter]

Rick: In my style…

Susan: It’s lesson number one! [Laughter]

Rick: In my style… [Laughter]

Susan: Learn how to take a punch! [Laughter]

Rick: Yup.

Susan: Oh, that’s great. And it also sounds like one must probably have a high tolerance for risk. I mean, you took it even a step further: a high tolerance for loss, right?

Rick: Yes, of course. A tolerance for failure.

Susan: Because there’s lots of it. Okay.

Rick: Warren Buffet teaches famously not on the speculative side, but the investment side, that in order to be a successful investor you have to work hard enough and learn well enough, that you are delighted to see the price of a stock that you bought fall 25% or 30% in a week, so you can buy more cheaply.

Now, for better or for worse, I’ve been tested by that sort of circumstances dozens of times in my career, but what he says is in fact true. What you will notice over time, if you’re going to be successful, is that the market is not a source of information. The information associated with price is only valuable if you have some sense of the value of the stock.

It’s the sense of arbitrage between price and value that is where you make your money, and the fact that the market took a stock down in price is only information that is valuable to you if you think that the market has more information associated with that stock than you do.

One of the things that’s always amused me when I hired geologists — and I have very good taste in geologists, I’ve hired good geologists — has been that my geologists, when they first come to work for me, let the market attempt to tell them what their stocks are worth.

These are geologists who know so much more about the exploration business than the market does, because what the market is, is a mob.

Susan: Right!

Rick: And so they would get price information from 10,000 people who were completely uninformed about what they were doing, and they would get information from a market that only can deliver misinformation in the near term, and in order to be a successful speculator, you need to understand the difference between value and price.

You need to understand a market, not as a source of information, but merely as a facility for buying and selling fractional ownership in businesses as represented by share certificates.

Susan: Right. Thank you! Do you have any other words of advice on how to determine value in these Junior Exploration companies?

Rick: Long, long topic subject for another interview.

Susan: Okay, no problem.

Rick: That’s the Holy Grail.

Susan: Experience, right? [Laughter]

Rick: That’s the Holy Grail.

Susan: Experience.

Rick: And remember, you don’t have to get it right. You just have to get closer than other people do.

Susan: Right.

Rick: The nature of this business is that nobody is ever going to get the right answer. You just have to get closer than any other person, faster.

Susan: Right. Okay. Well, thank you.

Rick: Pleasure.

Susan: If you have a moment, I have actually two last questions from subscribers.

Rick: Sure.

Susan: But they’re somewhat unrelated.

Rick: Okay.

Susan: One person wanted to know your opinion of oil and gas.

Rick: I grew up in the oil and gas business. It’s how I got into the mining business. The oil and gas business is a better business than the mining business, so I’m extremely attracted to it.

Susan: Okay.

Rick: It is a still high risk, but lower risk — lower reward business than the mining business — but it’s a better business.

Susan: Okay, and does Sprott or do you invest in oil and gas, too?

Rick: Oh yeah.

Susan: Okay. Fantastic.

Rick: We manage a lot of money in the oil and gas space, publicly and privately.

Susan: Wonderful. Okay, and if people want to find out more about that, they can go to…?

Rick: Www.SprottGlobal.com or if they live in North America: 800-477-7853.

Susan: Great! Thank you, and then someone else wanted to know — and this is a little out there — about buying and holding physical uranium. This is Winston. He said I could call him out by name. [Laughter] He said he had talked to you about this.

Rick: Well, buying and holding physical uranium is not something that people normally want to do.

Susan: Right.

Rick: It isn’t the type of substance that one would want to put in a spare bedroom.

Susan: Right!

Rick: The easiest way for most speculators to do this is to buy shares in a Toronto entity called Uranium Participation Corp. There was an entity formed in Canada about 10 years ago to buy physical uranium and store it in a bonded warehouse, and you can buy shares that represent ownership in this store of uranium.

Susan: Wow.

Rick: It’s very interesting because as of today, the stock is selling at about a 22% discount to the spot price of uranium.

Susan: What?

Rick: And the spot price of uranium is about a 35% discount to the term price of uranium. Eighty percent of the uranium on the market trades on the term market, but investors’ perceptions are set by the spot market, so Uranium Participation Corp offers you a 22% discount on a 30% discount on a commodity that’s undervalued all by itself.

Susan: That sounds like a fantastic buy.

Rick: By the way, that’s not a recommendation. I’m not allowed to do recommendations. It’s a disclosure of a conflict of interest.

Susan: Right. Absolutely. Well, thank you so much for your time. I really appreciate it. It’s always fun to talk with you.

Rick: Pleasure!

Susan: Thank you so much!

Happy 12/12/12! I hope you are having an auspicious, amazing, productive day. Personally, I cannot believe it is almost the end of the year…I have so much to share with you in the coming weeks!

Today I want to share with you Part 2 of my interview with Benay Wettle of DefineYourOwnReality.com. Benay lives in Thailand, owns her own business, and truly defines her own reality, and we sat down together several months ago to talk about investing and how to run a passion-based business like Kung Fu Finance. Some of the comments in response to our interview include:

“This is so lovely, and so true! Thank you for this reassuring and empathetic read!” and

“I SO NEEDED this today! Just starting my coaching business and it’s been such a roller coaster of emotions. Glad to know this is normal. I’m straightening and strengthening my resolve and getting back on track. Thank you.”

In case you, too, are in need of a reassuring and empathetic read (we all need that from time to time!) I wanted to be sure and pass it on to you! You can read Part 1 of our interview here: The Way of Kung Fu Girl: Redefining Investing in an Age of Uncertainty, and Part 2 of our interview here: A Behind the Scenes Look at Running a Passion-based Business.

Enjoy, and have a beautiful 12/12/12!

To your financial success,

— Kung Fu Girl

Back by popular demand, here is Rick Rule on how to interview mining company managements. Even if you are not in the junior mining company space, I bet you will find a lot of wisdom packed into his 35 minute talk (I know I did!). Rick is an amazing investor and resource speculator, and he really goes into teaching mode in this talk and shares with you exactly how to determine whether or not a junior mining company is worth risking your money on…or not.

This gets back to our Price vs. Value discussion — Rick definitely knows how to go about determining the value of these junior mining companies (and that is not an easy task!)

With great thanks to Rick and the team at Sprott Global for allowing me to share this with you…I hope you enjoy it! (I also sat down with Rick separately for an interview and will have that ready for you next week.)

Also, big thanks to the team at Future Money Trends for capturing a much better video than I did! (They have a great site if you are interested in resource-investing, by the way—they interview mining company execs, publish fact sheets, and post lots of videos…check it out!)

And now, here’s Rick…enjoy!

http://www.youtube.com/watch?v=1vluCiabIvA

First of all, I’m delighted and flattered to see so many of you here at 7:40 in the morning. As many of you know, I’ve taken these early-morning shots for years, figuring that the audience self-selects; that people who came to San Francisco because they want to get away from the wife and go out to eat and stuff like that were all fine people, but I didn’t want to talk to them.

I wanted to talk to people who were ambitious and greedy like yourselves [much laughter]; who, regardless of what they did to themselves the night before, were willing to be here drinking coffee at 7:40 in the morning. I found that dedicated audiences are audiences that are more fun to talk to, so first of all, I’m flattered that so many of you decided to come.

So let’s get started! Interviewing mining company managements. The first thing is that increasingly management teams have been schooled by investment bankers to have a pitch. They have a script. And the easiest thing for you to do is to show up in front of a booth, push a button, and they give you a script. And the script is often, though not always, designed to minimize the wear and tear on the executive, as opposed necessarily to educating you about the affairs of the company. There’s nothing wrong with that; the executive that’s talking to you is necessarily charged with creating value for you in many ways, shapes or forms, not just talking to investors; but it’s up to you, not to them, to get the information that you need.

And so, while it’s useful if you would like to sit through the pitch, you should say, “OK, now let’s get down to business,” because you are trying to ascertain a few things. (By the way, most of these guys are proficient, they can get through the pitch in seven or eight minutes—they flip the charts, and if you don’t ask too many questions in the interim, which is a good thing to do, don’t ask questions — just let them get through the whole chart if you want to hear their pitch.)

But before you do that, you need to orient yourself as to what you’re doing in the business. When I say mining company managements, now I’m talking mostly about the juniors, the exploration-stage companies. It’s important for you, first of all, to understand that value is created in the juniors in exploration by answering a series of unanswered questions. That’s how value is created.

Don’t worry too much about when options exercise periods happen, when hold periods come off. All of that stuff is interesting, but it doesn’t really matter very much. What matters is: are these guys going to make a discovery? And if they make a discovery, is it worth anything? Do they have the competence to make the discovery? That’s what you’re careful about.

A big mistake that we all make in this business is that we assume that these juniors are asset-rich; we assume that they are asset plays. First of all, remember this: most exploration properties have no proven reserves, and an intelligent accountant would probably put them on the balance sheet as liabilities; that is, the obligation to spend money, rather than assets. So when you think about this business, don’t think of it as an asset intensive business, think of it as an intellectual property business.

These are really research and development businesses, just like people who are doing biotechnology or software. These guys are answering unanswered questions in an exploration process, which is very much like research and development. So, if you think about Nevada Gold exploration the way that you would think about Silicon Valley microelectronics or software, you begin to understand the process better than you would thinking about it in some other fashion.

The consequence of that realization is that in the earlier stages, people are more important than property. People are more important than property. And the first thing that you’re going to do in analyzing a junior company, in interviewing mining company managements, is you are going to do an inventory of the intellectual capital associated with the company. And so hopefully in the booth you can start with the CEO—start at the top.

But many people say, “But Rick, CEO’s will only talk to you, they won’t talk to us.” That’s not true. A passionate CEO in any business is somebody that is so driven by his or her mission that they don’t want to talk about anything else but their business. They’re like me! They can’t talk baseball, they can’t talk movies—they don’t give a damn! It’s just what they’re doing. They will talk to you. And if they won’t talk to you, that makes the decision easy – you throw the presentation away and leave. It’s really, really, really simple.

So you start with the CEO, and you say to the CEO, “What are you doing? What is this company about? And what are your specific skill sets? What have you done in the past that qualifies you to take my money in this endeavor? What specific skill sets do you have? And tell me how you were successful before, not just for yourself, I mean, if you happen to drive a Rolls Royce I think that’s wonderful, but how many other people are driving Rolls Royce’s as a consequence of your earlier activities?”

How many people here are familiar with Pareto’s Law? Pareto’s Law is the 80/20 rule, where 80% of utility in a given task is done by 20% of the population base. It’s important to note that it’s a bell curve; that’s important because there are two 20’s. There is a “good” 20% that does 80% of the good, and a “bad” 20% that does 80% of the bad. It’s odd, but these performance dispersal curves work over many population subgroups and many tasks.

What’s also important to note is that the lips, the good 20% and the bad 20%, if you run them through the same performance dispersal curve, they conformably align again, which is a different way of saying that 20% of the 20% do 80% of the 80%. Or 4% of a population base generates 65% of the utility and 65% of the disutility. And probably conformably aligns again, but we’ll leave that alone—the third standard deviation we don’t care about.

What that means in just plain English is that 4% of the management teams generate 65% of the capital gains. And your job interviewing mining company managements is to at least find the good 20%, and preferably the good 4%. That’s what we’re about. There is no guarantee that someone who has been successful in the past will be successful in the future, but it turns out to be statistically the best determinant.

