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Rick Rule : The Most Beneficial Lesson of My Life

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By Rick Rule
Friday, March 27, 2009

In 1974, at the ripe old age of 22, I got licensed as a stockbroker. 

I remember the impact of the 73-74 bear market on the more senior brokers. I had the "advantage" of not having the book of customers yet... So by definition, my customers didn't get decimated.

My field of study was natural resource finance. So I did very well in the 1970s, as natural resources investments boomed. 

In the period from 1975 to 1981, I was making – relative to my age and experience – a truly stupendous amount of money. And I made the normal young man's mistake: I confused a bull market with brains. I thought the amount of money I made for myself and my clients was a function of my brilliance. 

The collapse of commodity prices in 1982 disabused me of that. I went from being a very wealthy young man to having a fairly substantial negative net worth.

That experience turned out to be the most beneficial lesson of my life. 

I learned the truth about the cyclicality of natural resources. You learn in school that these are cyclical, capital-intensive, volatile businesses. But until you've gone from pretty rich to being broke, you don't personalize those lessons.

In one year – 1982 – I went from having an academic interest in cycles to understanding them viscerally, something I don't recommend for anybody else. 

What I also learned digging myself out of that hole was that perversely, bull markets are very lethal. First of all, they lend themselves to hubris. They lend themselves to misinvestment as well as malinvestment. Rather than being afraid of making mistakes, you're afraid of missing opportunities.

While missing out on something is hard on my ego, making mistakes is hard on my wallet.

The businesses that I invest in are volatile, capital intensive, and risky, with long lead times. Most of my competitors are reward chasers. But I'm a risk manager. By limiting my risk, and being able to fight another day, my reward becomes assured. So what I'm trying to do is not make fatal mistakes. When I'm thinking about a deal, I'm looking at the probable return relative to risk.

One important thing I learned (and I don't mean to flatter you but I actually learned it from you [Steve Sjuggerud] and Alex [Green]) is after you have doubled your money and you then take half your money off the table, don't be afraid to be right. 

The mistake I used to make (and I don't make it so much anymore) is that when I determined the value of something in my own mind, when it reached that value, I sold it.

I left hundreds of millions of dollars on the table, literally. What I try to do now is, if I have limited my downside risk relative to my investment by selling half at a double, I am much more inclined to let a position overshoot to the upside and protect it by trailing stops.

By 1997, I re-entered commodities markets heavily. I was rewarded almost immediately with a 25% decline in my and my clients' net worth. There was really immediate punishment for coming in too soon. The market fell precipitously. At that point, we'd reached "no-brainer" pricing.

In the 1998 to 2002 bull market, I was in the right place at the right time. I'd trained. I had a reputation with clients. I'd developed the attitude that I was a pawnbroker, and I was presented an opportunity that was unusually stout.

I feel like I'm right back in 1998 today.

Now we're in a situation where the pricing is relatively attractive, and I think the volatility (which has always been my friend) is going to increase to levels not seen in my lifetime. I feel like I've trained my entire life for the conditions that are going to be in front of me in the next five years, and I'm incapable of checking out.

Do I have enough money to check out? Sure. As you know, Steve, I don't spend any money. I don't have any wants or needs. I'm one of those lucky guys that would do this for free if it didn't pay so well. I believe the paychecks will be stupendous in the next five years.

It's sort of like asking a well-trained ballplayer at the top of his game if he wanted to play in the World Series. Yeah!

I am keeping a bunch of powder dry, because I think the opportunities coming are the best I've seen in a long time. That's why I'm still working today... 


Rick Rule
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