So you are asking the CEO, to begin with, “What specific skill sets do you have? What have you accomplished in the past? Specifically, what have you accomplished in the past, and what was your role?” Write all of this down.

The second thing you say is, “Who is the second most important person in your business?”

Let’s say just for fun he says it’s the VP of Exploration. It’s an exploration company, it stands to reason, right? So, ask him, “Why did you hire this person? What specific skill sets does this person have and what have they accomplished in the past? Why is it that I should believe they are going to be successful in some endeavor? What skills, what attributes do they have that are deserving of my money?

And the third person, perhaps this is the Chief Financial Officer (CFO)…you understand what I’m saying. And you need to get very, very, very specific with them, because after this, you’ve got this list of people, and you take them through every director, “Why was this director chosen? What role does this director have?”

What happens in the course of this discussion is that in at least half the instances of these questions, you will find out the CEO has assumed that role because he/she wanted to make themselves 2 million shares at a nickel, and issue 4 million shares at fifty cents per share, so that they could enjoy the step-up from $0.05 to $0.50 and live for 2-3 years on the money that they raised. That’s really good for them, that’s really, really, really nice. They get to make a little bit of money and they get to have a nice lifestyle. But mostly, for more than half of the companies, this whole thing is a lifestyle- and paper-trading exercise. And it’s really good if you can come to that conclusion early, because you can throw away the presentation and you don’t have to waste any more time with them. Very, very, very useful. But you have to have the skills inventory just in case these guys get asked some more questions.

We’ve done people, now we’ll do property. This is what they love to talk about. Go in the exhibit hall; it’s interesting. If there were as much gold as the exhibitors say there were, the price of gold would be $100 per ounce! [much laughter] I saw in that room, 20 or 30 ten-million-ounce deposits. There is a boatload of gold over there! Didn’t have any drill holes in it, but there’s a boatload of gold! [much laughter]

So you have to have the property discussion with them, and you have to have your notes from the discussion about the management skills, because you’re going to let them trap themselves, maybe.

You say, “So now, tell me about your property.” And you can blame me, you can say, “Rick Rule said that exploration success is answering a series of unanswered questions. What do you think this exploration property is about? Describe the property, describe what you’re trying to achieve, describe this asset to me, describe the target size.”

One thing that I always like early in a discussion is a management team that says to me, “Everybody out there is looking for these great big deposits—they’re going to sell the company. What I’m looking for is a small, high-grade deposit that I can put in production so I can use the cash flow from that and bootstrap and build BHP.”

Wonderful seductive story, we’re all entrepreneurs so we like this idea. The problem is it doesn’t work. Everything that can go wrong with a big mine can go wrong with a small mine, but a small mine can never make you big money. So if a guy is trying to answer an unanswered question that is irrelevant, in other words, if the guy is looking for a small deposit, Bingo! I get to throw him away, I don’t have to waste any more time with him.

What you are trying to do in every step of the process is eliminate the company so that you don’t have to waste any more time with it and you can focus on companies that can actually make you money.

So if the answer to your question is that they are looking for a deposit type, and the reward size associated with that deposit type is irrelevant, thank you very much, best of luck to you, next booth. Go to the next booth. If, however, they are looking for a more attractive deposit – if the value associated with a “yes” answer is high enough that you can afford to take the risk – what’s important to determine, and this takes time, but what’s important to determine is, “Tell me, as reasonably as you can, you being a geologist and me being a layperson, why you believe this property is what you think it is? Explain to me the evidence that would support your thesis—is your thesis that you have a 5 million ounce deposit merely because you need a 5 million ounce story to get me to buy stock? Or is there in fact some evidence that would suggest that potentially, this is a 5 million ounce deposit?”

And let’s just say for fun that they have nice surface geo-chem, they have good alteration, they have some nice grab samples—they’ve done a bunch of surface work, which in fact does indicate that they have a large mineralized body. They have some grab samples that showed some grade…it seems like a reasonable story to you. The next thing that you say to him or her, running this company, is “So, tell me how you plan to test your thesis, and tell me why the plan that you have chosen, in the first instance, answers the question, but tell me how you are going to get from A to B; and tell me, if you get a “no” answer, what your next step is, and tell me if you get a “yes” answer what your next step is.”

This is important because of what you learn. Just as when you go through the management team’s resumes and you ask for the plan associated with the human resources, about 50% of the time when you do that you find they have no plan. Which is good; bingo, you don’t have to talk to them anymore. Mostly, about 50% of the time when you talk to companies about their exploration plan, “what will happen if they get a ‘no’ answer—will they drop the property? What will happen if they get a ‘yet’ answer—what question does that presuppose?”

Mostly you’ll find in more than half of the instances, that they don’t really have an exploration plan. Their exploration plan is that they are going to drill a couple of holes, try and get lucky, and if they get a good result they are going to try and raise some more money so that they can keep at it for a couple of years.

Mostly, if they get a “no” answer, they will tell you, “We didn’t adequately test the property so we have to dream up a new scheme, a new explanation to explain away our failure.” It’s very, very, very important to note that most of these people don’t have a plan, and if they don’t have a plan, any success they might enjoy is random. There’s enough risk in this business that you don’t want to expose yourself to random outcomes. So again, bingo! You get to throw the company away. You don’t have to waste any more time on it.

The point of this whole exercise is that if you’re wandering through an exhibit hall with 300 exhibitors, and you have a list of 40 that you’ve gleaned from your newsletters or from unrepentant touts like me on the podium, that you get rid of as many distractions as you possibly can and focus down on what you want.

So now we’ve gone through the management challenge and we’ve gone through the property challenge. This is where it really starts to get fun. Let’s just say that it’s a guy who runs the company, and you say to him, “Listen mister, I noticed something interesting and a little troubling to me. You have told me that you are successful in mining –in fact that you built and operated a gold mine in Archean terrane in French-speaking Quebec; but now, you’re exploring for copper in tertiary volcanics in Spanish-speaking Peru. What is it about operating a mine in 2 billion year old rocks in French-speaking Quebec that equips you for exploring for copper in 15 million year old terrain in Spanish-speaking Peru?

I have an off-color analogy that I love to use – it’s early in the morning but you’ll have to bear with me…it’s as though you went to the doctor’s office for some dentistry, and a proctologist appears. They’re both medicine, but the wrong practitioner would leave a bad taste in one’s mouth. [much laughter]

The nature of this is that not all mining tasks are created equal. Now you refer back to your notes about the skill sets of the management team, and you say, “What part of the skill sets that you described are appropriate to this property? You don’t have the skill sets associated with the task that you have organized yourselves around today; Why is it that I should give you money to do something that you haven’t done before?”

Their answer of course will be, “Well, it’s all mining.”

Well no, it’s not all mining. It’s very, very, very important that you do this. Very, very, very important that you do this. Because by doing just those two things, finding out about the property and about the the plan and the unanswered questions, and finding out about the suitability of management’s existing experience relative to the tasks that they’ve assigned themselves and that they are asking you to fund, you will eliminate probably 80% of the companies out there. Those two tasks, which you can accomplish in 15 or 20 minutes, eliminates 80% of the confusing data points that you have to screw around with.

Now we go one more step.

We’ve gone if you will, in very short form, over Mines and Management, and there’s one more M: it’s Money.

This one’s fun, too. This one’s particularly fun because the management teams almost never can answer these questions, which is very, very, very scary. It helps to have a portable computer so you can pull up either SEDAR or EDGAR and refresh the company’s management with current data available from filing statements.

You need to say, “Sir, in my experience, it takes 2 field seasons to answer an unanswered question; so it is probably going to take you 18 months to generate the kind of response that is going to get me the value that I need in your stock. If we assume it’s going to take 18 months, I have a couple of money questions. How much money has to be spent on the ground over 18 months to get me my ‘yes’ answer.”

And let’s just say for fun that the guy says, “Well, our budget is $5 million.” And you say, “Is that for a year or 18 months, sir?” Mostly the answer is, “Well, I’m not really sure.”

Well, if the president isn’t sure about a $5m budget, who else is going to be sure? So we help him along. We say, “I think that’s probably going to be for a year, so why don’t we assume it’s going to be $7.5 million.”

“Oh yeah, that’s probably a good assumption, that makes some sense.”

Then say, “Tell me, what is your burn rate? How much do you spend on G&A?”

A surprising number of times when you ask this question sort of pointedly, the guy will say “You know, I think it’s about $100,000 / month.”

“Really? Not $50,000 / month? Not $150,000 / month? Is it $200,000 / month?”

“Well, I, um, er…I don’t really know, I’ll get back to you.”

If you have a personal computer, that’s really handy, because you can pull up the guy’s quarterlies. “In fact you’re spending $200,000 per month on G&A, so to get through 18 months, you’re going to need about $3.5 million, maybe $3.2 million?” So you’re going to spend $7.5 million in the ground, and $3.5 million in G&A. Sounds like you need the sunny side of $11 million to get through 18 months to get me a “yes” answer.

“How much money do you have in the treasury?” “Uh… um… two million…” “So you need $11 million, and you have $2 million. Any ideas? It seems to me that you’re the sunny side of $9 million short of getting me the ‘yes’ answer that I need. So, how am I going to get a ‘yes’ answer and how am I going to get a double on my stock if you are going to be broke next quarter? Can you help me through this?”

I’d like to digress now and tell you a little story. About 25 years ago, there was a predecessor to this show, called the Boston Gold Show. I don’t know how many of you were ever there, it was the one before the New York Gold Show. One day I’d been speaking, and after I got done speaking I was going to fly, so I was in civilian clothes, jeans and a polo shirt or something like that, wandering around the exhibit hall. And there was a very, very, very aggressive white-shoed promoter who basically tackled me in the aisle.

It was sort of a slow show, and so, thinking, “this is going to be amusing,” I go in and he was this really wonderful, hyperbolic sort of guy, just nuts. He was going to do this, he was going to do that, he was going to drill this…I said, “Gosh, that’s very ambitious! You’re an amazing guy—you’re practically doing jumping jacks here! Tell me, what’s this drilling program going to cost, and how much do you have?” He said, “Well, money’s not the important issue.” [pause, much laughter]

“Hmm, that’s interesting, I’m here to learn, tell me more.” This is precious, I hope something like this happens to everybody here at some point in time. This guy, not recognizing me in civilian clothes, says “there’s a really hot California broker named Rick Rule who’s going to finance me!”

“You know, I’ve heard of this guy, I think he was speaking here!” He says, “Yeah, he’s really well known and is going to finance me.”

I say, “Oh, OK, why?”

He says, “He really, really, really likes the property! But the interesting thing is, Rick doesn’t like financing companies below $2/share. And so the opportunity for you is that you buy this thing at 60-70 cents per share, and as the stock goes up and Rick finances at $2, you get to leverage off of his money!”

“No shit?” I thought. So I said, “So if Rick really liked this property at $2, why wouldn’t he want to buy it at 60 cents?” “Well, you know, he has issues with low-priced stocks, I don’t know, maybe it’s the SEC, I don’t know, it’s just the way he is.” Finally, I pull out my driver’s license, and say “listen Leroy, I know this Rick Rule really well.” [much laughter]

So, it’s important you ask these money questions with a certain intensity. There’s a tendency in this industry to exaggerate. And this is really, truly, for lack of a better phrase, where the money meets the road. This is a capital-intensive business, and if these guys don’t have any money, they don’t have any business.

Remember that what you are doing is answering a series of unanswered questions. Answering these unanswered questions takes money. Without money, it’s just plain hyperbole. Every dream in the world, every wild arm wave, every good intention, every shred of intellectual capital in the absence of the money to carry it out, is completely ephemeral. These guys are selling dreams.

Which is OK, this is how the world gets built—dreamers are a wonderful thing! But these need to be really, truly applied dreams. And one of the things that happens, and you can’t really get this by interviewing management, you have to do a little bit of work on the numbers yourself, is you have to find out if these companies are truly exploration companies.

I presided over an exercise that Sprott did, looking at some number of these penny dreadfuls, maybe twenty of them. And we determined that the median of these companies were spending 65% of the capital they raised on listing, audit, general and administrative (G&A) expenditures. Which would suggest to me that 35% of the capital raised went into exploration. The probability of an exploration success, backing a management team that employs 35% of the capital at their disposal in exploration is extremely, extremely low. These turn out in many cases to be “lifestyle companies”. And I’m not opposed to anybody living a good lifestyle, I just don’t feel any particular obligation to fund it. I pay tax to other people; I don’t need to pay tax to junior mining companies.

It’s very, very, very important that you ask these kinds of questions. And assuming that you have survived all of this, assuming that you like the resumes of management, and assuming you understand why the management was chosen, and assuming that you like the property, and you like their explanation to why the property was chosen, and you like the method by which they propose to test the thesis, and you have determined they have access to the capital required to answer the unanswered question; the next thing you need to ask them is about the future.

Let’s say the unanswered question is, “We’ve established on the surface, strike, width; we don’t have the third dimension; we don’t have depth.” The unanswered question is, “We need to drill 3-4 holes and see if the surface anomaly projects to depth.” What you then say is, “OK, you think you can test this adequately with 4 holes?” “Yes, I do”. “Fine. What happens if the 4 holes are duds? Do you drop the property? What do you do in the event of a “no” answer, and what do you do in the event of a “yes” answer?”

If you get a “yes” answer, what question does that presuppose? And this is very, very, very important, because the risks in speculation are such that most of your investment decisions, most of my investment decisions, end up being failures. The expectation is failure. So your winners have to amortize your losers; and the way that your winners amortize your losers is not by shooting for 30% gains; it’s by shooting for 1000% gains. And getting a 1000% gain usually does not happen after answering just one unanswered question. You get a “yes” answer, which sets up a second question. Then you get a second “yes” answer.

I have found that by back-testing my partnerships going back many, many, many years, most of the results came from 5-6% of my positions, and the average holding period for 10/15/20-bagger was 5 or 6 years. Which means 2 or 3 exploration season campaigns, in other words, 3 “yes” answers in succession. So it’s important for you in this interrogation process to find out not merely what the value of the yes answer is, but the question that establishes, and the value of a subsequent yes answer.

What you’re doing in exploration is you are trying to be in a situation where the first yes answer gives you a double or triple, but it sets up a second question that gives you a second double or triple. What you’re trying to do if you’re rational is, if you get a double as an example, sell some stock back into the market, take your capital out of the market and get a free ride on the rest, and then try to get a 10-bagger or a 15-bagger on the balance. And that presupposes that second question.

Is everybody with me so far? OK, good.

The next thing you need to determine is “How am I going to determine your progress? Who is going to tell me? Am I going to get it from a press release or may I call you?” There’s nothing illegal about this. There is something illegal about obtaining material non-public information, but there is nothing illegal with calling the company’s president or VP of Exploration and asking them to interpret the drill holes.

“Tell me about this drill hole. Tell me what this drill hole, in this campaign of 5 drill holes, was intended to achieve; and tell me what you think it achieved; and tell me what you are going to do with the data you got from this drill hole.” Very, very, very often what you’ll find out from asking this question is that the person tasked with interpreting the drill holes, didn’t interpret those drill holes. Didn’t think in a granular fashion about what the mineralization, what the alteration that he or she encountered in the drill hole means in the context of their thesis in regards to this property. They didn’t think about what answer or what question should have evolved from the data that you paid for in that drill hole.

I know this sounds hard. It really, truly isn’t. Because the point of all this is not to get yourself a whole bunch of “yes” answers. It doesn’t happen very often. The point is to start with a list of 30+ companies and whittle that list of 30 companies down to 4 or 5. You will never, ever, ever in your life get an interview where every question that you ask comes back to your satisfaction. It won’t happen. You’re not looking for a situation where you ask 10 questions and you get 10 perfect answers. What you’re trying to do is take a list of 30 companies and make it a list of 5 companies, and then spend the rest of your time on the 5 companies. It’s important that you do that.

For those of you interested who are interested in this line of reasoning, on our website, http://www.sprottglobal.com/, there’s an article I wrote probably 25 years ago, called “9 Nosy Questions to Ask Mining Company Managements”. I see a lot of people still walking around the exhibit hall today with the 9 Nosy Questions, with those questions, as it’s sometimes easier to use my questions than to think up your own.

It’s not as efficient, however; it’s very important that you establish your own relationships. I think I’ve beaten you with enough data and technique this morning.

So I think what I’d like to do now for the 2 1/2 minutes I have left is to let you to ask any questions that may have come as a consequence to this or to ask any other questions that you may have in any way, shape, or form.

You know, I consider this an education mission…In a biblical sense I’m here to teach you to fish. And the gentleman here said, “That’s very good, Rick, but what I’d like you to do is catch the fish, clean the fish, fillet the fish, and serve it up to me cooked perfectly with garlic.” That great American economic philosopher, Janet Jackson, Michael Jackson’s sister, she paraphrased this very well, she said, “And what have you done for me lately?” [much laughter]

You need to understand that because I do transactions I can’t do research, and recommendations are regarded by the SEC as research so I can’t do them. I am required, however, to disclose conflicts of interest, so if I say something nice about a company, you need to understand that this is NOT a recommendation, which would be a felony, it’s a disclosure, which is a requirement. Do we all understand that?

I have been increasing my conflicts of interest in virtually all of the prospect generators. These are companies that use small amounts of working capital to generate ideas which they farm out to other mining companies and let the other mining companies do the heavy lifting. My experience in prospect generators in the last thirty years, is that my prospect generator portfolio has outperformed the general market portfolio by three standard deviations.

It’s the single-best exploration activity that I have ever been involved in. And so we have recently done micro-financings, because these companies won’t take much money, something that I’m mostly grateful for, but occasionally resentful of if I don’t own enough…we have recently done micro-financings in Miranda (TSX.V: MAD), and I’m just talking about exhibitors that are here, Evrim (TSX.V: EVM), Millrock (TSX.V: MRO), and probably a couple of others that are here but I can’t remember the micro prospect generators that we’ve been buying. But we’ve done financings in those companies, and so I’m adding to my position in prospect generators. I always do in bad markets, I love that.

I have been adding to my conflicts of interest in Fission (FIS.V), which is a small uranium explorer, I LOVE the uranium sector because everybody else hates it. They have a new discovery which may turn out to be something or may turn out not to be something, but I think the company gets taken over by Denison (NYSE: DNN), consolidating the Athabasca Basin and whoops! No time, I can’t give you any more names.

Ladies and Gentlemen, I have overstayed my welcome by about 20 seconds and I don’t want to cut into the next speaker. I want to tell you that I’m grateful and flattered that you got up at 7:40 this morning, and I hope that some of this made it worth your while.

Good luck this year, tell me how the questions went next year. Thank you very much.

Ask me that before this past weekend and I would have adamantly stomped my foot down and said, “don’t be ridiculous, of COURSE NOT! What on earth have you been smoking?”

You know that I believe 100% of most so-called “secrets” involve nothing more than hard work and perseverance, followed by more hard work and perseverance, followed by more hard work and perseverance, followed by…well, lather, rinse, repeat…with perhaps a dash of inspiration thrown in for spice.

I am instantly suspicious of most “secrets”—if some piece of information is such a big “secret,” then why on earth have you suddenly decided to share said “secret” with little ol’ me, not to mention the rest of the world?!

Call it my inherently suspicious nature, but I am highly skeptical to say the least when anyone promises to reveal to me “the secret” of just about anything, especially if it’s related somehow to money or investing.

“Click here to find out THE SECRET this multimillionaire is sharing for the very first time only to this EXCLUSIVE list of subscribers!” or “Click here to find out THE SECRET stock that has been making this Florida grandma millions!” or…you get the idea.

Secret==suspicious! (at least to me)

(That and the fact that my marketing brain instantly snaps to attention…the other thing “secret” tends to mean is “I will reveal it to you IF you buy my special, expensive, exclusive program!”)

So you might be surprised to find out that I traveled down to San Diego this past weekend to spend three intensive days hanging out with and learning from someone who was featured in the New York Times best-selling book and movie entitled…you guessed it…The Secret!

Seriously.

(And no, I have never read that book, nor seen the movie, because I was instantly turned off by the title—my initial gut reaction was something to the effect of, “The Secret? Really? Really do you think I am going to fall for that?”).  

And yet, there I found myself for three days this weekend…learning from a beautiful woman by the name of Lisa Nichols, who is most well known for her contribution to The Secret.

For those of you who aren’t familiar with Lisa (I wasn’t, either, until I saw her speak at AwesomenessFest a few weeks ago), in addition to her appearance in The Secret, she also runs a multimillion dollar company, is a multimillionaire herself, is dedicated to transforming the lives of millions of people, and has appeared on Oprah and Larry King, among other popular shows.

In fact, she was hand-chosen and asked to be “the next Oprah” but turned the opportunity down.

But popularity and fame aside, what drew me to Lisa and was the deciding factor for me giving up a 3-day weekend with my family (AND an article for you!) in order to learn from her, is that she is hands-down the best speaker I have ever observed. Ever.

(And I have seen a lot of great speakers!)

So THAT is why I trekked down to San Diego over the weekend for a 3-day intensive event called “Powerhouse Speakers”—I wanted to learn Lisa’s secret…her amazing transformational speaking and story-telling gift.

(If I’m going to transform the financial lives of millions of people, I’d better get up from behind my laptop sometimes and get out there in the world!)

And OK, truth be told, I also wanted to do some recon on “The Secret” itself… Because, after all, I am human, and I admit a part of me wanted to know just WHAT the darn secret WAS! Without having to buy the book!  

And guess what I found out…

I learned not only one secret, but TWO.

One is the secret that I just mentioned, which is only peripherally associated with “making money” so I’ll just touch on it briefly.

That secret is Lisa’s special gift—her amazing transformational speaking and storytelling ability. The woman simply commands a room. I’ve never seen anything like it—she is real, she is authentic, she is transparent, and she is incredible.

The audience sits (or sometimes stands) in rapt attention, laughing, crying, and accompanying her on her journey of wherever she wants to take us. She is seriously gifted—not “cheesy” or “preachy” and certainly not boring or inconsequential…you always leave her talks having internalized some amazing and important lesson, and having had a blast while doing so.

So that was secret #1, which I did my very, very best to soak up and learn to the best of my ability while there (and I didn’t just sit and take notes…you know I believe taking action is the best form or learning, so I got up and spoke for 10 minutes in front of 100+ attendees live and on stage and got coaching from the master herself!)

But it’s the other secret, the one from the famous book and movie, that is much more relevant to you and to Kung Fu Finance (unless you are considering a career in public speaking, in which case I highly recommend you get yourself to one of Lisa’s events.)

So what the heck IS this special “secret” from this famous book I’ve never read and movie I’ve never seen?

Well, it is something called “The Law of Attraction”.

Now, I know, The Law of Attraction gets a lot of flack.

(Don’t ask me why it’s always capitalized like that…apparently because it’s a “law”.)

You may have heard, “yeah, well, if you’re falling out of a plane without a parachute, let me tell you the Law of Gravity will out-trump your Law of Attraction every time!”

And Saturday Night Live did a skit awhile back chastising a man from Darfur about his “negative attitude”.

In fact, there have been countless satiric spoofs done on the Law of Attraction (and many of them are quite hilarious!)

But they are aimed at the group of the population who do not “get it” and who are simply into wishful thinking, which is NOT what the Law of Attraction is really about.

The Law of Attraction does not say, “simply sit on your couch with your favorite beverage and remote control and wish for Salma Hayek (or Will Smith…) to appear next to you and magically she will materialize on your lap!” nor does it say, “you don’t have to pay for that book in the store, just ask the Universe for it and then walk out the door!”

Right. Not what the Law of Attraction is about.

But what it IS truly about is crucial to your financial future, and is something I frequently talk about here on Kung Fu Finance:

You create your own reality—you are the product of your thoughts.

THIS “Law of Attraction” I believe in wholeheartedly, and so does Napolean Hill, who wrote one of my recommended Top 5 Personal Finance Books, Think and Grow Rich.

And the more rich and successful people I meet, the stronger I believe in the Law of Attraction and the fact that you are the product of your thoughts and you do have the ability to create your own reality.

Do I think you can just close your eyes, wish for an ounce of gold to appear in your hand, open your eyes, and suddenly be holding the gold?

Um, no (although that would be really, really cool!)

But all Olympic athletes visualize executing perfectly and winning before they do so. Every. Single. One.

And every successful, wealthy person I know has visualized being wealthy and successful for many years—they have always wanted to make money, have visualized doing so, and have eventually achieved it. Sure, they may have had doubts along the way, but I do not know even ONE wealthy, successful person who has or had a mindset of “I don’t deserve it, I’ll never get there, I’ll be broke forever, etc.” Not a single one.

An important aspect of The Law of Attraction is the distinction between visualizing and doing nothing, and visualizing and taking action towards your goals.

Visualizing by itself does not work—no Olympic athlete wins SOLELY by “visualizing”. They train (and train, and train, and train, and train some more…)

It is like those cheesy broken heart charms that only form a whole heart when connected:

Awwww, isn't that sweet...?

You need BOTH the proper mindset (ahem, “Master your mind”…) AND to take action on your financial education (ahem, “Master your money”…) to achieve real, lasting wealth and success:

Master your mind...AND...Master your money!

THAT is the big secret.

So many of us are experts at one or the other:

• I used to be GREAT at daydreaming about my amazing financial future, but my bank account reflected my lack of action-taking on my financial education, circa 2000-2001
• I know several people who earn a LOT of money, but feel like they don’t deserve to keep it…no matter how much they make it simply slips out the door as quickly as it enters their life

So I would say “The Secret” would be more aptly named “The Half-Secret” (but hey, they didn’t ask me, and I’m sure that wouldn’t have sold nearly as many copies!)

What do you think is the “secret” to building wealth? Do you believe in visualization? I would love to know your thoughts in the comments!

I’ll be back tomorrow with more from Rick Rule (he’s been requested a lot lately and I have a great transcription and video for you tomorrow), and with lots more…I am DONE traveling for the year! Hooray!

Have a wonderful day, and please let me know your thoughts in the comments!

To your financial success,
— Kung Fu Girl

Bruce Lee on visualization: “As you think, so shall you become.” and “You just wait. I’m going to be the biggest Chinese star in the world.” Word.

P.S. Speaking of creating your own reality, I recently sat down with an amazing woman, Benay Wettle, who has a business called “Define Your Own Reality”. She interviewed me on my investing and Kung Fu Finance success and you can find Part 1 here…I hope you enjoy it!

“So sorry I am late, Dorian. I went to look after a piece of old brocade in Wardour Street and had to bargain for hours for it. Nowadays people know the price of everything and the value of nothing.” – Oscar Wilde, The Picture of Dorian Gray, Chapter 4

Ahhhh yes, the age-old question…how on earth do you determine what something is truly worth, particularly an investment?

Just what IS value exactly, and how does it differ from price?

The dictionary defines price as: “The amount of money expected, required, or given in payment for something.”

And value as: “The regard that something is held to deserve; the importance or preciousness of something.”

In other words, price is objective—it’s simply the intersection of supply and demand.

But value is subjective—different items have different values to different people. That is why two people can look at the same item and one will think it is a bargain, while the other will think it is a rip off.

Bargain? Or rip off?

The price of the item does not necessarily represent the value of the item to a given person.

As consumers, we seem to instinctively “get” this. We understand that “one man’s trash is another man’s treasure,” and we buy consumer products using emotion… “Don’t you just LOVE that red sweater?” or “This is the house I have always dreamed of!”

We make subjective, emotional decisions about what is valuable to us, even with mundane items such as groceries—some will pay almost any price to buy their favorite brand name or to purchase organic, local oranges, for example, while others believe that an orange is an orange is an orange and will buy the generic “brand” every time.

Most of us continually shop for the best deal when purchasing consumer items—looking for that 50% off sale and making tough decisions on whether quality trumps price to us in any given situation.

However, as investors…we pretty much suck at determining value!

In fact, this is one of the most common mistakes we individual investors make—confusing the price of an asset with the value of the asset…and sometimes not even bothering to determine the value of the investment in the first place!

This is one of the big issues I have with CNBC and most mainstream media—they do a wonderful job reporting on price (just glance at that live ticker scrolling across the screen—continuous live price updates on all sorts of stocks, bonds, and commodities), but spend almost no time helping to educate investors on value.

Just because it's "cheap" does not mean it's a good value!

The above screenshot image of Jim Cramer is is from a mid-May 2007 clip…Toyota stock is still down more than 40% since then:

Ouch...

I honestly don’t mean to pick on Jim Cramer (at least not too much…)—he’s a smart guy, and I realize you can pick lots of individual stocks in 2007 and look at them today and cringe, though the S&P 500 has since recovered.

But what I do want to point out is that just because something is “cheap” doesn’t mean it’s a good value—many, many things in life are “cheap” but represent terrible value, and many “cheap” stocks become even cheaper (Enron, Worldcom…)

There is a big difference between price and value, and value is what we as investors need to get better at determining. This is what separates the “smart money” from the “dumb money” (and we want to be the “smart money”!)

So…how can you be the smart money?

“Smart money” investors inherently understand the importance of value, work to determine and analyze the value of their investments, and discern the difference between value and price.

This is why the legendary Benjamin Graham, author of The Intelligent Investor, is known as the godfather of value investing, not price investing, and the vast majority of that book (also known as the Bible of Investing) is dedicated to how he believes one should value stocks.

Warren Buffett understands this distinction, too, saying, “Price is what you pay. Value is what you get. The dumbest reason in the world to buy a stock is because it is going up.” – Warren Buffett

And in Robert Kiyosaki’s book, Conspiracy of the Rich, he explains why chasing the price of gold or silver is “a fool’s errand” and why buying based on price alone “is not the mark of a smart investor”. – Robert Kiyosaki

Determining and understanding the value of your investments is an essential part of your investment thesis.

You wouldn’t buy a car without first understanding the value it would bring to you and what the important characteristics were that you wanted to consider—maybe you have a large family and want a minivan, or you love to ski and want an SUV, or you’re concerned about gas mileage and want a Volt or a Prius, or you need to park it in tiny spots so want a Miata…or maybe you’re in construction and need a truck!

Whatever your personal needs/wants/desires are, you probably spend a decent amount of time researching the latest models, maybe reading Consumer Reports to get the safety and drive test results, deciding on “new vs. used”, shopping around for the best dealer and the best price, checking the impact it will have on your insurance, and then making your purchase.

Your investment purchases should be no different (other than you probably don’t emotionally “long” for those shares of JuniorMiningCo. X or municipal bond Y like you do for that new Harley-Davidson motorcycle or Manolo Blahnik shoes you’ve got your eye on!)

But you do need to spend some time valuing your investments, just like the “smart money”.

This is a two-part exercise:

1. What do you believe the value of the investment is?
2. What is the value of the investment to you?

Depending on the asset class, there are many ways to go about determining its value.

If you’re interested in income-producing real estate, it’s time to learn about cap rates and net operating income (if that sounds tricky, don’t worry…trust me, if you can grasp third-grade math, you’re all set!)

If you’re interested in valuing equities, you should definitely read Graham’s book, learn to read financial statements, and understand concepts such as net working capital, price-to-earnings, price-to-book, etc. (Also not tricky…again, think third-grade math!)

If you’re interested in valuing gold, you should brush up on your history a bit—what happened during the last bull market in the 1970’s? Do you believe gold is money and has intrinsic value in and of itself? What do people use gold for and what are its supply and demand fundamentals?

And so on.

And in case you are thinking, “oh but Kung Fu Girl, that sounds like too much WORK…”, I want you to remember one other important economic term—opportunity cost!

What is your opportunity cost of NOT learning to properly value your investments?

That’s right…PROFITS!!!  

The second question is equally important—I often stress here on Kung Fu Finance the importance of knowing yourself (“Know Thyself, Grasshopper!”).

What is this particular asset worth to YOU? For example gold may represent your future safety and security if fiat currencies collapse, a given real estate property might represent a future retirement income stream, and a junior mining stock might have value to you for its speculative potential.

Boring finance types would possibly term this “asset allocation” but I believe it goes deeper than that…ask yourself why on earth you are investing in this particular asset in the first place…what value do you expect it to bring to YOU?

If you can master this distinction between price and value, you will become a true master investor and instantly put yourself ahead of 99% of the population.

And that’s what I want for you!

Please let me know what you think about price and value in the comments!

Thank you as always for reading, and for being an awesome Kung Fu Finance subscriber!

To your financial success,

— Kung Fu Girl

Ahhhh, Black Friday. The craziest shopping day of the year.

America’s Ode to Consumerism…shop-til-you-drop-and-never-stop—do it for your country! For your economy! To line retailers’ pockets and fill your house with more stuff you’ve been conned into thinking you truly “want” and “need”! (And is it just me, or have they started decorating for Christmas now before Halloween?!?!)

I do understand the lure…we all love a good bargain. We all want to “buy low and sell high”—the very essence of good investing (and shopping). I get it. Honestly, I do.

However, on Black Friday (and now apparently Black or “Gray” Thursday, and Cyber Monday…who knows what they will come up with next!), you are only achieving at most half of the equation—“buy low”.

(And that’s if you truly are able to secure a good deal and don’t get suckered into some slick advertising ploy that lures you in with promises of huge bargains, leaving you scratching your head and wondering why your receipt totals $600+ when you only meant to spend $30…how did THAT happen?!)

But even if you are able to buy low and score a fantastic deal on Black Friday or Cyber Monday, just about any consumer good you buy will be worth exactly HALF its price the moment you proudly carry it out of the store, thus negating the all-important second half of the equation—“sell high”.

It’s nearly impossible to sell used consumer items for more than you paid for them—heck, it’s hard to even GIVE some items away, let alone sell them!

I know shopping does not equal investing, and as an awesome Kung Fu Finance subscriber I’m sure you didn’t go too crazy on Black Friday anyway…(right?)  

But even so, I think we should kick it up a notch as we enter this perilous holiday shopping season.

So just in case you suffered a bit of momentary insanity and slipped out to buy some “stuff” this weekend, I want to stop for just a moment and channel the “other” Susan, Susan Powter (remember her?) and remind you to “Stop the Insanity!!!!”

Stop the Insanity!!!

That’s right…I am officially renaming “Black Friday” to Black BELT Friday!

(Hey, that’s got a nice ring to it!)

And “Cyber” Monday?

No way, no how…that is now MASTERY Monday—the day you turn your personal economy (the only one that really matters!) on its head and reclaim your money for YOU (remember, your money represents all of the value you’ve created in the world—you don’t want to throw it all away on junk!)

Instead of thinking about the kickoff of the holiday shopping season like the “average” person (because you most certainly are NOT average — you are a unique and independent thinker, and an awesome one at that!)…you are going to think about it instead like a kung fu master.

That’s right, Black Belt Friday, and Mastery Monday.

Followed by Tai Chi Tuesday and Warrior Wednesday!
(OK, perhaps I am getting a bit carried away…)  

But you get the idea…while everyone else is out shoppy-shop-shopping, YOU are going to be kung fu finance TRAINING in preparation for the final month of the year…your very last chance to brush up on your financial goals, check out your investment performance, and make sure you enter 2013 ready to ROCK instead of ready to cry.

Just think how amazing you will feel if you start off the new year in January 2013 feeling proud and thrilled and excited about all you have accomplished financially, instead of hung over and bloated with too much “stuff” you didn’t really want in the first place, terrified to open your credit card and bank statements?

I want the former for you, not the latter….amazingness, not abject terror!

Pride at how far you’ve come financially in 2012, not shame at how great you did all year, only to blow it in the final stretch. No way!

You are so close to the 2012 finish line…it’s important to finish strong.

It’s time to go all kung fu on December—the final month of the year!

It’s time to STOP being taken advantage of by the big retailers, big banks, big government, big everybody, and start taking your financial future into your own strong and competent hands…let’s get your finances firmly into the black (ink)!

Rather than succumbing to the holiday insanity, I want you to follow this little 3-step program of financial awesomeness today, on Mastery Monday:

Step 1: Get out your trusty Kung Fu Finance vision statement that you created earlier this year, dust it off, and take a good look at it.

Ask yourself:

• Does it still excite you?
• Does it still fire you up?
• Do you still want to be THAT person living THAT life of your dreams?

If YES, then by all means laminate your vision and put it someplace (or several places!) where you can see it and get excited on a daily basis!

If NO, then take another shot at it—maybe something has changed for you over the past year and you want to update your vision with some new things that excite you.

Work on this puppy until you are not just “happy” with it but until you are actually SO EXCITED about achieving it you walk around your domicile with a spring in your step and a smile on your face. That’s the mark of a compelling vision—one that will give you the kick in the pants that you will need when navigating the upcoming perilous holiday shopping season.

Step 2: Get out your trusty SMART goals that you created earlier this year, dust them off, and take a good look at them.

How are you doing? How is your progress? Are you taking small steps (or big ones) to achieve them?

THIS IS IT…the final stretch! You’ve got one more month…surely you can knock some of those out and start 2013 on a positive note!

Remember Will Smith… “when everyone else is sleeping, I’m working…”

Grasshopper that is YOU—whenever everyone else is shopping, you are working towards your goals!

Step 3: Realize that you are in a WAR (a war for your financial future and independence!), and create your “final stretch” battle plan (I will help you).

Ask yourself:

• How are you going to end 2012 richer than when you started it?
• How are you going to defend yourself against all of the “great holiday bargains!” that will come your way on a daily basis?
• What is your plan of attack?
• Or at least your plan of defense? (Sometimes the best offense is a good defense…what will you do?)

Create your 30-day plan for December—how do you want to end 2012 and enter 2013?

I will be working right alongside you—I’ve got lots of plans of my own that I can’t wait to share with you!

Here is a bit of help on your 30-day battle plan and mentality—it honestly helps me to think of all excuses and enemies like a giant game of Whack-A-Mole:

Whack-A-Mole==Fun!

Seriously, just try this.

Visualize each little mole as your excuses and YOU as the powerful almighty whacker—when you catch yourself thinking:

“I’m too tired” (WHACK!)
“I don’t feel like it” (WHACK!)
“I’d rather watch TV” (WHACK!)
“But all my friends are…” (WHACK!)

See how that works?     (And it’s fun!)

This works for so-called holiday “bargains”, too…

“Buy 2 plastic toys get 1 FREE!” (WHACK!)
“This sweater is HALF-OFF TODAY ONLY!” (WHACK!)
“I’ve always wanted a Tiffany blue KitchenAid mixer even though my white one is just fine” (WHACK!)
“Buy Now! $0.05 wine if you buy one bottle at full price!” (WHACK!)

See how fun that is? I love whack-a-mole. (Someone in London even invented “Whack-a-Banker” awhile back…I love that, too!)

Whack-A-Banker...I could get into this!

It’s time to take back Black Friday, Cyber Monday, and the entire month of December…your loved ones don’t want “stuff” from you anyway, they want your love and attention.

Please let me know what you think of Black Belt Friday and Mastery Monday in the comments, and let me know how I can help you with your battle plan!

I’ll leave you with Bruce Lee’s version of whack-a-mole, from Enter the Dragon…watch what he does to each new little “mole” who dares to pop up in front of him!

http://www.youtube.com/watch?v=GZ9e3Dy7obA

To your financial success,
—Kung Fu Girl

Happy Thanksgiving to those of you in the U.S., and a happy thankful Thursday to my dear international readers! I hope you have a wonderful holiday (or day) filled with gratitude and love.

I have a little gift for you as my way of saying thanks for being such a loyal reader and awesome part of our Kung Fu Finance community of investors!

First, a happy announcement: I hired an amazing company, enfusionize, to bring the Kung Fu Finance website and newsletter into the 21st century and to help me provide better service to you, so be on the lookout for some upcoming enhancements soon!

(No more broken links! No more unchangeable small fonts! No more ugliness! Hip, hip, hooray!)  

Next, I created a PDF document for you, with huge thanks to Rick Rule and Sprott Global, of Rick’s top questions to ask these junior mining CEO’s when interrogating (er, I mean “interviewing”) them, and it’s also a terrific reference to have when thinking about buying most any new investment — I hope you like it and find it useful!  (This is a first draft, but I wanted to get it out to you ASAP!)

Finally, I had Rick’s first keynote speech from the recent SF Hard Assets Conference transcribed and I hope you find that useful and entertaining, too! (Many thanks to Rick and the awesome team at Sprott Global for giving me permission to share it with you!)

(I also sat down with Rick for a separate interview on Day 2 and will have that to share with you shortly.)

Please let me know what you think about all of this in the comments!

Have a wonderful holiday (or thankful day) and I will see you on Black Friday (doesn’t all of that shopping sound grim? I know it is called that because it’s the one day of the year that helps the retail sector get “into the black” instead of “into the red”, accounting-wise, but black makes me think of the grim reaper…which is actually not a bad analogy, come to think of it!). Instead of hitting the sales in your local mall, maybe you will find a great junior exploration mining company…they certainly appear to be on sale!)  

Without further ado, here is Rick Rule…Bear Markets are Best!

http://www.youtube.com/watch?v=P6ZfTuak8gQ

(With apologies on the less-than-stellar audio quality…I think it’s time to upgrade my trusty iPhone!)

Good afternoon ladies and gentlemen.

My topic is to discuss “Bear Markets are Best” and I think that I can make a common sense case to you that this is true. It’s a pretty straightforward case, I think…most shoppers want to buy goods on sale. I think it’s appropriate that this conference, this setting, this stage, this speech takes place in proximity to Union Square, the great retail shopping district of San Francisco.

And at least for the ladies in the crowd, and this may sound like a sexist remark when I’m actually trying to flatter you, the people who have the most shopping experience, but I want to ask the ladies in the crowd, if you were walking around Union Square and you saw a sign that said “Full Price!” all the time and there was a sign across the street that said “Goods on Sale!”, which sign would attract you?

Would it be the bear market sign or the bull market sign?

My wife today, came back, having been to one of the stores around here, with a wonderful jacket and skirt suit, that she bought at a Union Square store.

My wife is vicious. I feel sorry for the merchants when she goes into the store. She looks like a pussy cat, but do not underestimate her…she is vicious.

She came back with this wonderful skirt and jacket, a suit. And she said she paid $40 for it, this suit that everywhere else would be $200 or $300.

So ask yourself, as you think about the talk I’m going to give, whether or not you would prefer to buy that suit for $40 or for $200. If the answer is $40, then you have already heard the best part of my speech.

But I know that you all feel more uncomfortable now, when it’s time to buy, than you felt in 2010 when the analysts here were abundant and it was time in fact to sell.

Show of hands, how many people here in the next 5 years would like to buy a better house than they live in now? (many hands raised) Thank you.

How many here, figure in the next 5 years, you are going to buy a car? (hands raised)

This week, how many of you are going to go buy food or clothes? (all hands raised)

Thank you, thank you.

Because the way you look at buying financial goods, stocks and bonds, and the way you look at buying other goods, are very, very, very disconnected.

And I would suspect that most of us are relatively good at shopping for cars. Pretty good at shopping for houses. Very good at shopping for food and clothes, and lousy at buying financial assets.

Everything else we buy on sale!

Do you go to an automobile dealer and say…look, this is an upscale crowd, so say if you want to buy a Lexus or something like that, do you go to an automobile dealer and choose a Lexus for $70,000 and then say to the dealer, “do you prefer $80,000?”

Does anybody do that? (laughter and “no’s”)

If you are going out to buy a house. Would you rather buy a house in San Francisco in 2012 or would you rather have bought that house in 2006?

Anybody have an answer?

Goods on sale! Goods on sale!

And what everybody needs, and everybody knows this intuitively, but we forget. Bear markets, what a bear market is, is a sale. Which is specifically why bear markets are good.

Now I’m going to talk about our behavior, our collective behavior in two different time periods. And during this discussion I want you to bear in mind a simple fact, or a couple of simple facts about human behavior:

1. The first fact is that we like positive reinforcements in our decisions. We like, in addition to making money, we like to feel like we’re smart. We like to feel like we’re successful. We like decisions that have worked out well for us.
2. The other thing is that our, how would you say this, our anticipation of the future is set by our experience in the immediate past.

This is very important. I want you to remember these two things.

Because it’s a very, very, very easy thing in financial markets to confuse a bull market with brains.

The price of gold goes up. The price of gold stocks go up. We buy a couple of gold stocks, they go up. We think that happened because we were smart.

That’s not what happened. And, of course in a bull market, if you buy a stock, and it goes up, and then you sell it, you are inclined to anticipate success in the next position, because you had success in the immediate past position.

And you feel good about the market. You feel good about the position of your prices.

Bear markets by contrast are different. You buy a stock for a buck, it goes down to 70 cents, you get angry, you sell at 70 cents. And you are leery to redeploy capital having first of all lost money, and secondly you felt bad about your decision-making process. So in fact, bull markets, which are dangerous, where goods are marked up, are the times where we feel most aggressive and bear markets when the market has less risk, are of course when we feel worse and we are, in fact, the most cautious.

Everybody in this room remember how smart and how aggressive we felt in 2010? Remember that? Very, very, very heady feeling. This exhibit hall probably was twice the size and had half of the empty seats. Very bad signpost.

This year, the speaking hall now is half the size and has lots of empty seats…pretty good sign!

One period which I like to talk about now in San Francisco and you’ll understand why in a minute, was the juxtaposition between that market high in 2006 and the cataclysmic market bottom in 2008.

How many people remember 2006? How many people were here?

That was probably the most enthusiastic San Francisco Hard Assets conference in history.

I gave a presentation where there were probably, I don’t know, 1500 or 2000 people in the conference hall.

I mean it was odd, I felt like a rock star or something!

And, what was interesting about that is before I spoke, and this is maybe too much information, but I had a little too much coffee.

As a consequence, when I got off the podium, I got off the podium with some enthusiasm, and proceeded to the men’s room.

And the ebullient feelings among the participants and the aggression of the participants was exemplified by virtue of the fact that 30 people, hopefully all men, followed me into the men’s room!

They formed a couple of concentric semi-circles behind me as I was going about my business. They were asking me, literally, they were asking me questions, and if anything were more private than the function I was engaging in, I would have needed to go to my room!

It was wasn’t that these were bad people. It wasn’t that these were people who wouldn’t have normally respected my privacy.

It was really the function of a bull market. And the animal spirits…that might be the wrong phrase to use in San Francisco…overwhelmed their sense of social decorum.

You contrast that with 2008, you had a psychotic break in the market. Never mind people didn’t follow me into the men’s room; people didn’t even follow me into the speaking hall! I think to the time of 2008, when without too much difficulty, we identified 19 companies selling at 50% discounts to net-net working capital.

Thank about that, there were 19 companies that were selling for half cash. And people were unwilling to buy them!

Now, if you walked out the front door of this hotel, you know, on Mission, and somebody came up to you and said “Listen, I’d like to give you a dollar bill for those two 25 cent pieces that you have.”

The correct answer is “Yes”. “Yes, I’ll do that for you! A dollar for my 50 cents. I’m there!” That’s what a bear market is.

In 2006 when the value proposition was very different, “I’ll give you 50 cents for those two dollar bills of yours!”, everybody was eager, so eager they followed me into the men’s room.

In 2008, when in fact goods were on sale, and I had something intelligent to say, not that I wasn’t kind of intelligent in 2006, but I couldn’t have made you any money, there was absolutely no interest, whatsoever. But let’s bring it forward a little bit.

In 2010, the level of the companies that are exhibiting here, and by level, I mean the share price, or market capitalization…was substantially higher than it is now. 50% higher, 60% higher, 100% higher?

What happens to an asset? To a decent asset? Where nothing with regards to the asset changes, and the price falls by half?

It gets precisely half as risky!

If nothing else changes but the price falls by half, it’s half as risky.

And yet, this is regarded by speculators as a bad thing. Are you with me?

We need to shop for financial assets the same way we shop for every other kind of asset. It is unique in terms of our response to financial assets.

One of the stories that I like to tell so much, and those of you who have heard it will have to endure it but those of you who haven’t will perhaps look at this as an illustrative story.

Our old Sprott offices, our old offices in California, were located in a Southern California shopping center.

I will tell you a story of an apocryphal Southern California couple, who, being efficient shoppers, the wife would go to the supermarket, while the man would come to our offices. The wife goes into the super market, a Von’s Market, and she sees a brand of tuna fish, a good brand of tuna fish that her family is familiar with, a good brand of tuna fish, and it is selling for $2.00 / can, which she ascertained was a fair price and her family likes tuna fish so she bought some tuna fish, and put it in the car.

Her husband came to our office and there was a stock he had been familiar with from his newsletter and it was selling for $2 per share, which he ascertained was a fair and reasonable price so he bought some stock for $2 per share, and they both went home reasonably satisfied with their purchases.

They came back two weeks later, and repeated the same process…the wife went to the store, and the same can of tuna fish was $4 per can…it had been raised in price 100%. And she was outraged! She went and gave the store manager a piece of her mind, and she was just totally disgusted, and managed finally to buy herself some chicken, to substitute for the tuna fish.

The husband of course came to our office and saw that nothing had changed with his stock except that the price was now $4 per share, and he was delighted! He was so happy he bought himself another 1000 shares! So they both get in the car, she’s disgusted, he’s elated.

They come back two weeks later, and she goes to the store and she finds out that all of the other housewives had the same reaction to this price-gouging in tuna fish, and this store is buried in tuna fish, nobody is buying this tuna fish, they are stacked from the floor to the ceiling with goddamned tuna fish, and so they mark the stuff down to a buck a can…and she’s delighted. She buys so much tuna fish that their car is riding like this (hand movement to show weighted down trunk of car).

The husband of course comes to our office and sees that the shares that had gone from $2 to $4 are now at $1, and in disgust, he sells it all.

Who made the right decision?

The woman who bought the goods on sale!

And what is a bear market?

A bear market is very, very, very simply goods on sale. What we all have to understand is that the cause of a bull market is a bear market, and the cause of a bear market is a bull market.

That’s the way things ebb and flow. Markets actually work!

Let’s look, as an example, at the U.S. natural gas market over the last ten years. Ten years ago, the price of natural gas was over $10 per million BTU, and we were standing on liquified natural gas (illegible) to import gas from other parts of the world.

What happened? Exactly what you would think would happen when you were in first year economics…the high price reduced demand. People found a way to conserve—as an example they would substitute coal for natural gas and generation of power, and the very high prices, the high margins that existed for producers, caused people to go out and find new ways to drill for natural gas. So supply increased, demand fell, and what happened?

The price fell accordingly.

Bull markets beget bear markets, and bear markets beget bull markets.

The bull market that is in front of us is being caused by the bear market that you are enduring today.

They say you make money in markets by buying low and selling high, but everybody wants to be a contrarian only when it’s popular!

It doesn’t work that way. If you are going to sell high, you have to remember to buy low.

Now we’re going to go through the thesis as to how we do that, but I want you to remember, in the beginning, that bear markets are what cause bull markets.

What happens, people tell me in markets like this, if these markets *don’t* come back? How do we know that this is a rational expectation as opposed to aberrant financial behavior?

And I think you have to look at the underlying investment thesis.

This is an important thing to do anyway, of course…I digress, but one of the mistakes that most of us make is that we misunderstand what a market is.

Many people think that the market is a source of information. And in the short-term the market certainly isn’t a source of information, because the information that’s displayed in the market is the opinion of the mob.

It’s interesting to me that many, many, many smart geologists I know second-guess themselves in penny-stock markets based on pricing levels in stocks that were established by 10,000 people who know way less geology than they do!

The market isn’t a source of information, it’s merely a facility for buying and selling fractional ownership of businesses.

What the market gives you is price information, and price information only has utility if you understand something about the value.

It’s the discrepancy between price and value, which is where you make money!

If you misinterpret the signal that the market gives you, the price information, and allow your decision to be made by the mob, you are my rightful prey!

It is only the discrepancy between price and value that matters.

So let’s look at the underlying thesis. It is my belief that we are about midway through, and I can’t tell you whether that’s accurate, but it is my belief that we are in a natural resource bull market.

I believe that we are in a cyclical decline in a secular bull market.

And let me defend that thesis:

Markets happen for two reasons: supply and demand.

Supply

Let’s look at supply first: these are capital-intensive cyclical markets—periods of high prices bring on more supply slowly because of the capital that is required to develop productive capacity, and because of the political constraints of adding to supply—permitting, taxes, political uncertainty.

We are living, today, in the natural resource business, on investments that were made in the 1950’s and 1960’s and 1970’s.

We had in this market, a tremendous bear market that lasted from 1982 – 2002, a twenty-year bear market that constrained investment in natural resources of all types around the world. And remember that these investment constraints lead to long-term declines in supply.

We all know that you can’t stand on the lip of a gold mine and throw in fertilizer and water and have the mine grow more gold.

Every day you produce a mine, the mine gets smaller, and so you constantly have to look for new deposits, and build more productive capacities, which for 20 years we did not do.

We are supply-constrained, and the supply constraints continue today. Supply constraints such as credit markets…although there is plenty of credit in the world, it’s all short-term credit. And increasingly, the credit that’s offered goes government→big bank→ government. It doesn’t get outside of that nice little circle to do things like build copper mines. I think it’s a truism today that if you went to somebody like Deutsche Bank and asked them for $4 million to build a copper mine, if they could raise the $4 million they would take it, but they would keep it—they wouldn’t lend it to build a copper mine.

So we have supply constraints as a consequence of credit.

We have increasing supply constraints because governments around the world are responding to higher commodity prices by demanding higher social and political risk from resource activities— higher taxes, which is a different way of saying more theft from the center against investors, and finally there is a threat of resource nationalism, because it’s not enough to steal 50% of the cash flow—we’ll take it all, thank you!

These are all supply constraints that will have a serious long-term impact on markets.

Demand

On the demand side of the equation, I think that the message is also longer-term bullish, and this is a very, very, very important thesis. Economic leadership in the world is changing slowly, from the stagnating Western economies where people are becoming slowly less free and rapidly less rich, to emerging frontier markets where people are becoming slowly more free and as a consequence, rapidly more rich.

Just as markets ebb and flow, political cultures ebb and flow. And it’s a truism that countries that can’t get any worse generally get better, and a country that can’t get any better, sadly gets a little worse.

What’s important in this context is that 3 1/2 billion people at the bottom of the demographic pyramid are for the first time in history becoming slowly more free and rapidly more rich. And what’s important about that in the context of natural resources is that as poor people get more money, the goods that provide utility to them are made of stuff.

All of us have too much stuff. If we get more money it doesn’t impact on our resource markets much because we buy some little gadget from Apple or we load 1000 songs on it and give it to a grandchild, but there’s nothing in that that impacts resource markets.

But when poor people get more money, they take the per capita calorie consumption in their family from 1500 calories to 2500 calories, something I’ve done, too (laughs), but that’s not something we should do. But that’s an example…as calorie consumption increases energy consumption increases, and people might upgrade from an adobe home to a cinder block home, or they may change out a thatch roof for a steel roof.

The point is when poor people become more rich, the stuff that they buy is made of stuff. And so on both the supply side, as a consequence of twenty years of under-investment, and as a consequence of constraint from capital and politics, the outlook for resources is good.

On the demand side, as a consequence of 3 1/2 billion people striving to have a life like yours, and increasingly able to afford to compete with you for resource commodities, the demand is strong.

What happens when supply is weak and demand is strong? Prices increase—that’s a bull market, not a bear market.

The Bullion Market

And let’s talk about this same thesis with regards to bullion, because you could argue that the real prices of precious metals have not been in a bear market at all, but they’ve been in a bull market. Why would this bull market continue?

Let’s talk about that for a little while. Did anybody here watch the Presidential debates and listen to them?

I defy, but maybe you can do it…I defy anybody who listened to the Presidential debates NOT to be a bullion bug!

Why? When I listened to those two things, I can’t describe them as people, running for President or Vice President, either thing…I don’t know if any of you were struck by how little either of them had to say that made sense!

They were very good at evoking emotion, and both very good public speakers, I was actually impressed because I had a low expectation of Romney’s performance in terms of public speaking…I was impressed by how well they were able to speak to emotion.

The problem was that neither of them could have passed a class in third-grade math. Nobody talked about numbers!

I want you to think about this—the U.S. Congressional Budget Office (CBO) has told us that the on-balance sheet liabilities, and I’m just talking at the federal level of the United States, not worldwide…the on-balance sheet liabilities of the U.S. federal government are between $16 and $17 trillion.

Those of you who have a pen or pencil and paper, do this for me…write down “16” and a comma, and twelve 0’s. ($16,000,000,000,000) !!!

People throw around “trillions” the way people used to talk about “thousands”. A trillion is a LOT!

OK the ON-balance sheet liabilities are $16,000,000,000,000. The OFF-balance sheet liabilities are somewhere between $65,000,000,000,000 and $100,000,000,000,000. That’s “TRILLION”.

This. can’t. be. serviced!

It can’t be serviced. And just in case you don’t feel bad enough about this, here in the People’s Republic of California, we’ve managed to do the same thing on a grander scale per capita. And those of you who live in the Bay Area cities of San Francisco, Oakland, Vallejo, San Jose, Stockton…make California’s finances look pretty good!

So, it seems to me, given that our capacity to earn relative to the obligations that we have to service…that we have two choices:

1. We can default, or
2. We can default.

And that’s in the United States. The U.S. dollar of course is the strongest currency in the world. My friend Doug Casey says this about the U.S. dollar—he says “this is an I owe you nothing”…it’s a promise to pay.

As distinguished from the euro, which he says is a “who owes you nothing?”

As opposed to the yen, as opposed to the renminbi…

There are two points to this:

Is that around the world, the obligations of the center are beyond the ability of the individuals to service, and where they aren’t, the countries are engaged in competitive devaluations, deliberately devaluing their currency to maintain domestic employment and domestic demand.

Gold, silver, and platinum bullion are the only commonly accepted mediums of exchange that aren’t promises to pay…they constitute payment in and of themselves. They are currencies that don’t have a domestic constituency which favors devaluation, because if you devalue them you do nothing of use to the political class, you don’t encourage employment or anything like that.

So from my own personal point of view, mathematical expression is a truism, and you cannot add a column of negative numbers and come up with a positive, no matter how hard you try in the Presidential debates. You cannot do that.

And the fact is that bullion is the only commonly accepted medium of exchange that is simultaneously an asset without being somebody else’s liability, and is a medium of exchange that has no domestic constituency for devaluation.

Those things tell me that the bull market in gold and silver and platinum, the bull market in bullion, is very, very, very much intact.

Some of you may disagree with me, and honestly I hope you’re right. One of the things, well I don’t know if it amuses me, but one of the things that interests me and terrifies me is when I come to a conference like this and some people stand in front of you and sort of rub their hands with glee in anticipation of $5000 gold!

I hope I’m wrong…gold is catastrophe insurance.

The set of circumstances that would cause gold price to rise dramatically are sets of circumstances that would indicate a very sudden drop in people’s living standards and I like my living standards—I don’t want to experience this. But I certainly feel more comfortable myself owning bullion than not owning bullion, and I suspect that in this crowd, many people feel as I do.

So, what I hope I’ve been able to discuss in this part of our talk is that I believe that a bull market in natural resources is very much intact because of factors related both to supply and demand. And I also believe in the gold and silver bullion sector that a bull market is very much intact because it competes as an asset class against other asset classes that are actively trying to lose, and they will succeed.

Certainly the U.S. treasury market is deeper and more liquid than the bullion market, and certainly the U.S. treasury market is succeeding as we speak, because it is the least bad alternative among the fiat currencies, but when I look at the value proposition offered by U.S. treasuries, I think it’s best summed up by Jim Grant who described U.S. long-term debt as “return-free risk”.

The idea that a long-term treasury is going to pay you 3% while our currency is depreciating at 4.5% compounded, and we have proved mathematically that the operations of the federal government, at least I think we have…$100,000,000,000,000 on-balance sheet and off-balance sheet liabilities make it insolvent…the idea that I would take a below-inflation interest rate from an insolvent borrower, seems to me to believe that my alternative over time, which is bullion, is a preferable alternative.

And I suspect that there are people in the crowd who agree with me.

Why have I gone through this enormous digression? Because I believe that the set of circumstances that we are in today have a parallel in an earlier bull market that some of you might have experienced.

How many of you were gold investors in the 1970’s? Gold and silver investors? Great. You will remember fondly that bull market when the gold price went from $35 / oz. to $850 / oz., a truly spectacular bull market, a bull market on steroids. Of course it came from an oversold market, a government-controlled market, a price-controlled $35 to $850, but what I want you to remember, in addition to the fact that gold did so well, was in the middle of that market in 1975, we had a cyclical decline in a secular bull market.

Gold had risen, from 1970 at $35 / oz. to an early-1975 $200 / oz., pretty good move, a 6-bagger. And in 1975, gold fell from about $200 / oz. to about $100 / oz., a 50% decline in a secular bull market.

And many people who had the thesis about gold right in the 1970’s lacked either the cash, or the courage, or both to stay the trade. They got shaken out of the gold bull market from $200 to $100 and they missed as a consequence of that, a subsequent move from the end of 1975 at $100 / oz. to $850 / oz. in 1981. They missed an eight-fold move in six or seven years as a consequence of lacking either the cash or the courage to stay the trade.

It is my belief that what we’re in right now is a cyclical decline in a secular bull market. It is my belief that what we are experiencing as we speak is a sale.

It is my intention to take advantage of it, and it is my hope that some of you take advantage of it, too.

So, I hope what I’ve done is made the case…now I’m going to try and tell you, not what you should do about it, but rather, what I’m doing about it, and you can decide from your point of view if the strategies that I’m employing on behalf of myself and the clients of Sprott are strategies that work for you.

Firstly, I believe in establishing a core portfolio in bullion, or in certificated or bullion-related products. We own (my wife and I) a bit of physical gold and silver, we own a LOT of Sprott Gold, Sprott Silver, and soon we’ll own a lot of Sprott Platinum.

While of course I would prefer that you buy a certificated product that says “Sprott” on the top of it, what I want you to do is buy some gold or some silver or some platinum and PRAY that you don’t make a whole bunch of money on it. Own it for insurance purposes. But own it.

Please, please, please own it.

When you compare it with other sources of liquidity it will be more volatile, but at least it will be worth something. It can’t be counterfeited. You can’t quantitatively ease gold or silver or platinum.

Does anybody know what Quantitative Easing is, actually?

It’s counterfeiting!

I guess it isn’t counterfeiting if they have the right to do it, but it’s counterfeiting. Anyway, I’ve beaten this to death, but the groundwork of a personal portfolio, I think, has to include some bullion.

I also think, and some people will be happy to hear this, I’m actually not, but I think the bear market in the juniors has about run its course, which is unfortunate, I’d like to say it will last a little longer, but I don’t think it’s going to FEEL like it’s run its course.

I think that this junior market is bifurcated; I think that some substantial number of the juniors in this market are going to go to their intrinsic value, which is zero. And I think this washout is going to occur in the next 12 – 18 months, maybe 24 months, and I think this is a consequence of the fact that 60 – 70% of the juniors in the market have no value whatsoever.

It’s going to FEEL like the overall market is in a bear market, but my suspicion is that the best 10% of the juniors have already bottomed and are turning higher.

That doesn’t mean that they couldn’t go lower before they go higher again; it also doesn’t mean that they couldn’t be negatively impacted in the context of a psychotic break like the one we enjoyed in 2008.

But my belief is that the better juniors have bottomed and are heading higher. It will feel like and they will occasionally be dragged sideways or down as a consequence simply of the weight of the rest of the juniors. This means, as an example, that stock selection, as always, is paramount.

And by the way, I think this cleansing of the junior market is extremely, extremely beneficial.

John Kaiser, a good friend of this conference, showed a few months ago that over 50% of the companies on the Toronto Stock Exchange Venture Exchange shared three common characteristics:

1. They were selling for less than $0.25 (by now probably selling for less than $0.20)
2. They were selling substantially below half of their 52-week highs
3. And they had less than 6 months’ left of working capital, and that was 3 months ago, and they haven’t done any financing since then

That would suggest that roughly half of the exchange is headed towards the cliff…and that’s a really, really, really good thing!

We studied a fair number of these $0.25 stocks at Sprott, and one of the things we determined to our horror, is that the median of these penny-dreadfuls had general, administrative, and listing expenses that were 60 – 70% of total expenditures, meaning that of the money you put into these companies…if you put a dollar in, only $0.35 went into the ground!

That’s no way to participate in exploration with sense. So, the good news is that these things are going to go away. And good riddance.

The bad news is of course that they constitute the bulk of the exchange, so them going lower is going to make it feel like the whole exchange is going lower…but nothing could be further from the truth.

Remember we learned earlier, that what causes a bull market is a bear market, and we are in a bear market, and the simple fact that we come off of bear market pricing will give this market some momentum.

One thing that will happen is a dead cat bounce. We are approaching a period right now, tax-loss selling in December, where we have that final, spasmodic excuse to sell. But we are already experiencing this in this market, seller’s exhaustion, which means when stocks go down, they go down on such low volume that it doesn’t indicate anything about the market, it just indicates an absence of a bid.

This is indicative of the end of a bear market; this bear market will tail for a long time, because unlike earlier bear markets, this is going to be a bear market like the ’91-’92 bear market, where many penny stocks go to their intrinsic value, which is of course, zero.

But I hope I can make a case to you in the time I have left that there is a class of junior stocks that if they haven’t bottomed, first of all certainly offer value, and will certainly trade higher in the next 2-3 year time frame.

One thing you are starting to see, you will see with much more earnestness in the next 12 – 18 months, will be takeover and amalgamation.

As Brent Cook points out in his wonderful speech, every year we produce a carbon trend in the gold business, but we don’t replace the carbon trend, and every year, we consume a bigger canyon of the copper business, but we don’t discover a bigger canyon every year.

If you look at the cash-on-cash returns of the major gold mining companies in the last 20 years, they’ve been truly spectacular destroyers of capital—they have not been efficient explorers, they have not been efficient developers.

And the truth is, these companies have to acquire ounces to grow, they can’t grow organically.

They have proven that conclusively. I wish they could, they wish they could, but they can’t.

Good gold deposits are scarce, and when good gold deposits get discovered, they get taken over at a premium.

And there are several good gold deposits (ineligible) in the juniors now. Specifically, my belief is, the leadership in the market for juniors is going to shift from the institutional investor who has dominated the market for the last 15 years to the industry investor.

Institutional investors are still experiencing disintermediation, which is a different way of saying, “money is leaving”. When money leaves a mutual fund, a mutual fund manager can’t be a buyer, he must be a seller. And so leadership can’t come from sellers, leadership will come from buyers.

And buyers will be major and intermediate size mining companies that are looking to grow.

It is also my thesis that the type of company that they buy has changed, and will change, and this is important for you to know.

The acquirers five years ago were looking for increased leverage to the gold price, they were looking for marginality, and they certainly achieved their goal…they became extraordinarily marginal.

I don’t think that’s what they’re going to be looking for—they are going to be looking for financially accretive transactions. And this market, because of its pricing, offers them up.

I believe, and specifically we are screening at Sprott, for developmental stage companies that offer three common characteristics:

1. We are looking for enterprise value and front end capital costs that are combined, less than the Net Asset Value (NAV) established by the Preliminary Economic Assessment (PEA)
2. We are looking at Internal Rates of Return (IRR) certainly above 25% but preferably above 30%
3. We’re looking at payback of capital in three years or less

This is the first time in my life that these type of values have been on offer in the junior mining sector, and I don’t think that this opportunity will last more than two years.

It’s important that you understand this because the values that are established in the PEA are not perfect values, but they are the first 3rd-party values that get established in the business. And understanding the relationship between a financially accretive transaction and what you pay for, the initial parameters in the PEA, in the two years that pass approximately between the PEA and feasibility study, the bankable feasibility study, a couple of things happen:

First, usually these deposits get drilled more thoroughly, so the tons go up and often the grade goes up, and certainly the certainty associated with tonnage and grade, and the certainty associated with the costs and capital expenses will go against an increase.

But the other thing that happens is the bankable feasibility study becomes third-party validation and it becomes possible for the outside directors of a potential acquirer to be immediately covered to make the acquisition.

I’m telling you this because the arbitrage between preliminary assessment and bankable feasibility study is one of the surest traits in the junior mining industry.

How many people here own Canplats a few years ago? Not very many of you. At least I can’t see your hands. Canplats, thank you. Canplats was a classic example. In the preliminary economic assessment stage, the chart of Canplats looked like the electrocardiogram of a corpse. It went absolutely nowhere. For two years it tested me. I bought it and bought it and bought it… Sometimes I thought, listen, if you are the only guy that is right, you aren’t right, you are probably wrong. I was going against my own thinking and I was taking my cue from the mob.

But what was interesting was when they got the bankable feasibility study back, one of the outside directors, for want of a better phrase, had their ass covered legally.

It was about 90 days, after the bankable feasibility study came out, that the first takeover bid came, then the second takeover bid, then the 3rd takeover bid.

And that’s what I think is going to happen here. These companies that are financially accretive to acquirers, that have a low capital intensity, high risk, and high payback, will get taken over in the next two years. And the trigger will be the bankable feasibility study.

So the first thing that I think you need to concentrate on in your portfolios is, if you will, the lower risk junior strategies, note I didn’t say “low” risk.

The lower risk junior strategy, will be speculating on mergers in the arbitrage between preliminary economic assessment and bankable feasibility study.

This is the part where I hook you on my workshop… Tomorrow morning at 7:40 I’ll tell you more about this, and if you are very, very nice to me, I will even name some names.

The second thing, and this is much more speculative from my point of view, but I think it’s true, is the one leading the discovery cycle…(illegible) There is nothing (illegible).

Everyone says this is a bad market now, but look at GoldQuest— 6 cents to 2 dollars. Reservoir Minerals— 30 cents to 3 dollars. Africa Oil— 80 cents to 10 dollars! This is a market that rewards results, and this market has been starved for results.

For 10 years, we’ve spent money exploring. And it takes 10 years to get into a discovery cycle. And we’re in a discovery cycle. We will be surprised in the next 12-24 months with regards to discovery. And we’ll be particularly surprised because all of the hope will have been weeded out of us because of the bear market.

Finally, and I notice that my time is almost up. A couple of commercial announcements. I’d like all of you to come by my booth, which is 421. This year, like every other year, we have exhibitor stock charts. We have a stock chart for every exihibitor here. Given that we’re in a bear market, most of these stock charts look like the topographic map of a ski hill, from the upper left to the lower right, but they’re worth having.

And finally, I am doing a workshop tomorrow morning, which I would like to see as many of you as possible at. It’s at 7:40 and there I will talk to you about how to analyze, how to interrogate, how to interview the management teams at the booths here, which I think this year will be an extremely profitable endeavor for you.

I hope I have made the case that bear markets cause bull markets, and that bear markets are nothing more than “Goods on Sale”.

And I hope that you take advantage of the sale.

Ladies and gentlemen, as always, I thank you very much…

It was just under a year ago when I wrote my very first report on the SF Hard Assets Conference, and I must admit I’m feeling a little nostalgic!

I love the San Francisco Hard Assets conference.

As you know, I frequent a lot of investing conferences each year — in the past 12 months I’ve attended:

• SF Hard Assets Conference (San Francisco)
• SF Money Show (San Francisco)
• Agora Financial Conference (Vancouver, Canada)
• 3 Casey Research Conferences (Argentina, Florida, and California)
• Stansberry Research Alliance Conference (Georgia)
• SovereignMan Conference (Chile)
• FreedomFest (Las Vegas)
• Plus several other Internet Marketing conferences and mastermind meetings around the world (Underground in Washington, DC, Traffic & Conversion in Austin, TX, AwesomenessFest in Mexico, and many more!)

So, I guess you could say I am a bit of a conference connoisseur…I love them!

And in all honesty I love my life! I love traveling, love attending these conferences, love reporting on them for you, and each one has something special that recommends it and is why I attend.

(And there are many more that I would love to attend, but I do actually need to get some work and writing done, too!)

But there is something special about the SF Hard Assets conference…

Maybe because it was one of the first investing conferences I covered for Kung Fu Finance a year ago…

Maybe because of the ever-present beautiful “booth bunnies” at James Dines’ booth who single-handedly bring down the average age and simultaneously up the female quota at the event…

Maybe because of the fascinating mix of honest, excellent junior mining companies headed by serially successful CEO’s contrasted with the slightly sleazy, slimy, shameless promoters who care only about how quickly they can line their pockets with your money…

(Yep, I even love the promoters, particularly since I am finally learning thanks to Rick Rule how to properly interview the CEO’s and IR guys and to separate the wheat from the chaff, and YES, I will teach you, too!)

Or maybe it’s because of the fact that I now recognize so many fellow investors and speakers that it’s like visiting with old friends, even though we only see each other from conference to conference.

(Or maybe I’m just a conference junkie!)

But whatever the reason, the SF Hard Assets conference rocks.  

And the best part?

It’s FREE!

Yes, it’s a pitch-fest…but that’s the point of the conference—to allow you to talk one-on-one with the CEO’s of the various mining companies who are battling for your investment dollars.

It is so much fun to play “which one of these is not like the others?” (remember Sesame Street? see below…) and wander from booth to booth hearing the vastly different caliber of answers to your questions.

Plus, it is the hands-down best education you will receive on investing in hard assets, anywhere, for the price…did I mention, it’s FREE?

(Gee, maybe I should work for the SF Hard Assets Conference team! I swear I’m unaffiliated, but I can’t understand why more people don’t come to these…they are so much fun and nothing beats getting all of this info live and in person.)

However, the sad truth is that many people do not get out of their comfort zones and attend. I was shocked to see such a small crowd this year. I know the junior mining sector has had its, shall we say, “challenges” over the past two years…but I was still surprised at the lack of attendance.

To me, that spells a possible buying opportunity…and it does to Rick Rule, too, who gave two keynote speeches this year (which yes, I will share with you shortly—thank you Rick!).

The first was entitled “Bear Markets are Best”, and I will provide the audio and transcript of that speech for you soon (again, thanks very much Rick!).

To sum up, Rick’s main point is that bear markets are NOT bad (particularly when located in the midst of a secular BULL market)—they are your friend, because you can pick up quality assets on sale…the very essence of “buy LOW”.

We do this when buying a car, or a house, or cans of tuna fish (Blue light special! 10 cans of tuna for $10!) but for some reason when we buy financial assets we tend to want to buy them when they have already gone up tremendously in price.

Rick believes we are in the midst of a cyclical decline in a secular bull market…which spells a buying opportunity!

Other insights from Day 1:

• The “contrarian” award this year goes to Paul van Eeden who said that the value of gold based on his analysis is…$800-$900/oz. (note that’s not the price of gold, but what he feels the value of gold is.) Needless to say, he was in the minority at this conference!

• Paul also wins the award for “most optimistic” based on his statement that we have an “enormous available labor pool” here in the U.S., which he sees as a big positive (Talk about your glass being half-full…The rest of us call that a “high level of unemployment”!)

• There was an attempt to reach out to women investors with a special “Investing By Women For Women” session run by Bryce Bradley, investment banker from EuroPacific Canada, and Lindsay Hall, Commodities Broker from RMB. (Yours truly may join in for the upcoming Cambridge House conference in Vancouver…stay tuned!)

• James Dines is still bullish on gold and silver and sees China’s renminbi increasingly replacing the dollar in Asia. He’s also near-term bullish on U.S. real estate but says to avoid sea-level seaside real estate (Hurricane Katrina, Sandy, etc.)

• The excellent Louis James of Casey Research gave his expert view on the market and said that his premise is very much that gold is going higher, and that we are in an even more interesting place than we were last summer…but you need to search for quality, and you need to see numbers—preferably a 30% IRR and no more than a two-year payback (and these are tight requirements that he said he borrowed from Rick Rule…generally anything over 20 – 25% IRR is pretty good). But you can get companies at deep discounts to engineering values…it’s a great buyer’s market! You have the luxury of being selective…he brought up Warren Buffett’s quote, “Investing is like baseball with no called strikes”.

• Peter Schiff spoke as well that evening and again at a keynote on Saturday (Day 2)…he’s written a new book The Real Crash: America’s Coming Bankruptcy…How to Save Yourself and Your Country (Gee, what do you think Peter thinks is going to happen?)     I’ll report on this in much greater detail in the coming days.

All in all, my synopsis is that if you are interested in hard assets, the vast majority of speakers (I would go as far as to say “every single speaker except Paul van Eeden”) believe that gold and silver are going much higher in the years to come, and the dollar is eventually toast.

Here is a chart from James Dines that illustrates this (with apologizes for the less-than-stellar quality, and with thanks to James Dines):

Looks like James Dines agrees with Peter Schiff!

If you have some room in the speculative portion of your portfolio, now is a great shopping time for the “best of the best” junior mining companies…but remember to average into your positions (they could go down even further) and make sure to focus only on the top, quality companies with solid numbers.  (I will give you Rick’s picks in the next few days).

That’s it for tonight…your roving reporter is signing off but will be back tomorrow with Rick’s first keynote, “Bear Markets are Best”!

I will have much more to share with you in the coming days….have a wonderful night (and a happy holiday week if you are here in the U.S.!)

To your financial success,

—Kung Fu Girl

P.S. I want to give a huge shout out to the awesome subscribers who recognized and connected with me in person at the conference—it was so fun to hang out with you, and please help me out with anything I forgot in the comments!  Thank you to Ari, Lawrence, James, John, Chris, Daniel, Justin, Bonnie, and more….(if I have forgotten you in this list I apologize tremendously!)

And now, a blast from the past…

Big Bird: One of These Things Is Not Like The Other…

http://www.youtube.com/watch?v=ueZ6tvqhk8U